This staging company looks like they got you. Were they affiliated or recommended by the mastermind? Would really love to get that answer? That is robbery for a 2/1.
Mastermind seems HIGH ticket for an STR tutorial. I personally wouldn't include a mastermind in your "cash invested" or ROIsince that's just a general/high lever business expense, not an investment in any particular. This also goes for what you're grouping into OpEx...some are just overall business management so the asset looks worse because of your accounting for them.
Overall though, $6k of cash flow, $Xk of principal paydown, tax benefits, and 3% appreciation seems like a fantastic investment. People seem to forget their guests are paying down a mortgage and the taxes you're saving is real dollars...consider rerunning your calc to improve your perspective.
Don't forget RE isn't a 3 year hold...10 years (less with other benefits from above included) is not a long period of time with a physical asset. It sounds as just like you got pulled in with a mastermind class for $10k, you see shiny objects like crypto or stocks going up and think your approach/investment is bad. You need to take a 30-50 year approach.
No, staging company was not affiliated with the mastermind. I went with a different furnishing company than the mastermind recommended. I paid less than I would if I went with the mastermind's recommended designer.
And represents all furnishing & set up costs lumped together. When I hired the PM in April, we did a small redesign including light painting, replacing light fixtures, adding a few amenities and other small touches that I also included in this cost. So it was not just a single design & setup but one initial design & setup plus another small one. Still too much, to your point.
Yes, I agree that is a valid point about the time horizon. I don't want to sell right now (after less than 2 years of ownership). I would like to look at it over 10-year period.
I could see why you are concerned here, but if I was in your shoes, I'd try hold out as long as possible before jumping ship.
My burning question- What do your operating costs consist of here? They seem high for what I am assuming to be a smaller sized property. What can you do to reduce these? Once you are able to increase your margins, I would try to pay down the mortgage as quickly as possible using whatever extra cash flow you can generate. Look at everything, from utilities, to landscaping, to property taxes etc to see where you can save. Your debt payments appear to be around $16.8K per year, not $24K, so I'm not sure where that figure is coming from, but once the mortgage is paid off, you'll have some more cash flow to play around with.
1031 exchange is always an option if you are really just done with this property and want to sell. I think all of the capital improvements you made will increase your basis too, but make sure to confirm with a tax professional on that.
Where I sit right now, if I were to cut my losses and sell, I'd be cementing the loss of over $100K. I've done an excellent job at meticulously tracking everything, so I feel comfortable with the "monitor closely to see what a stable asset looks like" strategy. But I value the different perspectives and would like to understand what led you to that conclusion more clearly.
There's no future here where I could get closer to breaking even? Why do you feel that way?
Thanks for the additional context. I think I'm starting to understand your view and can see why you are making this point.
Regardless of how I got to this point (i.e., investing $130K capital), how much am I benefitting from the current $45K of equity. If I can get back to "paying back" the $130K faster with another asset, then I should pursue that other asset.
I was thinking more cleanly within the lines of this specific property/investment. That almost doesn't matter. It's a matter of current value, current returns. And if there's anything better available to me.
As a thought exercise, if I were to sell and take my $45K of equity and put it in an index fund earning inflation-adjusted 7% return, it would take 16 years for that to turn back into my original $130K. Not important for the numbers/math to be perfect, but more of a line of thinking.
Am I on the right track here?
The thing is, you could take that $45k and leverage it with multiple deals to regain that $130K in 1, 2, or 3 years. It’s a numbers game and a leverage game.
For example, you could split that $45k into two (properly analyzed) deals, leveraged with smart financing, and then refinance after rehab, cash out your equity, cash flow the properties, and carry on with more deals using the equity you extracted. Let’s pretend you create $80k of equity you can extract from each property ($160k total) - now you’re on your way to a much faster “recovery” than sitting on it or investing in a 7% stock.
There are even ways to keep that $45k and leverage other people’s money to make the same returns.
Read “Real Estate Deal Maker” by Henry Washington. It’s super insightful.
But as you’ve ascertained, the deal must pencil out. Analyze rigorously and don’t do a deal that doesn’t meet the metrics.
In my post regarding $45K of equity, I mentioned that just for an example and was using that number as an easy starting point for a thought exercise. But, I do appreciate your desire to be precise.
