Buying land / building a tiny home / short term rental?

Question

I am new to Bigger Pockets and trying to figure out my entry point into real estate investing.

One idea that is really appealing to me is:

Buying land around North Conway, NH / Fryeburg, ME ~65K

+ building a tiny-ish home which according to denoutdoors can cost around ~50K (2b/1b)

+ install water/electric/sewage ~ 28K

Total ~ 143K

Then renting it out for $150/night x 65% occupancy = 35,500/yr

I estimate I would pay about $4k taxes, $3k utilities, $4k property mgmt, $1k lawn, $500 snow =  11,500/yr

So, 35,500 rent -11,500 built in expenses = 22,000/yr

I think the Cash on Cash Return Year 1 would be.... Income / Cost = 35,500 / 154,500 = 23%.. seems like a good number

Or 6.5 years to start seeing profit. Or, use mortgage/home equity loan to see cash flow sooner.

Does this seem crazy? Any advice for a newbie considering this option?

Troy Zsofka · Answer

@Eliannah Linehan

Be careful how you are calculating CoC.

Cash Flow/Cash Invested.

In your unlevered example, your CoC return in Y1 is 15.38%, not 23%:

$22K Cash Flow (or NOI in this case since there is no Debt Service) divided by $143K Cash Invested.

If you put a loan on the property, you would subtract the Debt Service from the numerator since Cash Flow will no longer equal NOI, and you can subtract the loan proceeds (after closing costs) from the denominator since you will no longer have that cash tied up in the investment.

A couple other things I'm noticing:

1) You may want to factor in a CapEx/Replacement Reserves allocation to more accurately project your returns. I imagine this would be especially important with STR since you are providing furnishings.

2) The OER based on your numbers is only 32.4%. This seems low to me. Of course, I do LTR not STR so I'm not well-versed in expense ratios on STR. Does the property management include cleaning service? Do your income projections include whatever is charged by Airbnb, Vrbo, whatever?

3) Does the $50K for the structure include the foundation and sitework? The land must be cleared, the driveway installed, and I imagine some sort of foundation and drainage installed even if just frost walls and slab. If slab, it is a good idea to consider insulating it if you intend to rent it year-round as it can be a significant heat loss factor. Similarly, does the package include systems such as heating and A/C? Then there's engineering and permitting. Probably not a huge cost for those, but should be factored in for accurate projections nonetheless.

4) Have you done research to come up with your 65% occ assumption? I imagine that occupancy makes or breaks STR plays above or below the break-even point; so it would be a good idea to determine your break-even occupancy and then compare the annual occ of local comps to determine how realistic your assumptions are.

Happy investing,

Troy

Eliannah Linehan · Answer

@Troy Zsofka Thanks for the feedback, I considered some of these thing but definitely not all. The occupancy is what I’ve gathered as a conservative average of high and low season, but definitely would need to get quotes on the actual construction cost. Seemed like a STR might have more margin in todays market but might be a lot more work :)

Eliannah Linehan · Answer

Thanks @Jeremy Wirths, that gives me some confidence to continue my research :)

I don't have contacts yet, just an area I'm familiar with from visiting for the last 10-15 years - seems like it has potential in the winter for skiing and the summer for hiking, etc. I would need to hire someone (I think) to manage the build and the property since I'm about 2 hours away.

Jeremy Wirths · Answer

@Eliannah Linehan it doesn’t sound crazy. There are a lot of moving pieces involved with that plan, but don’t let that deter you. Do you have contacts in that area for everything needed or would you find a GC to manage the project for you? This is your investment so does 23% CoC seem good to you?