Buying a high end property as short term vacation rental

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Buying a high end property as short term vacation rental

Mike L.
Midlothian, VA · Member since 2016 · 4 posts · 0 votes

Hello,

I would like to move money from the stock market to real estate. I have $140,000 to invest in Savannah, Georgia. My initial plan was to build a portfolio of 4-5 single family rental properties; adding a new property once per quarter. These would be homes valued between $100,000-130,000.

Savannah's historic district is a phenomenal area for short term vacation rentals like Airbnb. Duplexes in this area are currently listed for sale at $400,000 and up. This area averages 80% annual occupancy on Airbnb with an average nightly rate between $150-200. Monthly gross on a duplex would be around $7200 using the lower nightly rate.

I decided to kick this can a little further down the road by getting pre-approved for a conventional loan through Quicken Loans. I'm pre-approved for a $540,000 loan with 25% down. I expect interest rates to be around 4% so I can avoid the ridiculous amount of points I'm seeing in the Fannie Loan Level Price Adjustment (LLPA) matrix.

A potential deal will probably look like a $500,000 loan on a 2 or 3 family unit with $125,000 of my money down and a 4% interest rate. Each unit gross around $3600/month. Plenty of cash flow after taxes, property manager, cleaning, utilities, and other fees. I would like add similar properties if this one goes well.

There is a bit of intangible benefit for us as well. My wife and I will use the property when we are in Savannah.

Is this a sound strategy? Is it wise to put that much cash into one property?

Best,

Mike

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Victor Menasce
Developer · Ottawa, Ontario · Member since 2014 · 212 posts · 169 votes
10y

I have several high end short term rentals. The key is to understand the laws of supply and demand in each segment of the market. For example, Las Vegas is a great market for high end short term rentals. Visiting entertainers often come with their families and want to rent a house, rather than stay in a hotel. They want to be out of the public eye in a more private space. They're willing to pay top dollar for these type of accommodations.

The question is whether your market has the same dynamic. There are some high traffic markets with lots of supply at the low end. The segment of the market will reach saturation as more properties enter the market. That will eventually kill the higher profit margins for everyone as more and more competition enters the market.

In my opinion, if you can properly identify a small but high value segment, you can provide an alternative product with virtually no competition. Not many people will put a 4000 SF 6 bedroom house into the AirBnB market. But if the demand is there, you'll do extremely well.

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  • Mike L.
    OP
    Midlothian, VA · Member since 2016 · 4 posts · 0 votes
    10y

    Trying my question one more time. Apologies if I've posted in the wrong forum.

    0Reply
  • Tanner Forster
    Investor · Mount Pleasant, SC · Member since 2015 · 11 posts · 0 votes
    10y
    I think your idea makes great business sense. I've thought about doing the same thing and who has a single family Airbnb type rental but lives in Chicago. He and his wife use their property twice a year. His biggest headaches are the sporadic turnover of clients. So having someone come change the sheets and clean every few days can be quite expensive. Also, in his experience good management help has been hard to find when managing from Chicago. However, his place still has decent cash flow and someone else is still paying to mortgage. I live in charleston and have seen the housing prices soar here. I have a feeling that savannah will be growing significantly in the next 10 years. There are major expansions taking place over the next 5 years with the port system and a great food and shopping scene similar to charleston. Also the tourism industry continues to grow there like crazy. I myself am interested in the market as I work there a day or two per week. However, in my driving for dollars experience and talking to my colleagues who actually live in the area, I am still a bit nervous of where to look. Even in the highly desirable tourist areas in the old part of downtown, you meander a block in the wrong direction and you are in a war zone. It seems to me that you will need to be dead certain on your location or you can still get into trouble with such a large investment. For that reason I've considered and have been looking at tybee island just outside of the city as its safer and and still tourist oriented. I'd love to hear what you decide on. Best of luck to you! Please let me know what you wind up doing.
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  • Mike L.
    OP
    Midlothian, VA · Member since 2016 · 4 posts · 0 votes
    10y

    Hi, Tanner. Thanks for the great feedback. You're absolutely correct that good areas and bad areas can be found on either side of the same block. Really helps to know the town. Fortunately, Savannah has strict STVR zoning regs that eliminate some of the guess work when trying to find a property in a decent area. It's a small zone with limited inventory. Good for business, I guess! Do you feel that prices in Charleston are peaking?

