First-Time STR Buyer --- Feedback / Guidance Requested

[Eric Carlstrom]

Hi all,

I have a few long-term rentals and am exploring a STR for the first time, and am seeking guidance / advice on my expected expenses (and ideally what i'm missing that i should factor into my calculations). Part of the value of the STR is that we will plan to use this property 4-8 times per year.

The property is a few hours from the major metro that I live in, and is a vacation destination for lots of people in my area. So much so, that according to AirDNA data there are 4000+ properties on airbnb / vrbo in this destination, though the property that I am evaluating has been used as a primary residence and has no rental history. As I'm sure most of you know, a long-term rental is simple since the only recurring expense I own is the mortgage, whereas with a STR I'll own the mortgage, internet, utilities, furnishings, cleaning fees, etc. which just makes my projections a bit foggier.

I'm looking for feedback on the below expenses and wondering what else I should be thinking about, that I don't currently have listed. I have spoken with the realtor at length and gotten copies of utilities bills, internet expenses, trash fees, etc. so I have reason to believe most of these are pretty accurate, but again, would like some feedback from the community on what i'm missing and what else i should be considering. Here's what I'm accounting for currently:

Mortgage (P&I)
Insurance
Taxes
Electric
Water
Trash
Internet
VRBO/Airbnb fees
General/Repairs
Cleaning (though these will be passed through)

If i'm super conservative on my monthly rate, I will need to rent the unit 10 nights/month to break even, if I am more realistic with the rate (according to my realtor who runs two STRs), i'll need to rent it 7-8 nights/month to do so. Also looking for best practice guidance on the risk tolerance based on these numbers. Thanks in advance.

[John Underwood]

what about landscape/yard maintenance?

Any additional permits?

consumables?

pest control?

[Eric Carlstrom]

@John Underwood good feedback I appreciate it.

I am viewing the property Friday so will have a better POV on landscaping maintenance then.

I hadn’t considered the other items you mentioned, so thank you!

[Eric Carlstrom]

@John Underwood

EDIT: I meant mainly the consumables and pest control. Permitting I have researched and am in the clear on.

[Lauren Kormylo]

I assume there's no HOA?

Re trash, you may have to pay someone to take the cans to the curb for you, as you can't expect guests to do that. Either a neighbor, cleaner, or some trash companies you can pay extra to pull the trash cans out for you.  

Another expense is replacing items that are broken, stolen, or worn out over time.  It's usually not a lot, but I've had to replace a broken office chair that was only 2 years old, had better quality bed pillows been switched with cheap Walmart ones, and had a blanket go missing.  Things like that.

Make sure to get fairly fast internet if you'll host a lot of guests.  I assume you'll use streaming only for TV, no cable or satellite?  

[Zach Edelman]

Are you self managing or outsourcing for management?

[Garrett Brown]

Quote from @Eric Carlstrom:

Hi all,

I have a few long-term rentals and am exploring a STR for the first time, and am seeking guidance / advice on my expected expenses (and ideally what i'm missing that i should factor into my calculations). Part of the value of the STR is that we will plan to use this property 4-8 times per year.

The property is a few hours from the major metro that I live in, and is a vacation destination for lots of people in my area. So much so, that according to AirDNA data there are 4000+ properties on airbnb / vrbo in this destination, though the property that I am evaluating has been used as a primary residence and has no rental history. As I'm sure most of you know, a long-term rental is simple since the only recurring expense I own is the mortgage, whereas with a STR I'll own the mortgage, internet, utilities, furnishings, cleaning fees, etc. which just makes my projections a bit foggier.

I'm looking for feedback on the below expenses and wondering what else I should be thinking about, that I don't currently have listed. I have spoken with the realtor at length and gotten copies of utilities bills, internet expenses, trash fees, etc. so I have reason to believe most of these are pretty accurate, but again, would like some feedback from the community on what i'm missing and what else i should be considering. Here's what I'm accounting for currently:

Mortgage (P&I)
Insurance
Taxes
Electric
Water
Trash
Internet
VRBO/Airbnb fees
General/Repairs
Cleaning (though these will be passed through)

If i'm super conservative on my monthly rate, I will need to rent the unit 10 nights/month to break even, if I am more realistic with the rate (according to my realtor who runs two STRs), i'll need to rent it 7-8 nights/month to do so. Also looking for best practice guidance on the risk tolerance based on these numbers. Thanks in advance.

Hey Eric! You had hit most expenses besides the ones @John Underwood mentioned but then a few sneaky ones people forget. Make sure you know your exact insurance costs with a specific STR policy that has general liability as well. This always costs more than people expect.
Bookkeeping- quickbooks, bookkeeper, etc. is going to cost something
Breakage - things will break and you'll spend about $50-100 each month on this

Software- You will probably spend about $50-100 a month on different software. They are usually worth every dollar plus some (things like dynamic pricing software and property management software like Hospitable if you like the tools). 

