First Time Investor in Real Estate with a projected first deal.

[Anthony F.]

Hello, I am new to real estate investing and I have a tentative verbal deal on a pre-market lake property that I would eventually like to make my retirement home (10 years or so). I am currently active duty military and looking for investment options for the property to create a passive income and build wealth. I am looking into longterm vs short term rental options as well as financing options. Property market value is 450-500k with an agreement of 300k. The property will need considerable work. I look forward to any and all advise! I am also a licensed electrician and very familiar with construction and project management.    

[Matt Vohnoutka]

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!