@Eric Coats, to answer your specific questions, estimating expenses are pretty simple. You should have a good idea of every expense you have in your primary home, then add the STR specific: (These are rough estimate numbers, depending on various factors)
STR insurance - a special insurance that covers both the property and your liability, could be $2~4k in areas without natural disasters, could be more than $10k in some other areas.
cleaning fee - approx. $50 per bedroom, so a 4-bedroom house will cost you about $150~200
consumables - bathroom supplies, kitchen supplies, beverage supplies: $20~30 per week, depending on how much you provide
wear and tear - towels, linen, kitchen utensils, some furniture: $1000~2000 per year
Repairs/replacement for things that guests break or steal: $1000~2000 per year
Also, if your personal use is less than 14 days a year, the entire property's expense is deductible against STR income, but if you use more than 14 days, then you will have to calculate the proportion of how many days it's rented out vs how many days you or your family uses. Don't quote me on that, but it's easy to look up the IRS regulations.
I recently had a conversation with somebody else who is planning to start an STR business. Below is what I told her. I think the main points would apply to you as well.
STR is great, as long as you go into it with eyes wide open and reasonable expectations. The first thing I want to point out is that it may be wise, in your thinking, to separate the property itself from the STR business that's being run from the property.
In the old days (as recent as 10 years ago), people buy a vacation home to enjoy, and they leave it empty when not in use. You only do that if you are rich enough to afford it. Thanks to technology and Airbnb, we can now rent it out when the property is not being used. Thanks to COVID, for a couple of years, you can actually make enough money to be cash flow positive even if you hire a property manager AND have mortgage payments. Alas, this scenario didn't last very long, as you would expect in a free market capitalist society -- new money flood in, more STRs in supply, property prices increase, STR incomes decrease, until a new equilibrium is achieved.
Nowadays, the word STR is being used to describe both the property and the business. I think that could be dangerous if people are not careful in their evaluation. I would recommend that you analyze the operating side of the business and the capital side of the business separately.
On the operating side, you can use AirDNA to predict the potential income which is gross revenue. If you hire a PM, they typically charge 15~25% of the gross. If you self manage, you save that money, but you are basically taking on a side hustle. Then you subtract your expenses: (1) Fixed cost: property tax, STR insurance, utilities, landscaping, etc. (2) Variable cost: platform fees from Airbnb and VRBO, lodging/hotel/transit or whatever pass-through tax your local AHJ requires, cleaning fee, cost of replacement for consumables, repair and maintenance, etc. What's left after subtracting the expenses is your Net Income. In a very loose rule-of-thumb estimate, your Net Income (revenue minus expense) may be about 50~60% of the gross revenue. If you lose 20% to the PM, then you still have 30~40% profit.
Now let's look at how you acquire the property, which is a question of capital. You can get a mortgage, or you can pay cash. If you have a mortgage, you will have a monthly payment. If you pay cash, you don't have a payment, but effectively you are giving up an income stream if the cash had been in a bond or ETF and earning you either interest or appreciation. A lot of people tend to mingle these things when they talk about "break even" or "cap rate", but that leads to a lot of confusion.
Let's use some real numbers which may be easier to understand. Typically, the STR property tends to be priced at 10x of the annual gross revenue, so let's assume you buy a house for $500k and you can get $50k a year in gross revenue. (Some people buy a run-down place and renovate it before starting the STR. In that case, your $500k house may get you $75k or even $100k revenue, because you actually turned it into a $750k house. You are basically doing a flip first, which requires a whole different set of skills.)
So, with $50k revenue, if you hire a PM, they charge 20%, so you give up $10k right away. Your fixed costs could be something like the following: $5k property tax, $2k insurance, $3k utility (including internet and TV), $2k landscaping (mowing, weeding), $2k or $3k maintenance (if you have a pool or hot tub). That's $15k you have to pay even if nobody stays at your place. Variable costs depend on how many guests you have and a lot of other things, but it could cost another $10~15k. So now you are down to about $10~15k net income from the STR business. (Your income will be $10k higher if you self manage, but as I mentioned before, you earn that $10k by acting as your own PM. Some people think it's easy and claim it only takes them a couple of hours a week, some people wouldn't touch it with a 6-ft pole.)
Now let's look at the acquisition cost or capital cost: if you buy the $500k house with a mortgage with a 20% down payment, your monthly payment will be about $2700. Annually, it's $32k. You make $10k from STR, you have to come up with $22k out of your pocket, not to mention the upfront $100k down payment and possibly another $20k to furnish the house unless you bought it as an existing STR.
So in summary, in today's market, it's impossible to buy a STR and be a passive owner and still make enough profit to cover your mortgage payment. You either have to earn extra money via sweat equity (working as your own PM or do the renovation work), or you have to be ok with a negative cash flow. Any profit you can make from STR will help with the mortgage, but it's a bad idea to count on the STR to make a certain amount of money if that's the only way you can afford the house.
Bottom line, you have to decide how badly you want to own the place, and how much financial cushion you have, and how much risk you are willing to take.
I don't mean to scare you away from STR. For the right people with the right perspective, it could be a great way to diversify your investment and enhance your quality of life. I wish you best of luck.
