First Home Purchase: Primary Residence or Short-Term Rental?

[Evan Tuuk]

I'm looking for advice on how to jump into the real estate world and maybe a possible off-market deal. My wife and I lived out of country from 2015 to about six months ago. When we moved back to the States I knew zero about real estate, but for the last six months I've tried to learn everything I can and have been listening to any podcast I can get my hands on. We live in Fredericksburg, TX which is a small-ish (about 11,000) town and a big wine and tourism destination. There are around 1,500 airbnb listings here, and real estate is really expensive. Just a note right away. I love the idea of house hacking...there is almost zero opportunity for it here. I always keep my eyes out for any multi-family properties but there's nothing. So I understand the advantages and would love to house hack, but to be realistic I need some help with other options!

I'm trying to figure out how to get started in such a high-cost place, especially as I don't make much money since we basically had to restart everything since moving here. We are very good with our money so we have some savings, but my monthly income is still very low. My main goal with real estate would be the long-term benefits, and I lean more towards the more conservative, lower risk models. I have a 1 year old, we're trying for #2, and family time is my first priority. Our ultimate family goal would be to buy land, build, have a small family "ranch" and real estate investing is the avenue I want to pursue to bring in passive income/long-term wealth to be able to even afford a small ranch around here.

Here's the question. I may have an opportunity for an off-market deal right in town (which means close to famous Main St. shopping). A friend is renting it right now and is leaving in June and mentioned the owners may end up selling. I'm trying to jump on it and see if I can make a deal with the owner. It's a 2/1, 800sqft which do really well as airbnbs here. I'm guessing if they put it up on the market it would probably be around $320-350k. As far as I know it doesn't have major issues, just an older house that would need some updating. I believe with some updates it would increase in value very quickly based on other things I see here. Houses around that same size and in the same area that are fixed up nicely go for anywhere around $400-$600k. I have a few options I'm tossing around if they are interested in selling and I'm able to work something out with them:

1. Buy the house myself for a primary residence. We are renting a 1/1 right now that we love, but it will be very tight if/when baby #2 comes along. Financing would be a little hard because I didn't make much before and I am in a total job transition and self-employed as of 6 months ago. I do have a connection here with a guy that does real estate, but more commercial real estate than residential, that is willing to help me out and is confident he could get me a loan with a local lender but that would most likely be at around 6% interest, 3-5-year loan with a balloon payment at the end of 3-5 years. His idea was to then refinance down the road when I can get a better loan. I think this could be a good stepping stone for the long-term, but I'm concerned we couldn't afford the short-term to be able to make it to the long-term benefits. This has been recommended by two different investors here as the best option.

2. My parents are interested in investing/helping us out in whatever way they can. If they buy it, I want to be able to give them a return on their investment but we certainly couldn't/wouldn't rent it long term from them since what we could afford they would be getting a negative cash flow. Similar homes in the area only rent for $1,400-1,600 a month. Because of the huge tourist market, there are very few long-term rentals even available. I would love to somehow own the property or have equity in the property at least, but I can't quite figure out how that would work. If they bought it, they would hire me to manage it for them as an airbnb. Airdna gives about a 3-5% cap rate at a $320k purchase price, covering fees, and about $25k put into the house. I would hope I could negotiate a better deal than $320k, though.

3. Buy it myself as a STR investment instead of a primary residence. I know there are benefits to buying a primary residence that you can't get if it's an investment property, but if I can't afford a primary residence with no cash flow, even if there are long-term benefits, could it still be a good idea to buy as an investment? Again, through my parents I might be able to get private money into this to help with a down payment, etc.

4. Any other ideas?!

I'm so exciting about getting started, and so excited about this potential deal. Everything here goes like hotcakes (well, everywhere does now it seems). Basically all listings here state that they accept offers for three days and then they pick the best one. So if I can snag this before it goes on the market, I hope to have a much better chance! Trap it, then figure out how to skin it...

I'd love to hear some other thoughts from you guys. Right now the advice I've gotten is that the best deal would be as a primary residence if I can afford it (I only make about $45-50,000 net a year right now in a high-cost area). Sorry for the long post, but I figured more detail is probably better. Thanks guys!