Short Term Rental- 30yr home loan allowed! Do I need to buy this?

Julie McCoy

Real Estate Agent · Sevierville, TN · Member since 2015 · 1k+ posts · 1k+ votes

@Account Closed Any reason why you're set on buying an STR in your particular town? I ask because I regularly sell vacation rental properties to out of town investors that will gross $45-65k in revenue for half (or less) of $900k, purchased with conventional financing. The numbers you cited are not exciting to me; by the time you allow for your maintenance, Capex, pay utilities etc. as you should allow for with any investment property, I don't even know that it would make sense as a long-term rental.

The other element is: you would be buying a business. You would have guests *in your house* pretty regularly and you need to consider all the ramifications of that: coordinating cleaning for four different rooms, what spaces are shared, which are not, access, rules, etc. etc. etc.

Any kind of B&B setup is not my cup of tea in any case, and you may have a different attitude towards it, but regardless I'm pretty sure running my four cabins is less hassle than running four rooms out of my home.

OP

Member since 2020 · 13 posts · 0 votes

Luke, self employed people's income varies. People also don't always like to disclose those things. AND it's got nothing to do with the property. I made it very clear I could pay for the mortgage without problem to get that obvious concern out of the way. The question is not "exactly what will my ROI be", it's more about the uniqueness of the situation and the opportunities it affords. Your comment really only shows that you didn't read it, which is fine, but why comment?

Mark Miles

Rental Property Investor · Philadelphia, PA · Member since 2016 · 543 posts · 716 votes

Originally posted by @Account Closed:

I live in a major vacation destination town. I believe RE prices are still pretty low and will grow a lot. I'm 53, with few assets, no debt, and want to get into the market now.

I can't afford to buy a home AND a rental property (currently don't own). And in this town you cannot short term rent/VRBO rooms in a home that you live in. So that means I'm very limited, as far as getting ahead.

HOWEVER, a former B&B just outside town limits is listed as residential so I can buy it as primary residence, eligible for a standard 30yr home loan/10% down, and I can also live in one of the 5 units and rent the other 4 units. Short Term Renting the 4 units will cover the mortgage payment, or possibly +$20k/year. I have another business which can generate maybe $70k to $100k ideally, so paying the mortgate will never be an issue, even with no renters.

This seems like a great opportunity? I spoke with a local realtor, who also manages rental properties. She seemed to be saying it's very hard to get a property like this. She actually said you won't find a cash flow prop for less than 50% down here. I spoke in generalities as I don't want to lose this property to someone else.

It's about $900k, 2800 sq feet = $325/sq ft, with 5 units/5 full baths. Several Decks, full kitchen & Living room. Decent views & proximity. Good online reviews. 40yrs old, recent renovations, etc. Maybe slightly on the expensive side, but probably not considering it's an income property. Average homes in this area of similar square footage sell for around $600k to $800k. The property (land) and view for the area is just average, not stellar. The rooms and baths are very nice, some impressive, with custom details, around $150/night. It's seasonal so maybe $45k to $65k annual revenue before expenses. That will easily pay the $40k annual mortgage, and I could pay it myself without any rental income anyway, so no risk there.

It has enough land that supposedly I can build another residence also. My other business would be perfect for generating cash flow to build a 2nd home on the property without debt, in the off season, not disturbing short term renters. This is where the real advantage would be. I could build it myself for $300k, a $600k value home, that will also appreciate. I can do that gradually which is a great opportunity as the land is mine, there is no time pressure, loan, etc, and I could eventually have a stellar home with the B&B down the hill, renting 5 rooms.

I can't think of another situation here that would provide this many options and opportunities for the future.

If I look at a plan to cash out in 10 years, with 50% to 100% appreciation, it looks like:

$100k down + $300k to build 2nd property = $400k total cost (assuming rental pays mortgage).

10 yr Future Property Values: $1,350,000 + $1,000,000 = $2.0M to $2.5M future valuation - 816k remaining mortgage = $1.2M to $1.8M cash out.

Or if I stay, I've got a beautiful home, paid for, and a cash flowing VRBO just down the hill. I could also have someone live there for free and care take the 4 rooms, leaving me free to travel, etc. Or sell the rental and have a few hundred thousand profit and the home.

Does this sound like a great opportunity? I'm an (unlicensed) builder, can do most work myself, etc. Would love to hear thoughts on this matter. I'm sure the VRBO will take more time than I think, and will likely hire help for that.

