STR Opportunity Review

[Michael Lyons]

Hi all,

I am hoping to get some outside opinions on a deal I am currently structuring. A bit of background:

I am 23, and this will be my first deal. I have sourced ~$150k in equity among friends for my LLC, and will be partnering with an outside investor to be an equity partner with another ~150k.

The property is in a growing, historic city with low seasonality (summer always does better, but still steady business flow in the winter months as there's year long activities). We've been following the market for a few months, and have identified a property that falls into our ideal profile (maximize 2b, 1.5 bath, has the right turnkey finish we need, minimal wasted SqFt you wouldn't be able to get value through as an AirBnB, compared to utilizing as a LTR).

Given where rates are, and due to the number of investors, the loan products we are looking at are not too favorable for Cash flow. 

We are considering purchasing the property all cash for three reasons: 

1. Less operating risk as we learn the in's and out's of running a STR effectively

2. Having a bit more pricing power to attract occupancy and build a strong review foundation.

3. Giving ourselves the opportunity to build a more accurate expectation of NOI

Initial expectations for COC is about 7%, which isn't amazing for a STR, I know, but we're also looking at a 2X equity multiple and a 10% IRR, but with a lot of room for upside on market appreciation (market has been the fastest growing in its MSA over the past 10 years and shows no signs of stopping in terms of population, and job opportunities, and long-term price growth). This is with fairly conservative operating assumptions and revenue expectations.

My plan would be to run this for 8 months to a year, re-evaluate debt options, and cash out refi at whatever LTV still allows for decent cash flow.

Questions:

1. Is this return metric worth considering for the minimal risk profile?

2. Would you consider this a base hit, and find the low-risk learning opportunity valuable? 

3. Should I hold the cash, and look to hit  bigger with a larger property that can cash flow more effectively with debt? (It's also worth noting that our team should be able to accumulate cash to a similar level within about a year, so even if this isn't the best deal in terms of opportunity cost, we aren't locking away the only capital we will have for the foreseeable future)

Thanks for the help!