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  • Tanner Forster
    Investor · Mount Pleasant, SC · Member since 2015 · 11 posts · 0 votes
    10y
    That's good to hear, Mike. I wish you the best with it and will be very interested to hear what you end up acquiring. As for charleston, I think the cycle is nearing the peak so I'm being pretty cautious. But, it seems there are always opportunities if you keep looking and know your market. Good luck and please keep us in the loop.
    0Reply
  • Jordan Archer
    Rental Property Investor · Stuart, FL · Member since 2014 · 280 posts · 68 votes
    10y

    @Mike L.

    Consider the return on investment, and the return on labor.

    If you can't get quite the return on investment, but you are saving yourself a ton of time by only managing one complex, that strategy may make more sense. 

    0Reply
  • Victor Menasce
    Developer · Ottawa, Ontario · Member since 2014 · 212 posts · 169 votes
    10y

    I have several high end short term rentals. The key is to understand the laws of supply and demand in each segment of the market. For example, Las Vegas is a great market for high end short term rentals. Visiting entertainers often come with their families and want to rent a house, rather than stay in a hotel. They want to be out of the public eye in a more private space. They're willing to pay top dollar for these type of accommodations.

    The question is whether your market has the same dynamic. There are some high traffic markets with lots of supply at the low end. The segment of the market will reach saturation as more properties enter the market. That will eventually kill the higher profit margins for everyone as more and more competition enters the market.

    In my opinion, if you can properly identify a small but high value segment, you can provide an alternative product with virtually no competition. Not many people will put a 4000 SF 6 bedroom house into the AirBnB market. But if the demand is there, you'll do extremely well.

    1Reply
  • John P.
    Investor · Vacaville, CA · Member since 2016 · 433 posts · 249 votes
    10y

    To me that's a lot of eggs in one basket. It's a lot of money in one property. Not sure of the percentage of all your assets but if it's a high percentage of them I would not be in favor of it.  All vacation property scares me as a recession can quickly change the income stream. Also, AirBB scare me as the hotel industry continues to fight it. I would be more inclined to do a few single family homes myself.

    0Reply
  • Raj Vachani
    Investor · San Jose, CA · Member since 2016 · 34 posts · 64 votes
    10y

    If you take a look at VRBO.com you can get a very good understanding of occupancy rates.  After looking at a view properties on VRBO, i think you are way overestimating your occupancy rate.  There are VERY few places in the word that fetch 80% occupancy rates.  Also occupancy rates differ tremendously just between units in a same building so make sure you dive deep into the research when trying to figure out which units will rent well. 

    0Reply
  • Brian J Peterson
    North Riverside, IL · Member since 2015 · 77 posts · 21 votes
    10y

    @Mike L. 

    Please read this article, it relates to the Chicago BnB Market and the proposed tax increase for business owners.. Now days some counties/states are trying to reclassify that type of business from residential to commercial property status, thus taxing it as a "commercial business" and that could double or triple business owners tax liabilities!! 

    "Chicago bed-and-breakfast owner Kapra Fleming was baffled and shocked when she heard the news: Her taxes and costs to do business could double or even triple before the year's end."

    I'm not sure how things are in your specific market, but I would most definitely check on if/when that may be happening in your area, or maybe it already has and you haven't heard much yet..

    Best of Luck 

    0Reply
  • Kevin Coleman
    Investor · Chicago, IL · Member since 2014 · 143 posts · 37 votes
    10y

    I would not recommend buying a property where the numbers only work if it is operated as a vacation rental.  Laws can change quickly and that is happening where here in Chicago where I am located.  Make sure you have 2 or 3 different exit strategies in case the first plan doesn't work out.

    0Reply
  • Mike L.
    OP
    Midlothian, VA · Member since 2016 · 4 posts · 0 votes
    10y

    Great feedback everyone. Nationwide, it seems the trend is towards more and more regulations making STVR investments more difficult. Savannah passed very specific STVR regulations in 2014. The area must already be zoned for an inn or traditional B&B. This creates a very small area for legal STVR. Low competition but also low inventory to invest in. Owners must apply for a business license and pay hotel tax in addition to state use. I see the clear and specific regulations as an advantage in our market. Takes a bit of the guess work and risk out of it.

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  • Jason Blondin
    Investor · Pooler, GA · Member since 2014 · 27 posts · 7 votes
    10y

    Hi Mike,  As someone who lives in the savannah suburbs I would be wary of projecting long term income on vacation property in savannah.  Easy comes, easy goes.  The city council has enacted a lot of interesting things that regulate the little guy recently.  One example is in order to be a tour guide you must be licensed, and pass a test on savannah?  Once the hotels in the area start to feel the vrbo pinch if demand goes down you will be in danger for sure.  

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