Selling AIRBNB’s in the CRE Market by putting a cap rate over the NOI
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[{"id": "i1gaos0", "text": "There are TWO valuations here.  One is for the real estate and the other is for the BNB business.  All the 6 cap means is that the seller wants you to pay $16.67 for each dollar of NOI from the real estate AND their business.  V=i/r  $16.67=$1/6%.  Sounds like he doesn't know what he is talking about or hoping you have no clue.  Sounds like a scam to me.\n\n&amp;#x200B;\n\nK, it sounds like you are the GUY trying to scam some novice by selling a 6 cap!  You bought the property at $1.5   hopefully you weren't scammed...  but lets call $1.5 the market value for the property.  Now you think the property is worth $1.9 because of the business so you think the business is worth $400,000  !!!!!!!!   I would love to see how that value is justified!!Hard pass for me.  I'll buy next door for $1.5 and start my own BNB and pocket $400,000!", "replies": [{"id": "i1gb3a2", "text": "Yes thank you i understand how cap rates work. To be honest, who cares? I clearly have no idea which i made clear. Not sure what you mean by he doesn\u2019t know what he\u2019s talking about?", "replies": [{"id": "i1gbzk0", "text": "1. Residential properties of less than 5 unites are valued by the more accurate method called sales comparison.  There are multiple ways to value a business.  If someone is trying to sell you real estate and a business based on one cap rate they are probably trying to scam you.  If the business goes bust then did you overpay for the real estate?  If you overpaid for the real estate then you will lose any profit that you may have made from the business.\n2. There is no 6% cap rate on this property.  Ask the broker how he came up with this number.  He will not be able to because he doesn't know what he is talking about or he is trying to scam you.\n\n&amp;#x200B;\n\n&amp;#x200B;\n\nK, it sounds like you are the GUY trying to scam some novice by selling a 6 cap!  You bought the property at $1.5   hopefully you weren't scammed...  but lets call $1.5 the market value for the property.  Now you think the property is worth $1.9 because of the business so you think the business is worth $400,000  !!!!!!!!   I would love to see how that value is justified!!  \nHard pass for me.  I'll buy next door for $1.5 and start my own BNB and pocket $400,000!", "replies": [{"id": "i1gcbs3", "text": "Yes this market does not exist hence why i asked the question. Valuation, in my opinion, would not be much different then valuations a hotel and it\u2019s real estate but instead AIRBNBs are typically better location. Again, this market DOES NOT EXIST.. yet. Honestly you sound like you have no idea what you\u2019re talking about.", "replies": [{"id": "i1gcodr", "text": "I have only stated facts.  What don't you understand about them?  I'm happy to explain.", "replies": [{"id": "i1gd4v8", "text": "You have an extremely narrow minded, tunnel vision view of what I\u2019m promoting. You clearly don\u2019t come from a CRE background. I don\u2019t care about residential real estate aspect of it all. People are buying the business, similarly to how they \u201cbuy a lease\u201d in the NNN world. The physical real estate is just a bonus.", "replies": [{"id": "i1gfycz", "text": "LOL. \n\nIt\u2019s evident YOU don\u2019t come from CRE or your background is some backwater &lt;1mm shop. Your responses are so cringe I have no idea why the original commenter keeps replying to you. \n\nGood luck hope you find some more great ideas on TikTok", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i1gf9gs", "text": "I\u2019ve seen a few. You may see a higher cap rate because it is in the Airbnb category and the higher cap rate may (or may not) reflect the additional operational risk. Up to the buyer to decide. It\u2019s all based on NOI and expectations that the property can sustain that level of NOI in the future.", "replies": [], "depth": 1}, {"id": "i1gfpt5", "text": "This sounds dumb for the following reason- a 6 cap won't cover business loans or property management costs or adequately compensate for risk given air bnb is a highly volatile business NOI should consider that, \n2. And real estate has concrete valuation on asset side so if the real estate value is less than the business value why would someone pay higher - especially for a bnb that anyone can setup with minimum costs and as a corollary why would the bank loan you that money at that valuation when they are like the asset isn't worth that and the cash flow is risky - can be subject to zoning bylaw and other changes", "replies": [{"id": "i1go2d7", "text": "Caprate is supposed to cover mgmt fees. 6 cap should def cover loan/mortgage unless you\u2019re getting a really high rate. \n\nIs Airbnb a highly volition business? I\u2019m sure there are examples of things not panning out but that\u2019s real estate in general. As long as you\u2019re in a high tourism area then it\u2019s no less volatile than a hotel.", "replies": [], "depth": 2}, {"id": "i1gtmeb", "text": "A cap rate won\u2019t cover loads or management? What are you talking about? A cap rate is simply ur rate of return and a reflection of risk. You would calculate those expenses INTO your NOI and price it out through the cap rate.