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The Short-Term Rental Cashflow Snowball

This week’s PhREI network post is from Ian Cook at Carpe Diem MD. He provides a really great example of just how much financial freedom can be created through short term rentals. It is a marathon though, not a sprint. Actually, it’s a cashflow snowball!

Short-Term Rental Cashflow Snowball is not a get rich quick scheme.  If you are looking for that game then you need to go for high-risk stocks or crypto.  I’m not talking smack I’m just saying that if you are looking to get rich in one year then you will need to be investing in high risk, high reward areas.  

With that said Short-Term Rental real estate may be considered higher risk then LTR but I would argue that both just have different qualities.  LTR has more “stable” income but is subject to ever increasing tenant-favored laws.  STR has high rents and cash flow but with higher variability.  STR is also susceptible to local rules and regulations, so choosing an STR friendly market is very important.

Either way Cashflow is King

So lets look at the Short-Term Rental Cashflow Snowball over a 10 year time frame. 

For this example we will use average numbers.  Some investors will purchase more expensive properties than the example.  Others will have less expensive property, more cash flow, less cash flow etc.  Just give the numbers a chance and then extrapolate to your own personal situation.

Lets say you purchase your first property for $500k with 10% down (50k) and 10K start up costs.  With 20k in Cashflow (Net profit).  

If you stay in the same market the next property (500k) will likely require a 25% down (125k down, 10K start up costs).  The cash flow  will be higher due to a higher down,  we will use 25k cash flow.  20k of your down payment will be provided from STR cashflow.

In year three with 25% down (125k, 10k start up) you are now putting 80k down with 45k from cashflow and this new property will cashflow at 25k.

Lets write out an example of the 

Short-Term Rental Cashflow Snowball:

Year 1: 500k property, 10% down (50K), 10k start up costs, Cash flow (20K)

Year 2: 500k property, 25% down (125k), 10k start up costs, Cash flow (25k due to higher down) 

(20k of the down comes from STR cash flow)

Year 3: 500k property, 25% down (125k), 10k start up costs, Cash flow (25k)

(45k of the down comes from STR cash flow)

Year 4: 500k property, 25% down (125k), 10k startup, Cash flow (25k)

(70k of the down from STR cash flow)

Year 5: 500k property, 25% down (125k), 10k start up, Cashflow (25k)

(95k of the down comes from STR cashflow)

Year 6: 500k property, 25% down (125k), 10k start up,  Cashflow (25k)

(120k of the down comes from STR cashflow)

Year 7: 500k property, 25% down (125k), 10k start up, Cashflow (25k)

(145k of the down comes from STR cashflow) exceeding down and start up costs…

AT THIS STATE YOUR CASHFLOW IS NOW ENOUGH TO PURCHASE YOUR ADDITIONAL STRS AND THE FASTER YOU REACH THIS STATE THE FASTER YOUR PORTFOLIO WILL GROW.

You can continue to grow just using your STR cashflow to reinvest or you can combine with your savings and begin purchasing two properties.

Year 8: 500k property x 2, 25% down x2 (250K), 20k start up costs (50k cashflow two new properties)

(170k of the down comes from STR cashflow)

Year 9: 500k property x 2, 25% x 2 (250K), 20k start up costs (50k cashflow two new properties)

(220k of the down comes from STR cashflow)

Year 10:  500k property x 2, 25% x 2 (250k), 20k start up costs (50k cashflow two new properties)

(270k of the down comes from STR cashflow)  exceeding down and start up costs…

Final property count:  13 properties:

320k annual cashflow: tax free…. Winning

130k in start up costs, $1,550,000 in down payments.

That is a 20% cash on cash return.  Not bad.

Now this example does take some liberties.  

It is not factoring in appreciation or inflation.  It does not include closing costs or tax savings.  Start up costs may be higher or lower than 10k per property. In addition, it does not account for hurricanes, earthquakes, extraterrestrial invasions etc…   

These are all factors to evaluate but they can vary so they were left out to keep the math easy to follow. 

The goal of this exercise is to relay the general concept of the Short-Term Rental Cashflow Snowball.

The other thing to look at is that the process is slow at first but it gradually builds.  In this example, you purchase 1 property per year and reach 7 properties in the first 7 years

But in the last 3 years you purchase 2 properties a year resulting in 6 property acquisitions in the last 3 years

Hence, the snowball. I envision the old school Donald Duck cartoon style snowball. 

cashflow snowball

The faster you build up your portfolio the faster the Short-Term Rental Cashflow snowball grows.  

At the same time there is nothing wrong with starting slow with a property you can use and then grow from there.  

The potential to reach 200 to 300k in short-term rental income in 10 years is amazing, especially, if you compare this to the stock market.

Conventional retirement plans recommend you save for 30 years and then draw down your retirement account to cover your retirement expenses.  Your withdrawals will be taxed and the remaining “income” will be available for you to spend on your retirement….  

It is the safe play and will work as long as your retirement account is funded to the correct level to match your lifestyle goals…. And you don’t’ out live your savings…. Kinda brutal.

On the other side, if you build a STR Cashflow Snowball you can reach retirement in 1/3 the time, experience a lower tax burden and no early withdrawal penalties. 

Now before I receive the hate mail… We still fund our retirement accounts… I’m not all in on real estate but I can definitely see the advantages of investing in real estate.

Our investment plan is to fund our traditional retirement plans while investing in Short-Term Rental properties.   Some years may turn out to be better than others for real estate and stock market investing.  Right now is definitely a tough real estate market but we are not be giving up on our strategy and we hope you find one that works for you. (Our 2021 STR Investing Strategy)

What do you think? Do you invest in short term rentals? Or real estate at all? Does this change your thinking? Let us know in the comments below!

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    Jordan Frey MD, a plastic surgeon in Buffalo, NY, is one of the fastest-growing physician finance bloggers in the world. See how he went from financially clueless to increasing his net worth by $1M in 1 year and how you can do the same! Feel free to send Jordan a message at [email protected]

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