Thank You for sharing your expertise!

As I always tell people: you can only invest every dollar once, you should invest it where you can make the absolute highest return, and that doesn’t seem to be this property.

For a $900k purchase price, I know some spots in the South where you can gross $150k+ not $45-$65k per year. It’s the seasonality that’s killing you, these southern towns don’t have that kind of seasonality. In the towns that I’m thinking of, you just rake in money year-round which gets you to 150 K+

This is why I don't invest in or near my hometown either. Because the highest ROI is about 1000 miles away from me where I own a number of properties that make a ton of money

John UnderwoodPro Member

Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes

Maybe I missed something but you said this is a 5 unit property. Anything over 4 is typically commercial.

If this is one building with five rooms (An actual B&B setup) then this is a full time job for someone to manage.

I don't think the numbers are that great for a significant amount of work.

I'd normally recommend someone start off with at least one Ling term rental before jumping into STR'S.

Also as we've all seen recently to have all your RE eggs into the STR market migjt not be the best thing.

Jon Crosby

Investor · Roseville, CA · Member since 2016 · 893 posts · 1k+ votes

https://www.biggerpockets.com/files/user/jcsacto/file/short-term-vacation-rental-analysis

@Account Closed I'm super curious where your town is, I don't know if I've come across a town that doesn't allow the owner to be present for short-term rentals...in fact, the more strict cities/towns actually require it so I'm always interested in learning something new when I can! :)

As for your deal, the numbers so far are not making sense to me...you have to remember that STR's often have a 60-70% Op Ex Ratio to deal with so if you are pulling in $40-50k in revenue...well you still have another $25-$35k in operational expenses to account for which would put you at negative cash flow it sounds like?

Below is a link to a spreadsheet I share on here with other new investors, it helps realize the cash flow at a high-level when first analyzing deals. At a minimum, maybe it helps you think about a few more nuances to the deal.

Best of luck!

OP

Member since 2020 · 13 posts · 0 votes

Originally posted by @Mark Miles:

Thanks Mark, this is a good reality check. I was trying to solve the problem of both wanting to purchase a home, and wanting an income producing property. I cannot afford to do both here. I have only $100k down payment, not 250k cash for an income property/business loan. I can put up with guests 4 months of the year as I'll be working 12 hour days (probably hire someone to clean the vrbo).

If I were to look for opportunities outside my area, I would not have a home here. But those numbers are impressive.

Where would you recommend I look to find out more about those locales you mention? (I work seasonally and am not opposed to properties in the south. But when I went to FL, I found their winter season very spotty for retail opportunities...a few busy weeks here, a few there, but not straight season like you get in many places during summer.)

Thanks Mark, this is a good reality check. I was trying to solve the problem of both wanting to purchase a home, and wanting an income producing property. I cannot afford to do both here. I have only $100k down payment, not 250k cash for an income property/business loan. I don't think it would make sense to buy an income property before owning a home, thought the 2 year ownership/flip into new home/rent old one could work, but may require more capital than I have. The biggest problem with that is long waiting list for STR license. I can put up with guests 4 months of the year as I'll be working 12 hour days (probably hire someone to clean the vrbo).

If I were to look for opportunities outside my area, then I would not have a home here. But those numbers are impressive.

Where would you recommend I look to find out more about those locales you mention? (I work seasonally and am not opposed to properties in the south. But when I went to FL, I found their winter season spotty for retail opportunities...a few busy weeks here, a few there, but not straight season like you get in many places during summer.) Rentals may be different.

Is there a figure at which you would consider a $900k property an ok/decent investment? 7% ROI? 10%? I thought the avg. target figure was around 7%. If I stayed full occupancy 4 months, I could possibly get around 60k to 80k gross revenue, which may approach 6-7% if I'm not mistaken (getting details from owner tomorrow). That, coupled with the possibility of building on the land seems like a fair opportunity. I've not been seeking this, it just came up at a somewhat opportune time. And bear in mind, a realtor with 30 yr rental experience here told me I wouldn't find a cash flow property for less than 50% down. That may sound outlandish to the experts here. I don't believe she was even including her management fee, but she may have. Thank You.

OP

Member since 2020 · 13 posts · 0 votes

Originally posted by @John Underwood:

Maybe I missed something but you said this is a 5 unit property. Anything over 4 is typically commercial.

