This post will update you on the income from the first few months of ownership of our luxury cabin short term rental in Broken Bow.
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I’m ready to give you an update on the income from our luxury cabin rental in Oklahoma. When we purchased the cabin in Broken Bow, it was in March of 2022. The economic climate in the US was very different. The real estate market was still red hot, and we were overjoyed to get a property under contract in Broken Bow, OK.
At the time, I already had a sense that inflation was a looming issue. More importantly, I knew that there was going to be a big interest rate hike for second home purchases. This interest rate hike was announced in January of 2022 and set to take effect on April 1, 2022. This was a separate plan from the recent interest rate hikes by the federal reserve.
As you know, the mortgage interest rate is one of the biggest factors in the affordability of real estate, so I felt some urgency in finding a cabin in our chosen market. I was therefore really happy that I was able to find a short term rental in the hot market of Broken Bow, which is ranked amongst the best short term rental markets by AirDNA.
What I could not predict, however, was that within a month of purchase, the federal reserve would start hiking interest rates to the moon to specifically combat inflation. I was not an investor during any similar time when interest rates had risen to this rapidly, so it was very surprising to me to see the rapidity of the fallout.
Within a span of two months, residential mortgage interest rates doubled. Stock prices fell into bear market territory, which is 20% from their highs. And on the real estate front, there were noticeable changes. For the first time, I noticed price drops on homes in vacation markets like Broken Bow and Palm Springs. Homes were sitting on the market longer too.
On top of all this, the Russian-Ukrainian war led to markedly higher fuel prices. It suddenly became very expensive to drive back and forth to work, let alone to a luxury cabin a few hours away. I’ve been feeling happier than ever about my Tesla purchase, but most people still have cars that run on good old gasoline.
Short term rental occupancy plunged in May
Data from AirDNA showed that although overall demand for short term rentals remained high in 2022, occupancy rates fell 8.6% in May. Their analysis suggested this was due to a massive 25% surge in available listings, which outstripped the demand.
Occupancy rates are important, because it has a direct impact on earnings. With a short term rental, you only make money when there’s a guest occupying the property. And with less occupancy, hosts are more likely to drop prices to attract business. This can lead to a vicious cycle of decreased earning.
Nothing is truly “turnkey”
On top of the new economic climate and increased competition for guests, I was also bringing a new short term rental listing online. Although the rental came fully furnished, there was some deferred maintenance. Therefore, my wife and I spent about $20,000 upgrading the rental.
Here’s a summary of some upgrades:
- Ecobee smart thermostats
- Eero mesh wifi system
- Luxury Brooklinen sheets
- Plush Standard Textile towels.
- Public Goods toiletries
- Refreshed blankets and cushions
- Roku smart TV
- Schlage Encode smartlock
We also restained the hardwood of the entry and patio areas and pumped the septic tank.
New listings are not as attractive to guests
In terms of attracting guests, we were also facing the headwind of being a new listing. My wife and I were pretty new to short term rental hosting, so we didn’t have the advantage of already having something like Superhost status on Airbnb. And the rental was starting from zero in terms of reviews as well.
We also were learning how to best price the average daily rate to attract guests.
Taken together, we struggled with income for the first few months from this luxury cabin rental. As you can see from our investment analyzer, we mapped out about $12,000 of gross income per month to meet our expected returns for this property. While this seems high, this is based on data from AirDNA from similar Broken Bow STR listings, prior to the pandemic.
Since we financed 90% of this property, our monthly debt service is quite high. Add in the property tax, insurance, and expected building maintenance, and we are looking at between $9-10k per month of costs just to keep the property up and running.
Unfortunately, due to low demand in the first few months, we did end up dropping our average daily rate by 25-30% just to get bookings. This really cut into our returns.
Good news on the horizon?
There is some good news. Our bookings for July are much better than June, which I hope means that we’ve gained a critical mass of reviews to attract guests. We should also obtain Superhost status soon, which I’ve heard will give us a good boost in the Airbnb algorithm.
We also recently had new photos taken, which I hope will add a little extra sparkle to our listing as well. Once this all happens, I hope to raise our rates to the 75th percentile of rates, as opposed to the 50th percentile where we are currently targeting.
Here is data of our bookings from March through June. July numbers are future bookings:
Tax benefits are guaranteed
I also should mention that the rental income is only half the story for this luxury cabin rental. There are also the expected tax benefits of this property. One of the great benefits of self-managing a short term rental is incredible tax deductions (even as a W2 employee in your dayjob).
We recently came full circle on this process for our upcoming STR in Palm Springs, and our projections were spot on. (I’ll outline this all soon in an upcoming post, but as a spoiler, we received a $105k tax refund from the IRS.)
If I’ve learned one thing from this grand experiment with short term rentals, it’s that tax benefits are perhaps the only guaranteed return. You’ll notice that our projected tax refund from this cabin is around $100k. This tax benefit alone should give us a lot of breathing room for temporarily lower income in Broken Bow as we ride out the recession and new listing blues.
The first few months of income from our luxury short term cabin rental in Broken Bow didn’t meet our projections. Total bookings from March through August currently total about $44,000, which is under our projections. I’m disappointed but not too surprised, as the economic climate in the US has changed and we were bringing a new listing online. There also might be an oversupply of short term rentals now.
But as always, there’s some good news. Our July bookings are looking better and we should have superhost status soon, which should give our listing a boost. And then there’s the expected tax benefits, which will shelter a good portion of our 2022 income.
In the grand scheme of things, I also have to ask myself one question. Is long term debt fixed at a 4.35% interest rate is a good thing when inflation is around 8.5%? If the answer is yes, I’m willing to accept some temporary bumps in the road for a longer term payout.
Stay tuned for a comprehensive report on the status of the real estate empire in the next edition of Anno Darwinii!
— The Darwinian Doctor
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