In this thought exercise, I would be selling, not pulling cash out to refinance. If I were to refinance (which would be impossible as you stated), it would be even more difficult to cash flow. I bought the property less than 2 years ago and my payments to this point have been mostly to interest.
To extract and make that equity accessible I would have to sell.
Let's say I get a full price offer of $193K market.
Immediately take a 10% haircut (at least) for selling costs. $193K - $19K = $173K.
Pay off my debt. $173K - $147K = $26K.
Tax burden, too? Probably.
But my point is that I can absolutely access the equity if I were to sell. It would be much less than the $45K of paper money that I currently "own". The thought exercise was how to make that equity work more efficiently.
Refinancing isn't the only way to access equity, as I'm sure you know.
@Steven DeMarco Several, hopefully helpful, questions:
1) Why did you pay so much for this property if it needed all this work?
2) How much of the Closing Costs of around $13,500 were actually cost versus property taxes and escrows?
3) Why was new electrical NEEDED and why so much?
4) Why was new HVAC NEEDED and why so much?
5) Why was new roof NEEDED?
Those add up to $35k.
You're probably going to say that you wanted to upgrade everything, so you didn't have to worry about it in the future.
We see many investors doing this, but for many, it's a mistake! WHY? Because as a business, you want to milk capital items for as much life as you can ring out of them! How would've the existing electric, HVAC & roof REALLY affected the STR marketing & guest enjoyment of the property?
Looking back, what business case do you really have to justify those expenditures?
For surgeon everyone needs a surgery. Well almost everyone.
So it stands to reason that for a roofer every house needs a new roof, electrician every house needs rewired, and for an HVAC technician/ company every unit needs to be replaced. ( Usually)
For the HVAC project, I got 7 quotes ranging from $7K to $30K.
@Steven DeMarco Several, hopefully helpful, questions:
1) Why did you pay so much for this property if it needed all this work?
2) How much of the Closing Costs of around $13,500 were actually cost versus property taxes and escrows?
3) Why was new electrical NEEDED and why so much?
4) Why was new HVAC NEEDED and why so much?
5) Why was new roof NEEDED?
Those add up to $35k.
You're probably going to say that you wanted to upgrade everything, so you didn't have to worry about it in the future.
We see many investors doing this, but for many, it's a mistake! WHY? Because as a business, you want to milk capital items for as much life as you can ring out of them! How would've the existing electric, HVAC & roof REALLY affected the STR marketing & guest enjoyment of the property?
Looking back, what business case do you really have to justify those expenditures?
1. & 5. Great question and I wish I could tell you that I anticipated all of these capital items but I didn't. I knew that the roof needed replaced within a few years and the seller contributed $1K towards the roof. I know a good local roofing company which gave me a friends and family discount so I went with the new roof. Did it absolutely, 100%, need a new roof when I closed? No, probably not. I could have possibly gotten a few more years out of it.
2. Here is the breakdown: origination charges, appraisal, title fees ($4.3K), taxes and other government fees ($4.7K), prepaids including insurance, interest, taxes ($2.9K), initial escrow payments ($1.8K), other including realtor admin fee and owner's title insurance ($500).
3. Insurance would not cover the property unless knob-and-tube wiring was replaced. The inspection never made me aware of this issue and I did not know what to look for when walking the house myself.
4. Furnace was 30 years old and there were cracks in the heat exchanger. This was not on the inspection report and did not present as an issue until I went through my first winter season. Instead of just replacing the furnace, I replaced the furnace as well as installed central A/C (which the property did not have before). From a guest experience perspective, in the summer months it gets hot in Pittsburgh and window units is not the best experience.
I couldn't get insurance with knob-and-tube wiring, so that was required. Roof, I probably could've gotten away with for a few more years. HVAC, I genuinely feel that the guest experience would have suffered if I didn't provide central AC.
There really isn't a business case here other than "make the property as good as it can be" which I can see is not optimal from a capital perspective. Again, had I known that all of these capital items were required to perform at the top of the market .. I wouldn't have pursued the deal further. But I'm a bit past that point ...
Hey BP - Want some advice/perspective on my situation.
Back in 2022, I had a strong desire to get into REI to diversify my investments and pursue a new side hustle. I envisioned real estate investing as a way to make extra money on the side and continue to build my wealth. I signed up for a mastermind class that teaches you how to invest in STRs and pulled the trigger on a 2BD/1BA house in Pittsburgh, PA to operate as an STR. This was my first real estate purchase and the final sale price was $166.5K which I purchased using a 10% down second home loan. I then proceeded to dump a ton of money into capital improvements in order to make it a competitive STR (details below).
