Strategies for High Equity Growth Properties: Risk Mitigation, Value-Add, Cash Flow

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Strategies for High Equity Growth Properties: Risk Mitigation, Value-Add, Cash Flow

Sidney DuquettePro Member
Investor · Rochester, NY · Member since 2022 · 15 posts · 5 votes

I am a moderately experienced RE investor looking for advice on investing in high-equity growth opportunities. I understand that at my age, focusing on properties with strong equity growth potential (even if cash flow isn't immediate) is a solid strategy. However, I’m running into a few challenges I’d love some insights on.

Background:

I'm considering purchasing a lakehouse in the Finger Lakes area, which I believe has significant potential for long-term equity growth. The downside is that these types of properties come with high property values, meaning a large mortgage. Even if I were to rent it out on Airbnb, the cash-on-cash return isn't very attractive.

Specifically, I’m concerned about:

  • High mortgage payments and the financial strain it could cause if the property doesn't generate sufficient cash flow.
  • Cash-on-cash return is low, even with high-revenue short-term rentals.

My Questions:

  1. Risk Mitigation:
    • Any strategies I can use to mitigate the risks associated with owning a high-value property with a large mortgage?
  2. Value-Add Property Option:
    • Should I consider looking for a value-add property in a high equity growth area instead? This could give me an option as a house flip if the numbers don't work out in my favor for positive cash flow.
  3. Target Returns:
    • Given the higher risk, what cash-on-cash return or annualized return should I be aiming for? What’s considered a reasonable target for a property in a high equity growth market like this?

Looking forward to hearing thoughts from you all!

Thanks!

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Benjamin AakerPro Member
Rental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votes
1y

I purchase my personal investments to maximize their equity and hold long term. You will want enough return for the deal to support itself or you won't be able to scale well. If you have a high personal income and can support the property if it needs cash, that helps, but is also not scaleable.

1. Get replacement cost hazard insurance along with an umbrella policy of at least $1M, probably double in your area. Try to put a bigger down payment in than you might need to give yourself some breathing room.

2. Looking for high equity growth areas is a bit of a gamble. How do you find one that hasn't started equity growth and now stagnated? If you have a solid deal in the Finger Lakes (which you have said has high equity growth), keep the bird in the hand.

3. The cash on cash return is only meaningful when you evaluate it based on your long term plans. You may not need a lot of cash flow if you want to maximize equity.  On the other hand, maybe you are going to lose some personal income due to retirement and want the cash flow. It's dependent on your situation. 

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  • Benjamin AakerPro Member
    Rental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votes
    1y

    I purchase my personal investments to maximize their equity and hold long term. You will want enough return for the deal to support itself or you won't be able to scale well. If you have a high personal income and can support the property if it needs cash, that helps, but is also not scaleable.

    1. Get replacement cost hazard insurance along with an umbrella policy of at least $1M, probably double in your area. Try to put a bigger down payment in than you might need to give yourself some breathing room.

    2. Looking for high equity growth areas is a bit of a gamble. How do you find one that hasn't started equity growth and now stagnated? If you have a solid deal in the Finger Lakes (which you have said has high equity growth), keep the bird in the hand.

    3. The cash on cash return is only meaningful when you evaluate it based on your long term plans. You may not need a lot of cash flow if you want to maximize equity.  On the other hand, maybe you are going to lose some personal income due to retirement and want the cash flow. It's dependent on your situation. 

    2Reply
  • Sidney DuquettePro Member
    OP
    Investor · Rochester, NY · Member since 2022 · 15 posts · 5 votes
    1y
    Quote from @Benjamin Aaker:

    I purchase my personal investments to maximize their equity and hold long term. You will want enough return for the deal to support itself or you won't be able to scale well. If you have a high personal income and can support the property if it needs cash, that helps, but is also not scaleable.

    1. Get replacement cost hazard insurance along with an umbrella policy of at least $1M, probably double in your area. Try to put a bigger down payment in than you might need to give yourself some breathing room.

    2. Looking for high equity growth areas is a bit of a gamble. How do you find one that hasn't started equity growth and now stagnated? If you have a solid deal in the Finger Lakes (which you have said has high equity growth), keep the bird in the hand.

    3. The cash on cash return is only meaningful when you evaluate it based on your long term plans. You may not need a lot of cash flow if you want to maximize equity.  On the other hand, maybe you are going to lose some personal income due to retirement and want the cash flow. It's dependent on your situation. 

    1. Got it, this makes sense. Is there a limit or target for what I should consider in terms of total return or cash on cash return for this strategy?

    2. Great point. I don't have a property in hand at the moment, but I do believe this area won't become cheaper.

    3. Gotcha. I do have a couple of properties, which are more cash-flow-heavy. I would like to find more of an equity play. However, I would prefer if the property could support itself and not be a drain on my personal income. 
    0Reply
  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    1y

    Hey @Sidney Duquette so I am not a fan of buying properties that can't perform with the hopes that it will build equity to offset the losses.

    There are always ways to increase the value of most homes, but that is also a crap shoot. There isn't any guarantee that whatever you do will add significant value to the property. Especially since you are looking at properties that are already high value. The additions are usually small.

