Quote from @Cody L.:
Quote from @Peter Brown:
@Cody L. Good point. This is basic finance that more expensive appreciating assets cash flow less and vice versa. The lower cap rates you see in the more expensive markets reflect both perceived lower risk higher upside due to expectation of stronger demand and rising rents.
My first deal was a duplex in a poorer neighborhood that cash flowed like mad...CoC returns 70-80% and up but higher risk and more management headaches over time. And more capex too as properties in poorer areas deteriorate faster. And years later the appreciation has been modest.
It really comes down to your time horizon and whether you want mostly cash or mostly appreciation.
Also the money is made by looking at the market and finding where it's 'wrong'. i.e., if you have a property in an area that trades for a lower cap rate than it should, sell it and buy one that's trading for a cap rate that's higher than it should be. Even though various markets have their own returns based on where all buyers/sellers agree, I see some areas that sell for more than they should (IMO) and some that sell for less than they should (IMO)
Exactly. The STRs were and still are in some cases great deals because the price of SFH in certain markets did not reflect the potential income stream that could be generated, with the right management. So the market was temporarily "wrong" there.
But over time we would expect prices in certain areas to reset to level out the premium of STRs relative to LTRs to reflect actual differences in management intensity, seasonality, and higher level of service needed for STRs and not simply the easy $$ arbitrage: "who knew there's people who will shell out $250 a night 20 nights a month for this place when i was only getting $1000 a month with this LTR?"
So now the market is correcting the prices are rising, the margins are narrowing and the winners in STR will be those who excel at management, marketing and value add.
