Buying STR New Construction during Covid?

Question

Hi everyone,

I am considering buying a new construction short term rental zoned 9 bedroom property in Kissimmee, FL. On paper the numbers I’m being shown look good despite Covid (management company is great!) What are people’s thoughts on this given the negative impact of Covid-19 on the international destination Air BnB properties? I have heard that domestic STR are doing well during Covid but International Tourism based STR are hurting - like Orlando/NYC/SF etc.

I just want to know if I am making a bad investment and should look elsewhere. I’m considering it because they are giving incentives on the new construction purchase with discounts given Covid. It would be a property around $600K. The solid property management company work leads to excellent returns based on nearly 90% occupancy despite Covid but I wonder what would happen if that PM company goes under or changes management or whatever. Will I be stuck with a low performing 9 BR Orlando high tourism based property hurt by Covid? Any thoughts on this matter is appreciated.

Todd Goedeke · Answer

Account Closed What s to be gained with a return of 26k on a 600k property? That s a 4.25% return! The realtor is the wrong person to get non prejudiced info from. As a seller of property and investor why would he be encouraging more competition with his existing STVRs? Let me guess the realtor is telling you that you need to act quickly before other investors scoop up the property? I ve heard that story and many similar by RE agents, they sound like used car salesmen!

Regarding a master lease or triple net lease. With regard to RE ,that s when the owner of the property leases it to a property manager for a fixed rate, with possible escalators . Property manager pays all taxes, insurance and maintenance. Lease rates of 9-10% of property value are common in the STVR business. In your case if you pay 600k for a property with a 10% lease rate, the property manager would pay you 60k per year. If it's such a good deal the property manager should gladly pay you that amount. In addition the leasee, property manager, furnishes the property. It's his business.

Jon Crosby · Answer

Account Closed  Always have exit paths available, it's great if it cash flows as an STR (on paper) but the true test is if it will still break even as a long term rental if you have to convert for some reason (COVID, STR regulations, etc.).  Additionally, make sure you don't over-leverage and put yourself underwater if you have to sell as another exit plan.

Also remember, new construction always costs twice as much and takes twice as long in reality versus on paper.  ;)

Best of luck to you and stay safe and healthy!

Account Closed · Answer

All good points. Thank you.

For clarification - These new construction buildings are in a development Close to Disney with a resort like community with a HOA. The construction is already completed and should be up and running soon after purchase. I did some shopping around the development and see resale properties at the same price as the new construction properties (they are all cookie cutter). Does that change anything for you guys?

Nicholas Herold · Answer

What does the investment look like at a 75% occupancy rate?

Joey Morea · Answer

@Mohammed F.

Is that with furniture expenses built into your numbers . If you are buying new construction you will have to fully furnish so that will be another 50-75k at a minimum. Really 75-100k if you want to do it right and get the style and theme the way it needs to be. 67% will be a high occupancy with an averaged furnished house. Again it all comes down to theming and cool factor. Look on VRBO and see how many homes are for rent to get an idea. There are a lot of options for resale that will save you at least 100k and if your renting who cares if it’s new or used it will be used the first time someone rents it!

Joey Morea · Answer

@Todd Goedeke

I bought my house as a resale so it was already furnished so I didn’t spend near that but that’s why I am a big fan buying that way, plus the amount of inventory to buy and savings. I literally made a bunch of offers till I found the deal I wanted. I paid 440 for my house vs a new one that is being built would have cost me 550. These large homes are a dime a dozen in that area, they are mostly purchased by foreign investors that are never at the home and Managed by property managers that don’t have a clue what’s going on are who they are renting them to. These large homes can be a receipt for party renters.

To maximize these Orlando vacation homes they need to be themed out not just furnished. You need lots of electronics,theater screens, game rooms, ps4s,xbox etc. Muriel artist, convert the Garage into living space etc.

Joey Morea · Answer

@Mohammed F.

I own a 7br vacation rental in championsgate. I personally would look at a resale vs new and save a ton plus get it furnished. I know the market well and the different vacation home communities and would be happy to answer any question. Do keep in mind these large vacation home 6-9 bedrooms are very common and there is a ton of supply so you need to make your house stand out from the rest as far as theming goes to make any decent profit especially if you are thinking 600k. You would need to probably net 55-60k net a year to break even at that price point. PM me if you would like to talk in more detail happy to do so.

Paul Sandhu · Answer

I bought a 3 story house with 4 baths.  Paid $15,900 and spent another $3000 to furnish it.  It has 8 beds.  It is the least rented STR of my 23 STRs.  But it brings in the most money when it's rented.  I imagine a 9 bedroom house would be similar.  It's hard to find enough people that get along with each other that would sleep under the same roof.

The house was bringing in $1750-$2000/week before the crisis.

John Underwood · Answer

If numbers look good with a PM then they will look way better if you self manage. Not that hard to do. Read this forum on this discussion point.

I would consider waiting till Post Covid before considering doing this.

Todd Goedeke · Answer

Account Closed is the property management company in any way financially related to the construction company or listing RE company? Would the PM agree to lease the property from you via a master lease?

At 65% occupancy using comparable nightly/weekly rates in that area,what would your net return be before subtracting any mortgage costs?

Buying STR New Construction during Covid?

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