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!!!