Since owning the property, my total cash investment is about $130K for initial acquisition, capital improvements, the mastermind course and floating negative cashflow. Here is the breakdown: Closing Costs ($30K w/ $16.5K down payment), Furniture, Setup & Design ($35K), New Electrical ($14K), New HVAC ($12K), New Roof ($9K), New Landscaping ($1K), Mastermind Course ($10K), and the remainder is floating negative cashflow ($19K).
I've been operational through 17 months (March '23 - July '24) and the following metrics are throughout this 17-month time period. My total gross income on the property is $37K and my operating expenses have been $32K, leaving me with a NOI of $5K. After factoring in debt payments of $24K ($1,400/month), my cashflow (before any capital expenses) is a total of $-19K. Averaged over this 17-month time period of operating the STR, I'm averaging a negative cashflow of about -$1,100/month.
To reiterate, I've put $130K cash into this deal. From a cashflow standpoint, I've obviously generated no return. The current Zillow Zestimate for the property is $193K, which means I'm sitting on roughly $45K of equity. If I were to sell anytime soon, with selling fees, I'd be realizing upwards of a 6-figure loss assuming the Zestimate is accurate. It may not be, as I've made a ton of capital improvements and I've seen comps sell for over $220K in the same neighborhood. Either way, selling doesn't paint a good picture.
In April '24, I hired a full-service PM which has helped tremendously with bookings and appears to have started turning the cashflow ship in the positive direction. I have been consistently within +/- $100 of breaking even for the first 4 months of the PM operating the STR. Since we have gotten momentum with the new listing on Airbnb, I am booking out well into Sep/Oct/Nov at the time of writing this post and I anticipate that the next few months will produce some positive cashflow. Over time, I also anticipate that the cashflow will improve slightly as the listing continues to excel (26 out of 27 reviews have been 5-star) and book out into the future.
My current plan is to give the PM a full year to establish the listing and then revisit what my cashflow scenario looks like. As of now, I (obviously) do not want to invest any more cash. I am a far cry away from the dream of building my wealth and it feels like I did absolutely horrendous on my first real estate investment.
Let's assume we take the happy path with my cashflow situation improving and over time, I average $500/month in cashflow after things stabilize with the new PM ($6K annual cashflow).
The estimated rate of appreciation since I purchased 17 months ago ($166K -> $193K) is roughly $26K over 17 months (about $1,500/month). It seems unlikely that this will continue into perpetuity and let's say a more conservative estimate is 3% annually, which would equate to about $6K annually in appreciation.
So on paper, it would take me 10.8 years ($12K in cashflow + appreciation) to net out the $130K in total cash invested.
What if the cashflow situation doesn't improve, but continues to break even or even worse begins to dip negative again? What should I do? Any help, guidance, critique, insults, etc. are welcome. I just want some discussion and perspective around this as I don't have a close network of investors to bounce ideas off of.
So as I have posted many times and others have, you make your money WHEN YOU BUY. You purchased much too high. Buy right, reno right, rent right. Sorry it seems you did none of those things. I am NOT beating you up well a little LOL. Do not take it personal. You want me to blow sunshine or tell you what you need to hear. Also, 10k for a class, are you nuts!!! How's that working out? PLEASE learn from this mistake, take your lumps and move on. I tell everyone, guru classes are a total waste of time and money, point proved. Again, NOT beating you up. It seems you do not have much of a choice,
All the best
If I'm being honest, I thought I was getting a deal for that purchase price. I didn't have the thought or foresight to expect massive capital investments to make the place nice. Had I gone through this once or twice before, I probably would not have even considered this property.
I appreciate your direct criticisms. I agree with you - I don't think I bought right, rehabbed right or rented right (at least initially, when I was self-managing). And the masterclass was not worth $10K.
I could see why you are concerned here, but if I was in your shoes, I'd try hold out as long as possible before jumping ship.
My burning question- What do your operating costs consist of here? They seem high for what I am assuming to be a smaller sized property. What can you do to reduce these? Once you are able to increase your margins, I would try to pay down the mortgage as quickly as possible using whatever extra cash flow you can generate. Look at everything, from utilities, to landscaping, to property taxes etc to see where you can save. Your debt payments appear to be around $16.8K per year, not $24K, so I'm not sure where that figure is coming from, but once the mortgage is paid off, you'll have some more cash flow to play around with.
