Choosing between two STR beach properties

[Jake Durell]

I am having trouble choosing between two beach properties for a first investment. 

One set of options are condos in a complex which basically has no beach during high tide and the HOA spends more and more each year remediating that. Fees were $5,500 but may go over $8,500 soon for beach work, but also other worthwhile projects. The HOA seems well organized. These units are anywhere from $160-$200k.

The other options that come up are villas on stilts usually in groups of 3-5 homes. These can be closer to $300k. When these rent, they rent for more money. There's not as many airDNA comps to see how often this might really rent. HOA Fees are basically nothing. Insurance might be as high $4k in CBRA zone though this property seems safer than the condos just outside the CBRA zone. But my wife and I would basically need to take a 90% mortgage to make this work. We'd need to average about 6k in rev after property management costs and any taxes and fees.

This is our first investment property which will be entirely debt financed. We will have a HELOC on our home and a new mortgage on the new property. We could do a villa and maybe have six months of reserves if we are lucky. We could have more with the condo. We likely have no where to go after that other than bankruptcy. I suppose we could try to increase the HELOC but that might be tight.

-Jake

[Derick Bonsu]

Option #2 seems ideal if you are willing/able to find a compatible partner or something more creative that still leaves you with a solid, not tight, 6 months reserve. Personally, I'm not comfortable with less than 20% down and not having 6 months reserve but your mileage may vary. You mentioned not having enough airdna comps, did you try checking out listings on the 2 platforms yourself? 

For me I've found it a lot easier to deal with higher end/nightly rate guests, so I would rather have 1 of option #2 vs 2 of option #1

[Luke Carl]

I'd both options are STR friendly (and most places aren't), then buy where the wife prefers to vacation! Simple as that :)

[Joe Norman]

I say don't buy either of them, it sounds like you're stretching yourself way too thin. Look for investments in a lower price point or save up more money - its not fun being house poor trust me.

[John Underwood]

Option 2 over option 1. 

Condo's don't make as much money and as you have pointed out are riddled with problems and fees.

[Marylin OShea]

I am here to vouch that the higher price per night properties are easier to manage, far less hassle! I don't have any problems with my STR guests and I think that is the main reason (coupled with the fact that I do take great care of my properties and my guests!).

Also sound advice above not to stretch yourself too thin, run the numbers and don't just run with Airdna, research comparable listings and educate yourself about the market you want to enter.

Good luck!

[Bruce Woodruff]

These both have HOAs? Can you find any places that are stand alone homes with no HOA?

[Karl McGarvey]

Quote from @Jake Durell:

I am having trouble choosing between two beach properties for a first investment. 

One set of options are condos in a complex which basically has no beach during high tide and the HOA spends more and more each year remediating that. Fees were $5,500 but may go over $8,500 soon for beach work, but also other worthwhile projects. The HOA seems well organized. These units are anywhere from $160-$200k.

The other options that come up are villas on stilts usually in groups of 3-5 homes. These can be closer to $300k. When these rent, they rent for more money. There's not as many airDNA comps to see how often this might really rent. HOA Fees are basically nothing. Insurance might be as high $4k in CBRA zone though this property seems safer than the condos just outside the CBRA zone. But my wife and I would basically need to take a 90% mortgage to make this work. We'd need to average about 6k in rev after property management costs and any taxes and fees.

This is our first investment property which will be entirely debt financed. We will have a HELOC on our home and a new mortgage on the new property. We could do a villa and maybe have six months of reserves if we are lucky. We could have more with the condo. We likely have no where to go after that other than bankruptcy. I suppose we could try to increase the HELOC but that might be tight.

-Jake

I am a huge fan of condo's on the beach for a first investment for my clients (and also what I did myself). Less CapEx items to worry about so can spend more time learning the in's and out's of the business operations for when you expand to more properties. I take a very close look at the HOA's to make sure they fully support STR (In Galveston we have some great Condotel type setups that have front desks to check in at to help us out with security of the units), and make sure their financials are in order.

When looking at condo's, make sure the lender you are using can lend on them, and honestly I only use lenders who have lended on that property before to  make sure there are no snags. Condo's tend to be a little tougher to lend on.

[Jon Martin]

I know the exact units you are talking with option 1! I tried to buy a few of them, but with one of them the seller wanted way too much and the other I think my agent was too aggressive with a low ball offer. They have awesome views which I think will always translate to good cash flow as long as they don't get swallowed by the ocean. 

If they go through with the beach replenishment, I imagine the value and price will go up significantly but I'm not sure if the extra sand will translate to enough of an improvement in occupancy and ADR to outpace the HOA increase.

