Stunning STR available, but is it too risky?

[Nicholas Fehr]

There's an incredible, one-of-a-kind mid-century home for sale in my area in Los Angeles. I think it would be such a cool Airbnb, but I have no experience in short term rentals. It definitely pencils nicely as a STR (more on that below), but I'm worried for two reasons: 1) Entering the LA market with a STR since they require it to be your primary residence, and 2) The "backup plan" of converting it to a LTR doesn't look super pretty.

I'm thinking it's a pass, but wondering how others would approach this?

Scenario 1: Short Term Rental. $1m purchase price (30Y Fixed @ 4.5%, 80% LTV)

Y1 NOI: $54k, Debt Service: $49k. DSCR: 1.09(!)

Y10 NOI: $93k, Debt Service: $49k.

Exit at year 10 and make $1m in profit, including cashflow over life of the deal, resulting in a 19% IRR.

Scenario 2: Long Term Rental (backup plan)

Y1 NOI: $30k, Debt Service: $49k. DSCR: .6(!!!!)

Y10 NOI: $50k, Debt Service: $49k.

Exit at year 10 and make $470k in profit, including negative $113k cashflow over life of the deal, resulting in a 7.8% IRR. Or hold forever and watch the profit gradually increase.