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What is my best strategy to start STR with $1M cash?
Hello, new to STR and selling my business. I want to invest $1M into real estate. In my mind, I want to buy a near-beach/ beach front condo/house with cash and use it as my cash flow. Since I won't rely on this cash flow I want to snowball it annually into purchasing more properties.
My question is, is that the best strategy or should I use the $1M as a down payment and finance more properties from the start?
Curious what the best pathway is. I've leaned towards cash first and sort of wait out the high interest rates, and then possible refi this first property in a few years.
Thanks!
@James Pearce, if you haven’t reached out to @January Johnson from The Short Term Shop, I recommend that you do. She’s local to the area and can definitely help you out!
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@James Pearce find a partner you can trust
- someone who needs the capital, but has all the experience with investing and management. Go 50/50 on everything. There is way more upside for you with that based upon the goals I see you having. Just my thought. All the best.
@James Pearce is the 1 mill borrowed $ or is it your cash free and clear? Need this variable before I give input!
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Quote from @Peter Kapner:
Why would you give up the power of leveraging that cash to build real wealth? With $1M you could buy 5 properties with 20% down and have 5x the upside.
Yep^^^^
That much cash gives strong power to leverage.
I would use that to generate sweat equity on STRS buying 3 in the best performing market you can find, then use remaining cash and equity and leverage that into 3 STRs in another top performing market to diversify and spread risk. I would stay in two markets and scale, which allows you to really build strong teams
I would then take the cashflow and use that to add another property every year or so in each area as good deals come along
Or i would adjust, if i felt like it would be less work to be in just one market or one performed better overtime i might shift to that market eventually owning them free and clear reducing my risk, and then heloc those properties in first position to help utilize their equity to do something else like short term private money lending etc
Quote from @Luke Carl:
Ask the internet what you should do with 1 million cash and you’ll get a bunch of DMs and probably a marriage proposal or two.
You let the cat out of the bag now you’re going to have people posting that they have $1 million. Lol.
Quote from @Bud Gaffney:
@James Pearce is the 1 mill borrowed $ or is it your cash free and clear? Need this variable before I give input!
Quote from @Raymond J. Rodrigues:
@James Pearce, if you haven’t reached out to @January Johnson from The Short Term Shop, I recommend that you do. She’s local to the area and can definitely help you out!
Thanks Raymond! I was definitely planning on reaching out to them. I don't want to waste anyone's time until I was funded, but thats pretty close so it's definitely time to get this thing moving forward. Appreciate it!
I want to take a moment and say thanks for all the responses. Certainly a lot to consider and exactly what i was hoping for. Keep them coming, its all really valuable advice. As you can tell, im new to this space specifically but generally a very driven person. Im committed to investing in real estate, and this advice really helps me start geeking out on different pathways. Thanks again for all the wisdom
Quote from @Leslie Anne Morris:
I didn’t read all the answers because I’m literally boarding a flight. But, I would do the smallest down payment that I was personally comfortable with. Get into one deal. Get your feet wet.
In order to pick market you can either go with what excites you or go with top performance metrics (see my bias here).
If beach resonants and will add some additional satisfaction and quality of life stuff then do it. It would be more like a lifestyle asset.
If you plan to self manage get a coach and pay to learn. Don’t mess around with teaching yourself. Keep the remaining cash as cash reserves for now, maybe do some forced appreciation or value add and get the property that’s in the best location with the lowest price per sq ft. Get an agent who is also an investor in the exact thing you are looking to buy who has a good performance record.
Do it for a minute and make sure it works - weeks / months / years - you’ll know. Then 10x in same market since now you have your process and team. OR you could pivot to another market but only if that will bring you personal satisfaction and you won’t be self managing. That’s my two cents!
I agree with most all of this, except getting a coach. I got free coaching through this forum from the likes of @Luke Carl @John Underwood @Michael Baum and a whole bunch of other helpful folks.
I also agree with what a lot of folks are saying and spreading out your risk with multiple properties. The beach places sound appealing, that's where I love to vacation, but higher cost (purchase and operational)... maybe consider a mountain place too.
