Should I use savings to flip basement or buy a second property?

Question

We bought our current (2bed/1bath) home that sits on top of a large unfinished basement in Atlanta (Cascade area) in 2021. The intentions were to buy a 2nd property within 2-3 years and then use this home as long, medium or short term rental. The year has come that we want to make this move but in all my research, I'm finding the long term rents are just so affordable in my area that, at best, we will break even. As for short/medium term rentals, it seams like the market is oversaturated and I see a lot of people folding. I'm nervous to invest in furnishing this home after seeing so many people moving to long term.

Looking for advice on my options -

1. Use money saved for our downpayment to flip the basement Instead. Possibly use flipped basement as airbnb to help build back up another downpayment and then property would rent for higher with more rooms and bathrooms when we are able to buy a second home.

2. Bite to bullet and just break even with a long term rental until I can raise them enough to cash flow.

3. If in ATL, am I wrong in sensing that airbnb or medium term rentals are not lucrative anymore?

Nathan Harden · Answer

I would take your money and go get another asset. I would go flip a house, take the profits from that flip, do your basement and still have the same money that you had in your pocket prior to the flip.

REI is how far can you stretch your dollar.

Michael Dumler · Answer

@Jaclyn Rey, what sources are you pulling from to justify the reasoning that the STR/MTR market is oversaturated? January and February are the slowest months for STRs, one of the reasons why many articles have panic headlines right now. You must account for the slow season if you source the property as an STR/MTR. Spring, Summer, and Fall are when you'll make your money. Being in the Cascade area, you're probably ~20 mins from the airport.

If you bought in 2021, you should have obtained an excellent rate. Many homeowners fear selling for this exact reason. How much equity do you hold in the property? Regarding the basement conversion, it's good to assess an increase in market rent, but more importantly, what does ARV look like? How much will the rehab cost, and what will the appraised value be after completing the project? This is where your money is to be recaptured. All being said, basement conversions can be tricky.

If you can sell and acquire a better deal to park your money in, execute, but this is easier said than done. My overall answer depends on how you answer the questions above, haha.

Matthew Kwan · Answer

If you have equity, you can try cashing out or open a line of credit for your primary. Typically rates are better and you can go up to 90% LTV from your primary house. This will allow you open  a line and tap into funds whenever you need.

@Albert Bui @Carlos Valencia

Shawn Parsh · Answer

Jaclyn,

I agree with the comment that the numbers have to work for you. Do your research to see what you would actually make for each option. I personally would never buy an investment house that did not produce positive cash flow. As suggested you could also flip a house or two to generate the cash to buy a long term rental that will produce positive cash flow. There are a lot of distressed properties in the Atlanta area that you could rehab.

I personally do not like the idea of taking a loan against my primary residence to buy investment properties. I would use that as a last resort. If you have a mortgage on your personal residence I would flip houses until you produce enough cash to pay it off. Just my thoughts, good luck.

Bob Stevens · Answer

RE is nothing more then math.  Which makes more sense NOBODY can answer your question intelligently? YOU and only you need to know the numbers.

Jay Thomas · Answer

If breaking even with long-term rentals suits you, remember it's a slow journey for equity but offers stability. On the flip side, entering the short-term rental market demands caution due to tough competition and changing rules.Flipping the basement could be a game-changer, but you'll need to handle construction costs, time commitments, and market uncertainties. For flipping, there's the allure of higher future income and property value, but beware of the construction costs, time investment, and market uncertainties. When it comes to long-term rentals, enjoy stable income with minimal fuss, although the slower equity growth and lower returns are part of the package. Don't forget to spruce up rentability with upgrades or amenities. Now, for Airbnb/short-term rentals in Atlanta, relish the prospect of higher potential income and pricing flexibility, but brace yourself for intense management, competition, and potential regulatory changes. Stay in the loop on local trends and rules, and perhaps consider unique offerings to stand out.

Chris Ayars · Answer

Does the property have septic or sewer?

If it is septic, you need to remember that the tank is rated for bedrooms. If you want to increase the number of bedrooms, you may have to increase the size of your septic to meet legal compliance.

One of the first properties I helped a buyer purchase, the seller was trying to sell it as a 4 bedroom, but the septic was rated for a 3 bedroom. They had to go with the 3 bedroom price.

Caleb Brown · Answer

If you rehab the basement would it increase the value? Is it a walk out basement? For me that'd be the main things. I'd also run #'s to see how active your area is for bookings. It's become more popular but if the place is priced well, nice/unique it's get bookings. People do it all the time so it's a viable strategy. Just compare. Nothing wrong with a second property either. My biggest thing would be to make sure the money you put into the basement would equal on the value/equity.

Should I use savings to flip basement or buy a second property?

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