Buying a high end property as short term vacation rental

[Mike L.]

Hello,

I would like to move money from the stock market to real estate. I have $140,000 to invest in Savannah, Georgia. My initial plan was to build a portfolio of 4-5 single family rental properties; adding a new property once per quarter. These would be homes valued between $100,000-130,000.

Savannah's historic district is a phenomenal area for short term vacation rentals like Airbnb. Duplexes in this area are currently listed for sale at $400,000 and up. This area averages 80% annual occupancy on Airbnb with an average nightly rate between $150-200. Monthly gross on a duplex would be around $7200 using the lower nightly rate.

I decided to kick this can a little further down the road by getting pre-approved for a conventional loan through Quicken Loans. I'm pre-approved for a $540,000 loan with 25% down. I expect interest rates to be around 4% so I can avoid the ridiculous amount of points I'm seeing in the Fannie Loan Level Price Adjustment (LLPA) matrix.

A potential deal will probably look like a $500,000 loan on a 2 or 3 family unit with $125,000 of my money down and a 4% interest rate. Each unit gross around $3600/month. Plenty of cash flow after taxes, property manager, cleaning, utilities, and other fees. I would like add similar properties if this one goes well.

There is a bit of intangible benefit for us as well. My wife and I will use the property when we are in Savannah.

Is this a sound strategy? Is it wise to put that much cash into one property?

Best,

Mike

[Victor Menasce]

I have several high end short term rentals. The key is to understand the laws of supply and demand in each segment of the market. For example, Las Vegas is a great market for high end short term rentals. Visiting entertainers often come with their families and want to rent a house, rather than stay in a hotel. They want to be out of the public eye in a more private space. They're willing to pay top dollar for these type of accommodations.

The question is whether your market has the same dynamic. There are some high traffic markets with lots of supply at the low end. The segment of the market will reach saturation as more properties enter the market. That will eventually kill the higher profit margins for everyone as more and more competition enters the market.

In my opinion, if you can properly identify a small but high value segment, you can provide an alternative product with virtually no competition. Not many people will put a 4000 SF 6 bedroom house into the AirBnB market. But if the demand is there, you'll do extremely well.