We have a calculator at BiggerPockets that can help figure out some of your numbers even more! https://www.biggerpockets.com/airbnb-calculator

I would not go cheap on the furniture and really pay attention to the design and amenities you can have that compete with the top places near by. This will make you get to the top of the market and max your ADR/Occupancy. 

[Eric Carlstrom]

@Lauren Kormylo

That's helpful, thank you. You are correct, no HOA and my plan is for no TV, just internet, as you noted. This area is remote-ish so i plan to use Starlink (and have done adequate research to ensure it'll work well.)

Thanks a ton!

[Eric Carlstrom]

@Zach Edelman

Self-managing.

[Eric Carlstrom]

@Garrett Brown I hadn’t considered bookkeeping software or dynamic price software. Can you elaborate on the value they add for you and how you use it?

I plan to use Airbnb / VRBO and understand they do a lot of this legwork for you, but would love to hear what I’m misunderstanding if that’s the case. Thanks for your detail!

[John Underwood]

Quote from @Eric Carlstrom:

@Garrett Brown I hadn’t considered bookkeeping software or dynamic price software. Can you elaborate on the value they add for you and how you use it?

I plan to use Airbnb / VRBO and understand they do a lot of this legwork for you, but would love to hear what I’m misunderstanding if that’s the case. Thanks for your detail!

Vrbo has free price automation software.
I use Excel for book keeping.
I don't pay for any third party software, not really needed on 1 or 2 properties.
I charge a little extra for cleaning fee than actual cleaning costs. This absorbs consumables and breakage for me.

[Christanne Wright]

Working with STR owners has taught me that you need to have a discussion with a Tax Strategist or your CPA to see if there are any opportunities that you can take advantage of. You'll likely want to reduce your taxable income as your property gets higher traffic. The investment is worth it as your income grows.

[Eric Carlstrom]

Quote from @Christanne Wright:

Working with STR owners has taught me that you need to have a discussion with a Tax Strategist or your CPA to see if there are any opportunities that you can take advantage of. You'll likely want to reduce your taxable income as your property gets higher traffic. The investment is worth it as your income grows.

 Thank you, that's helpful. I do have a CPA who is knowledgeable and involved here.

[Eric Carlstrom]

Quote from @John Underwood:

Quote from @Eric Carlstrom:

@Garrett Brown I hadn’t considered bookkeeping software or dynamic price software. Can you elaborate on the value they add for you and how you use it?

I plan to use Airbnb / VRBO and understand they do a lot of this legwork for you, but would love to hear what I’m misunderstanding if that’s the case. Thanks for your detail!

Vrbo has free price automation software.
I use Excel for book keeping.
I don't pay for any third party software, not really needed on 1 or 2 properties.
I charge a little extra for cleaning fee than actual cleaning costs. This absorbs consumables and breakage for me.

That's what I intend to do as well. I can be relatively sophisticated in Excel to handle something like this.

I'm sure there's a million posts about this but would be happy to hear your POV on vrbo vs airbnb.

[John Underwood]

Quote from @Eric Carlstrom:

Quote from @John Underwood:

Quote from @Eric Carlstrom:

@Garrett Brown I hadn’t considered bookkeeping software or dynamic price software. Can you elaborate on the value they add for you and how you use it?

I plan to use Airbnb / VRBO and understand they do a lot of this legwork for you, but would love to hear what I’m misunderstanding if that’s the case. Thanks for your detail!

Vrbo has free price automation software.
I use Excel for book keeping.
I don't pay for any third party software, not really needed on 1 or 2 properties.
I charge a little extra for cleaning fee than actual cleaning costs. This absorbs consumables and breakage for me.

That's what I intend to do as well. I can be relatively sophisticated in Excel to handle something like this.

I'm sure there's a million posts about this but would be happy to hear your POV on vrbo vs airbnb.

 So for me, I get 98% of my bookings from Vrbo. I think the reason for this that I have a true vacation rental. These are places you would spend your vacation dollars with your family to go have a good time for a week or longer. I only get a few airbnb bookings per year.

[Katie Ripp]

Hi Eric! Just wanted to chime in from a tax perspective, something to keep in mind and plan to have some discussions with your CPA:

Using the property for personal use during the year will prevent you from recognizing some expenses on your property. Additionally, if you have too many personal use days, losses may be further limited by the Sec. 280(A) vacation loss limitations. 

There are some great tax strategies for short-term rentals, but very important to be aware of the personal use rules to make sure 280(A) doesn't become an issue.