1031 exchange is always an option if you are really just done with this property and want to sell. I think all of the capital improvements you made will increase your basis too, but make sure to confirm with a tax professional on that.
Where I sit right now, if I were to cut my losses and sell, I'd be cementing the loss of over $100K. I've done an excellent job at meticulously tracking everything, so I feel comfortable with the "monitor closely to see what a stable asset looks like" strategy. But I value the different perspectives and would like to understand what led you to that conclusion more clearly.
There's no future here where I could get closer to breaking even? Why do you feel that way?
Thanks for the additional context. I think I'm starting to understand your view and can see why you are making this point.
Regardless of how I got to this point (i.e., investing $130K capital), how much am I benefitting from the current $45K of equity. If I can get back to "paying back" the $130K faster with another asset, then I should pursue that other asset.
I was thinking more cleanly within the lines of this specific property/investment. That almost doesn't matter. It's a matter of current value, current returns. And if there's anything better available to me.
As a thought exercise, if I were to sell and take my $45K of equity and put it in an index fund earning inflation-adjusted 7% return, it would take 16 years for that to turn back into my original $130K. Not important for the numbers/math to be perfect, but more of a line of thinking.
Am I on the right track here?
This discussion actually has real meat on it. Sorry for taking so long, but I've been having my own growing pains.
One of the things we're not really looking closely at is the hyperlocality of Pittsburgh, a fundamental understanding of the unusual nature of this place and how, through insularity and other factors, it tends to punish long-distance investors. My sense is that Steve is running into quite a bit of this.
Jay, the answer to your question of if I know any $200K and under locations here that would make sense as an STR, yes, I do, but a lot depends on how the property is marketed, how it is furnished, to whom you make it appeal, how long you have to build up your business, how much work you're willing to put in. From the long-distance, out-of-state perspective -- no, not many location. As a sideline to a regular local self-managing small landlord in my position, oh, very much so.
Anyway, Steve, I'll send you a connection request.
Thanks Jim. I have definitely paid for things to have a boots-on-the-ground resource take care of something that I definitely could have done myself had I lived in Pittsburgh. It's a fair point.
I have lived in Pittsburgh for almost 10 years during/after college so I am familiar with the area and have a solid network of contacts. But when cost is top of mind, nothing beats being able to drive to the property and fix/do something yourself. In the next few years I may be moving back to Pittsburgh so this could be an option for me in the future.
I did complete the backyard rehab project myself, where I went from a weed-ridden red cobblestone courtyard patio to a comfortable pea gravel patio with chairs, firepit, grill, string lights and life-sized games. It cost me $3K and lots of labor which I did myself. I got quotes for $15K and $20K. So I am willing to work and do things I feel comfortable tackling myself.
Thanks for the connection, I look forward to talking more.
I think there’s some stuff that may need to be considered
1. Projections for a STR are much less accurate than for a LTR.
2. STR is half investment, half business; LTR is all investment. Business is much riskier and volatile than investment.
3. The subject investment never had a chance from day one. It made no sense financially and it made no sense from a geographical perspective.
4. The $10,000 spent on “education” was spent to learn a specific method, technique or strategy. This is useless unless the investor has a foundation in or has first been educated as to real estate principles, real estate law and real estate finance. You can not “short cut” it.
5. Sunk in costs are irrelevant. Past operating history is irrelevant. The only numbers relevant to an analysis today are current real equity in the property, projected cash flow, projected equity build up, and appreciation.
6. In the real estate investment field long enough, we all have losing investments; those that don’t work out as planned, and those that approach the “disaster” state. What’s unique about real estate is that given enough TIME even very bad investments end up profitable. The question is alternative use of equity compared to current use.
7. When new to investing we tend to focus almost exclusively on profit potential with almost no consideration of risk. After 10, 20m 30 years or more investing we focus on risk FIRST. We develop a comfort zone, and if the risk is outside what we’re willing to consider we reject that investment without even needing to consider potential upside.
8. Non tourist areas are almost never a good place to STR. The may be decent for MTR or furnished LTR. But to make STR work, the DIFFERENTIAL in income between STR and LTR needs to be HUGE. That's why one room motels don't work - the costs of operations need to be spread over 50 units or more.
