First Time Investor in Real Estate with a projected first deal.
Member since 2024 · 3 posts · 4 votes
First Time Investor in Real Estate with a projected first deal.
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Property Manager · Chicago, IL · Member since 2016 · 21 posts · 23 votes
2yHey @Anthony F., very cool to hear you've got a line on a lakefront property for significantly under ARV! A verbal agreement is fine to get the deal figured out on the front end, but definitely try getting that deal down on paper sooner rather than later!
If this property is a lakefront cabin in Minnesota, my default advice would be to go the STR route. Since you mentioned the property needs a lot of work, if you could put in some higher end finishes into the cabin (kitchens and bathrooms), there would almost certainly be a pretty solid base of STR guests wanting to stay there - almost without exception, every modern STR cabin in Minnesota and Wisconsin that I've seen are all doing tremendous numbers. Without knowing more about the location though, if this cabin has direct water views and is able to sleep at least 6 people, a fully renovated version of your cabin could probably pull in at least $600/night in the summer without much effort. If you could configure the bedrooms to be able to sleep 8-10+ people, your ADR could increase even further from there.
However, if you go the STR route, make sure you factor in the time commitment it will take to manage the property. Being active duty military, if you wanted to remove yourself from the day-to-day operations, a vacation rental management company would probably take 25-30% of your revenue. Also check to see what kind of third-party management companies exist in the area. If yours is the only STR within 20 miles and there aren't any cities or larger towns within a 20-30 minute drive, you could easily run into trouble even finding a reliable cleaning person, let alone a full-service STR management company.
I would also definitely take the time to find some comps on Airbnb in the same area as yours, with as close to the same bed/bath count as yours, and with the same finishes and amenities as you are planning to put in yours. See what they're charging for weeknights versus weekends, what their cleaning fees are, and how booked up their calendars are for these summer months. This will help you get a feel for how saturated the STR market is, as well as what opportunities you might have for setting yourself apart in your market. For example, if every lake cabin within 20 miles of yours listed on Airbnb seems super rustic and dated and "northwoodsy" (for lack of a better term), is there an opportunity for you to skew more modern in your STR design/style to help capture bookings with guests who are looking for that kind of aesthetic?
Since STR cabin rentals in Minnesota and Wisconsin are super seasonal, I would also strongly encourage you to look at what amenities you could add to help boost bookings during the colder months. Memorial Day to Labor Day will pretty much take care of itself, but adding in amenities like a hot tub and a sauna will help you draw in more traffic and bookings even when there's a foot of snow on the ground.
Just to touch on the LTR option, I don't know if this would get you the kind of returns you'd be looking for to even cover your mortgage, let alone cover any maintenance/capex/management costs the property might require. And that's not even touching on getting you into positive cash flow territory and the passive income you mentioned that you'd be looking for. Check on Zillow to see what other long-term rentals are going for in the same area - if the monthly rent you could get would be worth it for you to achieve your longer-term investment goals, then it might be an option worth considering. But just generically speaking, STR returns are almost almost always going to blow the LTR returns out of the water for lakefront cabins in Minnesota.
For financing, the two options that come to mind would be a 10% down second/vacation home loan, or a DSCR loan at 20%+ down. Without knowing how much of the renovations you were planning on doing yourself over time versus how much you were wanting/needing to finance up front, you would also want to talk with potential lenders about what loan products they have which could incorporate both the purchase price as well as the reno costs into the loan package.
Hope this info helps get you pointed in the right direction - definitely keep us updated as you move forward with this project though!
5 Replies
- Property Manager · Chicago, IL · Member since 2016 · 21 posts · 23 votes2y
Hey @Anthony F., very cool to hear you've got a line on a lakefront property for significantly under ARV! A verbal agreement is fine to get the deal figured out on the front end, but definitely try getting that deal down on paper sooner rather than later!
If this property is a lakefront cabin in Minnesota, my default advice would be to go the STR route. Since you mentioned the property needs a lot of work, if you could put in some higher end finishes into the cabin (kitchens and bathrooms), there would almost certainly be a pretty solid base of STR guests wanting to stay there - almost without exception, every modern STR cabin in Minnesota and Wisconsin that I've seen are all doing tremendous numbers. Without knowing more about the location though, if this cabin has direct water views and is able to sleep at least 6 people, a fully renovated version of your cabin could probably pull in at least $600/night in the summer without much effort. If you could configure the bedrooms to be able to sleep 8-10+ people, your ADR could increase even further from there.