If this is one building with five rooms (An actual B&B setup) then this is a full time job for someone to manage.

I don't think the numbers are that great for a significant amount of work.

I'd normally recommend someone start off with at least one Ling term rental before jumping into STR'S.

Also as we've all seen recently to have all your RE eggs into the STR market migjt not be the best thing.

Interesting points. I was hoping to do it more as a low maintenance VRBO. Your comment brings up the significant issue of multiple guests sharing the same kitchen/dining/convenience bath adjacent to communal area. That would be a disaster without having someone constantly cleaning up after the guests who do not do so themselves, and result in very negative reviews, etc. The only solution to that would be a "bedroom" only rental, without communal area. And having a microwave/hot plate/fridge in each room. Anyone have any experience with this? converting a B&B to a low maintenance VRBO? The property could easily be converted as there is a single door leading to the communal area. That would just leave the outdoor area, but that would probably be manageable. It would also mean that it could truly be more of a private home for myself, rather than sharing communal areas with guests.

Michael BaumPro Member

Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes

Hey @Account Closed, there appear to be some holes. Good luck!

OP

Member since 2020 · 13 posts · 0 votes

Originally posted by @Michael Baum:

Hey @Account Closed, had this all thought out but I don't think you really want to know. I agree with

OP

Member since 2020 · 13 posts · 0 votes

...

OP

Member since 2020 · 13 posts · 0 votes

Michael Baum, I am clearly asking. No need for the aloof "you don't want to know". I have made it clear that I am trying to kill two birds with one stone and that It's nearly impossible to do here. Having any home which generates income is better than having one which does not. Those are the options. Not whether I get a 6% vs a 15% ROI on an investment prop. If you have read the thread please feel free to express your concern. The fact that this property appeared out of nowhere yesterday and I'm going to look at it this morning will tell you why there are "holes" such as not knowing the actual income yet as the realtor did not have that data.I agree that deals should be very well defined and financially assessed, but some situations, such as building a second dwelling, etc. add variables which cannot always be100% defined in advance, but in this case I think adds tremendous value. 99% of properties close to destination towns you do not have the option of building an entire second home which can be sold, because the areas have been already developed almost to capacity. And land here is 150k+ for a decent parcel to build. After a site visit and planning department conversation, if a second home is not feasible, that would significantly decrease it's value to me. But it would still stand as a unique opportunity for this area.

OP

Member since 2020 · 13 posts · 0 votes

https://www.biggerpockets.com/files/user/jcsacto/file/short-term-vacation-rental-analysis

Originally posted by @Jon Crosby:

@Account Closed I don't know if I've come across a town that doesn't allow the owner to be present for short-term rentals...i

...you have to remember that STR's often have a 60-70% Op Ex Ratio to deal with

Below is a link to a spreadsheet I share on here with other new investors,

Best of luck!

Thank You Jon, that spreadsheet is a great tool to cover all the bases. Maybe they don't allow home-stay VRBO so that visitors to this small town will have positive, professionally managed experiences vs staying in someone's home and possibly having a questionable one. These small towns, tourism is the only economy and is guarded as such. Small problems in small communities can quickly become big ones due to loud mouths on social media, etc.

Paul Sandhu

Investor · The worst town to live in, KS · Member since 2016 · 4k+ posts · 4k+ votes

Find another market. The last 4-6 houses I bought were between $6.50 and $9 a square foot. They gross $400 to $600 a week.

Jerry W.Pro Member

Moderator

Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes

@Account Closed, welcome to BP bud. I have both long term and VRs. I think you have heard fairly loud and clear that a pure investment this not a very good one. It is also clear that what you want is to buy this property. There are some things that I like about the deal. First if you plan to buy a personal residence anyway, and you would pay about $600K then the investment part of this deal is only the $300K increase in price. The VR license is probably worth a fair bit. You also seem pretty confident that the property will appreciate in value. You didn't elaborate on that much, but I would like to hear more about that. As a pure investment this is not a good deal, however you really like it and want to buy a home, so ask yourself are you willing to pay the $300K more and put up guests for 4 months for the potential income? While I would not invest in it myself, that doesn't mean it is not right for you. It is your money and your future. How confident are you that values will go up? How confident are you that you could get your money back out if you end up hating the VR business? If you are confident for good reasons on the last 2 questions it might be the right choice for you. Keep in mind that if you use the home for a business that you will only be able to claim the primary home exemption on a future sale to part of the sale price, not all. Either way you must do what is right for you, but do it with your eyes open and an exit plan.

