build from scratch STR in my home vacation market?

Question

I'm considering a new build STR, seeking opinions on this strategy in current market and with my numbers attached (3 scenarios). My numbers are conservatively based on 3 STR's I already own in this market. I have no other income than from my 3 STR's.

I have been in the STR game 7 years and have built from scratch two times already, with unique architecture/ design forward STR specific builds as a hedge against the competition in my area. My goal is to be always be on the first page of airbnb listings. Winning so far.  We have experienced the oversaturation here like most places, and a couple months this winter RevPar off by 20-30%, but picking up now, and expect peak season to be full as typical.

Building from scratch is a ton of work, I do most of it myself, and it's 9 months of climbing a big mountain. But then it should pay me back the rest  of my life, at least that's how I look at it. I self manage and for me, adding another here locally does not increase workload much.  Also starting with a brand new property is nice for the lack of capex for a while. But a lot has changed since the last one I completed in 2020 for an all-in cash price of $239k. Now I'll be at $350k financing 50% or so... yielding half the returns for all that work!

So the alternative would be stepping out of my comfort zone and buying in another market where, theoretically I can get the same returns on an already built property including management fees. I see projections like this, but are they real? It would seem the property would have to do 20% better than mine (all things being equal) just to make the management fee. And then there's all the unknowns and lack of quality control etc...with out of town.

Did I mention I need the income? Alternatively I could just put $300k savings into a notes fund and hope for the best - earn 10% ( about the same annual amount) without doing anything, but also without control.  But missing out on some levered real estate appreciation I guess. It's a tough call....Which is riskier? I don't know...

Bryan H. · Answer

Hi Tyler,  @Carrie Matuga, thanks and yes the out of market issues you mention do worry me.

This is the last one I did. Very simple open concept. It is 650sf 1br, so definitely won’t appreciate as much as a bigger home. It does have full size kitchen, big closet and washer/dryer so still a good vacation home option for a couple with no kids. I also designed it and sited it on the lot for an easy addition if one wanted to add bedrooms and additional living area.

Sarah Kensinger · Answer

I think @Andrew Steffens brought up some good points to think about, especially if you would like to do more with the cash on hand. Also, don't forget a good STR company wants to succeed as much as the owner. Plus their reputation is on the line! As an owner keeping tabs on your OTA reviews, gives a good idea of what is going on with the management company.

Andrew Steffens · Answer

There are some missing pieces of data needed to make an in depth analysis from where we sit and give you more sound advice, however I own/manage property in Tampa which is a highly producing market and:

- With $300k to play with you can acquire a $1M property or more which does provide the best cash flow

- On a $1M acquisition and $200k (or less down possible) you can achieve 10-30% CoC returns, likely 15% inclusive of management is possible.

- Do not forget about appreciation, which is where the real wealth comes from.  I would recommend buying in a market that is growing such as Tampa, or many other Florida cities and Southern Cities for that matter.

Best of luck!

Andrew Steffens · Answer

@Bryan H.

Shooting you a DM now

Bryan H. · Answer

Thank you Andrew, yes I am interested to explore purchasing a much larger property for better growth/appreciation, and I do realize my strategy of building very small houses (geared toward max income) is lacking in the growth and appreciation side. If you have any examples showing the numbers penciling out on $800k-$1m properties I'd be interested to see. I think I can only qualify for DSCR loan though as I don't have any W-2 income. I must say, I am leery of hurricanes  - both in my own market but even moreso in Tampa area.

Carrie Matuga · Answer

@Bryan H. If it were me, I think I'd keep doing what worked! Like others said, I'd love to see your listing, it sounds awesome! One thing to note, is that you could diversify your strategy by using more leverage during construction. You don't "need" to put 50% down for ground up construction, especially based on your previous experience. You could compare what it looks like to do 85% -90% LTC for the build and then the forced equity for your refi, which would leave you more available cash for buying in another market and driving revenue while you build.

Bryan H. · Answer

Hi Michael, Thanks for responding. I'm located in the coastal Carolinas. Housing stock in this price range in my area are all cookie-cutter 3br "beach boxes" - meaning they are all more or less the same architecturally. Very difficult to stand out with so many of these, so building myself is part of my strategy to beat the competition with eye-catching architecure. To be honest, the way prices are right now, I think I can still build new for equal or even cheaper than buying an older house. The last one I completed in 2020 had an instant $100k equity added the day it was done. So much has changed last few years though with cost to build and lot prices doubled, so its hard to be sure,  but I marked building cost up 50% and numbers still seem to pencil out, just not as good as it was.

Tyler Winget · Answer

Hey Bryan - seems like you're definitely a Pro.

I'd say explore other markets, but man, if you're already doing this yourself, in your hometown hitting above 20% CoC, building cool places that appreciate and can be sold later not just as STR , but as homes....man keep going! And share one of your properties! I want to see!!

If what you're doing is working....why change it up? Keep at it.

Also sounds like you're quite handy if you're doing most of the work on these new builds yourself, at which point, if time was the unattractive variable to doing another new build, you could do a flip in your local market and only have 2-3 months of work vs 9 for a new build. Still a pretty good payoff if you put $50k into a home and can make it look like you put in $100k. Just connect with a good, active agent in your area and ask what's selling quickly. See if there are any options for you to look at.

At the end of the day, with out of state market and management, you'll always be left wondering, "are they doing as good of a job as I would?"...and the answer is No. Once you manage for yourself, no one will take care of the home like you take care of the home. And if you can't give into trusting that, out of state managers won't help. No matter how good they are.

There's my 2 cents!

Michael Baum · Answer

Hey @Bryan H.. You don't say what the area is so it makes it harder to really judge.

Is the housing market where you are at really tough to get a place that needs a bit of work in the right area?

I am not against building new, but it usually doesn't pencil out as well as refurbing a place. Not that it won't but it will take longer.

Frankly, if you are sitting on 300k cash, that needs to be put to work. Right now there are plenty of cash accounts that are paying 4.5 to 5%. You could dump that in there and earn while using it for the purchase/remodel.

So, tell us where you are located so we can get a better idea.

build from scratch STR in my home vacation market?

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