Short Term Rental Strategy

[Stacey Ocampo]

Hi guys! I recently acquired a short term rental in Big Bear, CA with a partner that closed in January and am now just starting to discuss this topic outside of my partner and circle since I don’t know where else to go.

When we ran numbers, call it rookie mistakes or unexpected events, but we got hit with a blizzard our first month and a half of knowing and the bottom floor got hit with a leak. It’s been a headache to say the least in getting the property ready because of what needs to get done. (I’m more so a “let’s get it done now and urgently”) type of gal, but my partner likes to wait. She’s conservative but I see her point of view because we have bled money (about $2k-$2.5k) each per month and it still hasn’t looked good for us.

It’s been managed and getting bookings, but it’s truly not enough as it’s slowed down tremendously. I’ve gotten 5 star reviews, but it’s not giving the even slightest of break evens.

I have a baby coming up in January and I am getting pure anxiety from owning this thing since I think I may have made a mistake, knowing this was a lot riskier, but calculated risk. I just may have miscalculated.

What would you do in this instance? Would you weather the storm and keep paying out of pocket or sell and move on?

My gut really wants to sell it, take my loss and move on to prevent any further long term losses.

[Collin Hays]

A few thoughts:

"It's been managed".  Does that mean you are paying a Property Manager?  If so, self-management could be your ticket to at least break even.  That might sound odd coming from a Property Manager, but self-managing can save you quite a bit of money if you have TIE - Time, Interest, and Energy, to do the job right.  It is a part-time job.  Most of our clients are missing part of "TIE" equation, so they pay us to manage.

Another thought, but you'll need following along with me:  

A $2000 per month deficit might not be that bad, depending on what you paid. I am going to use some really rough math here, but if you bought say a $1 million property, that's means that someone else is still paying off the vast majority of the asset.  You are kicking in about 2.2 percent of the asset value per year, plus the presumable $200,000 (20% down payment) that you made in the beginning.  As time goes on, your rental rates will likely increase - a bunch - and that $1 million asset could be worth $2 million in 15 years.  

Even if the situation never improves and you are out $2000 per month from now on, after 15 years your total investment will have been $530,000 (your down payment plus the $2000 month deficit).  If the asset value is worth $2 million in 15 years, you have still will have earned roughly $1.5 million from a $530,000 investment.  That's quite a respectable return for any 401K, I assure you.  I had a monthly deficit for several years on my first vacation rental, and it still turned out to be a terrific investment.  

In reality, it will probably do a lot better than that if you hang on.  I presume, for example, that it will eventually cash flow.  If you decide to sell, you may find that, in today's environment, prices have contracted to the level that you will need to bring money to closing:  It appears that the average sales price in Big Bear is -17.8% versus one year ago.  

Those are just a few things to think about, not knowing very much about your specific situation.