Where would you invest? Long/Short Term rental, Airbnb, BRRRR, MF

Question

We have been pre-approved to purchase our 2nd rental/investment property for up to $750k after pulling out close to $175k from our 2 properties during a refi. I'm a stay at home dad with plenty of time, so we're open to multiple options including:

• Short term rentals for vrbo/airbnb (No experience, but have heard it has the best margin)
• Long term rentals (We've successfully run a LT rental for the last 5 years)
• BRRRR (Never tried, but am fairly handy and not afraid of adding some sweat equity to a property)
• MF (Spreaking out our risk across multiple tenants makes this an appealing option)

Would you get 1 property financed worth $750k, 1 property all cash worth $175k, or multiple properties financed up to $750k?Our main goal is building long term wealth, second is cash flow, and third would be a destination property we could use when not rented out.

BRRRR: I like this strategy, but there are multiple concerns. First, I'm not sure how long the local real estate market will continue this fast paced rise which has been the main driving factor behind our big increase in Net Worth the last few years. Both our properties have appreciated more than 50% in the last 4 years alone = Yay! Buying at the peak of the RE market = Boo! Second, the shortage of inventory makes finding potential properties very tough (though maybe I'm not looking for the right type of properties). Third, any properties that do come on the market don't meet the 70% rule as far as the ARV goes. With the funds we presently have available, we 'could' do an all cash deal for a property between $100-$150k, and would have $25-75k available for remodeling. The average rental in our area for a house in our area is roughly $750/mo per $100k in property value. One thing we have considered is a beach vacation rental property. Hurricane Florence did a number on the NC coast a few years ago. There's still an inventory of houses that need to be gutted and rebuilt. Could be an opportunity for us to dive into the short term rental market, and build some instant equity. Long Term Rental: A definite option and the strategy we've had a lot of success in, but the area our present rental is in has almost no inventory. Properties are in such high demand, any prospective property is off the market almost as quickly as it comes on the market. Thanks to COVID-19, it looks like the smart play here is to maximize leverage and finance as much as possible over multiple properties to reduce our risk across multiple areas. We thought we got some great rates when we originally financed our primary and investment property 5 years ago (3.875%/4.625%), but they're nothing compared to our present refi offers (3.25%/4.125%). I've never seen mortgage rates so low - especially for investment properties. The way I believe our mortgage guy explained it to us is that any rental property has 75% of the rent instantly credited against your liabilities. In other words, if we rent out a house at $1k/month, and our payment is $750/mo, we'd be able to repeatedly do the same thing over and over again as long as we were purchasing properties WITH a tenant in place and good rental history. Say the average deal finds 1 month to finalize and 2-3 months to close. We could pickup a new rental every 3-4 months or 3-4 new rentals/year. I know the tendency w/ long term rentals is to cash out of a property, cash out the increased equity from previous rental, and go bigger or more units? In other words, instead of refinancing our 1st rental property from 4.625% to 4.125% while taking out $60k, we'd sell it and take out roughly $100k after selling costs. Assuming the bank says we're good at the 75% LTV if we can come up w/ the down payment - if we combined the sale of our rental w/ the refi of our primary, we'd have access to ~$225k for our next property vs $175k - so we'd be able to get a $900k property instead of a $700k property. To me, that doesn't make a ton of sense (unless we sold the property at the absolute market peak). We can already get out $60k from the rental, keep $40k in equity plus the $500/mo cash flow, and don't have to eat $15-20k in selling costs. If the average holds true of $750/month in rent per $100k in property value, we'd be able to generate maybe an extra $1500/mo on the $700k property vs $900k property. And the present rental currently generates $1400/mo in rent w/ great tenants in place that pay on time every month with few if any problems. Right now, it looks like regardless the best play is to maximize leverage to buy solid, consistent rental investment properties? But my old man once said all of us are smarter than any one of us, so looking for other opinions. So, what would you guys do if you were me? Thanks for any suggestions or things I hadn't considered. I appreciate it!

Julie McCoy · Answer

Short term rentals will hit all three of your criteria.  In a very short span of time I've built a tremendous amount of wealth for myself, fantastic cash flow, and I have a selection of properties to stay in if I want to - and I started while working a full time job on the other side of the country.  My market is the Tennessee Smokies (Pigeon Forge/Gatlinburg/Sevierville) - which is already slammed again post-COVID, and doesn't suffer from the seasonality or threats of severe weather (hurricanes) like many other destination markets.  We're drivable, affordable, we did well through the recession and are doing well as we come out of the pandemic.

