3.A2. Basic Deal Calculator Video Walkthrough Pt. 2

Short-Term Rental Example Analysis

Overview of Short-Term and Long-Term Rentals

• The speaker discusses a rental strategy involving five studio lofts, with the intention to use four as short-term rentals and one as a long-term rental.

• A nightly rate of $150 is established for the short-term rentals, emphasizing the importance of occupancy rates in determining revenue.

Revenue Calculation Insights

• The speaker manipulates occupancy rates to illustrate their impact on monthly revenue; at 100% occupancy, potential revenue could reach $18,000.

• Management fees are set at 6%, highlighting that these are typically calculated as a percentage rather than a fixed amount.

Expense Breakdown

• Various expenses are outlined including advertising ($600/year), insurance (approximately $6,000/year), and repairs/maintenance estimated at $3,000/year.

• Janitorial services are projected at $1,200 annually based on bi-weekly visits costing about $50 each time.

Additional Costs Considerations

• Contracting fees for pest control and landscaping total around $3,400 per year; this includes quarterly pest control costs and monthly landscaping fees.

• Common area utilities such as water and trash are estimated at approximately $7,200 annually based on market knowledge regarding waste disposal costs.

Legal and Maintenance Fees

• Professional/legal fees for tax returns and other legal matters are budgeted at around $1,500 yearly.

• Short-term maintenance costs associated with running short-term rentals are discussed; initially set at 20% but adjustable based on management decisions.

Tenant Turnover Costs

Understanding Cash Flow and Debt Service in Real Estate

Calculating Net Operating Income (NOI)

• The speaker discusses a projected NOI of $22,000 per month, translating to approximately $260,000 annually. This figure does not account for debt service.

• The current calculations are impacted by an incomplete amortization schedule; the loan amount is automatically populated from a previous spreadsheet.

Loan Terms and Interest Rates

• Commercial loans typically have shorter terms; 20 years is standard, with 25 years possible for new constructions. Older buildings should be assumed at 20 years.

• An interest rate of 7% is set for calculations, which will affect cash flow projections significantly.

Cash Flow Analysis

• Free cash flow is calculated at around $8,000 monthly or $85,000 annually. The debt service coverage ratio (DSCR) must meet bank requirements—typically at least 1.25 times the NOI.

• In today's market conditions, DSCR often limits loan amounts more than loan-to-value ratios due to unfavorable interest rates.

Impact of Interest Rate Changes

• Adjusting the interest rate to prime minus half results in increased monthly payments from $14,000 to nearly $16,000, affecting net cash flow negatively.

• With income numbers now included in the analysis, stabilized cash on cash return shows a return of 7.6%, which may not be attractive enough for investors.

Investor Returns and Market Challenges

• Investors only receive 70% of project returns while retaining 30%. High-interest rates create challenges as banks demand higher equity contributions from borrowers.

• Aiming for an investor's cash on cash return between 7.5% and 10% is ideal; however, current conditions make achieving this difficult.

Strategies for Improving Property Performance

• To enhance performance amidst high costs and low returns, increasing short-term rentals could yield better financial outcomes compared to long-term rentals.

• Reducing personal capital investment can improve returns but increases mortgage obligations due to larger loans required by banks seeking lower risk profiles.

Risk Assessment Between Debt and Equity

• There’s a fundamental mismatch when banks charge higher rates than equity partners despite having collateral backing their loans; this creates tension in financing structures.

• Understanding these dynamics helps identify strategies that can improve property performance while navigating challenging financial landscapes effectively.

Understanding Short-Term Rental Management

Revenue and Cost Dynamics

• The speaker discusses the relationship between rising costs and revenue, emphasizing that while costs may increase, effective management can lead to even greater revenue growth.

• It is suggested that outsourcing property management can provide flexibility; if one chooses to manage properties themselves, they should still account for management fees in their budget.

• The importance of compensating oneself for property management work is highlighted. Managing properties without a salary can lead to burnout and decreased performance.

Cap Rate Analysis

• A detailed explanation of cap rates is provided, indicating how they affect property value. Four different cap rates are presented to illustrate varying impacts on valuation.

• The speaker calculates the building's value based on a 6.75% cap rate, demonstrating how net operating income (NOI) influences property valuation through simple division.

Financial Scenarios