Today’s PhREI Network post is from Ian Cook and Lauren Ihde from Carpe Diem MD. In this post, they will go over one of their Short-Term Rental properties to discuss some real numbers and analyze the cross sections of cashflow, appreciation and lifestyle. Which is most important?
Take it away Ian and Lauren!
There are many reasons to invest in Short-Term Rental properties. As you know, Lauren and I choose our investments based on our Lifestyle goals. There are definitely faster ways to grow wealth but this path is the one that has worked for us. The important part about short-term rental investing is to choose the investment strategy that works for you.
Cashflow is King
Cashflow is king, as we have discussed before, but that is not the only reason to invest in Short-Term Rental properties… So let’s take a look at some numbers.
In 2016, we purchased our first STR for $500,000 with a 10% down. This is a 3-bedroom 2-bath with a loft condo very close to the slopes in Mammoth Lakes.
We did not perform a cost segregation study at that time or perform bonus depreciation. If rented full time the gross rental income is $100,000 with a net of $45,000 to $50,000. Not bad. The breakeven point is $50,000.
In today’s, market the purchase price would be $950,000, gross rental income of $100,000 with a net cashflow of $25,000. So, a pretty big hit to cashflow but still a profitable property. The breakeven point is $75,000.
Let’s examine cashflow a little more closely
In the first example, the net cashflow is $50,000 and let us assume that is tax-free. At a 37% tax bracket that $50,000 is actually worth $18,500 more than $50,000 of W-2 income due to the fact that it is tax-free.
If that was W-2 income $50,000 after 37% taxes would be $31,500!!!! I think I would prefer the tax-free option…
Now let’s look at Personal use (Lifestyle)
In general, you want to limit your personal use to less than 14 days and have your average length of guest stay 7 days or less.
In addition, you want to spend 100 hours self-managing and spend more than anyone else to maximize your tax benefits…. (Click here)
After the first year, if you decide to use your property more than 14 days then you will need to subtract the percentage of your personal use from your deduction calculations.
The average nightly rental for this property is $550/night. Therefore, if you use the property 14 days you would be “saving” $7,700 by not renting someone else’s place.
Add in 14% tax and 18% Airbnb booking fees and the “savings” is $10,164.
In the covid era, personal use was even higher.
Let’s look at an extreme case.
For example, you went snowboarding every weekend for 6 months…
That would be awesome right?
90 days of Personal use
(Thursday, Friday, Saturday bookings, and a few Sunday nights)
90 x $550= $49,500. Add in 14% tax, 18% Airbnb fees and you are at $65,340.
Note: this example does not even include cleaning fees.
The breakeven point for this property is $50,000 with an average gross income of $100,000.
If you subtract your personal use from the potential gross income your annual income would be $34,660 – expenses $50,000 = -$15,340….
Therefore, you “spent” $15,340 to use your property for 90 days, which would normally cost $65,340 if you rented someone else’s Airbnb.
Therefore, you “saved” $50,000 this year by using your own place.
With this example, you can quickly see how personal use can both decrease your annual cashflow but also be a considered a cash savings to you. It really depends on how you intend to use your short-term rental property and how you view your “savings”.
Be careful though with these types of personal use calculations. You do not want to convince yourself into purchasing a liability… if that is not part of your long-term lifestyle goal.
In general, the more you use your property the less cashflow you will have but the more memories you will create. Obviously, the best scenario would be to maintain both cashflow and personal use.
Lastly, let’s talk Appreciation
Appreciation is not guaranteed even when you are “forcing” appreciation via renovations and upgrades but in a long-term buy and hold strategy the general trend is that property will appreciate over time. Just like the stock market…. Don’t sell during the dip.
In our example, we purchased the property for $500,000 in 2016. The most recent sale was for $950,000. That is $450,000 in appreciation.
If we did not rent the property at all over the last 5 years, with an annual holding cost of $50,000 per year for a total of $250,000 that results in a $200,000 gain. That calculation does not include our rental income over the years or factor in our personal use “savings”.
In the end, this is a major win.
Take the time to “Enjoy Your Journey to Financial Freedom!”
What do you think? Why do you invest? What’s most important to you? Cash flow? Appreciation? Lifestyle? Let us know in the comments below!
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