AirBnB & House Hack Duplex Construction project, Austin TX

[Mike Cossette]

Investment Info:

Small multi-family (2-4 units) buy & hold investment.

Purchase price: $800,000
Cash invested: $170,000

I Purchased a 3bd/2bth 1300sf bungalow in DT Austin. In 2018 I took out the carport and built a 3bd/3th 1900sf house in its place. Turning the SFR into a duplex, renting out the old 1,300sf side for $10,000/mo gross as a short-term rental. The rental income potential financed the construction cost of the new unit in which I live. (2022) Net Income $100K/yr, Property Value 2.1M, $8,000/mo positive cash flow.

What made you interested in investing in this type of deal?

Running a hostel, or an STR for travelers and big groups in Austin that was affordable was a dream for us as experienced travlers. The House hack aspect gave us the ability to stay Downtown, and live in a brand new construction house while running a profitable and fun business. The complexity of finding the right combo of financing, and the planning, permitting, and construction was something I have experience in as a real estate professional.

How did you find this deal and how did you negotiate it?

The negotiations came into play with the city permitting department, the lenders, and the builder. The property acquisition itself was pretty standard. After multiple lenders turned down the project a local in-house lender built the financing around the deal he saw as a great investment. The permitting and construction took 22 months. 1 year of going back and forth with the city on plans, exceptions, re-drawings ect.. then 10 months of construction.

How did you finance this deal?

First acquired with a conventional mortgage Fannie/Freddie owner-occupied 30yr fixed. Then refinanced with an In-house" lender on an Interest-only construction loan, using the STR potential income ( that was based on our previous off and on weekend rental rates and history) combined with our DTI. Rolled the cost of the new construction project in with the balance of the original mortgage. Third, we refinanced again once construction was complete into a 30yr Fixed owner-occupied jumbo mortgage.

How did you add value to the deal?

Turned a small 1950s single-family bungalow into a small multi-family short-term rental business by adding a brand new construction unit.

What was the outcome?

A huge success, especially after a few years and a pandemic the STR business income covers PITI, business expenses & a big chunk of our daily living expenses.

Lessons learned? Challenges?

Challenges finding the right lender to finance a deal based on projected AirBnB income in 2017/ &2018 before it was as common as it is now. Challenges with the city of Austin permitting getting them to approve a duplex construction with a brand new construction house attached to a 1950s house in a historic neighborhood. Challenges building a project one side being pier & beam construction other being slab, and both being connected.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Recommended in-house lender Southwest Bank for non-conforming deals that make sense logically and realistically but may not fit the conforming box or standard lender requirements. As for an agent, I would shamelessly recommend myself in the central Texas area.