STR Investing - which quick metric do you use to filter property?

Question

For long term rentals its the 1% rule (for me anyway).

I've read that a good metric for STRs is whether a monthly mortgage payment equals a weeks worth of revenue.

Which financial metric do you use to filter your list of STR investable properties?

Avery Carl · Answer

STR's don't really fit into many of the boxes and calculations that traditional long term rentals do. There are many moving parts and there are no real rules of thumb that work for every property or market. I agree with @John Underwood, you have to get as much information as you can on the expenses, do as much research as you can on similar properties in the market's performance (on any and all rental platforms), and then run your numbers. You can also use the major STR income data sites like Airdna and Mashvisor as a loose guideline. Although their data isn't perfect, it's pretty good and it can definitely help you figure out the income range that you should be able to attain (it's actually a little on the low side compared to what my STR's do).

It's important to take any rental history with a grain of salt. Two owners with identical properties can have wildly different returns that have everything to do with their own management skills/style, and nothing to do with the property itself. You can usually find the differences in their listings that make one more successful than the other.

In my markets, most of the sellers are not investors, they are true "vacation home" owners who just threw the property on with a local property manager so that it can "pay for itself." In addition, most of the local management companies' properties underperform compared to self-managers and some of the more cutting-edge national managers, so it can be difficult to get accurate/investor-centric data from them.

Bottom line, nothing is going to be handed to you in a nice neat spreadsheet in most cases, but if you are willing to do a little research, you can come up with a pretty accurate basis for what sort of return you can get if you maximize a property's potential. Unfortunately there's just not a rule of thumb or calculator that can do this for you. But if you do your research, and you find that the return is high enough for it to make sense for you, then go for it!

Paul Sandhu · Answer

Another metric I use is "Hookers to Workers".  It's generally 1:250 to 1:500.  YMMV.

There are a lot of refinery contractors in my STR market.  Hookers are something I deal with.

Eric P. · Answer

In the most desirable parts of the US (Tennessee, Florida, Arizona, Colorado, Utah, California, Hawaii), you can earn gross annual rental revenue of 15-20% of your purchase price. Eg, a $300k house will earn $45-60k in gross annual rental revenue. If you can get anything close to this, buy! (Of course, this requires being able to estimate annual rental revenue for a house or having a good agent who can help!)

Mike F. · Answer

@Greg S.

Looking at "a week's worth of revenues" can be very misleading if you're not accounting for seasonality and vacancy.

No need to reinvent the wheel- just look at KPI's for the Hotel Industry.

Revenue Per Available Room (RevPar).

RevPar = Average Daily Rate (ADR) * Occupancy.

As you get a better handle on expenses, it's a quick look at profit.

David Bergmann · Answer

Agree with others that you should always run a full analysis before purchasing.  That being said, I have created a metric for myself that I think serves a similar purpose as the 1% rule...

The rule for me is the .1% nightly rate.  I will explore a property further if I believe I can reasonable demand .1% a night relative to the property's purchase price.

So a house for $100,000 would need to  bring in $100 / night.  A house for $200,000 would need to be able to bring in $200 / night...and so on.

Again, this is just a rough metric that works for me in my market..

Justin Ellis · Answer

@James Murphey @Eric P.

Airdna.co is gonna be your best friend for finding occupancy rates and average nightly info. Beware there is such rich data on this site that it can cause analysis paralysis, but it's amazing, accurate info. It's an aggregate of 36 months of data from Airbnb and Homeaway!

Note, their income numbers include cleaning fees (which I hate and don'tunderstand why they do it this way) so you'll need to back those out unless you plan on turning the unit yourself. Other than that little issue, it's pure gold!

Julia Bykhovskaia · Answer

On the revenue side, to get estimates - the most reliable way it to find someone already doing STR and ask them and hope they would disclose. Or, call property management companies (if it's a vacation area - they should be there) - and ask. The problem is...even those data points are not 100% reliable. Because you don't know how they are running it. Same property well run vs property poorly run - HUGE revenue difference. Decor, # of people it can sleep, great photos - all make a difference. Can look on AirDNA too - but don't rely on this info either. Hugely distorted. But if there are a LOT of listings, can get some directional guidance what a true occupancy/daily rate is. So that's the challenge #1.

Expenses are much easier to get right - taxes, insurance, mortgage, maintenance, HOA fees, utilities. Revenue side is more complex.

Challenge #2 as others pointed out - regulations. They are truly unpredictable. Example of Jersey City - they passed an ordinance in 2015 allowing Airbnb. In 2019, out of the blue, with no warning - reversed 2015 ordinance and largely banned STR (very heavy restrictions). NO GRANDFATHERING. (The hosts are still fighting it, it's not final yet). This part I find unanalyziable - you just don't know. So the only thing you could do to mitigate this risk it so to buy at such a price that your rental would work as a long term rental if  you have to convert down the road.

Paul Sandhu · Answer

My two other metrics:

Would my wife and I live in the neighborhood of the property?

Would we live in the house?  I make my places just as good, if not a little better than our own house.  The main difference is that every bedroom in the STRs is decorated like Hugh Heffner sleeps there.

Tim Schroeder · Answer

I believe STR's are much more complicated to filter than LTR's. There are so many more moving parts. So I doubt you're going to find something as simple as the 1% rule.

John Underwood · Answer

I run a detailed analysis of all expenses, repairs, upgrades and projected revenue. This is much more reliable.

STR Investing - which quick metric do you use to filter property?

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