From D.C. starter condo to Airbnb to corporate rental

[Kevin Leahy]

Investment Info:

Single-family residence buy & hold investment in Washington. Purchase price: $348,000.

Cozy 1-BR condo with patio in the heart of Adams Morgan. I lived there myself for 4 years, then moved out and converted it to a super-profitable short-term rental (it's ideally situated near great restaurants/nightlife, the National Zoo, Rock Creek Park, and hotels that host professional conferences). After the condo association came out against STR's, I converted it to a furnished, corporate rental. I target traveling professionals who are willing to pay a premium for a turnkey rental.

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

The low condo fee! A lot of investors are (wisely) wary of condos because condo fees can rise and special assessments can eat up your cashflow. But because two investors own the majority of the units in this complex, they keep the condo fees at $150/month (about half the area average). This, combined with putting 20% down at 4.375%, allows the place to cashflow nicely.. all things being relative. (Very tough to cashflow buying at retail prices in the District!)

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

I rented a unit in the complex and struck up a conversation with a realtor who was listing the place. In retrospect, I did not negotiate very well; I accepted their counter which was just below the list price. But I also felt strongly that I wanted to live there myself for my bachelor years, that I should take advantage of low interest rates, and that it would eventually at least break even as a rental.. so no regrets. I learned a lot that will equip me for my next deal.

How did you finance this deal?

30-year fixed rate mortgage at 4.375%, no points. Although that is historically quite low, this was the fall of 2013 so I should have gotten a better interest rate. I just didn't shop around enough.

*One quirk that made financing more complicated: the banks got nervous when they saw that just two people (the investors I mentioned earlier) own more than half of the 48 units, and wanted a big down payment. So, less competition to buy the place, but tougher terms from the bank.*

How did you add value to the deal?

I started hosting on Airbnb when I would go away on business or on vacation, and began to really enjoy the hosting experience and that high of making money from a passive investment. So when I moved out, I kept the furniture -- including a huge wall-mounted TV -- and rented it out on Airbnb full-time. One month, my cashflow was $2500 on top of the mortgage! Eventually the condo board cracked down (bylaws say 6-month lease max) and I converted to the 6-month furnished corporate rental model.

What was the outcome?

I plan to hold it forever, letting tenants pay down the whole mortgage. With a 1-BR condo, the appreciation lags well behind SFH's, but over the long term there's no way it will lose value -- it's near hotels, a major bar/restaurant destination, good schools, and a station that serves the city's best Metro line. If I do eventually sell, I will 1031 it into a down payment on a small multifamily building somewhere outside D.C.

Lessons learned? Challenges?

Look for low condo fees (if the people on the board are solid, and there are sufficient reserves). Short-term rentals can be great vehicles, but ALWAYS HAVE A CONTINGENCY PLAN. In fact, the D.C. gov't is now poised to outlaw STR's for second homes. So had I gone all-in on this strategy and bought a condo that only cashflows using STR projections, I could easily now be in a negative cashflow situation. As Tim Shiner says in show #300, start your REI career with your first home purchase!

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

Realtor: Michael Fowler, Compass
Twitter: @202realtor

I learned a ton from Richard Fertig's "Short-Term Rental Secrets" Youtube channel, Sean Rakidzich's "Airbnb Automated" Youtube channel, and Jasper Ribbers' "Get Paid For Your Pad" Podcast