First Investment - Duplex Rental or STR Vacation Home?

Question

(cross posting, not sure where this should go)

I have a feeling this is a common question, but interested in feedback on my personal situation. After sitting on the sidelines for the last 20 years, I'm finally ready to deploy some capital and it seems like I have narrowed down to two options: (1) purchase a rental property (preferably a duplex or triplex) for LTR, or (2) purchase a second home (an hour or so away in the mountains or lake) for STR.

Looking for any opinions on pros/cons of each of these options based on the timing and my situation.

Some background: early 40's, divorced, older kids, W-2 employee in the 35% bracket. I own my home, but am about to rent it out and downsize into a smaller rental (kids don't come see me enough to justify larger house). I have ~$50K for down payment and adequate emergency savings. I have commercial real estate background and am handy, FWIW. Not a lot of equity in the house, but rate is 3%.

Option 1: There are a few duplexes within 20 mins of my house that need minimal work but could be improved to increase rental rates. Seems like most would cash flow with 5-15% annual ROI. My understanding is that I would likely need to take out a rental mortgage for this option.

Option 2: Have thought about doing this for awhile now. Since I usually only see my kids during holidays now, I've thought about getting a mountain or lake home to use for 3-4 weeks a year, and STR the place the rest of the time. I would probably use a property mgmt company for this. I think I can get a second primary mortgage for this option. I'd need help finding the property, as I could not do the scouting myself. Bonus consideration, if I don't purchase beforehand, I will have to rent a house in this area for Thanksgiving to host my folks, so that will be money out of my pocket.

There's probably more useful information I can provide, so let me know if you have questions. Thanks!

Dan Maciejewski · Answer

I agree with this.  I usually recommend first time investors start with long term rentals.  It's a great way to get your feet wet without a ton of stress.  Recently, its been harder to cash flow, but if you have an opportunity to cash flow with light rehab, that's great!

Also, I agree that a true second home/vacation rental that you will use and enjoy tips the scales on that side a bit.  An STR is a lot more frenetic to set up and run, even with pro management, though.  Cash flow has been better, especially in a vacation area compared to LTR.  BUT, that will vary depending on yearly occupancy for your location.  I am in a 12 month transient area, so our yearly average occupancy looks like 75%+

Jenni Utz · Answer

I have both short term/vacation homes and long term rentals. It would all depend on your goals. For example, if you are buying the second home for not only short term rentals but also for your personal enjoyment when you travel to that area, that needs to be factored into your decision. It wouldn't 100% be on profit per property as it would profit plus enjoyment.

If I were starting off now, my initial opinion would be to go long term rental. Usually they are easier to deal with. They are steady income (vs most short term rentals which can be seasonal). Management fees on short term rentals are much higher than those of long term. (20%+ vs 8-10%). Plus you would be close to the property in case of an emergency.

Jessica Abou · Answer

First of all, I would NOT recommend you rent for yourself!  A better solution is to rent out your current home and buy a home you can house hack. If you get a multi unit, live in one unit and rent out the rest. Do that before you buy your mountain home. Also, STRs in the mountains are saturated, so you must be very careful when choosing a property!  It’s risky right now. Make sure anything you buy works as a LTR as well as STR or MTR. I just sold my 2 North GA STRs. You can buy a primary residence (house hack)once a year!  Maybe do that for a while allowing the STR industry to settle.

Chris Troutman · Answer

Thanks @Jerry W., appreciate the kind words and advice. First choice for me is a duplex or triplex, but difficult to make the numbers work with some of the asking prices v. rents around here. I've always liked the idea of fixing a duplex up while living in it, but at this point in my life I'm not really a house hack person because I don't like sharing walls with neighbors, just my personal preference. I'm starting to lean towards the vacation home idea to start, and would need to be within 1.5 hours or so of Atlanta. Suppose I need to start with finding the right agent.

Jerry W. · Answer

@Chris Troutman, Welcome to BP bud.  Just thinking out loud for some ideas for you.  What about buying a duplex or triplex as another home in your area?  It would be in your own home.  You could live in one instead of renting, and fix up the one you live in really nice, then move into the other one and try doing a vacation rental in the one you fixed up.  You can buy up to a 4 plex and still do a fannie or freddie loan.  I don't have any idea what your area is, but often you can do STRs in a lot of places.  Now you have a place to live, regular income, get experience on STRs, and increase your cash flow.  After one year you can do this again up to 4 loans I think.

You might tell us more about where you live and what the market is like to see if a STR would work there.  It doesn't have to be a $500 per night mountain cabin or beach house.  I have plain houses in the middle of Wyoming and they do fine during summer months.

A third option is to add a duplex or up to a 4 plex and get cash flow up for a least a year to show more income for getting a loan for a STR in a year or 2.

Either way I want to say I admire how you are bouncing back from what has to have been a really tough time.  Use this as a time to grow.  Imagine any goal you want and start working towards it.  Give yourself permission to succeed.  I cannot stress how much you need to respect yourself and believe in yourself right now.  You are clearly articulate, intelligent, and ambitious.  You can't make other people do anything, but you can make your own life amazing.  There is often a silver lining in hardship.  Maybe there is someone who you will find who will be amazing, maybe you will reevaluate your relationship with your kids to make the time you do get special.  Take the time to really find out about them and what they are going through or their dreams and goals.  Anyway sorry for the rant, you seem like a nice guy who has had a hard time.  Light the fire and follow your dreams, there are amazing times ahead if you let yourself do it.

Chris Troutman · Answer

Thanks @Dan Maciejewski and @Jarrod Covey!

Discussing options with a few lenders today and finding that the financing for the LTR option is likely going to render that option impossible, just doesn't pencil. Still pushing for it, but will have to start looking into Option 2, which means I unfortunately will have to rely a lot more on an agent and eventually a PM company.

I'll still have the opportunity to LTR, as I plan on renting out my primary, so can get my feet wet that way as well.

Jarrod Covey · Answer

Made my quick pros and cons list for each option, hope it helps!

Option 1: Purchasing a Duplex or Triplex for Long-Term Rental (LTR)

Pros:

• Potential for stable, long-term passive income
• Opportunities to build equity and increase rental rates with property improvements
• Diversification of your investment portfolio with a residential real estate asset
• Local proximity allows for easier property management and maintenance

Cons:

• Rental mortgage might have less favorable terms compared to a primary mortgage
• Dealing with tenant issues and vacancies
• Potentially lower ROI compared to short-term rental (STR) in a high-demand vacation area

Option 2: Purchasing a Second Home for Short-Term Rental (STR)

Pros:

• Dual-purpose investment: personal use and rental income
• Higher rental rates and potentially greater ROI in a desirable vacation area
• Second primary mortgage may offer better terms than a rental mortgage
• Outsourcing property management can save you time and effort

Cons:

• STRs may require more hands-on management or higher property management fees
• Rental income can be seasonal or fluctuate with market demand
• Additional costs related to furnishing, stocking, and maintaining a vacation rental
• Scouting for properties remotely may pose challenges

Chris Troutman · Answer

Thanks for insight @Jenni Utz!

First Investment - Duplex Rental or STR Vacation Home?

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