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July 29, 2024 | 5 Minute Read
December 2021, I assisted an out-of-state investor with refinancing his turnkey properties in Birmingham. To my surprise, I discovered that he had several short-term rentals (Airbnb’s) in the same areas where we had long-term Section 8 rentals. Who would have thought short-term rentals (STRs) could operate in these areas?
At the same time, we had one of our properties listed for sale in a similar area, but it just sat on the market. Reducing the price would have resulted in breaking even or taking a loss. Keeping it as a long-term rental would only barely cover the mortgage payment.
On average, our long-term rentals typically net us $200-$300 monthly. This may not seem like much, but with a sizable portfolio of rental houses plus the tax benefits and appreciation, the average monthly net income results in exponential growth.
So, the questions we asked ourselves: Why not convert this property into a short-term rental?
STR Conversion Key Points:
The STR must earn at least the same net profit or more as long-term rental (LTR).
The projected income analysis for an STR must be 2.5 times the monthly rent of an LTR. For example, if the monthly rent for an LTR is $1,000, the STR would need to earn $2,500.
The property wear and tear is minimal since STRs require higher oversight, reducing maintenance costs.
Long-Term Rental (LTR):
Monthly fixed income.
Tenant responsible for all utilities and lawn care.
Minimal tenant communications, mostly regarding rent payment and maintenance requests.
Minimal management and oversight required.
Rent ranges from $900 – $1,300, with an estimated monthly net income of $200 – $300.
Short-Term Rental (STR):
No fixed income but unlimited earning potential.
Higher level of oversight required, including guest communications, resupplies, pricing, and platform management (Airbnb, VRBO, etc.).
Owner responsible for all utilities, resupplies, and lawn care.
Property maintained at a high level, resulting in lower maintenance costs.
Estimated income of $2,500+, with an estimated monthly net income of $500 – $1,500.
In May 2022, we launched our first short-term rental on Airbnb and VRBO. In 27 months of operations, it has earned a gross total of $68,248.63, averaging $2,527.72 per month.
Monthly costs:
$714.43 – Note payment
$80.00 – Electric
$43.00 – Water
$55.25 – Resupplies
$61.99 – Internet
$120.00 – Lawn care
$20.00 – 3rd party services
$475.00 – Housekeeping
$1,569.67 – Total expenses
With a gross income of $2,527.72 minus $1,569.67 in expenses, the net profit was averaging $958.05 or a total net income of $25,867.35. Compared to a $300 net profit average or $8,100 for our LTRs over the same period, this is a 31% net profit increase.
From a tactical standpoint, setting up, furnishing, designing, and managing the property as a hospitality rental requires significant effort. Is this worth a 31% increase in profit if your exit strategy is to use this property as an LTR for under 24 months? Furnishing costs can range from $15,000 – $30,000, and you need time to recoup these expenses. But, if your exit is to bank additional appreciation and perhaps sell it as a short term rental after 12 months or more to another investor, that is a possibility provided your rental income justifies your asking price.
Stress testing your short-term rental with projected average daily rates, furnishing and supply costs, maintenance, systems, and management are part of what we refer to as the stabilization period, typically the first year of operations.
Strategically, your net profits will increase significantly after the stabilization period.
Since converting over to an STR, the property value increased from $120,000 to $165,000, and we are earning triple the net income, not to mention the tax benefits of depreciation. The profit may not be as impressive as luxury vacation STRs earning six figures yearly, but for an STR now earning three times more than one of our LTR’s, it’s more than satisfactory for us.
