Have your parameters for new purchases changed in 2023?

[David Gogs]

In the last two years, home prices have gone up 30-40% in my area and rates are at 7-8%+. It seems like the only options are to either sit on cash and wait, or buy using different parameters than in the past.

I used to only consider a purchase worth it if the numbers worked as an LTR, imagining they can ban STRs tomorrow. Are you still following this rule yourselves, or has that changed? I live in a state that has outlawed local municipalities from regulating STRs, so it's pretty safe, but who knows if state laws change one day.

Next is the numbers. I used to find cap rates of 10% or higher. Now, it's more like 3-5% at best. Cash flow is still solid and Gross Yield is 12%. Should I change my standards to continue to make things happen? Is this just the new normal and new risk we have to take on?

I used to follow a "15% rule" where I wouldn't buy unless the gross revenue was at least 15% of the purchase price (e.g. Gross Yield). Now it's lucky to find something that hits 11/12%.

Lastly, the vacation market, while still strong in my area, has cooled off and numbers are down 20% this year compared to last. Still, even adjusting for this, the cash flow is solid and the yield is 11-12%.

I'd love to hear from people still buying in this new market and to learn if you have changed things to keep it moving.

[Alex Scattareggia]

Quote from @Andrew Steffens:

I am buying less - but I would not necessarily blame the rates. I am being more choosy and only purchasing STR's that will really stand out. They have have the right location, layout, and amenities or I will not bother. Even with higher rates, higher taxes, and higher insurance the best properties will still have great cashflow.

I think this is probably the best advice in here as far as evaluating new STR buys.  Just going through AirDNA data for a few different markets it is pretty clear that the funky and unique properties are continuing to perform at really high levels.  The stuff that is getting crushed seems to be the generic SFH or apartment that was thrown up without much thought and made money in the post pandemic boom but is struggling to compete now.