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i1gfsbo", "text": "No bank is going to lend on this, so why is this even a topic of discussion. Yes, if you value an Airbnb home like this you may discover some untapped equity, but you'll never be able to unlock it so why bother.", "replies": [{"id": "i1go8tg", "text": "Why couldnt you get a standard SFR mortgage?\n\nEdit: what kind of tiny weiner nerd downvotes for asking an honest question?", "replies": [{"id": "i1gpkch", "text": "You could, but banks don\u2019t lend on STR income.  They would value the property based on market rents for 12 month leases (at best).", "replies": [], "depth": 3}, {"id": "i1gzcif", "text": "You could. But your loan will be sized based on comparable sales of single family homes in the area, not it's ability to produce to produce cashflow. He is talking about valuations, and no bank will lend on a STR home using a cap rate approach when calculating the LTV.", "replies": [], "depth": 3}], "depth": 2}, {"id": "i1gt373", "text": "\u201cNo bank is going to lend on this\u201d smart lenders will. Pre Covid why would banks lend on hotels??", "replies": [{"id": "i1gyhbb", "text": "For one. I believe you are misunderstanding what I mean by no bank will lend on this. yes you can get a mortgage on a str property, but the LTV will be calculated based on an appraisal of other comparable single family homes in the area. No way a bank will value a STR (4 units or less) property by it's cashflows. \n\nSecond, A hotel with a lot of doors, other income, and large corporate guarantees greatly derisk the loan compared to a short term rental business in a single family home managed by mom and pop. Come on man. Do you really work in CRE? Lol", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i1ghatr", "text": "I\u2019ve only started learning CRE very recently so I probably don\u2019t know what I\u2019m talking about.\n\nThat being said, it seems like what you\u2019re proposing is basically to use CRE valuation methods to put a value on a single family residence that operates as an Airbnb (so like the other commenter said, real estate + business). I don\u2019t see why you wouldn\u2019t be able to value it using a discounted cash flow analysis and then using a cap rate to find the value of the Airbnb property, assuming you could accurately forecast the cash flows and find a realistic cap rate.\n\nThe one limitation might be the one you mentioned - the market doesn\u2019t exist. I\u2019m guessing there aren\u2019t industry standards that would allow you to easily model the DCF analysis. I guess you would have to make your own model without the experience to know all the typical costs &amp; risks associated with an Airbnb.\n\nMaybe talk to someone who\u2019s been working in the short-term rental space for a long time so they can give you a better picture of the associated cash flow?\n\nI\u2019d be curious to know what you or others think about this. Hopefully I didn\u2019t completely miss the point.", "replies": [{"id": "i1gsv7s", "text": "Thank you for being level headed and actually answering my prompt", "replies": [], "depth": 2}], "depth": 1}, {"id": "i1ginh2", "text": "I'd be really curious to know if the AirBNB income would be that much higher than traditional rental income over a five-year period. Accounting for bad weather, low seasons or something that drives down bookings for a period that should be higher, costs of upkeep, wear and tear on furniture, etc. Haven't ever really looked an analysis. I have been thinking for at least two years now that those little communities which have exploded solely due to AirBNB are absolutely going to bubble soon.  I just don't see the instability being worth it", "replies": [{"id": "i1gsoaw", "text": "I own a duplex in a core urban market and experimented with the Airbnb model.  You have furnishing costs ($10k or so for my 2BR/1bath) and I hired a manager to do the marketing/leasing as well.  \n\nAs expected, it absolutely crushed in the peak summer months but slowed down in a big way in the \u201coff seasons.\u201d  It definitely earned more than the other unit (identical quality, 12 month lease), but the instability and occasional nightmare occupant were enough for me to skip the experiment and switch back to the typical model.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i1gsstb", "text": "To all the people that i have apparently triggered- I\u2019m simply raising a question about a potential asset class that has yet to be commercialized. I know NOTHING about how air bnb would perform in a commercial market. The market doesn\u2019t exist. Simply asking for thoughts on if there even could be a market", "replies": [], "depth": 1}, {"id": "i1h2lzm", "text": "I don\u2019t think any investor with any clue would pay a cap rate off net cash flow on an Airbnb. There\u2019s no barrier to entry.  Anyone can buy a house or condo and throw it on Airbnb. Compare that to a Marriott courtyard or residence inn where you have better locations, corporate accounts, much more robust reservation system, and room refreshes every 4-6 years.", "replies": [], "depth": 1}, {"id": "i1hmgcr", "text": "What kind of hotel sells at a 6 cap?", "replies": [], "depth": 1}, {"id": "i1qnp3c", "text": "You're... An idiot", "replies": [], "depth": 1}]