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

[Sidney Duquette]

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!

[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.