Working With First Time STR Investors in 2022

Recently I have started working with several investors new to Short Term Rentals in the Pensacola, Destin and Panama City Beach area looking for the right property. During the initial phase there have been three hurdles we all had to overcome. 

1. Condo vs House

2. What are the returns like

3. Financing 

The most abundant resource in the markets along the coast are condos but there are still communities of homes to be found. The way STRs are zoned along the coast most approved properties are south of US HWY 98. Next is the pricing for homes vs a condo unit will usually be higher unless it's a townhome. The buyers I have worked with so far have ended up going with condos because there are more options available. This brings up the next big question of what the numbers look like.

Most agents in the area wont be able to get pro-formas on returns for Cash on Cash, Gross Rent Multipliers, NOIs. Usually an agent will look up in the MLS database for licensed agents to see if there are any revenue documents available for the property. Then they will pass that to the client. I have noticed most properties listed for sale underperform because they are not used as full time STR units, they have a property manager or it is not maintained well. AirDNA gets a lot of heat for inflated returns but in the emerald coast market they have been within 10% of projections to actual income. A favorite term we use on the team is "it depends". With every investment there is some level of risk and to expect no risk when investing is not a realistic expectation. I have noticed also that traditional long term rental investors are very uncomfortable with term "occupancy rate" and "nightly rates" because it is not predictable like a long term lease. This is probably what scares away most leads I work since they can't trust the revenue in the on season will make up for the lower revenue in the off season. Once we get past the skepticism of STR returns we have our final challenge of getting the deal financed.

One of scariest emails I used to get when I was new to working with STR clients is "this condo isn't warrantable". Then I realized most condos wont be warrantable but that if you pair up with a good lender the portfolio loan can be a saving grace. Picking a local lender that works in the area on investment deals and has a relationship with the agent is the best if not the only way to get through this phase. Especially as we enter 2022 and the announcement that "G" fees on conventional 10% second home loans will be going up along with interest rates, the portfolio loan may be golden arrow that most investors and agents don't know about. Besides the loan product, understanding what to expect as far as your interest rate on the loan is going to save you a lot of time. Before you run the numbers to see if the investment makes sense, have a conversation with the agent recommended lender to get an idea of what to expect. Then use those numbers to see what your returns look like. It is a less fun day when you ran the numbers expecting 3.75% on your loan, then go under contract only to realize your rate will actually be 4.75%. So setting the expectation will be huge to prevent those kinds of surprises.

That wraps up my short list of deal killers for STR investors coming into the space. This is geared towards my area and others may have different experiences where the property types are unique. For example the smokeys with all their log cabins probably wont have issues with condo questionnaires, HOAs or being warrantable. Thats why its important to lean on your markets local agent expert and ask what are the top deal killers in their area. 

- Kev