First Property Complete! Now What?? BRRR or Build some reserves?

Question

I am a full-time marketing manager and I JUST wrapped up my first STR remodel after 6 LONG months. I went over budget of course but my husband and sunk in a good 60K on property renovations and took on extra debt to renovate an A Frame property near a popular tourist destination. I was also able to work out additional rehab work (including outdoor living space and updates) with my contractor on a trade agreement for marketing consulting. Which is great, because I was able to add value to the home without the extra cash out of pocket.

I have been live on Airbnb and VRBO for just about 3 weeks and we have hit over 13K in reservations through the first week of August alone. This is incredibly promising but is our busy season, and do not expect these numbers year-round. But cash flow is better than anticipated. I put 20% down initially, have paid 6 months of mortgage payments, and have forced appreciation.

We purchased the home with a 15-year conventional mortgage and considering a BRRR to purchase the next property, possibly refinancing into a DSCR under our LLC. The challenge is that we took on CC debt for the remodel and our scores dropped a good amount in the last 6 months. Is it better to sit and collect the cash for a while and pay down the debt that way? Are there creative ways to restructure the debt with a BRRRR to do this?

Our initial goal was to let the cash accumulate and not touch it until we had another 20% built up for another property, but not sure I want to wait a couple of years to do that.  Does anyone have advice on the best possible strategies on if it makes sense to pay the debt first if I could even BRRRR with a score in the mid 600s right now? Not sure the best path forward to continue building our portfolio, ideally with another STR this year.

thank you!

John Chong · Answer

You could start paying down some of the existing CC debt to help bring your score back up. I would pay down some of the maxed out lines first to bring down the utilization if you're getting good cash flows from Airbnb or VRBO.

If there's enough margin in the deal you could also do a cash out refi since its been over 6 months and your FICO's mid 600's (minimum with some lenders is 620, higher the FICO the better the leverage and rate). Depending on the payoff and cash flow you could get up to 70% LTV on a STR refinance.

Seth Nightengale · Answer

Hey Melissa,

Congrats on this deal! I am not an expert in financing, but I wanted to chime in and talk a bit about the STR market in this area and what I would do as a STR investor.

Of course, the STR market is very segmented. My airbnb is in a different vertical (a replacement for a hotel) than yours (destination), but I can speak to general trends. July and August are far and away the best months for Airbnb in Wisconsin. Gross cash flow for my property in the summer is 3x what I get in the slowest months. It's great that you have had success in the initial stages of your Airbnb journey, but regardless of what you do with the cash you have you should prepare yourself for the extremely cyclical nature of demand here in the north. Generally, there is a large taper through the fall and close to complete dry up through the coldest months, especially from Dec-Feb. Add speculations about a general slowdown/fall in discretionary spending across the economy to this cycle and I would encourage you to be very conservative with how you play the next few months. I'm sure it's tempting to take some dramatic actions now (pay off as much debt as possible, find some financing mechanism to get your money out), but if I were in your position I would put together a plan to achieve all of these goals and take it a few steps at a time to help with risk exposure.

Hope this was helpful.

Seth

January Johnson · Answer

I vote to wait a bit.  Take a breath, pile up some reserves, pay off any reno-related debts, and revel in your success for now.  There will always be another good property to purchase in the future.

Melissa Thomas · Answer

That is a really great point on the guaranteed return, we sit at 24.99% on the line of credit we used, and if we roll that into a conventional mortgage even at a higher rate it is saving a ton. Its easy to forget the cost of that line of credit, when in reality could save us more than another property would bring in.

Travis Timmons · Answer

If you're paying the going rate on credit cards, pay that off first. It's a guaranteed return of 18-25%.

We did the same thing though. We ended up doing over $10k in gross rents in each of the first 4 months (July-Oct). The first and only thought that I had was, "But what if we had 2 properties doing $10k per month?"

I will say that it is really nice to have the busy season cash flow while we renovate the 2nd place though - it just takes a lot of the stress away. You will also see an increase in ADR and income the second lap around the calendar (assuming that you get good reviews and performance). We're making about 50-60% more this summer compared to last year. It's a 5 bedroom place, and we have noticed a lot of large groups plan summer vacations 3-6 months in advance. We just weren't able to capture that crowd last year since we did not go live until the last week of June.

Melissa Thomas · Answer

Thanks for that! Yes, it was incredibly difficult and there will be loose ends to tie up at our current property for sure. It is likely smarter to bank up rents now and pay down the dept over time. We do not have 0% but perhaps that is something I can roll the debt into to get the interest down at least.

Travis Timmons · Answer

You did exactly what we did last year. We spent SO much money renovating a place, got it listed, and booked 11k in the first 48 hours (it was July in Maine, though - busy season as well). All of this depends on your financial situation, but I'd take a breath, and get through the first season before doing anything. You'll likely find that you won't finish out a lot of the additional or forgotten details and updates to your current house until Jan-Feb of next year. While our place was certainly rent ready, there was $5-7k of additional work that needed to be done in the offseason. We also had a pile of CC debt (0% interest for 12 months) that we ended up paying off by December of last year. It was a dangerous game to play but it worked out.

One of my favorite sayings to repeat to myself is "nothing fails like success." I'm never more vulnerable to make a mistake than after doing something like buying a fixer 2000 miles away from my primary residence as a short term rental (and it worked!). I'd suggest taking a breath, piling up money, and re-assessing next Jan-Feb-March.

We did end up buying another project of a house in February. It's hard to not try to find a way to get another one when you see how well it went the first time. It's also easy to forget how hard it was...go figure that this renovation is taking longer than expected as well (and we are missing the busy season). Who could have seen that coming?

First Property Complete! Now What?? BRRR or Build some reserves?

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