Quote from @Jonathan Dempsey:
@Luke J Nelsen curious if when underwriting you put in a management fee although you self manage. Just to keep apples to apples and cashflow projections honest?
There is definitely some cat & mouse going on in vacation markets where sellers are utilizing higher returns through covid to justify prices. However, I don't know that we will have the level of demand drop to pre-covid levels. In my opinion, many of the markets that exploded during covid will cool down, but remain strong with historic highs after being placed in the spotlight. Florida being a prime example. Many people who transitioned down do not have plans to ever look back. Also keep in mind the workforces opinion on remote work has made a paradigm shift. People have more freedom than ever to work where from where they like. Although that may recess, remote work will remain at a higher level than the world has ever seen after testing the landscape through covid.
Rates may slow the markets, but vacation towns are forever redefined and will become increasingly popular as people realize the freedom's of the post covid era.
All great points! I agree that vacation destination markets will still be solid from a travel standpoint. And people buy and underwrite these properties like they would a business. That being said, with travel regressing back to normal and prices and interest rates so high there’s a gap between buyers and sellers. Listings are sitting and prices are dropping daily. For the amount of work STRs take vs LTRs I personally need much more cash flow to justify it. I’ll still buy STRs but it will need to be the right deal. If I can make the same return on a LTR, I’d much rather go that route since it’s more passive.
For fun I compared what my mortgage would be today vs April 2021 on my first cabin purchase. Purchase price in April 2021 was around $555k at 3.125% 10% down. Mortgage with escrow is $2485. Now if I paid the same amount(today it’s closer to $725k+) my mortgage would be $3560 at 10% down and 6.5% and paying points. That’s a $12,900/yr difference and not factoring in the increased value. That’s over $1000/mo straight to the bottom line. And yes, some deals will still pencil out. However, I think we need to be cautious and use 2019 occupancy rates to be safe. Maybe that’s just me though.
I do also see saturated markets effecting returns and occupancy here. In my personal case, there were a total of 2 rentals on my small road when we bought in April 2021. Now there are 6 rental cabins with more being built a new tiny home village being built as well. We are fortunate to stay pretty booked which I believe is because we only buy properties with a nice view. However, I wonder if some owners will fall behind on their payments if travel slows…We shall see!
If only we had a magic crystal ball!
