[Calc Review] Help me analyze this deal

[Steven Koch]

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*This link comes directly from our calculators, based on information input by the member who posted.

[Richie Thomas]

@Steven Koch I applaud your effort to apply creativity to a deal.  Learning how to see value in deals that other investors pass on seems like a valuable skill to acquire.  Just be careful to guard against over-optimism.  You don't want to "see" value that isn't actually there.

From the MLS photos, this property looks like it's been rehabbed already, and there's no reason to think the seller is motivated by something other than getting top dollar. It looks like it's being marketed to owner-occupants, as opposed to investors. Those kinds of properties are quite common on the MLS, and my (beginner) understanding is that it's hard for an investor to add a lot of value to the mix with these properties. We generally get paid to solve peoples' problems, which means helping them unload a property that has become a headache to them. This can mean a home in poor condition which the owner doesn't want to repair, or a home in great condition where the owner needs to move quickly for a new job, sell quickly because of a divorce, etc.

That said, you can definitely find investor-friendly deals on the MLS, and I hear about people doing so all the time on the BiggerPockets podcast. If we put on our creativity hat and ask how can we make this deal work, my first thought is to turn this into a house-hack, living in one room and renting out the other 2 as Airbnb rentals. If the property really is "in the heart of downtown" as the MLS listing says, then this could be a viable option, especially if you put a bit of rehab work into the property (white picket fence, maybe?).

Looks like Colorado Springs allows short-term rentals, but there are restrictions involved and you have to apply for a permit.  If this is a make-or-break part of your strategy, make sure your property conforms to all local short-term rental laws before purchasing it.

AirDNA is a great resource on how to estimate what your income could be if you opted for this strategy; their reports are a bit expensive and they bill on a monthly basis, so make sure to get all the information you need and then cancel your subscription.  You would be renting a private room in a shared house, so be sure to limit your comparison to other private rooms in a shared house in your property's immediate area.  A non-exhaustive list of questions I would want to answer from AirDNA includes:

-What is the average nightly rate?

-What is the average monthly occupancy %?

-Which amenities are considered "must-haves" or "table stakes" among the rentals here?

-Which amenities are considered "nice-to-haves", which will help your property's photos stand out among the search results?

-Is the rental activity (i.e. # of listings and # of bookings) increasing or decreasing in the property's zip code?

-Is this property in the most tourist-friendly part of town?  If not, what type of guest is this property likely to attract?

-What are the downsides to Airbnb'ing this property that I should be up-front about with my guests?  i.e. "this property is in a not-so-great part of town", or "the neighbors have a pit bull that can be intimidating" or "there is a fire station across the street, and we frequently hear fire truck sirens at all hours").  It's better to be as up-front as possible in your listing about things like these, so you can filter out guests who will leave you bad reviews because of these things.

Also keep in mind that there's a big difference in laws depending on whether or not you occupy a room in your short-term rental.  Laws for non-owner-occupant rentals are usually more restrictive than laws for owner-occupant rentals.

Your expenses for a short-term rental will be much higher than if you rented to a standard tenant.  Utilities will be your responsibility, as well things like toiletries.  You'll have to budget for cleanings and room changeovers after every guest checks out, or you'll need to plan to take care of these things yourself.  And you'll be responsible for all communication with guests, as well.

Lastly, be sure that your mortgage lender allows short-term rentals. If you're planning on getting an FHA loan, this may not be an option.

Be careful not to get too attached to any one property.  To a certain extent, investing is a numbers game. As others have said, if you can't make the math on this property work, move on to the next.