    Buy focusing on real high value places, you are putting yourself in a narrower guest pool. A great lake front home doesn't have to cost a mint but it sounds like you want something that is really fantastic which will bring a higher nightly rate. That is good but there are fewer folks looking to spend over $1000 a night on a place.

    This all looks like a problem waiting to happen IMHO. There isn't a lot of things you can do to mitigate the risk.

    Anything 1m+ will be harder to sell (I am making assumptions on the price), there is simply a smaller pool of buyers. Flipping it will take time if you have to sell.

    Plus a home like that doesn't lend itself to a LTR unless there is a demand for high end rentals.

    What I would like to see is some examples of what you are looking at along with basic numbers you have run so far. There aren't many lake front properties in that area for sale, but there are a number that are in the 800k range. Nothing fancy at all but waterfront.

    I will agree that basic numbers look pretty bad.

    2Reply
  • Andrew SteffensBusiness Member
    Tampa, FL · Member since 2022 · 3k+ posts · 3k+ votes
    1y

    I think going into an STR purchase with reasonable expectations of cashflow in this current market and rate environment is admirable. A few years ago there were a lot of get rich quick types, and I still get contacted by people who think they can buy 2 houses and retire on the cashflow. However, echoing many of the comments above, it is risky. Most STR markets have seasonality, and there are untold issues in the future that will effect cashflow. I wholeheartedly believe in the end you will come out ahead, but you must be prepared to weather potential storms with the strain of limited to no cash flow, which can be challenging. You should have ample reserves and make sure the house is not a money pit from the maintenance perspective. There are markets today, even with high rates, that are cash flow positive and do have great appreciation. Keep that in mind and just proceed with the utmost caution. Good luck!

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    2Reply
  • Sidney DuquettePro Member
    OP
    Investor · Rochester, NY · Member since 2022 · 15 posts · 5 votes
    1y
    Quote from @Michael Baum:

    Hey @Sidney Duquette so I am not a fan of buying properties that can't perform with the hopes that it will build equity to offset the losses.

    There are always ways to increase the value of most homes, but that is also a crap shoot. There isn't any guarantee that whatever you do will add significant value to the property. Especially since you are looking at properties that are already high value. The additions are usually small.

    Buy focusing on real high value places, you are putting yourself in a narrower guest pool. A great lake front home doesn't have to cost a mint but it sounds like you want something that is really fantastic which will bring a higher nightly rate. That is good but there are fewer folks looking to spend over $1000 a night on a place.

    This all looks like a problem waiting to happen IMHO. There isn't a lot of things you can do to mitigate the risk.

    Anything 1m+ will be harder to sell (I am making assumptions on the price), there is simply a smaller pool of buyers. Flipping it will take time if you have to sell.

    Plus a home like that doesn't lend itself to a LTR unless there is a demand for high end rentals.

    What I would like to see is some examples of what you are looking at along with basic numbers you have run so far. There aren't many lake front properties in that area for sale, but there are a number that are in the 800k range. Nothing fancy at all but waterfront.

    I will agree that basic numbers look pretty bad.


    Thank you for your response, Mike. I really enjoyed your podcast episode! I'm certainly looking for some cash flow but from my initial analysis, it usually is around the 5-7% mark in terms of CoC return. I certainly want to err on the side of caution in terms of investing in a pricier asset (at least in my RE experience thus far).

    In terms of a narrow mark for guests, this is a great point. I definitely need to do more analysis in terms of comparing against other rentas in the area and ideal beds and heads count. 

    I realize now that I should have supplied numbers initially- for numbers I am looking for $650k and under. There have been some around the $800k mark that did have multiple units either through multiple houses on a property or a guest house on the property in addition to the main house. 

    Thank you again for your advice thus far!

    0Reply
  • Sidney DuquettePro Member
    OP
    Investor · Rochester, NY · Member since 2022 · 15 posts · 5 votes
    1y
    Quote from @Andrew Steffens:

    I think going into an STR purchase with reasonable expectations of cashflow in this current market and rate environment is admirable. A few years ago there were a lot of get rich quick types, and I still get contacted by people who think they can buy 2 houses and retire on the cashflow. However, echoing many of the comments above, it is risky. Most STR markets have seasonality, and there are untold issues in the future that will effect cashflow. I wholeheartedly believe in the end you will come out ahead, but you must be prepared to weather potential storms with the strain of limited to no cash flow, which can be challenging. You should have ample reserves and make sure the house is not a money pit from the maintenance perspective. There are markets today, even with high rates, that are cash flow positive and do have great appreciation. Keep that in mind and just proceed with the utmost caution. Good luck!


     Thank you for your input, Andrew. I am certainly trying to be realistic about this investment. I am going to continue to analyze the market until I am absolutely ready to buy with ample reserves and more specific analysis on comparable properties. I think having a market analysis of the area would also be helpful. 

    1Reply
  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    1y

    I wish you luck in your search @Sidney Duquette!

    I don't see much waterfront in that price range of 650k or under.

    Thanks for the compliment on the podcast!

    0Reply
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