[Garrett Brown]

I would not use dynamic pricing software in OTAs' systems. Do you think Airbnb and VRBO consider your best interest and profitability when determining pricing, or are they just worried about getting guests into your place? I would look into Pricelabs, Beyond Pricing, AirDNA, etc. for this. These may cost $20-50 a month but will pay for itself and more with the increase in profitability you have. These are similar softwares that hotels use to constantly change pricing depending on the demand/supply for the area. 

Something like Quickbooks, Baselane, etc., are much better platforms for automated help with bookkeeping to save time and make your life easier. If you want to do it all manually in a spreadsheet, you can definitely save about $30 a month here but how much is your time worth as well? 

I would be on every platform that you can. Airbnb, VRBO, booking.com, etc. You can sync all of these using a property management software for maximum occupancy and systems within your business. Did you know Booking.com has 4x the visitors to their site than Airbnb and VRBO COMBINED? 

@Eric Carlstrom 

I own 4 STRs and cohost 4 others. If you plan on only having 1 property forever, then yeah you can probably get away without any of these but you'll be losing out on money, missing bookings, and more. If you ever decide to add more, starting now will make your life way easier going forward. I highly recommend the dynamic pricing softwares out there though. You will be losing money relying on OTA (Airbnb, VRBO, etc) pricing software. 

[Bonnie Griffin Kaake]

 @Eric Carlstrom

Regarding taxes, be sure you are not paying too much and that your CPA/tax professional is up-to-date on the regulations. I see too many depreciation schedules done on 27.5 day depreciation schedules for STRs. This is a red flag for the IRS. All short-term rentals of less than an average of 30 days per year belong on 39 year depreciation schedules.

You can only occupy your STR 14 days per year and not more than 10% of the actual rental days by tenants. You may be better off renting another property for your own vacation stay than staying in yours; why put up a red flag for the IRS?

There is another tax benefit you may not be leveraging. Get a no-cost estimate for an engineering-based cost segregation study on every investment property you own over $250K in purchase price. You are likely leaving thousands of dollars in tax benefits and cash flow on the table. I am available if you have questions or need a study. 

[Jake Baker]

@Eric Carlstrom

My STRs tend to experience more frequent repairs than my long-term rentals so I tend to budget more for repairs and maintenance. 

Cleaning after every tenant does great, but every so often, you need a deep clean. I hire a specialist to come in and deep clean for an entire day 4 times a year. 

[Bryan Stengel]

Hi Eric, I really love the idea of STR and some of them could bring serious cash flow at the right price point. I think you need to weary about several other aspects with an STR. I will say from experience that STR renters tend to be more needy than long-term. While it is justified or not, the market has changed in terms of expectations too. Some renters become home inspectors and will tear your place apart regarding anything (maybe for a discount). It seems if you are far away from this property then it might be a good idea to consider hiring the services of an experienced property manager who really could provide ongoing communication during the whole stay.

I'd also consider ways you can maximize your cash flow. While cleaning is a huge and necessary expense, you can also make part of your ROI by adding an additional amount to the cleaning fee. You may also charge a pet fee as well. We've never had an owner that was not unhappy paying one. Honestly, it does open up the amount of renters you attract to. Overall, STR could really provide you with a whole lot of cash flow or it can go the other way. It depends on the month for myself. I will also consider the value it may bring you and your family especially if you will be going there yourselves. My family goes to our STR quite often and we alway have a nice time. It is a place to create memories so that in itself sometimes supersedes cash flow. Best of luck!

[Bryan Stengel]

Quote from @Katie Ripp:

Hi Eric! Just wanted to chime in from a tax perspective, something to keep in mind and plan to have some discussions with your CPA:

Using the property for personal use during the year will prevent you from recognizing some expenses on your property. Additionally, if you have too many personal use days, losses may be further limited by the Sec. 280(A) vacation loss limitations. 

There are some great tax strategies for short-term rentals, but very important to be aware of the personal use rules to make sure 280(A) doesn't become an issue.

 Hi Katie, do the tax benefits apply to just Real Estate professionals or could it also apply to regular full-time W-2 employees?

[Berry Starnes]

Quote from @John Underwood:

Quote from @Eric Carlstrom:

@Garrett Brown I hadn’t considered bookkeeping software or dynamic price software. Can you elaborate on the value they add for you and how you use it?

I plan to use Airbnb / VRBO and understand they do a lot of this legwork for you, but would love to hear what I’m misunderstanding if that’s the case. Thanks for your detail!

Vrbo has free price automation software.
I use Excel for book keeping.
I don't pay for any third party software, not really needed on 1 or 2 properties.
I charge a little extra for cleaning fee than actual cleaning costs. This absorbs consumables and breakage for me.

Love this answer
Bootstraps is the way to go if you can
Just getting in to my first STR and this is how I plan to tackle it