Interest Rate Hike Decreased My CoC Return, DSCR. Should I Back Out?

Question

I've been looking for an investment property for about 2 months now in a vacation area that is about 3hrs away from my city. It's overall a good area for STRs. I found a house that I think has potential - AirDNA is estimating 62K/year at 63% occupancy and $273 a night; however, I spoke with a Vacasa rep who thought those numbers were a little high. There is a similar home about 15min closer to amenities doing 61K, at 79% occupancy and $211 a night but with no outdoor amenities or interior design.

I made an offer on the home and it has been accepted. I've also put in my earnest money.

The recent interest rate hikes have taken a toll on this deal for me; however, because now my lender is telling me that because of the changes, I need to pay off more debts to make the deal work. Here are the terms:

Purchase Price: 255,500

Loan Value: 229,950

Sellers Credit: 15,000

Down Payment: 25,550 (10%)

Debt Payoff: ~22,000

Interest Rate 8.12%

This high debt payoff has doubled since I initially started this process (at first it was 10K) and lender is telling me it's due to the interest rate increases.

Because of the debt payoff increase and the cost to furnish (~20K), my CoC is just 5% now (this is if I keep a management fee of 10%, though I'll be managing the property myself). If I calculate the management fee at 0%, my CoC would be 13%.

I'm not thinking this is a good deal anymore but I really need some guidance as this is my first investment property and I don't want to make a costly mistake.

Does anyone have any advice on how this is looking on paper? I'm prepared to walk away if it just doesn't make sense anymore but feel as though I could use the advice of more seasoned investors on this.

Thanks in advance!

Chris Seveney · Answer

@Ariana Jones

Debt payoff has nothing to do with the property performance

It’s to get financing. You should not calculate that in your review honestly.

Curious if you have the cash for that debt why not just pay it off as the interest is probably burning a big hole in your pocket

V.G Jason · Answer

If you have a car note and CC debt, you shouldn't be looking to invest at all. Get that stuff figured out before you invest.

Michael Baum · Answer

Hmmm, this seems like a deal that is going down the tubes @Ariana Jones. Sorry to say that.

If I were you, I might think about getting in a better financial position to get that place rather than stretching so much right now.

Who is doing the full management for 10%. That is very low and hard to imagine.

Self managing remotely is easy if you have a good cleaner and handy person on standby. The cleaner will be your eyes and ears and keep the place in top shape. You don't need to be driving each time you need to flip. That is kinda crazy.  That can work if you live 5 minutes away. 3 hours, not so much.

John Underwood · Answer

10% PM fee is very low. I'd keep that in place.

You should account for it even if your doing the work.

You should also have cash reserves in case the estimated numbers are off. You don't have much margin for error if the estimates are off.

I would not want in on this deal unless this was a super unique property that has room to improve the numbers.

James Mc Ree · Answer

Did you include all of your marketing and management costs in your model, such as AirBnB/VRBO-type fees, cleaning, vehicle costs, maintenance, etc.? You mentioned you were going to do all of the PM yourself, but the property is three hours away one way.

If you are doing everything, that will be a lot of driving. This will impact your available time and cash flow. For example, 200 miles one way (guess) x $0.67 IRS mileage rate x 2 = $268 estimated vehicle cost per round trip, which is per guest stay.

Jeff Langley · Answer

This is my comment without knowing the whole story…. Why not go 20% down DSCR instead? I closed one Monday @8% with no buy downs.

Sarah Kensinger · Answer

You need to check into Rob Abasolo new STR creative camp. I think it would be a very good fit for you!

Also, Vacasa is a terrible place to take STR advice from! They are quickly heading downhill and could be potentially closing up shop in the decade if they don't their act together. It would be a dream for Vacasa to hit numbers like that on a property, so yes, they would say it's not realistic.

Todd Goedeke · Answer

@Ariana Jones the interest rate of 8.12% makes this deal a non starter.

Use 60% occupancy to calculate your potential  gross revenue. If you can t generate at least a 20% Cash on Cash return why get involved with running a STVR business.

Jeff Langley · Answer

A true DSCR product doesn’t care about your personal debt.

Ariana Jones · Answer

I'm using a calculator that factors in management costs (cleaning, hot tub maintenance, CapEX, OTA service fees, supplies, refunds, utilities, landscaping and internet) - it does NOT include marketing/tech tools like Lodgify, Guesty etc. so good flag.

I'm using Rob Abasolo's (Robuilt) calculator if you're familiar.

I would plan to drive up bi-weekly but depend on a housekeeper and handyman for the day to day and turnover.

Interest Rate Hike Decreased My CoC Return, DSCR. Should I Back Out?

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