Mistakes made... Looking for advice

[Sean Taylor]

As the title suggests, I can already admit to mistakes for this deal. What I need help with is how to pivot. In March 2022 we bought a 4bd home in Montgomery TX (about 45 min north of Houston). My wife wanted an STR and we were excited about the area. Lake Conroe with yacht club amenities. We did a cash out refi and borrowed $345,000 @ 3.5% to use to buy a house. We have a property manager and the property has generated $24k in rental income for 2023 as of the date of this post. By the time you add our true expenses, like the cash out refi ($1500), landscapers, wifi, utilities, property taxes and insurance we are spending $40k leaving us negative $16k/ yr at this point. We have twice the number of guests YOY so we don't know if we should just stay the course or cut bait and invest elsewhere. Property values have come down about 10% which means by the time we pay commissions to realtors we will likely lose between 50k-70k on this property. Solutions we have considered are changing to LTR, selling and investing elsewhere, continue to STR and market the property more. What would you do?

[Dan H.]

I have had 2 STRs/MTRs for many years (since 1999) that have always performed except for the Covid year and last year due to a rehab gone bad.  

So we decided to start 2 addition STRs last year.   Neither of them have the gross that they would have as a LTR and both have negative cash flow.

This year, one of the 2 long time STRs did not get selected in the STR lottery in spite of being an STR under same ownership since 1999. It was converted to MTR at the same time as ~200 other units in the small community (Mission Beach) that also did not get selected in the STR lottery. I rented it as a furnished rental for less than I would have got as an unfurnished rental.

The other unit that has always performed also has reduced occupancy and gross compared to normal.   The occupancy numbers are high for most areas but in 2019 this unit had 95% occupancy.  This year it is ~75% occupancy and was taken off market 3 times (2 sewer pipe leaks and a new roof) so the occupancy is artificially reduced from the 3 times taken off market.   I suspect without being removed from market it would have occupancy in the low to mid 80s and may have had some small positive cash flow.

None of the 4 units have positive cash flow, but this is in large part to extracting equity via refinances in Dec 2021 (so they are all near 80% LTV).

I point out these struggles to show that even a long time successful STR owner can struggle. I am unsure that the 2 new STR units are good STR units (not special enough location and very high LTR rents - market LTR rent in these units is ~$4.5k).

I possibly would let these ride indefinitely as I have rentals to offset these, but the wife probably will want to use the resource/units to optimize profit and it is unclear that the STR/MTR option is optimal on 3 of the units.

If I were you I would try to ride out the government attempt to slow the economy and hope this results in both higher rates and higher occupancy.

Good luck