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Deal Analysis - Requesting feedback
Seeking a second look for "blind spots" in my deal analysis, I appreciate your time -
Situation: My wife and I recently sold our primary house and moved to
Florida, primarily for a healthier lifestyle and better quality of
life. We also want to use the proceeds from the sale of our house to
begin building a balanced real estate portfolio of short, Mid, and
long-term rentals.
Market: We are in a coastal market that is primarily short-term rental heavy and as you probably know that puts upward pressure on prices and affordable long-term housing.
The Deal: I've calculated 2% COc as long-term rental under a best
case aggressive offer with 20% down on a fixed 30 conventional loan. As a
medium term rental the COc is 6% using the calculators. The property is
very close to a hospital and market research indicates demand for
medium term housing. The property is in a sparsely built area with many
un-built acres. Air BNB calculator indicates a potential 44% Coc
although I'm skeptical given that the property is not on the beach, it
is centrally located between the beach and bay on a side street, in a
residential area (about 13 minutes +/- from the beach) so probably would
result in a higher vacancy than beach homes as vacationers are looking
for walking proximity to the beach.
The Plan: Our plan is to
purchase the property as our primary residence, live in it for the next
two years until our son graduates from high school and turn it into a
rental. This property is well suited as a turn-key, long term buy and
hold with decent appreciation.
The issue: I'm not sure it's
wise to make any investments with such a low yield given the current
market conditions and there seems to be an increasing likelihood that
prices will decline and supply will increase (who knows, but sold prices
are trending downward). But the opposite may be true in that prices may
go up as more affordable inventory becomes available and more buyers
jump back in. Many of the trusted forums and podcasts preach that you
should not accept anything less than 8% yield. It is close to impossible
to find that yield in this market. On the other hand, we're throwing
away $2600 a month on apartment rent. After the purchase of this
property, we have more than a year's reserves which helps mitigate risk
and we can cover the monthly mortgage with our current income.
Is it a wiser decision to keep the cash ($110k) in a 5% yield account and wait for market adjustment or make this purchase?
Hey Brad,
Thank you for posing this question, its interesting topic of conversation because i feel there are a lot of people in the same boat. I have been a firm believer in keeping it simple when investing in real estate, numbers have to make sense. If i am able to achieve similar returns in the stock market meaning to your point if returns are not greater then 8% its not worth it for me personally, others may feel differently. When it comes to your personal home i would ask the question will my mortgage payment be more or less with escrow then what it costs me now to rent? That may help you look at it from a different perspective and help you with your decision. Side note if you are able to find a deal in your location that you are able to add value too, that may be better use of your funds and still get you into a property that has upside both in mid and longterm. I love STR but if you are in a saturated market like Destin, you have to stand out to keep your occupancy rate up without sacrificing nightly rate. We currently have a STR in Myrtle Beach and has done well but have noticed this year occupancy rate has gone down because of so many STR in our market.
Hope this helps.
I think this is where its NOT all about the numbers....
The past 5-7 years has seen a phenomenal increase in rents... Its been about $1k in my local market... the prior ~10-15 years it went up about $200 during that period...
Of course, the past 5-7 years has also seen a phenomenal increase in values, appreciation. I know there is a big push for cash flow, but the main rates of return come from the appreciation which is speculation and some lucky timing, for example, if you purchased before 2007-08, you've waited until the past year or so for values to recover...
So, no other advice but to just decide if you want to take the risk. Happy to chat if you'd like. Good luck.
Hey Brad,
Were you looking at the free results from AirDNA? Or have you paid to see the comp set?
If you'd like to see the como set, feel free to DM me the address and I can use my unlocked account to run a more robust STR analysis.
I personally don't think you should put so much pressure/emphasis on the low CoC return that the property holds as an LTR. If the asset is in a true vacation market, then there is less risk than that of an urban market for possible regulations. In Vacation Markets, the local economy is heavily reliant on STRs for the revenue the tourists/guests bring. From just strictly a CoC perspective, I personally feel strongly about this deal. With that said, it is also important to triple check the revenue estimates you are using for underwriting. Are you strictly using Air DNA?
Money is always better put in real estate than anywhere else, and if you're going to use the property as a personal residence you would be gaining appreciation over the next couple of years. We nearly purchased a condo in the Miramar Beach area earlier this year, so we learned a lot about that area! Our realtor kept telling us that even with everything going on, that part of FL was holding its own. Here we are months later and still keeping an eye on the market and she was right, the prices have hardly changed, and the market is still strong. When it comes to the STR market and running numbers on properties on and off over the last year I feel like that has a dipped a bit, but it all depends on the location and property size. MTR are in strong demand and there isn't enough of them, so you wouldn't go wrong with that strategy if your property is close to the hospital there. I know the heart hospital in Miramar Beach is always needing housing for out of state workers that come in.
Hope that helps! If you would like to chat more about the area and what we have noticed and learned over the last year feel free to DM me!
Quote from @Brad Morrison:
Seeking a second look for "blind spots" in my deal analysis, I appreciate your time -
Situation: My wife and I recently sold our primary house and moved to
Florida, primarily for a healthier lifestyle and better quality of
life. We also want to use the proceeds from the sale of our house to
begin building a balanced real estate portfolio of short, Mid, and
long-term rentals.
Market: We are in a coastal market that is primarily short-term rental heavy and as you probably know that puts upward pressure on prices and affordable long-term housing.
The Deal: I've calculated 2% COc as long-term rental under a best
case aggressive offer with 20% down on a fixed 30 conventional loan. As a
medium term rental the COc is 6% using the calculators. The property is
very close to a hospital and market research indicates demand for
medium term housing. The property is in a sparsely built area with many
un-built acres. Air BNB calculator indicates a potential 44% Coc
although I'm skeptical given that the property is not on the beach, it
is centrally located between the beach and bay on a side street, in a
residential area (about 13 minutes +/- from the beach) so probably would
result in a higher vacancy than beach homes as vacationers are looking
for walking proximity to the beach.
The Plan: Our plan is to
purchase the property as our primary residence, live in it for the next
two years until our son graduates from high school and turn it into a
rental. This property is well suited as a turn-key, long term buy and
hold with decent appreciation.
The issue: I'm not sure it's
wise to make any investments with such a low yield given the current
market conditions and there seems to be an increasing likelihood that
prices will decline and supply will increase (who knows, but sold prices
are trending downward). But the opposite may be true in that prices may
go up as more affordable inventory becomes available and more buyers
jump back in. Many of the trusted forums and podcasts preach that you
should not accept anything less than 8% yield. It is close to impossible
to find that yield in this market. On the other hand, we're throwing
away $2600 a month on apartment rent. After the purchase of this
property, we have more than a year's reserves which helps mitigate risk
and we can cover the monthly mortgage with our current income.
Is it a wiser decision to keep the cash ($110k) in a 5% yield account and wait for market adjustment or make this purchase?
I would look at your overhead with less of a downpayment versus more. I think right now it's better to be secure and conservative in your choices. Perhaps try to meet somewhere in the middle for the downpayment amount or play around with the payment. Inquire how much the home could rent for today with positive cashflow. I would consider homes that could be renovated to add value and maybe use that chunk of money towards that.