1. Agree it is much harder to nail STR projections. But I didn't just put my finger to the wind and say a prayer. I looked at 3 years of historical data and my target was the 50th percentile, which was $34K/year. Admittedly (and to your point), in my first 12 months I missed this mark by 25%. Already in my second year, I am on target to meet and likely exceed this $34K/year mark.
2. Completely agree that it is a business, and I am running it like a business.
3. Actually agree with you here. Looking back (hindsight is 20/20), this deal does not pencil out.
4. Other than listening to BP podcasts, reading over a dozen books and engaging with the masterclass content, I have no formal education in real estate.
5. This is the perspective that I was hoping to get by transparently posting my details. I spent $130K to get an asset which has $45K of equity in it. That $45K of equity is going to continue to grow and generate a certain amount of cashflow. I need to measure/evaluate if that equity's performance is where I expect it to be. Thank you for your contribution.
6. This may be hard-headed or not wanting to "lose" but I want this to eventually be profitable. Even if it isn't the best use of my capital I just don't want this to be a failed investment. If the cashflow situation does not improve, I imagine this will be the biggest mental/ego battle for me personally.
7. That is a major takeaway for me. I would plug numbers into the spreadsheet if I were to perform in the Top 10% of the market and be amazed that I could cashflow so well. In reality, I doubt I'll ever be in the Top 10% but I do truly believe that I can be in the Top 25% consistently.
8. Agree that they are almost never a good place to STR. However, guests are spending over $14M per year on 2BD Airbnbs in Pittsburgh. This number has gone from $8.7M/year to $12M/year to almost $15M/year in the past 3 years. Unless this number starts going down, there is money to be made and it's evident in the data. It's all about being a top-performer to capture the most of that market. Point taken regarding spread of operational cost. With 1 unit I cannot do that, as you mentioned.
Steven, admittedly I haven't read this entire thread.
But if I can be a resource to help at all, please reach out.
I operate a STR in Detroit that I self-manage. My entry numbers are admittedly very different. I purchased what was an existing duplex for $48,000 and proceeded to take the entire thing to the studs and turn it into a 5 bed/3 bath home.
That cost me about $130,000 total. And then it appraised for $240,000.
So we had nothing really invested in the deal at that point but then we operated it for a year as a LTR before converting it to a STR. I'd have to look back, but I'm sure we sunk in another $10k - $15k to convert it.
A quick glance at the numbers show that we're netting about $1,000/mo after all expenses and I'm happy to compare notes.
For example, I see you're paying quite a lot for software. What exactly is that? I pay for Pricelabs (to automate pricing) and Hospitable (channel manager). Combined, I think that comes to like $30 or $40/month.
I don't run FB ads or anything else. I simply rely on Airbnb and VRBO (although the vast majority of my bookings come via Airbnb).
I have a great cleaner and I'll have a handyman, plumber, etc. come to the house when needed for those things.
Anyway, again... happy to help where I can, compare notes, etc. if you need it.
Thanks - appreciate the perspective. Sounds like you were able to really nail the buy which allowed you to run a successful rehab and recoup all of your initial investment.
When I was self-managing, I used Guesty for Hosts ($528 per year or $44/month). I also subscribed to RankBreeze ($80 per quarter or $27/month) and have a StayFi router to collect guest contact information ($15/month). I also subscribe to AirDNA monthly ($80/month). My annual Ring subscription is $40 ($3/month).
Now that I've got the PM fully onboarded, I cancelled the following: PMS, RankBreeze, AirDNA. So that should help bring down the software cost moving forward.
From an advertising perspective, I had 2 separate photo shoots: 1 when I started the listing myself and self-managed ($450) and 2 when I hired the PM and we did a small re-design ($400).
When I was self-managing, my listing was struggling from a performance perspective so I ran FB Ads and spent $300. Complete waste of money and time.
The ebbs and flows of business include losses, even big losses. I like @Mike Dymski's perspective. Move forward and keep building. And heck - go ahead and keep what you have and try to salvage it so you're not bleeding. Just don't get stuck investing time/energy into recouping something that can be recouped in a different investment faster.
Agreed - this is exactly what I was looking for. Some external perspectives that I probably wouldn’t have been able to come up with on my own.
I’m not quite at my tipping point to sell and try to recoup faster but maybe I will be a year from now.