Is 2% rule a good measure for STR

[Leon Lee]

Hi, BP family

I was recently thinking about a good measure on whether it is worthwhile to convert LTR to STR. I asked around and got different answers. Some say that your STR gross income needs to be at least twice as the LTR gross income, and some say 4X. Such measures seem to be a little problematic to me because they depend on how expensive the STR property is. For example, if I spend $1M on a mansion and the market long-term rent is $3000/m. Even if I make $6000/m by converting it to a STR, i.e., 2X of the long-term gross monthly income, I still could go broke.

This makes me think of the 1% rule for LTR, i.e., your monthly gross income needs to be at least 1% of the purchase price to ensure that the property has positive cash flows. In the same nutshell, I wonder whether. I could use the similar rule on the STR: that is, the gross monthly income of the short-term rentals need to be at least 2% of the market value of the property. This measure incorporates the market value of the property in the test and may be applicable in properties with wider ranges of values. Interestingly, from my super small sample size (2) of STR and short operating time, I found that the gross income of the two properties fit 2% rule quite well. To use a $200K property as an example, the following table listed major differences in income and expenses (please correct me if they are way off) for STR and LTR scenarios and ignored those items that are similar (property taxes, mortgages, etc). In this case, suppose the LTR has $0 positive cash flow after incorporating all other expenses, the STR scenario still has $700/m to $1600/m positive cash flow, which seems to be fair compensations for extra hassle and time related to STR.

Any inputs from you experienced STR operators are welcomed!

Thanks
Lee

	STR	LTR
Gross Rent	4000 （2%）	1600（0.8%）
Cleaning, supplies, utilities	1200 （30%）	0 （0%）
Management fee (optional)	800 （20%）	160 （10%）
Vacancy	0 （0%）	128 （0.8%）
Remaining (including management fee)	2000	1312
Remaining (WO management fee)	2800	1152

[Ken Boone]

@Leon Lee Here is my two cents...  Forget the rules.  I have LTRs and I have STRs.  My LTRs have done well for me but in comparison my STRs are out of the park.  Now let me back up.  I am totally fine with my LTRs netting me about $250 - $400 month.  I let a management company handle it for 8% and it takes up almost ZERO of my time.  LTRs in my book the way I do it is strictly a 98% passive investment.  The STRs on the other hand are a business and need to be run like a business.  We manage those ourselves.  STRs are not passive they require some work.  My rule of thumb is I need to make enough money on my STRs each month to compensate for that extra work.  - And that my friend is different for each person.

Now this is just my opinion but the good measure on whether or not it makes sense to turn an LTR into an STR is not based on a rule but on your goals. Work the numbers up like you have and determine your reasons for doing it. Does the extra money you will produce with an STR adequately make up for your time involvement to justify going that route in your situation? That is only something that you can decide.