Best ways to break even or profit on short term rentals (STR)?

[Eric Baron]

Hello, 

I was really excited about the prospect of purchasing a STR (my goal was one in Breckenridge and one in Hilton Head) to be able to use a couple times a year personally and then use as a STR the rest of the year. I would need to hire a full time management company for the STR. My goal was to hopefully break even at minimum, if not turn an eventual small profit. I just didn't want it to put me in a financial deficit each year. After all, that's what investments are supposed to do, right?

However, after talking with several people in the industry including veteran realtors (whom I am working with to find properties of interest) that work specifically in these cities and with people that mostly buy for STR, they say most people are lucky to break even who own a STR and most do not profit. That was a bummer to hear from several different people, and I'm not clear what major benefit having a STR would be at this point. So now I'm rethinking if it would be worth it, or would I more likely lose a lot of money each year? If I could break even and it would be a place to stay a couple times a year for free (well not really, but you know what I mean), then I would be ok with that. However, if investing in any property including a STR, I would hope to actually make some profit from it.

So it seems to me that finding a super low rare deal (which I don't expect in these areas), and/or paying off the majority of the STR when purchased rather than financing the majority would be the most likely way to break even or perhaps make a profit. Am I wrong? I realize a lot of factors come into play including location, % that management companies keep, etc.

With all of that said, here is my main question. What are the ways that a STR purchase (especially in these 2 areas) would result in breaking even or perhaps even a small profit? Specifically, is there a certain % to pay off when purchased that would be suggested in this scenario (beyond a typical 20% down, and I realize the more the better, but am looking for the minimum suggested), or other recommendations/thoughts that may lead to this end result of break even or profitability?

Thanks in advance!!

[Michael Baum]

Hey @Eric Baron, well to be honest, whomever your real estate veteran is, you probably need to take what they say with some skepticism. If most people doing STR's aren't making money, no one on here would be doing it.

Having said that, there are plenty of areas where people do very well. As far as your 2 choices, I have no experience there, but Breckenridge is, from what I have read is going to be difficult due to the high cost of entry.

Hilton Head, there are a bunch of folks on here that invest there and seem to be doing well. Do a forum search and you will find info on that area.

Our lake house is in north Idaho on Lake Coeur d'Alene and we are doing great business. It took 2 years to get profitable, but now we are going gangbusters. Nothing like what you could do with the right place in Pigeon Forge TN, but we are making money and we are happy.

[Eric Baron]

Great, I appreciate the response. Thanks!

[Nancy Bender]

I have one in Hilton Head with an average 2% ROI a year. I love it there so I deal with it. I have three in Pigeon Forge that average a 14% ROI. You can do well, just pick the areas you invest in wisely.

[Amy Nakos]

I just responded to a similar thread a few days ago. here was my response: 

I work in the Breck market and have for 17 years. I have STR rental examples on my website along with a spreadsheet you can download that assumes a 10 year hold with certain appreciation and rental increase assumptions. I have run numbers in this market thousands of times and the secret sauce is how much you can make and keep on your rental revenue. 100% cash expect a 2-3% cash on cash return first year, no tax benefits assumed. With a loan you are subsidizing. Prices are high because people don't care if it cash flows - they want to use it for fun and offset expenses with rentals. Be aware of transfer taxes, condo tels, STR regs as they relate to septic, wells, and of course special assessments. Amy

I will add that a 50% LTV may get you close to breaking even.

[Justin Anderson]

I could never make the numbers work for Breck and I vacation there a couple of times a year so I have incentive too!  I ended up in Pigeon Forge for my STRs because I can use the cash flow from those to pay for my Breck trips and still have money left over.  Even now with prices that have run up, the numbers are still better than Breck for a given monthly payment.

I started out exactly where you are, so I sympathize!

[Eric Baron]

Thanks @Amy Nakos, very helpful! 

Thanks @Justin Anderson, that's unfortunately what I'm coming to realize, in that the most likely way to make it work is by offsetting Breck costs with a separate STR in an area with higher ROI. Any idea of what other mountain town (preferably Summit county but not absolute) might have a better chance at getting closer to a break even? I've heard Durango area may be one of the more likely by some.

[Justin Anderson]

@Eric Baron The play there was to buy for appreciation and make money that way.  Up until this past year, CO massively outperformed Pigeon Forge/Gatlinburg on that front.

You can pick one usually -- cash flow or appreciation.  For cash flow LTR you'd have to go to semi-scary places like Detroit or Baltimore.  Appreciation would be SF/NY/Miami.