Quote from @James Pearce:
Quote from @Andrew Steffens:
I would buy 5 $1M beach houses in FL generating 15%+ gross return with 20% down
I will continue to work for the next 3-5 years so I don't need to count on this cash flow as income. I'm concerned that 20% down with these interest rates won't yield positive cash flow, but to be fair I haven't done enough market research yet to make that assumption. The goal is that in 5 years I can live on the cash flow, still add properties and not count on a salary. I'm definitely for leveraging and acquiring as many properties as possible, as long as there's good flow behind it.
Easier said than done & sounds great on paper to buy 5 properties w/ 20% down payment.
Quote from @James Pearce:
Quote from @Raymond J. Rodrigues:
@James Pearce, if you haven’t reached out to @January Johnson from The Short Term Shop, I recommend that you do. She’s local to the area and can definitely help you out!
Thanks Raymond! I was definitely planning on reaching out to them. I don't want to waste anyone's time until I was funded, but thats pretty close so it's definitely time to get this thing moving forward. Appreciate it!
I'm here when you're ready! :)
I really like some of the advice on here especially @Marcus R.'s last line "I would focus on education for a year before investing anywhere."
With that said I am going to say a few things that are very unpopular:
1. STRs are way higher risk than long-term rentals. Look at places like Oahu where overnight 90% were made illegal.
2, SFHs are dollar for dollar very inefficient, financing is easy and they are more liquid but your most valuable asset is time so if you go into STRs and SFHs you could find yourself at a loss of years before you gain traction.
3, Watch what the big players are doing (I know that some hedge funds are buying SFHs but not at the rate as large multi-family)
4. If you are willing to put in the work and pursue value add opportunities, buying at market just to get a small return or depending on short-term booking sounds like a nightmare.
5. I strongly encourage you to find a largeish multifamily project where the seller will seller finance to you and invest the money into renovations of units. I have done this a bunch of times on MHPs and I feel like smaller apartment complexes would be perfect for this.
Another huge plus with most apartments is the financing on the commercial end is way more straightforward so your scalability is awesome.
Sorry to highjack your question.
What is your end goal?
And I'd be cautious about getting after the "best." It takes base hits all day long to be successful in this space. Most of my clients who are seeking the "best" and the "lowest" of whatever sit on the side lines the longest.
If you want to be active, I'd counsel dipping your toes with $100k leveraged out and learn from it.
Quote from @Logan M.:
I really like some of the advice on here especially @Marcus R.'s last line "I would focus on education for a year before investing anywhere."
With that said I am going to say a few things that are very unpopular:
1. STRs are way higher risk than long-term rentals. Look at places like Oahu where overnight 90% were made illegal.
2, SFHs are dollar for dollar very inefficient, financing is easy and they are more liquid but your most valuable asset is time so if you go into STRs and SFHs you could find yourself at a loss of years before you gain traction.
3, Watch what the big players are doing (I know that some hedge funds are buying SFHs but not at the rate as large multi-family)
4. If you are willing to put in the work and pursue value add opportunities, buying at market just to get a small return or depending on short-term booking sounds like a nightmare.
5. I strongly encourage you to find a largeish multifamily project where the seller will seller finance to you and invest the money into renovations of units. I have done this a bunch of times on MHPs and I feel like smaller apartment complexes would be perfect for this.
Another huge plus with most apartments is the financing on the commercial end is way more straightforward so your scalability is awesome.
Sorry to highjack your question.
I really appreciate this Logan. I know enough to know there's a lot I need to learn, and I need to be cautious and strategic in the direction I follow. MFH has been on my mind for a long time, and something I certainly will be entertaining. I know the answer is probably too detailed for this thread, but what do you think is the best way to start emerging myself in that market, find the right people to work with, and create pathways to the available properties?
I would definitely do what others are suggesting and not spend all of that $1M on a property, especially if you're new. The best return on your investment is going to be to educate yourself. Find someone who's done this, kick them a fee, or learn this on your own.
I'd pump the breaks and work with someone on the first deal. Make it smaller and learn the ropes.
Find a lender that offers both free coaching and financing. When they're lending, they're also motivated to guide you through the process and make sure your set up for success. Leveraging other people's money (OPM) is key to scaling, and with the right financial partner, the sky's the limit!
Hey James!
It's awesome to see your interest in diving into the world of short-term rentals (STR) with a solid budget. Your plan to use $1M from selling your business to kickstart your real estate journey sounds exciting.