However, if you go the STR route, make sure you factor in the time commitment it will take to manage the property. Being active duty military, if you wanted to remove yourself from the day-to-day operations, a vacation rental management company would probably take 25-30% of your revenue. Also check to see what kind of third-party management companies exist in the area. If yours is the only STR within 20 miles and there aren't any cities or larger towns within a 20-30 minute drive, you could easily run into trouble even finding a reliable cleaning person, let alone a full-service STR management company.
I would also definitely take the time to find some comps on Airbnb in the same area as yours, with as close to the same bed/bath count as yours, and with the same finishes and amenities as you are planning to put in yours. See what they're charging for weeknights versus weekends, what their cleaning fees are, and how booked up their calendars are for these summer months. This will help you get a feel for how saturated the STR market is, as well as what opportunities you might have for setting yourself apart in your market. For example, if every lake cabin within 20 miles of yours listed on Airbnb seems super rustic and dated and "northwoodsy" (for lack of a better term), is there an opportunity for you to skew more modern in your STR design/style to help capture bookings with guests who are looking for that kind of aesthetic?
Since STR cabin rentals in Minnesota and Wisconsin are super seasonal, I would also strongly encourage you to look at what amenities you could add to help boost bookings during the colder months. Memorial Day to Labor Day will pretty much take care of itself, but adding in amenities like a hot tub and a sauna will help you draw in more traffic and bookings even when there's a foot of snow on the ground.
Just to touch on the LTR option, I don't know if this would get you the kind of returns you'd be looking for to even cover your mortgage, let alone cover any maintenance/capex/management costs the property might require. And that's not even touching on getting you into positive cash flow territory and the passive income you mentioned that you'd be looking for. Check on Zillow to see what other long-term rentals are going for in the same area - if the monthly rent you could get would be worth it for you to achieve your longer-term investment goals, then it might be an option worth considering. But just generically speaking, STR returns are almost almost always going to blow the LTR returns out of the water for lakefront cabins in Minnesota.
For financing, the two options that come to mind would be a 10% down second/vacation home loan, or a DSCR loan at 20%+ down. Without knowing how much of the renovations you were planning on doing yourself over time versus how much you were wanting/needing to finance up front, you would also want to talk with potential lenders about what loan products they have which could incorporate both the purchase price as well as the reno costs into the loan package.
Hope this info helps get you pointed in the right direction - definitely keep us updated as you move forward with this project though!
- Member since 2024 · 3 posts · 4 votes2y
Hello @Account Closed Thank you so much for the response! I do own a seasonal property close to this one and my retired father in law (retire contractor) is looking to do the renovation work for me and lives 1 mile away. I also have a plumber across the road that I allow to use my lake access in exchange for labor when needed. My retired mother has a cleaning service and lives close as well. My father in law has also agreed to plow snow and mow lawn at this property. It has three bedrooms and could easily get to the 8-10 sleeping space. It has a hot tub on the property as well but not sure of the condition and hasn't been used in years. It also has a garage loft with pool table. It is located close to the ATV/snowmobile trail head and has lake view. I considered using my 26' 16 person pontoon as a rental and I have 2 kayaks and 2 paddle boats. I did some VRBO searches and there are not many comps in the area. Most are small and outdated and only one other VRBO on this lake. The lake is in Northern MN and has a good walleye and northern pike fishing. I really like the potential for higher returns on the STR. My reno budget would be between 15-20k to get to where it needs to be. Looking to figure out the financing and legal structure. I've seen allot of social media about trusts and holding companies and I don't want to get too complicated but want to protect myself and family from legal issues that could arise......
Thanks again for your advice!
Tony
- Property Manager · Chicago, IL · Member since 2016 · 21 posts · 23 votes2y
Hey @Anthony F., you're quite welcome! Having those neighbors and family members nearby to help handle the cleaning, renovations, and maintenance is definitely super helpful. I would still check on the availability and pricing of a secondary cleaner in the area though - always want to make sure mom can take a reservation or two off if schedules don't line up for some reason!
