Where to Invest STR or long term....preferably a vacation rental

Question

I live in Roseville CA and recently bought my first income property. I put 20% down and the rent covers the mortgage. I bought it for the long term equity appreciation. In the next couple of years I can probably make a couple hundred, but again my plan is to have home paid off in 15 years. At which point I'm estimating rents would be $3500-$4500/month.

I was thinking of buying another in my area as the growth and increase in value is great for this area, but I was looking at a condo in St. Thomas VI. After cost of mortgage and HOA fees etc, it would not cash flow. I had looked about a year ago at Tulum but decided to hold off.

So where is the next place to invest in STR whether it be here in the states or abroad? I have 50K in savings. I make about 120K a year, credit is good, I only have my primary residence mortgage with about $300k equity. Realistically, I can set aside 5K per month. That's 60K/year. Am I looking at flips and if so what areas?

With interest rates up to almost 7% and putting 20% down it seems that the numbers dont work at this point.....or do they?

Any suggestions or insight would be helpful.

Matthew

James Peterson · Answer

Matthew,

I commend your strategy to buy and pay down.  Everyone looking for cash flow now, is not considering the equity gain and appreciation over time.  Listen to the last BP podcast...Beyond Cash on Cash: How Thinking Like an Investor Unlocks More DealsDavid Greene and company nails it and hones in on all the advantages of real estate over-looked by investors.  My philosophy is you should be earning a 40-60% rate of return on your real estate investments. This is over 15-30 years. Find a strategy to buy as many properties as you can afford in great areas where you don't have to worry about bad tenants and appreciation.

Rule of thumb - If prices are really low now, it's probably going to be that way in 15-20 years... those areas have low appreciation for a reason.

History teaches us a lot.  I bought a house in Santa Clara, CA in 2005 for $535k when I could have bought 2 or 3 homes in Louisiana for that price.  Now that home is worth $1,750,000.  No amount of 'cash-flow' could have earned that kind of equity, and it rents for nearly $4000/per month.

History WILL repeat itself.

No amount of cash-flow can beat the appreciation and that was prior to the crash.

Find a strategy that will help you achieve your goals in the future, don't just focus on cash-flow.

Here's what we are doing...We are finding off-market 'flip' type opportunities in A-class areas where we can purchase for 25%+ below ARV making repairs and adding additional units just to achieve cash-flow even status once cash out refinanced. We may not be able to recover all the $ invested to achieve the cash flow requirements but we are maximizing the return on cash invested.

Air BNB is very labor or cost to manage intensive, and takes time to earn good returns.  In my opinion it's not as safe with changing regulations all the time and should be a one-off to building your real estate portfolio.

Just my 2 cents.

Best of luck in your investing.

Jeremy H. · Answer

So there's a lot to be learned here:

1) Putting down 20% is nice IF you want to buy a property or two a year. If it's an expensive property, maybe 1 every 2+ years. The capital runs out quick - doesn't matter who you are or how much you make.

2) Appreciation play is somewhat of a gamble. In the short term it's extremely risky - long term it should work out just due to inflation. That being said I always want cashflow to cover maintenance/repairs/Cap Ex. You live in California (very liberal place and not landlord friendly) so you may be capped on your rent increases (this would impede your potential cashflow even more) - something to look out for. Assuming you meant you'll make a couple hundred thousand in a couple of years...this is an extremely bold prediction. I can almost guarantee if that was the case those properties would be long gone by companies that have access to more data than you or me.

3) An STR can be nearly anywhere - popular vacation destinations or your neighborhood. Regulations are a thing to pay attention to. This again should cashflow. If you buy a STR that doesn't cashflow...you'll have two places that don't cashflow. This is a recipe for disaster.

4) Why do you want the home paid off in 15 years? What's the benefit of a paid off home? Your ROI will likely be lower since your monthly payments are higher and you'll have to leave more in the property if you want it to cashflow. I don't care if my loan was for 50 years if the place cashflows...see where I'm going here? Let the debt work in your favor. Lower monthly payments = more potential cashflow.

5) There are always deals. Some may be harder to find, but they are always out there. And there will always be another one.

The last few places I bought - PITI is $616 - rent is 1350 (duplex, $675 per unit), PITI is $909 - rent is 2600 (fourplex, 650/unit), PITI is 662 - rent is 1250 (SFH). You really want your PITI to be half of your monthly rent for a place to cashflow well.

Bruce Woodruff · Answer

The numbers always work. If you get a property with a great price, maybe a fixer?

And besides you are going to refi in a couple years, so don't worry about it, as long as you cash-flow now, you'll really cash flow then.

And I'd get over your fixation with doing 20% down. Save your money, use the bank's.....

Chris John · Answer

@Matthew Swearingen

If you insist on overpaying the mortgage, I hope you at least put the overpayment into a liquid,side account in case things go south for you instead of sending it to the mortgage company every month.  If you overpay your mortgage by 30k, lose your job and quit making payments, you'll get foreclosed on.  If you keep the 30k in a side account and lose your job, you'll have some money to buy time with.

Most likely, the side account will make a higher return than your mortgage rate, so you'd probably have enough money in the side account to pay off the mortgage before 15 years anyway.  Win-win.  You keep liquidity and can probably pay it off even earlier than overpaying straight to the mortgage company.  Just a thought in case you are sending a check each month directly.

Troy Miller · Answer

Hey Matthew. Everyone has a different set of goals and targets for their investing so you knowing YOUR goals works best, but bringing that alongside how you might alter your goals with BETTER ideas and strategies. I'm at that point (again) now, having turned the equity in my main home into 8 rentals (6 sfh and 2 duplexes) and 5 flips. I've gotten this through essentially BRRRRing them. Now we've met goals for this year in equity build up, and almost there in cashflow, but am needing greater cashflow now to come fully out of my job (my wife already has), and doing this in a shifting market. I can keep at the same focus I've had, which has worked, but also need to see and learn if other things might get me to where I want/need to be. BTW, we've done all this in Chattanooga. Let me know if you have interest here still. We are investors here and my wife is a realtor. Reach out if you are interested! Keep pressing!

Rob Chiang · Answer

Are you more focused on having fun at the STR vacation home for personal enjoyment or just want to make more profit?  If more personal use then get a house on the delta or lake tahoe, it's close to Roseville.

Ricardo Hidalgo · Answer

The emerald coast offers strong appreciation at lower prices if you would consider those options. If you were to find something that needs cosmetic repairs you could be cash flowing position and have a strong equity position for the future.

Noah Laker · Answer

I just purchased 5 units and constructed a 6th right here in Sacramento. I am a local broker, property manager, and investor, specializing in STR (I host over 100 units on Airbnb).

I can show you some numbers. Airbnb is still a great option; I am particularly bullish on "by-the-bedroom" short term rentals.

Call me sometime! (916) 603-3423

Matthew Swearingen · Answer

Yes it's wealth building and cash flow. Not so much personal use of STR.

Adrienne Green · Answer

You have a lot of good advice on here!  I'd add on to it that from your initial post your "why" is unclear.  Is it cashflow?  Wealth building through appreciation?  Personal use of the STR?  Having a crystal clear "why" makes the correct path much more apparent!

Where to Invest STR or long term....preferably a vacation rental

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