Why Short-Term Rentals aren’t Sustainable

For some people, the new and hip means of investment has been in short-term rentals, such as Airbnb, and the like. While it might be winning the legal battle, it’s not sustainable to buy and hold this investing. The high rents might be interesting, but it can’t really be attractive. Here are a few reasons why short-term rentals aren’t a sound investment strategy.

The first thing, is that they depend on tourism. Now Nashville and other cities that have a lot of tourists and business travelers can do well here, but often, the fluctuations happen where when the economy gets lessened, tourism stops, such as in the case of terrorism, a natural disaster, or a tight economy, which could cause demands for this to lessen fast. Florida is a great area, but if hurricane season happens, you’re putting this investment at risk.

They also create artificially high rental rates, where they’re about 2-3 times the annual rental rates, so they’re not affordable to the locals, and it will drive out good workers to an area. This goes for long-term residents that can’t afford to live there. This can have an impact on the location. These rates also cause buyers and sellers to trade the properties based on inflated incomes. When this dries up, many times these landlords find themselves in a negative cash flow on an asset that’s so badly overpriced.

They also increase landlord competition. It means that this will make it harder to really go and stand out. This also can cause a lot of bad landlords to come in, and lots of people will fail. This has happened, and it’s something that unfortunately is more common than you think.

Rental gain is also offset by high fees. Yes, you’ve got a higher rent on there, but the higher management fees also are higher as well. If you do this through Airbnb, you’re going to end up paying a fee on there, and sometimes, they’re about 30% of the short-term rental itself, which is a huge price. Yes, you’re making more money, but if you think about it, if you’re in an area that does have a tourism dry up, is it really worth it to have this, when you’re going to be paying fees like crazy? The answerer is a resounding no.

Now, these also don’t have reliable, long-term residents. These savvy buy and hold investors that do well went the long-term. If you want to stay in this game, you need to think about it in the long term, and these long-term tenets save you a lot of money on marketing, screening, turnover, and also the cleanup too. If you have people staying for only a week or a month at a time, they don’t care about the property, so you’re going to have to repair and cleanup. Some people get these rentals for parties and such, and really, do you want to be cleaning up after a crazy, wild party, getting it ready to sell to the next person that comes through?

Finally, the cash flow is something that’s inconsistent, that means that in some vacation destinations, it is possible to have this booked a year in advance. However, this can cause a lot of problems with occupancy, since you’ll need to put this together. Think about it, do you really want to sit there and block out a schedule for a bunch of residents who will only be staying for days, or for a few weeks, and other for a few months? It can be crazy, and if you’re not getting enough people into there, it doesn’t make this worthwhile.

So, there you have it. They might be alluring, and having one as a vacation destination for a few months of the year might be great. You’ll enjoy it, and the memories and time you spend there make the best returns. But, if you’re going to be renting this out to people, you won’t get optimal returns, and it’s best to make sure that you’re not spending your money on short-term rentals, but instead going with the annual option in order to net a good investment income for you.

 

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Real Estate calculations every Investor Should know

If you’re going to go into real estate investments, there are a few equations that you should know. While you don’t need to be a mathematician, these are super important, since they do affect the overall impact of your success in real estate investment. This article will go over a few that you should master.

The first, is the cap rate. This is the total income divided by the cost of the property. This is used for valuing the apartment complexes and commercial buildings. It’s used for multifamily homes too, but often if you use it for the latter, it can mess with the operating expenses, since you don’t know how often the turnovers will happen. With the cap rate, you want it to be an 8 or better, since it should be better than most of the buildings in the areas. You should use real numbers or estimates to calculate this, and don’t just take what’s on the form.

Rent divided by property cost is another huge one, since this is a good calculation that you can use for houses, and some multifamily apartments and homes. However, it should also be used when you’re comparing the rental value of properties. The one thing that you should make sure that you do is not compare the rent cost of a property between two totally different things. If you’re looking at a dangerous war zone area, in comparison to a gated community, it’s not worth it. The roof will cost the same and square foot is the same as well. Obviously, the vacancy and the delinquency will be higher in an area that’s bad. So, remember this doesn’t tell you the cash flow, but instead you should make sure that you’re looking at similar properties in the area. You should try to be around 1% to about 1.5% ideally.

The gross yield is another. This is the annual rent divided by the total price of the actual place. This is the same calculation flipped around that can be used when you value larger portfolios. It’s the same thing as the rent/cost, but just literally flipped around.

The debt/service ratio is a super critical one to look at. In essence, it’s the net operating income divided by the annual debt service. This is one that banks will look at when you’re trying to get financing. Typically, a bank will look at this in terms of the property’s debt service ratio, and also the global debt service ratio, which is a fancy term for your portfolio period. With this one, you always want to be over 1. You know why? Because anything less means that you’re losing money.

Cash on cash, which is the cash flow/cash into deal that you need to look at, is probably the most important number for any real estate investor to have. This will tell you straight up what kind of return that you’re getting from this. for example, let’s say you’re taking in a 40K deal and you made 10K on that from the year, you’re making about 25%. In the same vein, if you take a 100K deal and make 10K, it’s a 10% respectively.

Now, this is critical because it not only tells you what the value of a property is, but it will also evaluate what kind of debt and equity structure the thing has before you begin to purchase it, so it helps you get everything ready before you begin.

Finally, there is the 50% rule, which is something that tells the estimate of the property. It’s simply dividing the cost of it by two, and that’s how much you’ll need to put in. a good rule of thumb is that a nicer building will have a lower ratio of this, and a shoddier building a higher one. This will help if you’re not sure if you want to take on the operating costs of something.

These calculations are super important, and as a real estate investor, you need to know every single one of these in order to truly get the success that you so desire from each investment. Best part is they’re simple too.