Picking a marker for short term rentals out of state

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Picking a marker for short term rentals out of state

Alex K.
Houston · Member since 2016 · 72 posts · 18 votes

I am looking to find a property to Airbnb but I want to do it out of state.

I'm debating two possibilities.

One is buying a place in Los angeles for about 700k (2/3) with 10 percent down that has a detached two car garage in the back and putting in about 120k in for adu to rent it out and get a one percent or so deal.

85k plus 120k means I would be all in for about 205k .

And the return would be 1200 monthly for the rental in the back for a studio with a kitchen and a fridge.

14400 a year in income after 120k roughly invested cash.

85k invested in front house with 3300 per month for piti.

And I would have two room mates at about 800 a month 1600 a month.

And I would pay about 1700 a month for my room to make the mortgage payments.

That seems like alot of cash to put out for over 200k to lose on the front house every month. I have rent control on my apartment I live in now.

So , I would only have about a $ 300 increase in my rent to go from my one bedroom apt to a small room within a 3 / 2 with a back unit. And I can try short term rentals in the back but due to Los Angeles restrictions I think I can only do 120 days a year for 30 days or less.

Or I can find a property somewhere else that works as a long term or short term rental that might cashflow better. Any suggestions on any areas?

I don't expect people to just hand me areas. I suspect Houston and Scottsdale would be great ones.

Any thoughts on this guy's ? Btw I have ran an Airbnb before in Los angeles in the past.

So I do have some experience running one rental and have been thru some crazy stuff with that lol. But it was stressful fun and I want to do it again.

My goal is to really have healthy cashflow I can duplicate and if I get appreciation great if I don't I'll just pay off mortgage over the years and just retire on cashflow 30 to 40 years down the line.i rather manage and hustle for more cashflow. I'm in my early 30s now with great credit and healthy savings with decent income for Los Angeles standards and I have great energy levels to take something down.

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Jon Schwartz
Realtor · Los Angeles, CA · Member since 2018 · 952 posts · 1k+ votes
5y

@Alex K.,

For somebody in your position (strong savings, good income), I highly recommend house hacking and Airbnbing here in LA. I’m in a similar situation, and my longterm plan is to keep my investments in LA for at least the next decade, then sell my LA portfolio and buy buildings in growing southwest markets for cashflow.

In the meantime, while I earn a living outside of the my estate portfolio, I’m happy with limited cashflow while I become rich on paper. My duplex house hack didn’t produce positive cashflow this past year, but it did reduce my cost of living by thousands of dollars while adding about $200K to my balance sheet.

As for Airbnbing in LA, the rules are strict, but workable. You can’t Airbnb anything outside of your primary residence for less than 30 days at a time. You can Airbnb all 365 nights of the year; you have to purchase an $850 permit to do so. All of LA’s regulations are here:

https://www.airbnb.com/help/article/864/los-angeles-ca

The best Airbnb hack in LA — and I have two friends doing this — is to rent a private space that is legally part of your residence. A friend of mine is house hacking a duplex in East LA that, when he bought it, was a triplex. One of the units, a studio, was non-permitted and carved out of a larger unit. A 2/1 became a studio and a 1/1 — so my friend moved into the 1/1 and rents the studio to short-term tenants on Airbnb. Technically, the studio apartment is part of his primary residence; it just happens to have an exterior door and a kitchenette.

Best,

Jon

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  • Michael C.
    New to Real Estate · Denver · Member since 2020 · 75 posts · 81 votes
    5y

    I wouldn’t. All that just to loose $1700 a month and gain 2 room mates.  House hacking is about lowering your costs not raising them.

    Go out of state or find a better property.

    0Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    5y

    Few items:

    • New ADUs cannot be used for STR in any jurisdiction that I am aware of in CA.
    • Coastal CA sucks at initial cash flow.  Your projection is only evaluating the initial cash flow.  If initial cash flow is you primary criteria, Coastal CA sucks.  Historically Coastal CA has outstanding long term cash flow.  This is due to high rent rate increases and prop 13 protections.  CA is the only state I am aware of with something like Prop 13 (of course there are states with no prop tax which is even better than prop 13 protections).  The market with the higher rent rate increase will always eventually have better cash flow than the market with the lower rent rate increase (assuming rent rate increase exceeds expense increase).  It is simple math and growth rates (it is a mathematical fact).
    • If you need the cash flow in the short term to supplement your income, etc., Coastal CA may not be the correct market. If you want long term superior cash flow, long term outstanding appreciation, outstanding ROI (top 3 cities in Case Shiller buy and hold return for this century are each Coastal CA cities and only one coastal CA city is not rated a 10/10 for appreciation this century by NeighborhoodScout (and the one that is not is a 9/10).
    • Historically there is little correlation between initial cash flow and long term cash flow.  There is a reason for this.  RE markets are fairly efficient.  Numerous parameters determine the price of the RE in any market.  These parameters include anticipated appreciation which is tightly associated with anticipated rent rates.  The low cost markets are typically not forecast to experience the same rent growth as the higher cost markets.  Most the time these forecasts are accurate over the long term.

    You live in an outstanding RE market and are considering going to a market that historically has not performed like your market (per Case Shiller, no OOS market in the US has out performed L.A. for buy and hold return for this century similarly none are rated higher by Neighborhood Scout for appreciation this century as L.A. is 10/10).

    If you should be valuing initial cash flow as you primary criteria, Coastal CA is not an ideal market.  Otherwise, it is an outstanding RE market.  

