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How do you evaluate STRs? With over 1.2 million listings, it is expected that there will be 15% more full-time STRs this year. Additionally, data from AirDNA and iPM predicts that 25% of second houses, or over 2.2 million, will be used for vacation rentals on occasion. Nevertheless, despite the industry's phenomenal development, certain STRs are more profitable than others. Essential elements influencing an STR's potential profitability include: o Location o Seasonality o Amenities i o Occupancy rate o Cap rate o Annual Revenue o Supply and demand o Cash on cash return An attractive market and the perfect STR property might mean the difference between a successful investment and barely breaking even. How do I pick the best place? Purchasing STR real estate provides the chance to increase income and diversify an investment portfolio. When the ideal home is bought in the ideal market, STR property might potentially be profitable with a stated average rate of approximately $250 per night. Let's start by talking about assessing an STR, then move on to the eight steps to purchasing an STR. Here are crucial actions to take while purchasing an STR home. 1. CREATE A BUSINESS PLAN Create a business strategy before starting the search that outlines your present situation, your desired future state, and the precise steps you must take to get there. Some investors may want to diversify their holdings or retire early, while others may want to buy an STR to earn supplemental rental income. 2. SEEK PROFESSIONAL HELP Sometimes people believe they are foolish for not making real estate investments sooner, but that is not the kind of expert assistance to seek. Putting together a real estate team will make locating, acquiring, and managing a lucrative property much more straightforward. A local property manager with experience in the hospitality industry, maintenance professionals who can react swiftly to crises, and a cleaning service that can prepare the property for the next guest fast are possible team members. 3. RESEARCH THE MARKET Thinking like a hotel operator can be helpful when conducting market research because owning an STR is comparable to being in the hospitality industry. Renting a home to understand other STRs better may be a good idea once a market has been whittled down. When doing a thorough analysis, take into account the following: o proximity to commercial and tourist destinations o local patterns in demand o Seasonality and length of peak and off-peak periods Projections of occupancy based on the number of nights the property is rented o Vacation rental property's median listing price o Total number of STRs operating in the area o Based on the number of bedrooms, the average size of competing STRs o Amenities include a pool or hot tub, parking, internet, and cable TV. o daily average rate o Variation in Revenue from year to year o Number of rental nights required for a residence to break even o Municipal and homeowner association ordinances that may place restrictions on or outright ban STR properties 4. RUN THE NUMBER The next stage is to predict expenses and run the numbers to see if a property is likely viable as a short-term rental after obtaining a good handle on future income. STRs incur the exact costs of residences that are long-term rented to a tenant, such as upkeep and repairs, property management, taxes, insurance, and the monthly mortgage payment if the building is financed. Among the metrics to become acquainted with are the following: o daily average rate (ADR) o revenue per night or available room (RevPAR) o Based on the ratio of nights booked to nights available, the occupancy rate o average annual rent o Money flow o A cap rate o yearly return o total Revenue 5. ARRANGE FINANCING Financing should be established before making a purchase offer since many sellers request proof of finances or a pre-approval letter from a lender. An STR may require a down payment of 30% or more, and typical mortgage interest rates are 0.50% to 1.00% more than those for purchasing a primary property. Lenders typically require the following from buyers to pre-approve them for financing: o Fill out the loan application. o Provide proof of your income and debts. o Have worked for at least two years, or three to five years if you are self-employed. o Acceptance of a credit check o usually has a credit score of at least 680. o Have the down payment plus up to six months of operating expenses in cash. o A good debt-to-income (DTI) ratio should be between 28% and 36%. 6. MAKE AN OFFER Like purchasing any other investment property, making an offer on an STR property is straightforward. An appraisal is ordered, and due diligence is completed, such as a property inspection, after a purchase price and contract terms and conditions have been agreed upon. One benefit of buying an STR posted for sale on Roofstock is that the entire transaction may be completed online. 7. HIRE A PROPERTY MANAGER Being customer-focused and treating tenants more like guests than as tenants is a must for managing an STR, just like it is for a hotel operator. A local property management business with expertise in STRs is engaged to take care of the property, guest arrivals, and departures, as well as cleaning, maintenance, and repairs because many investors don't have the time or energy to be concierges. 8. TRACK YOUR FINANCIAL PERFORMANCE Owning an STR property requires you to keep thorough records and important papers. When tax time comes around, it might be simple to lose track of income sources and valuable deductions due to guests' frequent arrivals and departures. For this reason, many STR property investors create a free account with Stessa, a Roofstock company.