In my market, you'll get the most bang for your buck by doing one $750k property (I can point you to some that can reasonably gross in the low to mid $100k annually).  If you want to diversify a bit, two mid-range properties will also do well, though likely won't be quite as efficient from an ROI perspective.  Also key to cash flow is self-managing, which you will be completely able to do as an articulate, intelligent human with time on your hands. :)

Good luck making a great decision for you and your family!  What a great situation to be in!

Taylor L. · Answer

What's your long-term goal? Not number of units, but how much do you want to make and when? What lifestyle do you want? Answer that first.

STRs- Too much regulatory and market risk. We haven't seen the bottom of that. If I were doing an STR deal, I wouldn't do anything that I couldn't convert into a long term rental. Vacation markets are going to be hit, hard. We are not out of the woods on Covid. Even if we were, the economic impact is not going to heal by the summer. People stop taking vacations when they're not working.

BRRRR - My friends that do this are very active investors. How much time per day do you have to research deals, manage contractors, etc? As you've identified, there are real market risks that hit a lot of BRRRR investors during the Great Recession. Hopefully we don't have that big a drop this time, but unemployment numbers are very high right now...

Multifamily - This is my preference. Buy affordable housing in markets with high housing demand, diverse economies, and modest new construction.

I would not be maximizing leverage at this point. Reserves are what get us through tough times, and the pandemic's economic impact could potentially get worse. Furthermore, lending standards have tightened (at least from my experience) so lenders are going to want you to have plenty in reserves and healthy debt to income numbers.

Jingru Sui · Answer

Do you want to be more hands off or hands off in the future? You have a lot of capital thus options here. I can go in detail on all of the options you mentioned because my 9-5 job is managing short term and a 40 unit multifamily. And my self on the side is an agent/ investor. I buy and hold long term single family and have done BRRRR.

If you want to have a full time job and make more $$, short term rental is the way. Obviously you can find PM to help but short term PM charge premium which is understandable because it’s constant work. Answering questions, arranging cleaning etc etc. if you have less than 10, you might be fine but more than 10 you’ll find it become a full time job. Also if you want to try Short term, depend on location, during covid you might want to rethink . Our downtown Airbnbs have to turn into month to month and profits not good because of the HOA’s eating up all of our profit. Tip is if you do want to try short term, please make sure your number work for both long term and short term so you can prepare for the worst.

Honestly I think you can try multifamily either buy a small one yourself or syndication. You might be easy to scale this way.

Just my 2 cent. Good luck!!

Evan Polaski · Answer

@Jeff Lever obviously, no one can truly answer this for you.  But having done BRRRR (before it was called BRRRR) and with those long term rentals, short term rentals and passive investing through syndication, here are my takes:

STRs are on-going work.  My wife manages ours.  On just the one, she spends about 30 - 60 minutes per day on her phone responding to various requests, checking occupancy, adjusting rates, plus managing cleaners, supplies at the house, etc.  Not to say you can't outsource this, but it is steady work.  We experience a fair amount of seasonality.  There will be months that you barely breakeven or lose money, and months you will hopefully be making a killing.  For us the numbers are not much better than long term rental, but there are several factors to this as well.  Remember: with a STR, you are responsible for utilities, internet, Netflix, toilet paper, replacing towels and sheets, cleaning supplies, etc.  It all adds up fairly quickly.  And lastly, being short term, there is just a lot of stress of whether you will fill up or not.  Then there is the issue of getting something repaired and trying to force that into the 11am check out through 3pm check in times, so you don't have to cancel someone.

BRRRR: as you mentioned, hard to find real deals right now that would let you completely cash out, but they are there just harder to find. And you have to manage a renovation, which can be a full-time job. And then you continue to have any struggles you may have now with you long term rentals.

To get to your refi vs sell question, it really depends on what your return on equity looks like.  If you can get better returns on having access to the full $100k through reinvesting, then your answer is sell.  If you get a better combined return from pulling out out and reinvesting the 60k and keeping 40k in at $500/mo free cash flow, then that is your answer.

Where would you invest? Long/Short Term rental, Airbnb, BRRRR, MF

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