@Binoy3 , here is a basic primer for purchasing both LTR and STR properties.
A requirement for me is that the numbers have to work as a long-term rental (LTR) as well as a short-term rental (STR). If you can easily rent the property out long term, then you can always fall back on that if for some reason short term renting is temporarily disrupted (like a recession, a pandemic, 9/11, etc.)
Among other algorithms, I use the GRM (gross rent multiplier) as a rule of thumb for viability when analyzing potential properties. For me, anything less than 10 is good (gross rent per year times 10 being equal to or greater than the purchase price). You might want to be more or less conservative than this.
For a relatively safe investment, 20-30% down is recommended. It will open you up to more lenders, and it will give you some padding if for some unforeseen reason (like one of the reasons listed above!) the value of your property goes down and you have to sell at the same time. Also remember that lenders will only use 75% of actual (if available) or estimated (if not available) rents to determine qualification. This is to account for things like vacancy, repairs, expenses, etc.
So, suppose a property is listed for $100,000, and say market rents are $1000 a month.
$100,000/($1000 * 12) = 8.33. So this qualifies under my GRM rules.
Purchase Price $100,000
Down Payment 30,000
Loan amount 70,000
Amortized over 30 years @4% = $334 per month principal and interest
Now add taxes and insurance
Let’s say it all adds up to $650 a month
Now take your $1000 a month rent and multiply times .75 to account for vacancy and expenses, just like the lenders do. That comes to $750 a month. So, this amount should cover your costs most of the time in this scenario.
Please remember that the above are just estimates, and depend on a lot of factors like interest rates, property tax and insurance costs for the area, cost of improvements and repairs, utility costs, age of property, etc. Also, I am in the US - the rules and considerations in other countries may be different.
Of course, if the area in which the property is located is excellent for short-term rentals (not too saturated, high demand) you can make considerably more than with an LTR, but it is MUCH more work and IMO more risk (as witnessed during this latest pandemic). But again, you can weather the storm if you can convert to a monthly or long-term rental until things return to normal.
You should also consider how involved you want to be. You can manage the whole property yourself, get help from a co-host who takes some of the responsibility off your hands, or hire a full-time property management firm. As you can imagine the costs increase with each of these options. For STRs you don’t want to completely manage yourself, you can expect to pay 10-50% of gross rents depending on the option you choose.
I think that because of COVID19, most conventional lenders are currently VERY wary of STRs, and are unlikely to approve a loan if income from an STR is being used to qualify. You may find an in-house lender willing to do it if the short-term rental history is strong, but typically the interest rate/down payment will be higher in that case.
I wish you good luck in your search!
-Pat