[Eric Baron]

Great perspective to think about @Justin Anderson. That makes sense. Sounds like I need to reconsider what that ROI looks like as I haven't really thought about it from this angle. I guess it boils down to how close to break even I can get in order to see the actual ROI once I sell eventually. Thanks!

[Brian G.]

@Eric Baron can’t speak to the specific market you are referencing but the key imo to profit with STRs is to learn how to self manage remotely like most of us do on BP. I remote self manage from 2,212 miles away. You can do it too provided you have time flexibility to engage the occasional issue that comes up which usually requires sending text messages and/or making an occasional phone call. Good luck!

[Scott K.]

Location. Location. Location. Most people don't do their research before buying and end up wasting their money and quitting. Even people in the right location end up not putting enough effort and research into how to make a good listing, and making guests happy and sell their house. When I bought my 2nd STR, there were failed STRs on the market that were fantastic opportunities. I bought a place next door when I got outbid. My STR now has a 40% ROI. My place was the exact same floor plan, community, size. Just different street. It's like any other business. If you aren't willing to work hard on it, and you think you can just hire some management company and an interior designer and walk away, you shouldn't be buying into this business.

[Eric Baron]

@Scott Kunz great points.

[John Underwood]

You have to keep looking and run the numbers. If the numbers don't work keep looking.

Many people on here remotely self manage. When you take off 30% for a PM and self manage you will likely find many more properties that would break even or make money.

[Eric Baron]

@John Underwood I would prefer the concept of self managing for cost savings, but it seems tricky doing this from half way across the country. Just seems like too many potential situations that could fall through and get you stuck if I'm depending on different people or small groups assigned to keep each of the STR moving parts running smoothly and independently. That would be my concern rather than a company that does it all and there is plenty of backup support to get things done when needed. However, I know those costs eat away at chances of break even or profits.

[Louis Zameryka]

@Eric Baron self managing is not too tricky. At first it is because you need to develop your system and find a reliable cleaner who is sort of able to function a bit as a PM and knows or is a handyman.

Marketing yourself gets you the savings and that savings allows you to find and pay a great cleaner that is hands on. The guest handling and marketing is the highest cost of a PM and if you are even decent with using internet based software you can do it easily yourself. They are not really marketing your unit they are curating the content and distributing it while using rate software to price. Also that rate software in most cases is garbage at the moment except for a few because most are built on historic data and that is useless at the moment.

I actually think that in the current climate the only way to cash flow on a STR is buying at a rock bottom price somehow. Most stuff I look at is so inflated the numbers don't work or barely work even if you self manage. Finding a less inflated market or an off market deal is probably the way.

Hope this helps

[Michael Baum]

@Eric Baron, we manage our lake house from about 360 miles away. We have been doing that for 4 years and so far we haven't had anything crop up that couldn't be handled by our people.

I will say that keeping up on maintenance on your home's systems is very important. We have our A/C and furnace serviced 2x a year. We have a contract with our company for it. Costs about $150 for a year but includes service, cleaning and filters. Replace the anode in your water heater. Do duct cleaning. That sort of thing. An ounce of prevention is worth a pound of cure.

[Zachary Beach]

@Eric Baron I don’t know your market but in my market 50th percentile are luck to break even if they have any meaningful leverage on the property. 90th percentile makes more cashflow profit than 50th percentile revenues. The property I run (I own a few and also manage for others) are all over 90th percentile monthly and have crazy good cashflow.

[Collin Hays]

Originally posted by @Justin Anderson:

@Eric Baron The play there was to buy for appreciation and make money that way.  Up until this past year, CO massively outperformed Pigeon Forge/Gatlinburg on that front.

You can pick one usually -- cash flow or appreciation.  For cash flow LTR you'd have to go to semi-scary places like Detroit or Baltimore.  Appreciation would be SF/NY/Miami.

 Funny you mention that.  Even with all of the activity and price escalation in the Gatlinburg market, they'd have to double or even triple again to approach the prices you see in the Colorado mountain towns.  Gatlinburg is still very much a bargain in many ways.

[Michael C.]

Originally posted by @Collin Hays:

Originally posted by @Justin Anderson:

@Eric Baron The play there was to buy for appreciation and make money that way.  Up until this past year, CO massively outperformed Pigeon Forge/Gatlinburg on that front.

You can pick one usually -- cash flow or appreciation.  For cash flow LTR you'd have to go to semi-scary places like Detroit or Baltimore.  Appreciation would be SF/NY/Miami.

 Funny you mention that.  Even with all of the activity and price escalation in the Gatlinburg market, they'd have to double or even triple again to approach the prices you see in the Colorado mountain towns.  Gatlinburg is still very much a bargain in many ways.