[Corbin Loveless]

@Jake Durell it sounds like you're leaning toward your second option. 

I would look on Air Bnb for the Superhosts in the area and develop a relationship with them. Someone will be willing to provide the details of their investments- what's working, what's not working, what would you if you could do it all over again? etc. A ton of people in the real estate community are willing to share. Take advantage of this and find a subject matter expert in your area to consult with (someone who has no dog in the fight and isn't trying to sell you something!)

[Jake Durell]

Thank you everyone!

@Luke Carl hit the nail on the head about "where the wife prefers." We both love the area and I'm sure I've heard here to invest where first where you're comfortable.

But the money makes us uncomfortable. The plan was to use part of the HELOC to make the house we live in more STR worthy. This forced us to think how we do that for less and we will do that. But this will still leave us with $2,500 PITIA at the Beach, and maybe reserves to cover that with 8 months. Not sure if that is too thin @Marylin OShea, @Joe Norman, but I can't imagine getting comfortable with it by the Sunday offer deadline.

I think we do need to accrue a little more cash, and starting STR on our home soon will help. We could also do a little more research. We have a good prospective cleaning/consulting service who is providing solid advice, but talking to superhosts is a great idea @Corbin Loveless. Starting with a Condo may be the way to go as you say @John Underwood, @Karl McGarvey@Jon Martin I have trouble seeing how they generate enough to get us to our next property for at least five years. I agree higher end makes more sense when you can swing it @Derick Bonsu, and I never considered the hassle would be easier but that makes sense.

HOAs are somewhat unavoidable in this area at our range @Bruce Woodruff, but there are certainly ones that control fewer aspects of life. I have the honor of being "president" of a 2 unit HOA at home which is obviously pretty uneventful. Part of me gets excited about the idea of getting immersed in the politics of a larger HOA facing intense issues, and option 1 may be just the place for the @Jon Martin.

[Lisa Marie]

@Jake Durell, where are you finding the beach houses under $300k?  Up and down the Atlantic seacoast, I am not seeing any beach house (in reasonably attractive condition and attractive location) for anything under $250/sq ft.  The avg is more like $300~350/sq ft. I may be generalizing a bit here, but my point is, if you can buy these properties at such low prices, it tells me that this is not a prime vacation spot, therefore more susceptible to demand shock.

Also, regardless the location, if your finance is stretched so thin in order to buy a $300k house, I am sorry but I don't think you are ready for real estate investment, especially at this market condition (both in terms of real estate prices and the uncertainty of STR supply vs demand). Don't fall for FOMO.

If you have time and energy on your hand (which you have to, if you are new to STR and want to be successful), you may be better off spending that time and energy to find a better paying W2 job.

If you have some money laying around, I honestly think right now you are better off putting it in the stock market. The stock market today is 30% less than what it was 6 months ago. You can argue it was frothy before, but is Google or Amazon's business prospect suddenly 25~30% dimmer over the last 6 months? If the real estate market price drops 30%, everyone on this forum will be talking about liquidating every brokerage/401k/IRA account to buy houses, right?

I know I am sprouting heresy here by advocating stocks on a Real Estate investment forum, but I believe most people on this forum are smart and reasonable market-neutral capitalist, i.e they want to make money in whichever way that provides the best return at the lowest risk.  My husband and I have money in both -- our networth is about 50% in RE and 50% in stocks, so I consider myself unbiased.  I can tell you any new savings we have right now is going into the stock market. 

[Karen Chenaille]

Hi Jake

I have four condos along the gulf coast and I would say the biggest downfall across all of them has been the HOA's. When I got into STR's, they seemed pretty innocuous. One thing that is common to all of them is the boards are comprised of folks that are not short term rental investors...in fact, few of the board members have any background in investing at all, much less short term rentals. On the plus side, all of them provide a nice return and I have accepted the fact that I am in it for the long haul, but if I had it to do again, I think I would do my best to steer away from a complex with an HOA.

[Jon Martin]

@Jake Durell whether you can make Option 1 or even 2 work for you depends on your situation and only you can decide that. I pivoted to more of a college town market because I knew that the beach condo probably would not appreciate (relatively) much and that a rehab wouldn't help the value much either, so for BRRRR or a future sale it didn't offer much. It's a good cash flow play for the price but you would have to save the proceeds diligently to scale for the next.

As for why they are so cheap @Lisa Marie, it's because these units are close to being swallowed up by the ocean . ..  Hence the amazing view lol. It's basically a sandspit with a huge inlet at sea level. And why sellers are trying to get of them. Same goes for neighboring properties, and if it were to take the brunt of a large 'cane that could be the end of it.