How to properly value a performing short-term rental

Question

I'm under contract for an Airbnb duplex in Dayton, OH. The agreed upon purchase price factored in the revenue generated from the property, so the purchase price is probably around 30k more than the appraised value of the property itself.

Does anyone know what type of lender would look at more of the revenue generated as opposed to the actual value of the property?

Or, is there any other option I can look into other than personal loans etc?

John Underwood · Answer

Sales price of a residential property is based upon comparable sales of other similar residential property. I don't think I would pay more that a property is worth based on appraisal. I generally only buy properties below ARV.To get any kind of credit for rental income you will need a couple of years of income and then they may only take 70% or so of that income. You won't be able to use this towards purchasing a STR.

Jon Crosby · Answer

Conventional lenders will generally only look at last 2 years Schedule E/C for STR income. Not to say there isn't some out there that will look at future potential, but generally speaking they will not. You can always just create a long term lease and then 'make the choice' to convert to an STR after you acquire the property. I'm not promoting you do that, but that is what some people do. Best of luck to you!

Blaine Moore · Answer

@Jon Crosby Right, my issue is that the seller is selling it for more than the appraisal value will be. I guess in that situation, you just either attempt to make concessions with the seller in getting them to come down on price, or bring in the cash of the difference between what my bank will lend me according to the appraised value, gap funding etc.Any other thoughts?

Matt Groth · Answer

@Blaine Moore put yourself in the banks shoes..you loan me more than the property is worth, because of a future income that has not taken place yet. Foreclosure happens, and the only way for the bank to get their money back is to operate it as an str, because the market won't pay what they have into it. Banks hate that, and you should, too. It's just a house. Nothing more. Your option is to bring more cash to the table, but I'm not a fan of that plan, either.

Blaine Moore · Answer

@Myka Artis Thanks for your input. I actually already talked to Host Financial and they frowned at the situation. If the short-term was shot and I had to find someone for long-term leasing, my rent-to-price ratio would be just above 1%. So, not a total loss, but still definitely worth more consideration which direction I should go. I'll call Kram Capital. Thanks for your input!

Rohin Dhar · Answer

I think it sort of depends on how good the deal is. If it's a phenomenal property find a way to make it work. If it's not a great deal, maybe you're over paying and should walk away. Oversimplifying things a bit, I'd define a phenomenal deal as annual gross rents are 20% or more of the purchase price. If the gross rents are 10% or less of the purchase price, you're probably not getting any great deal.We've had two properties not appraise. They were great deals, it didn't matter! In one case we got the seller to cover most of our closing costs, even though they wouldn't budge on the price after the appraisal.

Myka Artis · Answer

You would need to look into Host Financial or Kram Capital even though I'm not particularly sure that they would be willing to loan 30K over the appraisal but they specialize in short-term rental loans.My personal suggestion would be to run long-term numbers on the property and if the long-term numbers don't work then walk away from the deal. Short-term rental numbers are safe to rely on in the arbitrage game but in the buy and hold game that's a setup for bad business unless you're in a vacation rental market. If those STR laws change and the long-term numbers don't work you'll be stuck holding the bag. This is the biggest mistake I've seen on the buying side when it comes to short-term rental investments. Good luck in your investing but definitely reach out to Host Financial or Kram Capital. They will be able to guide you in the right direction.

Matt Groth · Answer

Just out of curiosity, what kind of gross rents are you getting? Are you.buying it fully furnished with all of the gross rents that are already booked? If you can even get it, your financing will be easy or cheap, so you are paying a premium for future earnings. How long will it take to net back the 30k, plus the added financing costs?

Blaine Moore · Answer

@Matt Groth I totally get what you're saying. I would look at it the same way if i were the bank. It would be different if I didn't have the past two years of revenues and expenses on this particular property, but I do. As I said to @Rohin Dhar, I am looking at this as a revenue generator, not just a valued piece of Real Estate. I know, its worth consideration, but if I'm bringing in 1k per month in cashflow after all expenses paid and putting money aside for vacancies, maintenance, cap ex etc. I would still take that deal. Worst-case scenario's happen, but often times they don't. At least in my experience and the experiences of many others I've talked to. Plus, in this market where most of everything is selling over asking anyway! My worse-case scenario in this, is that if I can't continue to use 1/2 of the property as a short-term rental, I can find a long-term tenant like there is in the other half of the duplex, which would still keep me at a 1% rent-to-price ratio. Not great at all, but manageable until another plan arises..anymore thoughts?Thanks for your help at looking at this!

Blaine Moore · Answer

@Rohin Dhar The property's gross rents do exceed 20% of the annual gross rents. I'm looking at this deal as a revenue generator as apposed to a traditional valued piece of Real Estate. I know everyone has their own opinions, thats why I reached out here to get some additional perspective. Thank you!