Building a brand new home for vacation rental purposes

[Jason Miller]

I got a deal on 2 (3 acre) lots (on lake Michigan) it is a few hundred feet from the lake, there isn't a direct line-of-sight with the lake, but the property does have deeded access to stairs that access a private beach about a 2 minute walk from the property. I've already purchased the land and another lot next to it (closing soon), it is 100% wooded, and was planning to build a log cabin in the middle of the first lot for complete privacy (not real logs, half logs). About 2,000 sqft 3 bedroom 2 bath. The nice thing about this property is in the off season, its a winter wonderland and I think it has great appeal that way - very secluded yet close to water. You can't even seen another house from the middle of this lot. In the summer, it has obvious appeal of being close to the lake, yet still secluded etc...  It's a very short drive to downtown as well. I am very familiar with the area, its a popular tourist town near the lake (been going there for decades), no location risk there.

I have not purchased real estate as an investment yet, but it has been my goal for the last year as I diversify out of the stock market. I was initially looking at commercial instead of residential LTR to avoid the hassle of time commitment, long term tenant problems, evictions, etc. I know these are all still possible in STR, but I like the flexibility of simply not renting it when I don't want to deal with rents. I've been educating a lot and can't get over how bid up commercial properties are at this time. I feel like a vacation rental is bit safer, as even if its not renting, we could get some personal use out of it. At the same time it doesn't have some of the problems that I've experienced in past with LTRs. The thing that seems odd to me is building a brand new house for the sole purpose of vacation rental.... I know the market is hot there, big tourist area (country allows STR), I've looked at houses literally on the same street that have great homeaway/airbnb bookings. With the housing prices high it does seem like an OK time to build versus buy, but man something about building a brand new house for the purpose of STR still bugs me...

On the plus side I figure I don't have the time to deal with all the things that require maintenance on older houses and I figured if we build new on this lot we get a decade of little to no maintenance. The last I want to do is buy a 30 year old house for a STR and be constantly dealing with repairs. If in 20 years this property is looking like its about to fall apart we'll unload it. Is there anything wrong with that logic? I don't want to build a large home, I would rather build a small-medium size home and keep the costs down (3 bed, 2 bath) - I figure I can squeeze at least 8 people in there.

I don't know if it makes sense to build on the second lot, but if I did I figure being right next to each, large families could rent both. They could both share wells/septic and a few other things to keep the cost down. I don't have the cash to build both at once (which I assume would save money). Instead, I plan to build the first one with cash, mortgage it, and use the cash to then build the other and eventually mortgage it. 

What are the thoughts on:

1) Building a brand new house for STR

2) Having two STR right next to each other, but on large lots (you wouldn't be able to see the other house) - would they compete with each other? Perhaps we build two different kinds of houses? I figure being so close they would be even easier to manage - is it a luxury to have two STRs right next to each other?

3) Building the house with cash to avoid construction loan and mortgaging afterwards

4) Potentially not building a garage to save money

5) Trying to build the house ASAP after closing to start cash flow

6) What is the risk of county changing ordnance that allows STR? I feel I'd be screwed and have to sell the house for a loss if that happens < 5 years. Is there any other ordinances I need to verify?

6) I was going to put both in an LLC and claim as full time rentals (we live in Indiana). I understand that some folks like to play the game around getting a "Second home" mortgage versus an investment property rate, but I'd rather stay on the safe side liability/tax wise.

7) If you had the opportunity to build a brand new house purpose built for STR, what are some of the features it would/should have? I figured the log cabin look would be helpful for marketing purposes and the wooded lot / cottage feel.

Thank You