Undecided Exit Strategy from a REO property

4 Replies

Hi guys,

I am planning to buy a REO foreclosure property on a resort-like location. The apartment is a 1b/1b that needs total restoration, estimated in around 25k. One thing that will affect my cash flow are the Home Owner Association (HOAs) fees. Yes, it has 2 HOA fees, one monthly fee for the neighborhood and a quarterly fee for the whole complex. This is one neighborhood with multiple neighborhoods around it.

Current options that I am thinking about:

  • Vacation Rental (higher profit / higher vacancy rate) – calculate that with 2 weekends rentals I can paid all the monthly expenses. The more reservations, the better the profits. In addition, I can use the property for family weekend vacations or second home since I like the area.
  • Montly Rent (lower profit / lower vacancy rate) – Cash flow around $150 monthly.
  • Flip (one time profit / waiting time for the resale) – Comp Sales are around 200k, and I planning to buy it for 100k plus the rehab expense.

My plan for now is to set this property as a vacation rental and use homeaway.com to manage the reservations. After the rehab is completed, I will like to refinance the property and take the profits from the equity. Then use the equity profits as a down payment to buy another property that will offset the loss/profits of this property. Then I will have 2 properties. A good way to start my Real Estate Investing path. I think…

I will like to hear about your feedback in regards. Any strategies, suggestions and/or options that I can use in this business will be gladly appreciated.

Sincerely.

Island Newbie

P.S. - This is my first post so sorry for my writing...

Hi @Anthony Benjamin , congrats on your first post! 

I'm a big fan of vacation rentals.  We currently have one in Kihei, Maui (and possibly two soon!) and our condo brings in more than double the amount in vacation rental income than we would if it were a long term rental.  Granted, there is no real low season there, so we have a great occupancy rate.  

As you mentioned above, expenses are much more w/ a vacation rental than a long term rental. You will need to buy linens each year, replace damaged items like cookware, shower curtains, pillows, and occasionally big ticket items like couches and mattresses. And don't forget to add property management and housekeeping. 

As for being able to use the property yourself, be careful of the tax implications.  Now I'm no tax professional, but as far as I understand, for the property to be classified as an investment property, owners can only use the property 14 days or 10% of the total amount of days rented.  Owner use also includes days that you rent out your place for less than market rent value.  So if you let a relative use it for free or cheap, that counts against your personal use days.  Use too many of these days and your property is considered a second home and there goes thousands of dollars in tax breaks you can take advantage of.

As for a flip, I'm assuming this is a condo, so make sure you check out the average days on market for that area. It seems most places, even in Maui, condos take longer to sell, so make sure to figure in those possible holding costs and this is where the HOA fees can hurt ya!

Anyways, I think it really depends on your goals, your experience and the market where the property is located.  One thing you can do is to make sure which ever route you go, that you can have a backup strategy.  For example, if you decide to flip, make sure in case you can't flip it that you can and are prepared to rent it out. 

Thanks @Jeremy Baker for the information.  It is really helpful and I wasn't considering the additional expenses like mattress, linens and other stuff.  Regarding taxes, soon I will have a meeting with my accounting and I will ask her about the taxes implications of this opportunity.  Appreciate your feedback.

Hmm yes Puerto Rico, I like the food, music, and people. Nice find and Good Luck. 

The flip numbers look good. I don't know much about vacation rentals but I'd take the 75k over 150/month.

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