Is it "wrong" to invest in an STR as your first property?

Question

So I've been doing tons of reading on this forum, listening to podcasts, reading articles, and running sample numbers on random homes for practice to get ready for my first STR.

But the more I read into it, the more old-fashioned advice there is for going with an LTR.

Am I making a mistake for investing in an STR as my first home? Would you advise against this? Would there be issues with lenders/the bank?

Honestly the idea of LTR just doesn't appeal to me- I mean all that work for $200/door per month? I can do Uber and make that in a day.

Yeah, there's the whole equity, appreciation, etc. but I'm much more interested in getting paid today than tomorrow so I can reinvest it faster.

Yes, STRs are more work. But they're also more profitable. STRs always outperform LTRs in terms of cash flow (if you're doing it right).

So is there any reason to re-evaluate my whole plan and consider an LTR? I'm interested in sustainability right now and having a monthly cash flow that I can use to expand.

Am I doing it wrong? Or am I just having second thoughts?

Ken Boone · Answer

@Roy Hu All we have our a lot of opinions for you man but at the end of the day you need to make a decision that will let you sleep at night. From my perspective, with myself starting with LTRs and then going the STR route, I think they are just two totally different entities completely. I did it that way because when I started, the real estate thing was new to me and that is what I was comfortable with. The only thing similar between the two is the purchase process, mortgage, insurance that kind of thing. Now having said that my LTRs are managed with a company that gets 8% and they are 98% passive. For 8% on an LTR it is not worth my time to self manage. The STRs are an active investment and just a different ballgame. The mgmt fees are typically 20-35% and for the cash flow they generate it is absolutely worth my time, but it is a business that requires someone to run it, manage it, handle customers, etc.. Now it is not hard but it is for some people and its not for others. That is what you have to decide. STRs will make a ton of cash flow, but you have to have a good product and good customer support just like any business. Having a good product means being in the right market, the right amenities and being 1 step ahead of your competitors.

I guess the my main point here is that to me an LTR that is not self managed is more equivalent to investing in the stock market through a broker. You invest and kind of forget about it, you check on it every now and then, sometimes you make an adjustment to your position, but you don't do a lot with it. An STR that is self managed is a business and needs to be run like one. Some people see the cash flow opportunity and don't fully understand that aspect of it.

Best of luck to whatever you decide to do.

Julie McCoy · Answer

@Roy Hu My first investment was an STR for the same reasons you articulated - an LTR just didn't appeal to me. I liked the idea of having to be a bit more involved (though still not a crazy amount) and higher cash flow etc. Zero regrets. My first STR rapidly paid for my second which paid for my third etc. and in a few short years my portfolio has brought me financial freedom.

I do intend to diversify into LTRs for some additional stability, but STRs have been and continue to be an amazing investment for me and I enjoy working with them.

Avery Carl · Answer

@Roy Hu it's definitely not wrong. I invested in STR's first and then used the cash flow to scale my portfolio into a mix of LTR's and STR's. My big question is WHERE are you interested in investing in an STR? There are many short term markets that are decades old where you don't have to worry about the regulations and volatility of metro markets. The market you choose will determine just how risky of an investment it is!

Yitzchok Carmen · Answer

Honestly I think its a great Idea. Thats what I did. As long as you can get the cleaner and are within the Zoning rules. Heres why I think its actually better than LTR.

1) They're often almost turn-key. No major rehab needed to start making money from Day 1

2) No Evictions. For a guest not to leave is extremely rare and if it happens you can just call the cops (as long as theyr'e not there 30 days). Evictions are the Number 1 thing that I dont like about LTR

3) Money upfront. You dont pay you dont come

4) IMO the screening process is much simpler. No credit checks etc. People on vacation are not interested in trashing your house usually (unless your rates are too low, that will get bad guests who are looking to party). If a bad guests does come, they're out in a few days at most! You're not stuck with them for years like in a LTR!

Yes STR is a dif animal and its not for everyone. And you really need to know your market and its potential esp post Covid. Also its a lot less passive and its really a hospitality business. But for the higher returns I think that is worth it.

Good luck!

John Underwood · Answer

No it's not wrong. However you would be better served in your education and experience to learn how to handle long term rentals first.

Also the STR market is highly volatile right now. I wouldn't recommend anyone jump into this and have all your eggs in this one basket especially right now.

I would recommend you buy a duplex or quadplex. You could try doing a STR on one of the units if you absolutely want to try it and still have some steady and predictable income from the other LTR unit/s.

Gerald Pitts · Answer

I agree with @Avery Carl and @Julie McCoy! This is my plan too. If you listen to Avery's podcast on BP, you hear her talk about diversifying into LTRs. I would like to get into apt syndication at some point as a passive investment. For now, my STRs are just a little bit active for more cashflow, and I am looking to replace my 9-5 with it and "retire" early.

Paul Sandhu · Answer

Running a STR is like owning a thoroughbread horse. It's takes time and skills. Having a LTR is like having a horse out in the pasture. You just have to make sure it has food and water, and it'll take care of itself.

Source: Me. I have a stable of 23 STRs. Enough to fill 2 city blocks.

Michael Baum · Answer

Hey @Roy Hu, STR's are more unpredictable that just about any other real estate investment. While @Jon Crosby is mostly right, we didn't experience that beating due to the pandemic. We have having our best year ever.

I will say that it is much more work and profits aren't necessarily as high as you think they are going to be. Running a 5 star vacation rental can be expensive. Far more than the typical LTR.

I am not discouraging from doing it. This is our first investment, it is a STR and we are doing well, but it could be better.

I am also worried about your get rich quick thinking. I understand you want to roll over profits and leverage, but no one is getting rich overnight in real estate. It take time to build a solid foundation.

Roy H. · Answer

@Jon Crosby Thanks for your post!

Yes, I'm trying to see things from both sides of the fence before it's too late. I can find tons of info for how LTRs are the holy grail, but I just don't know if there's a reason why STRs aren't as "encouraged." Probably all the unpredictability and the need to discourage newbies from making mistakes? Or because they're *relatively* new to the general population with platforms like AirBnb/VRBO and have become convenient enough to go mainstream?

It's very easy to find info for investing in LTRs online, but hardly anything that prompts to invest in an STR as for your first investment. Perhaps it's just like you said- easier, stable, and more manageable, especially for the newbie.

One thing I read is that your numbers for the STR should be well beyond positive when compared to an LTR. So that if it satisfies an STR, it better darn well satisfy an LTR and remain positive. And then you can convert it to an LTR if needed (such as current situations pose).

I guess I'm just more interested in getting more cash flow quicker for reinvesting. I'll make a ton of (expensive) mistakes the first time around especially since it's my first home. But I'm thinking the profit from STRs can be used towards your second home much faster.

Jon Crosby · Answer

@Roy Hu

LTR's are by far more predictable, safer and easier to manage, if you are looking for sustainability than they are sort of the de facto definition of a sustainable real estate investment.

STR's just took the beating of the century with COVID and while they are rebounding quickly, it's very reasonable to assume things will get locked down again in the coming months, so short-term sustainability of STR's is a little questionable at the moment.

Are you looking for somebody to talk you out of investing in STR's, or into LTR's is the question?

Is it "wrong" to invest in an STR as your first property?

Is it "wrong" to invest in an STR as your first property?

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