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Updated about 1 year ago on . Most recent reply

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42
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Patrick K.
19
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42
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How do you evaluate STR arbitrage investment?

Patrick K.
Posted

I was wondering how you evaluate investment with limited or no equities such as STR arbitrage. Since when the lease is up, you have nothing in the deal other than a few years old furniture, whose value would be limited if anything.

My initial thought would be to evaluate it like a hotel, which is usually evaluated with a payback period, but in a hotel deal the investment usually includes the land and buildings, which have significant value on exiting. 

Any pointer would be appreciated. 

Most Popular Reply

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279
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Richard Elvin
  • Investor
  • Cleveland, TN
187
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279
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Richard Elvin
  • Investor
  • Cleveland, TN
Replied

@Patrick K. I'm not a big fan of the model, however, I love numbers. :)

Here's how I would evaluate: (all numbers are random, just for example)
Setup cost divided by the lease term. $36,000 setup, 36 month lease term = $1,000/month

Add all monthly expenses so you know what is expected outflow. 
Setup cost $1k/month, + lease $3k/month, plus insurance $1,250/month, plus utilities $350/month, plus maintenance $150/month, etc, = $5,750 expected outflow/month

Then take expected income $7,500, subtract expected outflow of $5,750 = $1,750/month expected incom

Multiply $1,750 times lease months (36) to get gross expected profit ($63,000) and subtract setup cost to get net expected profit ($63k-$36k) = $27k 

To get total ROI multiply monthly expected expenses by lease term, add setup cost, then divide gross expected profit by the result (($5,750*36)+$36k) = $243,000

ROI $63000/$243,000 = ~26% or ~9%/year.

All numbers made up on the spot for visual display of calculations. Again, this is not something I have any interest in, so I would definitely want to fine tune my equations before building a spreadsheet to calculate.

Off the top of my head, this is how I would evaluate arbitrage. I hope it's helpful as a thought exercise at least.

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