Let's break down your options:
Your initial thought of going all-cash and buying a near-beach or beachfront property has its perks. With no mortgage, your cash flow potential could be higher. Plus, having a solid cash flow from the get-go gives you flexibility and peace of mind. And since you're aiming to use the cash flow to snowball into more properties annually, that's a strategic approach.
However, there's another path to consider – using a portion of that $1M as a down payment and financing more properties right away. This could diversify your portfolio and potentially speed up your journey to accumulating more assets. It's a bit of a balancing act – you'd have mortgage payments, but you might be able to acquire multiple properties faster.
The decision often comes down to your comfort level, risk appetite, and goals. Going all-cash provides stability and a solid foundation, while leveraging with mortgages could potentially accelerate your portfolio growth.
Your idea to wait out high interest rates is thoughtful, and refinancing the first property down the line is a smart move to capitalize on favorable market conditions. It's a way to optimize your investment while making the most of the flexibility you gain from your cash flow strategy.
In the end, there's no one-size-fits-all answer. It depends on how hands-on you want to be, your long-term vision, and your comfort with leverage. Given your unique situation, I'd recommend sitting down with a financial advisor who understands real estate and can tailor advice to your specific goals. They can help you map out the pros and cons of both approaches and guide you toward the strategy that aligns best with your vision.
Exciting times ahead – best of luck on your real estate journey!
Cheers,
John Mathew
Quote from @James Pearce:
Quote from @Collin Chan:
Quote from @Ricardo Hidalgo:
Quote from @James Pearce:
Hello, new to STR and selling my business. I want to invest $1M into real estate. In my mind, I want to buy a near-beach/ beach front condo/house with cash and use it as my cash flow. Since I won't rely on this cash flow I want to snowball it annually into purchasing more properties.
My question is, is that the best strategy or should I use the $1M as a down payment and finance more properties from the start?
Curious what the best pathway is. I've leaned towards cash first and sort of wait out the high interest rates, and then possible refi this first property in a few years.
Thanks!
I would look into value add or renovation. We invested a similar amount of cash during this time into several construction, Reno and land acquisitions projects. Some of them were for cashflow and other for equities positions. Currently we are sitting above a 30% return since buying in march of 2023. If you don't want to do any work, I would look for turn key options with strong rental history or gulf front options that are underperforming.
+1. We've done value add BRRR STRs as Rob likes to call it and put money into remodeling houses from 3/2 to 5/3 houses. We bought for $950k and after $200k in remodeling had it appraised at $1.4M and did a cash out refi to pull out the construction cost. We increased the value by 200k and are doing a cost segregation study on the improvements to accelerate the depreciation to offset other incomes. So we got the forced appreciation, the accelerated depreciation, and now STR income.
Given that you sold a business you might want to talk to your CPA about this strategy to minimize the taxes from selling your business.
I love everything about this. Now that it's a 5/3, what % were you able to refi out? And at that amount you have no problem with cash flow on the STR side?
We kept 40% in the property. It was part of a 1031 exchange split across 3 properties and we put more of the funds into this property since we planned to remodel and pull some of it back out after the value add project.
Our 5 bedroom on Airdna is pretty wide from 180k-240k annual gross income. We're on track for 140k but just launched this one in March so it's a slower run up but fall and holidays are booked already.
Feel free to connect and I can fill you in on more details.
@James Pearce
Wait for the stress sales and forclosures. Everything is overpriced, cap rates are lower than the interest rates, and interest rates are high.
If your new to STR, I think a combination of using leverage but also starting out slow would be a good approach here. You don't want to, since your a beginner, invest too large of a lump sum of cash in an asset that god forbid doesn't perform, isn't worth what you thought it was, etc. Not saying this will happen but risk needs to be taken into account. What could be a good plan, is obtaining financing with low to no prepayment penalties, acquiring one or two properties, and if they are performing well, great, you have the cash to acquire more and can refinance out of the 7%+ handle interest rates on those one or two properties down the road. If they aren't performing, well know you've probably learned what is causing them to not perform/what mistakes you've made, and you have ample dry powder to make another investment and do it right/make the proper corrections :)
James
I would spread it over multiple properties if you can, as not not put all eggs in one basket. If you decide to go with one, you will have negotiating power with cash to try to find a good deal. A good amount of properties here underperform because they haven't been updated lately or utilized optimally. Feel free to reach out, I specialize in STR sales in the Emerald Coast of Florida - Destin, PCB, 30A etc.