Million dollars: Multifamily or short term vacation rental??

Question

We have multiple single family long term rental properties in our portfolio (being self managed) and are looking to add/diversify. We have about a million budget and are trying to decide between getting a tri or quadplex close to home for long term rentals and continue to self manage or invest in a short term vacation property up in the TN or NC mountains near a city with plenty of tourism (Gatlinburg, Asheville, etc.) what would you do and why??

Michael Baum · Answer

Hey @Rosemary Saleeba, it's hard not to agree with @Ken Boone on this. You have a bunch of performing properties and branching out to a STR isn't a bad idea.

Pigeon Forge, Gatlinburg et al in the Great Smokie Mountain region seems to be the way to go. There are several folks on here with large homes in that area that are doing very well.

Hit up @Luke Carl and @Avery Carl on this subject area.

Alex S. · Answer

@Chanakya J. The market possibilities are nearly limitless.  I am in the Metro East of STL, but I've also done this same model on the outskirts of Sacramento, CA.

Middle America is full of medium-sized cities with various universities, military bases, refineries, or other big business/organizational population draws.  These towns always have a few mid-grade hotels and therefore DEFINITELY have STR demand.

1. Call the city planning department to verify legality/regulation/taxes

2. Buy a small house or 4-plex with 1-2 bedrooms

3. Renovate with nice/clean design features (can't feel old and dark)

4. Hire two cleaning people and two on-call maintenance repair people to rotate in/out

5. Get a hospitable.com account and automate absolutely everything (messaging/reviews/cleaning notifications/etc)

6. List on AirBnB/VRBO with awesome pictures

BONUS: Split one of the 4-plex units into two, making a 5-plex and then cash-out refi based on income appraisal (not comps).  If you pull that off, you win.

Ken Boone · Answer

If you are self managing and put a million into the Smokies, you will probably generate 150 - 200k gross on that property at this point in time.  What will you gross in multifamily?  Probably not near that much.

Chaits J. · Answer

Thank you! Will start my research/hunt now.

Ryan Moyer · Answer

If I'm reading OP's post correctly I think he is saying he has budgeted for a $1m property.  That that he has $1m in cash to use as a down payment on a much more expensive property.

Brandon Pace · Answer

Diversification is important. I do not think there is a right or a wrong answer. Both directions have advantages.  Your decision depends on your short term and long term goals with your next step. If you are looking to maximize cash flow as a strategy to use to build up your portfolio, STR is a great way to go. If your strategy is to make a long term investment to shore up your steady cash flow and potentially sale a long term multi that  increases in value to due rent performance, go with multi. In the end, I feel that it is good to go with the one that fascinates you or interests you the most. For me personally, I am giddy about vacation rentals. Good luck!

Zander Kempf · Answer

@Rosemary Saleeba

Multifamily all the way. I just looked at a deal where a million (plus a bank loan) would get you 75 units. Solid long term cash flow that will pay dividends to you for decades.

My concern with high exposure to short term rentals is regulatory risk. The cash flow on them can be great, but the municipality can pass an ordinance overnight disallowing short-term rentals in single-family zoning, destroying your income property immediately. I have some STRs in my portfolio, but intentionally limit the amount of them. Multifamily on the other hand, has a severe shortage across the country that isn't looking like it will be filled anytime soon.

Collin Hays · Answer

I think diversification is always a good idea. A blend of income producing properties gives you a better hedge against inevitable downturns.

I do think real returns in the Smokies are often heavily embellished/over-optimistic.  I've been investing in the Smokies since 2005.  The returns can be very good, however.

Mitch Davidson · Answer

Hi @Rosemary Saleeba and others. I would struggle with this decision as well, but would also lean towards diversifying and focusing on STR and single family, if anything because we have very little small multi supply in our region.

Our general region continues to draw more and more people, and not just for vacations, which seems to put our equity on a strong growth trajectory for years to come.

Also, with STR, you can do way better in some small towns than others. For a start, perhaps look at average rates per town in Airdna, and compare to average sale prices. And as you probably know, in any of the markets you can do way better than others if your photos, decor, features, and reviews are standout.

Million dollars: Multifamily or short term vacation rental??

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