Totally agree with Justin here. Although the area has experience massive price appreciation over the last 5 years, if you look at Colorado or California, you can see there is still plenty of headroom in the Smoky Mountains (Gatlinburg, Wears Valley, Pigeon Forge, Sevierville) especially when properties are generating double digit cash on cash returns.

We purchased a few cabins in the Smokys and are looking to buy more. Inventory is very low so it's a very competitive environment. I put together a brief presentation for friends and family who are also looking to buy a cabin. Hopefully you'll find it helpful in your research. 

[Sam Harrell]

@Michael C. I liked the presentation. Are you predominately purchasing off market or on market listings?

[Candice De]

@Eric Baron I agree with others that you have to choose cash flow or appreciation, and if your choice is cash flow, Breck is not your place. I live in Frisco (20 min away) and there are plenty of properties outside Breck that are more affordable. The STR property management fees and HOA fees make cash flow very hard without a lot down. But seeing some neighborhoods go up 40% this last year tells me resort areas are in demand. Look into Dillon, Silverthorne, and Blue River for more reasonable prices with access to great skiing.

[Alberto Barreras Diaz]

Quote from @Eric Baron:

Hello, 

I was really excited about the prospect of purchasing a STR (my goal was one in Breckenridge and one in Hilton Head) to be able to use a couple times a year personally and then use as a STR the rest of the year. I would need to hire a full time management company for the STR. My goal was to hopefully break even at minimum, if not turn an eventual small profit. I just didn't want it to put me in a financial deficit each year. After all, that's what investments are supposed to do, right?

However, after talking with several people in the industry including veteran realtors (whom I am working with to find properties of interest) that work specifically in these cities and with people that mostly buy for STR, they say most people are lucky to break even who own a STR and most do not profit. That was a bummer to hear from several different people, and I'm not clear what major benefit having a STR would be at this point. So now I'm rethinking if it would be worth it, or would I more likely lose a lot of money each year? If I could break even and it would be a place to stay a couple times a year for free (well not really, but you know what I mean), then I would be ok with that. However, if investing in any property including a STR, I would hope to actually make some profit from it.

So it seems to me that finding a super low rare deal (which I don't expect in these areas), and/or paying off the majority of the STR when purchased rather than financing the majority would be the most likely way to break even or perhaps make a profit. Am I wrong? I realize a lot of factors come into play including location, % that management companies keep, etc.

With all of that said, here is my main question. What are the ways that a STR purchase (especially in these 2 areas) would result in breaking even or perhaps even a small profit? Specifically, is there a certain % to pay off when purchased that would be suggested in this scenario (beyond a typical 20% down, and I realize the more the better, but am looking for the minimum suggested), or other recommendations/thoughts that may lead to this end result of break even or profitability?

Thanks in advance!!

Hi Eric,
From experience I tell you that investing in STR is not an easy task.
I have the experience of investing in a 420 sqft beachfront studio in sunny isles beach Florida.
The first factor that you have to take into account is financing, small rooms (less than 500 sqft) + condo tels are a nightmare to obtain conventional financing, 30 years conventional is almost impossible, don't waste your time and with 20 percent less.
bridge loans are the most you will find 1-2 years (35 to 40 % down), they have high costs, and you will have to refinance in the short losing money). Brokers will try it for months and will most likely go back at qc for conditions to close. 
Another important factor is the hidden rental costs of the condo hotels, you will have hidden costs that the hotel operator charges you for renting it, implausible things (resort/application fees), which you cannot avoid because condo-tels declaration of condominiums are designed for the hotel operator to profit from owners even if they don't put the room in their hotel program. Also check the specific rules of the condo-tel for renting, some of them goes from only allowing rentals through a "hotel program" in which you split 50% of your profits but they will not share 50% of expenses, others give you the option to rent it by yourself, but they charge an app/resort fee that will be about a couple of hundreds of dollars.

Also take into account city regulations and permits, normally you will need a STR license with the city and a license with the state which will cost a couple a hundred dollars annually.

Also keep in mind, cleaning and supplies expenses, maintenance, re-furniture, STR insurance, Building SPAs and bad clients

I'm not saying is not profitable but, with a bad LTV and the high cost of this kind of business most likely first year and second possible you will not break even. Good news is that passive losses can be accumulated for taxes and in STRS almost anything related to the room is deductible.

I would say to invest in high occupancy rates areas, such a beach near, airports, big cities or some places where you expect more than 75 % occupancy rates, also to do it if you are planning a 50% percent down or more.

Good luck!!!