    I look at total returns. Initial cash flow is very far down my list of criteria when I purchase an investment property. It is behind cost of acquisition (I love properties that 1 year after purchase I have 0 zero money invested), value adds, COC, ROI, appreciation, long term cash flow. Initial cash flow may be the last item on my criteria list. To this end, I have purchased a property that my pro forma projected as cash neutral. I have made ~$500K on the property in 7 years and have 0 money still invested in it.

    Good luck

    0Reply
  • Jon Schwartz
    Realtor · Los Angeles, CA · Member since 2018 · 952 posts · 1k+ votes
    5y

    @Alex K.,

    For somebody in your position (strong savings, good income), I highly recommend house hacking and Airbnbing here in LA. I’m in a similar situation, and my longterm plan is to keep my investments in LA for at least the next decade, then sell my LA portfolio and buy buildings in growing southwest markets for cashflow.

    In the meantime, while I earn a living outside of the my estate portfolio, I’m happy with limited cashflow while I become rich on paper. My duplex house hack didn’t produce positive cashflow this past year, but it did reduce my cost of living by thousands of dollars while adding about $200K to my balance sheet.

    As for Airbnbing in LA, the rules are strict, but workable. You can’t Airbnb anything outside of your primary residence for less than 30 days at a time. You can Airbnb all 365 nights of the year; you have to purchase an $850 permit to do so. All of LA’s regulations are here:

    https://www.airbnb.com/help/article/864/los-angeles-ca

    The best Airbnb hack in LA — and I have two friends doing this — is to rent a private space that is legally part of your residence. A friend of mine is house hacking a duplex in East LA that, when he bought it, was a triplex. One of the units, a studio, was non-permitted and carved out of a larger unit. A 2/1 became a studio and a 1/1 — so my friend moved into the 1/1 and rents the studio to short-term tenants on Airbnb. Technically, the studio apartment is part of his primary residence; it just happens to have an exterior door and a kitchenette.

    Best,

    Jon

    2Reply
  • Jimmy Woodard
    Walnut Creek, CA · Member since 2020 · 285 posts · 318 votes
    5y

    @Alex K. there are plenty of markets you can get in at a much lower initial investment than CA with a greater cash flow on Airbnb. Here's a list of some top-performing markets. If you need help with self-managing remotely, feel free to DM me. Good luck!

    0Reply
  • Alex K.
    OP
    Houston · Member since 2016 · 72 posts · 18 votes
    5y

    @Jon Schwartz

    Thank you so much for the info. I think doing renting out as room out of my primary or looking at duplexes is the way to go.

    I really really appreciate this info Jon.

    0Reply
  • Alex K.
    OP
    Houston · Member since 2016 · 72 posts · 18 votes
    5y

    @Jimmy Woodard

    Thank you Jimmy.

    1Reply
  • Alex K.
    OP
    Houston · Member since 2016 · 72 posts · 18 votes
    5y

    @Dan Heuschele

    Thanks Dan you've contributed to some of my other questions as well so much much appreciated sir.

    Dan when you say 0 cash invested can you please explain how you got to zero and how you achieved infinite returns. What did you do to have zero cash invested ?

    Sorry 😐 I just don't understand fully.

    Maybe you refied and got all your money out after doing a rehab for 75 to 80 percent ltv ? Just throwing guesses out.

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    • Dan H.Pro Member
      Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
      5y
      Originally posted by @Alex K.:

      @Dan Heuschele

      Thanks Dan you've contributed to some of my other questions as well so much much appreciated sir.

      Dan when you say 0 cash invested can you please explain how you got to zero and how you achieved infinite returns. What did you do to have zero cash invested ?

      Sorry 😐 I just don't understand fully.

      Maybe you refied and got all your money out after doing a rehab for 75 to 80 percent ltv ? Just throwing guesses out.

      Correct. We typically do BRRRR, but seldom can extract all of our cash out just based on the value add. Fortunately, every investment property purchase has been well timed. I cannot say the same thing about my two primary home purchases both that depreciated almost 20% after purchase (1993 and 2004 purchases). Both of these primaries look like outstanding purchases today (one has appreciated ~$1.9k/month over the hold period, the other has appreciated ~$2.9k/month over the hold period) but a few years after purchase were looking pretty bad.

      So between the value add and the appreciation we have extracted all of our investment out of every property we own except for the one purchased 7 months ago (which had no value add, but was ~20% below retail).

      If I can purchase a property and 1 year later have no investment trapped in the property, I am perfectly fine with zero initial cash flow.  My worse appreciating property has appreciated ~$1.9k/month over the hold period so I recognize that I am likely to achieve at least this level of return over the long term.  In addition, I recognize that with that appreciation, the cash flow will improve.  All my investments have market rent to purchase price in excess of 1%.  Virtually none of them had this ratio at the time of purchase, they have achieved this ratio due to rent appreciation.

      Good luck

      0Reply
  • Dan Portka
    Real Estate Agent · San Pedro, CA · Member since 2019 · 253 posts · 128 votes
    5y

    @Alex K. garage conversions are a great way to boost your returns. but why not consider a duplex and use the same strategy? now all of a sudden you have a 3rd unit that can bring in cash every month while spending maybe 100-200k more on the purchase price. low down options still exist for duplexes too, there's even a FHA product that allows you to finance the adu construction all in one loan.

    I have some out of state rentals that i've bought using the BRRRR strategy. dont have experience with STRs OOS, but i'd imagine you'd have to find a really good property manager - its difficult enough finding a PM you can trust and do a good job for LTRs, can't imagine finding one for STRs.

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