STR pros - what is your target annual ROI?

Question

I’ve been VERY impressed with the knowledge and professionalism of the STR professionals posting in this forum.  It appears as if your much more on top of your market and profitability that most more conventional property investors.

When I purchase a real property investment my minimum return on an all cash basis that I’ll consider is 8%.  I look at this after all actual cash expenses PLUS management fee and a depreciation allowance.  I don’t use the depreciation allowed by law, I use a real number based on my experience.  For a property in great condition, I have found that a reserve of 2% per year should be adequate.  Of course, if the property is in less than great condition, an increase in reserves is required.

Now, my question is how much money may I be leaving on the table by not investing in STR instead?

I’m not asking if I should convert property I currently own to STR, the answer is probably not because as I have learned from this forum STR only makes sense in vacation destinations where it’s accepted and those cities where restrictive legislation or ordinance hasn’t been enacted, and competition doesn’t degrade rates to the point of no excess returns.

So, if you don’t mind sharing, what’s your minimum and your target ROI for an STR?  And does this include you managing the property or hiring a manager?

Thank you and eagerly await your response.!

Luke Carl · Answer

@Don Konipol hey Don! I don’t figure ROI on STR. Did you put 10% down? 20? 15? Did you pay cash? ROI will make your brain hurt. I should also admit I’m not a spreadsheet guy so I probably don’t have the answers you seek.

My concern is cash flow. If it’ll cash flow roughly twice as much as my LTRs it’s a winner. My STR market, for the most part, is all winners. A 2 bedroom will make the same as the next 2 bedroom and a 6 bedroom will make the same as the next 6 bedroom.

Here’s the catch..... You can’t put it with a PM and make money. You must set up your systems and put out the occasional fire. Again.... most of this is market specific.  So..... the question is not necessarily “how much will it make” it’s “is this business for me”

Thanks!

Typed on iPhone

Ken Latchers · Answer

You cannot compare long term rental again short term rental income. My long-term unit do not have a 3% credit card fee. They don't have a property management fee. They don't have a channel manager fee. Or software fee. Long-term renters pay most of the utilities as well as Wi-Fi or cable. My long-term unit don't pay a commission to VRBO or Airbnb. I don't pay self-employment tax on long-term rentals. Short-term renters demand immediate fixes and long-term renters can wait a couple of days for most things. I don't have to clean units every weekend or chase after cleaners. I don't have to obsess over reviews and answering of use or giving directions every time they get cluelessly lost. I don't have to supply clean towels and linens and coffee setups and recommend things if they call and furnishings and a lot of headaches that short-term rentals have.

it's the difference between gross and net profit. I would say that is a long-term rental dollar is worth at least $0.30 more than a short-term rental dollar.

Justin Ellis · Answer

@Don Konipol

So $2350 before mortgage, cap ex, and repairs.

What's your mortgage on the unit?

How much cash do you have in the deal?

Thats what I would base the keep/sell decision on. But I assume you've got a good bit of equity sitting there and want to roll it into something with a better ROI?

Could you get your money our with a refi or heloc and still cash flow? As a super newbie I'm cringing at the thought of getting rid of a property as I'm trying to scoop em up! :) But I know things look different from different experience levels.

Justin Ellis · Answer

@Don Konipol I have 9 arbitrage units (rent to re-rent) and 2 other units I manage in Tucson and it's not a "vacation" or "destination" marke per se. These units do just fine, so I wouldn't rule out your current units until you do the research (airdna.co or just look on airbnb and see how others are doing).

Also, I respectfully disagree with @Lucas Carl in that you can't make money with a manager. I manage 2 units at 20% (str management is more expensive) and both of them make about 50% more than they would with LTR, the owners don't have to deal with anything and have their properties cleaned and inspected every week on average!

I have to admit, Tucson is really the perfect storm though...

- It's big enough to have plenty of traffic but not so big that the competition is really fierce (yet)

- Arizonas laws prohibit cities regulating STR (for now)

- Property/rent costs are low enough even in popular str areas (near the University and downtown)

But I imagine there are similar areas around the country (I know Tulsa is a VERY similar market to Tucson for example. In general, not necessarily when talking STR)

But as a cash on cash investor even if you made another 15-20% better than ltr doing str with a manager handling everything wouldn't that be a huge ROI boost? So the question isn't "whats a target ROI" it should be, of the 2 options in your particular selected market where can you do better WITH a manager included in both scenarios. Because if you have to manage the STR to do better I would say all bets off (the day to day is not easy).

John Underwood · Answer

I just look at how much  cash flow I have made at the end of the year. I don't worry about ROI on my Vrbo.

Todd Goedeke · Answer

@Don Konipol, sure passive RE investments using property managers are investments. You should consider visiting the forum that talks in detail how you can purchase real estate ,notes and have tax free cash flow in a Solo 401k or IRA.

There are thousands of

investors leasing their RE held by their retirement plan to property managers while achieving 10-12 % returns and 15%+ returns with some leverage.

Don Konipol · Answer

@Ken Latchers

Thanks Ken.  You’ve just described a BUSINESS more than an INVESTMENT.  But, can a STR be an investment if you have a good property manager?

Ken Barton · Answer

It stands for Short Term Rentals

Paul Sandhu · Answer

Look up ^^^ at the top of the page.  It says Short Term Rental.

STR pros - what is your target annual ROI?

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