I like the pontoon boat rental idea as an add-on service for your STR - on decent-sized lakes, pontoon boat rentals can easily bring in $200-250 for a half day rental or $400-500 for a full day rental, so you could make a tidy little profit off of this kind of add-on amenity. You'll definitely want to make sure you have some waivers put together if you go that route though, as well as getting the appropriate additional insurance coverage for using the boat as a rental. For the kayaks and paddle boats, I would just keep those available free of charge for guests to use if they want; those are definitely great to have as an available amenity though.
The garage loft could be a really interesting opportunity for setting your cabin apart from other STR's in the area as well. Turning the pool table loft area into a full-on game room, or maybe even doing a projector screen with a home theater or video gaming set-up there - that could be a huge selling point for families looking to book a stay with amenities and spaces that will help keep their kids occupied and entertained.
One note on the existing hot tub: having an awesome, well-running, clean hot tub can definitely help you command a nice premium on your STR bookings. Having an older, mostly reliable but starting to show its age hot tub can easily become a liability. If the hot tub you have is hard to keep clean (and keep in mind: the hot tub looking clean is equally as important as it actually being clean), or if it breaks down in the middle of a guest's stay, it can easily cost you in the form refunding part/all of a booked reservation, or lead to your listing getting bad reviews. And in the STR game, reviews are pretty much everything.
Assuming you have the hot tub up and running smoothly though, I'd also take some time to focus on what cold weather amenities you can offer to guests to entice them to visit during the colder months when ADR's drop and occupancy falls off a cliff. Some common ones that come to mind in addition to a hot tub are a cedar sauna (gotta lean into that Minnesota sauna culture - check out Cedar and Stone out of Duluth for some really cool sauna ideas), snow shoes or cross country skis, or even just a nice outdoor firepit area with tons of firewood (you could also include complementary s'mores supplies for every reservation). As I mentioned in my original post on here, the warmer summer months will take care of themselves, but if you want to have the STR operating all year round, the winter months require much more effort to make your property a place people will want to visit and stay even when the weather gets nasty.
Nothing against VRBO, but I would also take a few minutes to check out what listings are available on Airbnb as well. I forget which guest/episode on the BP podcast it was who I heard say this a while back, but in most of the STR world, Airbnb is Google and VRBO is Bing; there are way more people out in the world googling stuff, and not nearly as many binging their search results. Airbnb is also exceedingly easy to get an idea on what 3BR comps in the area are getting for their weekday/weekend ADR, cleaning fees, as well as seeing if there are common check-in/check-out times, minimum stay restrictions, and how booked up their calendars are, especially right now heading into the back half of the busy summer season.
As far as the what kind of legal structures to use for this property, there's so much noise on social media about stuff that just doesn't matter or apply to most people, so I wouldn't worry about overcomplicating your purchase with trusts and holding companies at the beginning. Set up an LLC on the front end and make sure your lender knows your intentions to purchase the property using the LLC, and you'll be in good shape. Having a solid insurance policy which covers your property being used as a short-term rental will be the other important piece to keep in mind.
Hope this advice all helps - can't wait to hear how this project turns out for you!
- 2yTim SwierczekPro MemberLender · White Bear Township, MN · Member since 2016 · 1k+ posts · 1k+ votes
@Anthony F. First, I completely support doing any deal that is so far below ARV. Great job, it sounds like you have a lot of connections. @Account Closed is correct you should get that thing under contract. You can always write a long closing if you need more time but don't let the seller change his/her mind.
However, I am going to offer an opposing view to the STR idea. It's rare that vacation rentals on Lakes in MN make money. You get about 3 months of rentals, maybe 4, and that must pay 100% of your expenses for the year to break even. I've talked to many clients and investors who consistently lose over 10K per year on MN Cabin STRs. I would strongly encourage you to investigate long-term rents. A lake home with a hot tub that's remodeled should be appealing and it's worth a look.
I hope it goes well either way but look into it and feel free to hit me up if you want to talk more about it.
- Contractor · Chicago, IL · Member since 2016 · 4k+ posts · 2k+ votes2y
Hey there @Anthony F. - Congrats on your first upcoming potential deal! Real estate is an amazing vehicle to pave your way to success!
Wow LAKE PROPERTY would be an AMAZING RETIREMENT HOME! Assuming the area is on the up and up Lake Property will always trend in the right direction because of the limited supply around the lake.
I am in Chicago, but my father bought a lake house sw of Louisville and I think it's at least doubled in value.
With your background as an electrician this sounds like a no brainer!
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