Using STR to beat LTR Income

[Jessica Piff]

Hi BP! 

So I have a thought and I just want to put it out there to get some feedback on it. 

Our strategy is to invest in small MF's and SFH with 4+ bedrooms that are under 100K. These properties are located in a town with a college and hospital. We've noticed that there are quite a few STR's in the area that are averaging a 50-60% occupancy rate. Although its not a "hot" market for STR's, the people that offer them there are definitely bringing in more income than if the properties were rented long term.

For example, a 4/1 or 4/2 SFH long term rental is averaging $850-$1000 a month. This same property on AirBnb is going for $150+ a night. This would mean we would only have to rent the house for 10 nights a month to beat the LTR income potential. On top of that, single room rentals are going for about $30-$45 a night.

In terms of the small MF's, 2/1 are renting for $750 a month as a long term rental. As a STR, they're averaging $60-$100 a night, which once again we would only have to rent the place for 10-15 nights a month to beat the LT rents. Or lets say if we bought a duplex with 2 3/1's then we would have 6 bedrooms to rent out for $30-$45 a night.

In addition to all of this, if the STR didn't seem to be working out, the properties would be fully furnished with the ability to do student rentals by the room or just get slightly higher rents as a whole.

Basically, we found a market where we can get duplex's and SFH's for about 60-75k. We really believe we'd be able to get considerable cash flow from these cheap properties by utilizing this STR strategy. One other thing we love about this strategy is that it would eliminate the cost of property management. We would still have the cost of a cleaning crew, but that would be considerably less than a property manager for LTRentals. There are so many people who self manage STR out of state with much success. I would be traveling to this area to do cosmetic updates and furnish the places.

I'm just wondering if anyone is using STR's to beat the LTR's in markets that aren't really big STR markets, but still have a decent enough occupancy rate to produce more income in an area where LT rents aren't really that high. Please poke holes in this idea and let me know if you think it could work as well as we think or if we're just missing the point.

[Nathan Gesner]

Jessica, this is a great question, but not an easy answer. There are many investors on BP that will brag about making $50,000 a year on their vacation rental but they rarely tell the whole story. Just for background, I used to manage 70 short-term rentals, I currently own one short-term and 30 long-term rentals, and I manage about 400 long-term rentals for others.

I have a single-family home that would rent for $1,600 a month. Tenants would be responsible for utilities so I would essentially earn $19,000 a year as a long-term rental. 

I instead chose to use it as a short-term rental and charge $275 a night. I anticipate renting it for at least 150 nights in 2021 so that's $41,000 in a year. It's a no-brainer, right? But short-term rentals have a lot of additional expenses:

• Furnishing costs
• Utilities
• TV/Internet
• Consumables
• Taxes

Those are just a few examples. The biggest expense is management, whether you hire someone or do it yourself. I'm a busy guy, so I hire a property manager to handle everything for me so about 30% of my income goes to management, utilities, and other expenses. Many of the investors on BP fail to account for the time they spend answering calls, meeting guests, mopping floors, etc. If they paid themselves for their time, their net income would drop dramatically.

I don't want to scare you away from short-term because it can be more lucrative if the market suits it and you provide a good product. Just be honest and realistic with your numbers. My short-term produces about 50% more than it would as a long-term and I still get to use it mysef during the winter or block time off for friends and family.