New Construction Opportunity: Perfect Airbnb ??

Question

Hey BP community,

An interesting opportunity just came my way and I am having trouble analyzing this deal and deciding if it is the best usage of my capital. Here is the scenario (I will try to make it as concise as possible):

A brand new construction high end condo complex went up for sale this past June in my community. I ended up buying a unit for myself, as I truly felt it was a great investment opportunity and more importantly was the perfect home for me at the time (I was looking for something low maintenance and move in ready, as I was working on many BRRRR/Flip projects at the time). Anyway, over the course of last few months, I have befriended the builder and he recently told me, the penthouse unit has fallen out of contract, it was pending for so long because beneath the unit are 2 commercial units and the town would not issue C/O for penthouse, while those were under construction. The buyer backed out and the builder called me to ask me my opinion on market rents for Airbnb/STR for summer season (this property is located at the Jersey Shore). During our discussion, I told him I would buy it, if he decided he didn't want it. Long story short, he called me and said he would sell it to me for $860,000. Full transparency, I feel $860,000 is what it was worth last year, so I feel this number is inflated, but I know he would rather hold the property and rent himself if he cannot get that number. After running numbers, here's what it looks like:

$860,000 Purchase Price, however the builder will hold $400k of paper (interest only) at 6.5% per year for 5 years. So essentially, I only need 20% down on the $460k portion of the loan, which I plan on funding through a local bank.

Mortgage/Taxes/Insurance/HOA Fee will be roughly $3900 per month on the $460k note

Mortgage on the $400k through builder will be $2,166.66 per month.

Capex will be a little lower than normal since A. It's brand new construction B. HOA covers all ext. maintenance roof, side etc. and landscape / snow, but I will adjust and say $60 monthly for CAPEX

Cleaning fees, W/S, Gas/Electric for the year will likely be around $3,800 for the year.

My all in costs for the year will likely be around $78,000

The estimated revenue from Airbnb/Short Term rentals will likely be around $144,000 per year. That accounts for peak summer season and off season rentals. This is in a highly desirable area.

My net looks to be somewhere around $40,000 low end to 66,000 high end per year.

My out of pocket will likely be $125,000 from the 20% down payment and then furnishing the rental.

If I use cash on cash calculations, the returns are absurd. What do you guys think of this deal? Does it make sense? Is it too risky? Hopefully if everyone has read this far, you will leave your feedback! Thank you so much :)

James

Ricky A. · Answer

@James Lauer

Without digging in to confirm/refute your numbers, on the surface, the deal looks good to me.  The areas where I would really pressure test the assumptions would be:

- Rental Projection:  Make sure you feel great about them.  Triangulate between multiple sources like 3rd party sources like AirDNA, Rabbu, and 3rd party PMs as well as manually looking at rates and occupancy of competitive STR listings.

- Bank Loan:  Make sure you can actually get 460K at 20% down at whatever rate.  The bank may look differently at it because of the seller 2nd and/or because that seller note is interest-only and/or because it balloons.

- CapEx / CAM:  A few things...1) true CapEx might be low if you're only having to cover big things INSIDE your unit like appliances, major furnishings, and (maybe) HVAC, but make sure it's enough.  2)  Short-term HOA items should cover CAM (common area maintenance) items like landscape/snow, but if they have underestimated, you'll see a higher HOA fee very soon.  3) I don't trust HOAs to adequately save for long-term HOA items like major building fixes and replacements, so depending on your intended holding period, you may want to account for these by allocating more to CapEx.

With the room in your current numbers, even some changes in these will probably still result in a good deal.

PRO TIP:  With all the anti-STR activity, if the seller is the one creating/incorporating/organizing the HOA (or if the seller still has control of the HOA), have part of the deal include that both of your units be "guaranteed" to be able to be used as STRs (as long as municipal ordinances don't specifically forbid it).  That is, have the incorporation/organization docs specifically state that the HOA cannot restrict your units from being used for whatever rental purpose.  Have it at the unit level not the owner level, so that future owners can enjoy the same benefit.  That will make your units far more desirable than the equivalent one next door if the HOA ever tries to limit STRs.

Ricky A. · Answer

No, not really.  Once the HOA is up and running, it's very unlikely that they would amend their restrictive covenants to bake in a special benefit for someone.  However, the original developer is typically the one that creates the HOA and the initial restrictive covenants, and they have 100% control at that time.  Honestly, I've never actually seen what I proposed done, but I think it should be doable in a lot of original build-out cases (as long as there aren't local or state laws that don't allow a separate "class" of units within the same HOA).

Ryan Moyer · Answer

Like you said, CoC numbers are great in this current market.  If you're confident in your annual projections then it seems like a no brainer.  Just comes down to how confident in those you are.  Remember, if they're based off the trailing 12 months they may underperform that next year.  Now is the time to be underwriting conservatively.

Sara Levy-Lambert · Answer

It sounds like you've done a thorough analysis of the financials of this investment opportunity, and it appears that it has the potential to generate a good return on investment based on the estimated rental income and expenses. However, there are a few other factors to consider when evaluating the risk of this investment:

• Market risk: Real estate markets can fluctuate, and it's important to consider the potential for changes in demand for rentals in your area. If demand decreases, it could affect your rental income and potentially make it more difficult to sell the property in the future.
• Vacancy risk: It's possible that you may experience periods of vacancy, which could impact your cash flow. Be sure to factor in a vacancy rate in your financial analysis to account for this risk.
• Maintenance and repair costs: While it's good that the HOA covers some maintenance and repair costs, you should still be prepared for unexpected expenses that may arise. Make sure you have a reserve fund set aside to cover these types of costs.

Overall, it seems like this could be a good investment opportunity, but it's important to carefully consider the risks and be prepared for the possibility of unexpected costs or changes in the market.

Sean Bramble · Answer

@James Lauer your cleaning fees seem quite low @ $3800 per year. if you’re pricing to (nearly) maximize occupancy I would budget for 2 or so cleanings per week. Better yet check Airdna for the average length of stay in that area, see what a reasonable occupancy target is, and estimate based on those two data points.

Cleaning is definitely your biggest operating expense, and Airdna’s revenue estimates include cleaning fee revenue, so don’t skimp on doing a realistic bottoms up of what you’ll actually pay your cleaners.

OR maybe you just forgot a zero and I typed all of that for nothing ;)

Sean Bramble · Answer

@Ricky A. is there any way to do this HOA trick when buying a re-sold property in an existing HOA?

John Underwood · Answer

Remember that interest are still going up and your are going to have a Ballon payment due in 5 years. Make sure you have the worst case scenario figures in for this.

Bruce Woodruff · Answer

Make sure of your estimated income projections. If they can be verified, then on paper it sure looks good.....