Michael BaumPro Member

Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes

Hey @Account Closed said. You want to do it. Nothing we say will convince you otherwise. Just get all your ducks in a row and push forward.

Vincent Chen

Real Estate Investor · Philadephia, PA · Member since 2016 · 214 posts · 36 votes

@Mark Miles I agree with you for the analysis for the market. But for 900k purchase to generate 150k gross income, which means the GRM is around 6? That is kind of too great? Do you mind to share some of those markets informaiton?

Luke CarlPro Member

Rental Property Investor · Tennessee Florida · Member since 2016 · 4k+ posts · 5k+ votes

Podcast Guest on Show From Surviving on $30/Day to 30+ Properties Thanks to Blue-Collar Skills

@Vincent Chen 900k in my market can do anywhere from 120k to just south of 200k per year depending on number of bedrooms and if it has a pool.

Vincent Chen

Real Estate Investor · Philadephia, PA · Member since 2016 · 214 posts · 36 votes

@Luke Carl Thanks for reply. That is kind of what we saw, there is two folds of story:

1. Economics of sale. The number of bedrooms is matters for price and cost. But there is kind of limit here, 900k range house might have better benefit for cost (per room per year) side than the 600k range house? So I think it is determined by so many factors to choose the best sweet, since we only care about the bottom line, which is the net income.

2. Location and features. That is determined by DD process.

What I saw in the market, is that 400~500k house seems to be not so much benefit of cost, and GRM is not so great as well. But when you get into 600+k or even more, the GRM seems to be better and benefit of cost is much better?

Luke CarlPro Member

Rental Property Investor · Tennessee Florida · Member since 2016 · 4k+ posts · 5k+ votes

Podcast Guest on Show From Surviving on $30/Day to 30+ Properties Thanks to Blue-Collar Skills

Originally posted by @Vincent Chen:

@Luke Carl Thanks for reply. That is kind of what we saw, there is two folds of story:

1. Economics of sale. The number of bedrooms is matters for price and cost. But there is kind of limit here, 900k range house might have better benefit for cost (per room per year) side than the 600k range house? So I think it is determined by so many factors to choose the best sweet, since we only care about the bottom line, which is the net income.

2. Location and features. That is determined by DD process.

What I saw in the market, is that 400~500k house seems to be not so much benefit of cost, and GRM is not so great as well. But when you get into 600+k or even more, the GRM seems to be better and benefit of cost is much better?

Lots of abbreviation and speculation here. Numbers are yours to crunch.

If you can find a short term market better than mine in numbers and regulation -let me know so I can come buy everything on the market!

Paul Sandhu

Investor · The worst town to live in, KS · Member since 2016 · 4k+ posts · 4k+ votes

Originally posted by @Luke Carl:

If you can find a short term market better than mine in numbers and regulation -let me know so I can come buy everything on the market!

Wynnewood Oklahoma. The refinery in my town has a sister refinery in Wynnewood. That's also the home to where Tiger King started.

OP

Member since 2020 · 13 posts · 0 votes

Originally posted by @Jerry W.:

@Account Closed, welcome to BP bud. I have both long term and VRs. I think you have heard fairly loud and clear that a pure investment this not a very good one. It is also clear that what you want is to buy this property. There are some things that I like about the deal. First if you plan to buy a personal residence anyway, and you would pay about $600K then the investment part of this deal is only the $300K increase in price. The VR license is probably worth a fair bit. You also seem pretty confident that the property will appreciate in value. You didn't elaborate on that much, but I would like to hear more about that. As a pure investment this is not a good deal, however you really like it and want to buy a home, so ask yourself are you willing to pay the $300K more and put up guests for 4 months for the potential income? While I would not invest in it myself, that doesn't mean it is not right for you. It is your money and your future. How confident are you that values will go up? How confident are you that you could get your money back out if you end up hating the VR business? If you are confident for good reasons on the last 2 questions it might be the right choice for you. Keep in mind that if you use the home for a business that you will only be able to claim the primary home exemption on a future sale to part of the sale price, not all. Either way you must do what is right for you, but do it with your eyes open and an exit plan.

Excellent points for consideration, Thanks Jerry! I think prop's here have room to appreciate compared to other areas. But being as it's a bit outside of town, it's probably won't be as much, so I'd best be careful with that metric.