What kind of cash flow should you be expecting from your Sarasota rental property? Every investor has certain expectations for how their real estate investments should perform—but they don't always work out that way. The type of cash flow you can (and should) expect also varies by rental property type.
As a Sarasota property management company that serves both long-term and short-term rental property owners along the Gulf Coast, we want to dive into the cash flow expectations for each property category. This way, you can get a better idea of how your goals may differ depending on your real estate investment category.
Foreword: The following article is not a substitute for legal counsel. The information contained herein was current as of the time of writing. If you need immediate help with a pressing issue concerning your rentals, turn to a competent attorney or our Gulf Coast experts for real-time assistance.
Cash Flow in Short-Term Rental Properties
- If you own a vacation rental property in the Sarasota area, you have the potential to achieve positive cash flow.
- You have a desirable property located near some of the best beaches in the world, with year-round conditions much more conducive to booking a rental.
- Compare that to a seasonally-locked short-term rental property (like a ski chalet), and you'll see you have greater access to potential cash flow in a year-round market.
That said, even a vacation rental property that exists in these kinds of market conditions can suffer from zero net or even negative cash flow depending on its size, location, amenities, and the kind of vacation rental property management services you employ as the property owner.
However, there's an additional consideration for short-term rental homes that serves as an extra perk: your property can also function as a vacation property for you when it's unoccupied. If you've invested in the right technology for your Sarasota vacation rentals (online booking calendars, to be specific), you'll be able to control the flow of occupancy such that your property is available to you and your family when you want to visit the beautiful Gulf Coast area.
2020 was an atypical year for short-term rental properties for obvious reasons. That said, as a vacation rental property management company, a typical occupancy rate we view as a positive-cash-flow-producing number is around 90%. A property can be functional and break-even around at least 80%, depending on your overhead.
If you simply want your slice of paradise—and you're looking at vacationers to 'float' the cost of the mortgage for you—then cash flow isn't your primary concern. If you're considering the return on investment with a trip to your rental once or twice a year as the cherry on top, then those numbers (and the hours you invest in caring for the property) really start to matter.
At that point, you're really going to need to be looking closely at who you work with for vacation rental management services to come out ahead. Otherwise, you may find that the hassle of managing bookings, paying taxes, hiring (and finding) the right cleaning services, and dealing with marketing may be more work than it's worth for only $5,000 in returns.
Cash Flow in Long-Term Rental Properties
What kind of cash flow should you expect from an annual rental property in the Sarasota area?
- $100 monthly?
- $200 per month?
- What about $500?
Here's where the type of property you have impacts those figures.
- Just like a vacation rental, an annual rental can suffer in the Sarasota rental market depending on its size, location, amenities, and the type of Sarasota property management services you have working for you and your renters.
- Your numbers as far as positive cash flow are concerned also vary depending on whether you're working with single-family homes or multi-family units.
- The more properties you have, and the greater the acquisition cost, the larger those expected cash flow numbers need to be to actually make the investment worthwhile.
Some investors will only touch property deals that net them $500 a month in positive cash flow due to experience in the market, but you'll need to consider what kind of numbers you're comfortable with based on your financial goals—and how much management help you have.
You Need to Consider Your Cash-on-Cash Return as Well
Just like occupancy rate impacts your minimum vacation rental returns, cash flow isn't the only number you should be considering when you analyze the profitability of a long-term rental in Sarasota.
- Consider your cash flow as one piece of a larger picture: you'll also want to calculate your cash-on-cash returns for a potential investment.
- Most investors here will take the average returns from the stock market and double that to get an average cash-on-cash return figure they want to shoot for while factoring in their monthly cash flow.
- If the rough average of stock market returns (for those not holding the top 25 performers in 2020) was only about 5%, then a steady 10% return on real estate investments is nothing to scoff at.
Let's say you purchased a single-family residential rental for the median selling price—at the time of writing this, that was about $350,000 (rounding down a bit).
- If you didn't leverage the power of Other People's Money (OPM) to free yourself of a down payment, let's say you put $70,000 of your own money into the property up front with closing costs on the 'low' end (about $10,000).
- Maybe the property you purchased was rental-ready: in that case, your total upfront contribution is $80,000.
- If you peg your monthly cash flow expectations at about $500, then that's $6,000 a year.
- If you divide that figure by the initial cost of your investment ($6,000/$80,000), you're only looking at a 7.5% cash-on-cash return.
With most investors targeting returns at a minimum of 8% (but upwards of 12%), you can quickly see how only focusing on monthly cash flow isn't enough to give you a picture of your Sarasota rental property's performance.
Finding the Right Real Estate Investments
Return on investment and cash-on-cash returns are often used interchangeably, but they are not the same. When it comes to finding real estate investments in Sarasota that produce the kind of returns you need based on the financial picture you want to build, working with professionals who understand this is going to be crucial.
That said, the Sarasota property management team you rely on should also be well-versed in these concepts, given that they manage everything from your rental pricing to reducing the costs associated with a vacancy. Seasoned investors agree that unless you plan on forming your own company with paid employees, property management services are the best way to grow.
Choose wisely—and if you have any additional questions, you can always reach out to the experts here at Gulf Coast Property management.