500k better to buy one STR cash or multiple with financing?
Milwaukee, WI · Member since 2020 · 13 posts · 1 vote
Hello! My friends/investors and I are looking to invest into some STR properties out of state. (Currently I live in Wisconsin) I own my own home and a condo that I rent out yearly in Milwaukee but want to expand into some better markets with some STR properties. My question is, if one had 500k cash would you recommend purchasing one property cash or multiple properties financed? Why and why not?
I like the idea of owning one outright for risk purposes but am open to opinions (hence the post)
Thinking Palm Springs area. If there are other extremely healthy STR markets please fill me in as I am not paying $500 a month for Airdna services ...
Leverage is a tool. You should use it to the extent that it helps you achieve your goals, but never to the extent that it puts your goals at risk. Ask yourself specific questions to find the right answer.
* What equity and cash flows do you expect to gain if you pay cash?
* How much would your cash flow and equity gains/losses be affected if you bought two houses financed at 50% LTV?
* What about 5 houses financed at 80% LTV?
* How else can you mitigate risk? Should you leverage 2-3 houses and maintain a large cash position?
Imagine some scenarios and compare the different ways to buy. I'll go through some here, where all the homes are 250k, they rent for 2500 with pro forma monthly costs of $1350 with no mortgage, and $2370 with a 200k mortgage and $1960 with a 125k mortgage.
ways to buy
1) cash - Pay 250k cash for a single home.
2) high leverage -Pay 50k and borrow 200k each for five homes.
3) slight leverage - Pay 125k and borrow 125k for two homes.
4) hedge your high leverage purchase with a cash position - Pay 50k and borrow 200k for 3 homes. Keep 100k in reserve.
Initial scenario
1) cash buyer has 250k equity, $1150 monthly cash flow, and no debt.
2) The highly leveraged buyer has 250k equity, $650 per month cash flow, and 1m debt.
3) The slightly leveraged buyer has 250k equity, $1080 monthly cash flow, and 250k debt.
4) The cash position buyer has 150k equity, $390 monthly cash flow, 600k debt, and 100k cash.
Notice that for the slightly leveraged buyer there is not a tremendous cash flow difference from the cash buyer.
In a good market, let's say after 5 years, home value has gone up 20% and rent has gone up 10%.
1) The cash buyer has 300k equity, $1400 monthly cash flow, and no debt.
2) The highly leveraged buyer has 590k equity, $1650 monthly cash flow, and 910k debt.
3) The slightly leveraged buyer has 375k equity, $1580 monthly cash flow, and 225k debt.
4) The cash position buyer has 360k equity, $990 monthly cash flow, and $540k debt, and 100k cash.
The leveraged buyers (including the cash position) are all far wealthier, even after only 5 years, and two of them already surpassed the cash buyer's cash flow. If the cash buyer were to refinance and pay off 90k of his debt, he would also have higher cash flow than the cash buyer.
But how about In a major crash? Let's say after 5 years home value has gone down 40% rents drop by 10%. With home values depressed, the guy who kept a cash position can purchase 3 homes that will cash flow $320 per month each.
1) cash buyer - 150k equity, $900 monthly cash flow, and no debt.
2) high leverage - no equity (underwater 160k), Losing $600 per month. 910k debt.
3) slight leverage - 110k equity, $580 cash flow per month, 225k debt.
4) cash position - has no equity (but not underwater), $600 cash flow, 900k debt, and 10k cash.
In this down scenario, the cash buyer is temporarily the best, but both the slight leverage and cash position scenarios are in great shape. As the market turns back up the cash buyer will be envious of their positions.
So look at the high leverage strategy, and ask yourself - how would I survive this scenario? If you can not give a sensible answer then that's too much leverage for you. Consider a less leveraged position or keeping a cash reserve as a contingency.
@Chris Elkendier
The better question is what are your goals?
Hey Chris,
It depends on your risk tolerance and liquidity needs. If you want a relatively safe place to park your cash and get a constant income stream then buy one property for cash.
That being said, leverage is one of the best tools to grow your wealth quickly. If you have a higher risk tolerance then I would suggest buying as much property as the bank will finance. 500k at 20% down means you could afford up to $2,500,000 of property. This could mean a decent core+ 32 unit apartment complex, or a really nice STR on the beach in Florida that you can rent for a couple grand a night. In my practice I've always found there's safety in numbers and economies of scale with volume so I'd personally pursue a large complex focusing on cash flow and let the property pay down the debt.
@Chris Gantz thanks for the feedback. I don't know too much about the apartment complex game. I was thinking multiple STR units but I am sure it isn't too different.
I like the idea of safety and a consistent revenue stream however the regulations can change and then you are stuck in one property that you need to sell. Technically not a major issue if you own it outright but still annoying and can affect resale value.
@Justin Woodworth to have a secondary income and an appreciating asset while also having a vacation home. Honestly I don't think I would use it much as a vacation home. Lastly as diversification to my portfolio. I will have to have it managed by a PM company as my primary job in Wisconsin is demanding.
@Chris Elkendier
Your investors (aka future partners) and you need to sit down and figure out your goals and what you want the business to achieve for you. Is it to provide some side cash or replace your full time job down the road? Once you have some of that business plan figured out you will be in a better position to determine if you do one purchase or several purchases.
Investing out of state can be tricky. Once you have a city you want to invest in I believe it is critical to have someone their that is reliable. This affords you the ability to know what part of the city to buy in, what rents are going for, and what PM companies carry a good reputation, etc.
It doesn't sound like to want to be making lots of flights per year to your REI property.
Leverage is a tool. You should use it to the extent that it helps you achieve your goals, but never to the extent that it puts your goals at risk. Ask yourself specific questions to find the right answer.
* What equity and cash flows do you expect to gain if you pay cash?
* How much would your cash flow and equity gains/losses be affected if you bought two houses financed at 50% LTV?
* What about 5 houses financed at 80% LTV?
* How else can you mitigate risk? Should you leverage 2-3 houses and maintain a large cash position?
Imagine some scenarios and compare the different ways to buy. I'll go through some here, where all the homes are 250k, they rent for 2500 with pro forma monthly costs of $1350 with no mortgage, and $2370 with a 200k mortgage and $1960 with a 125k mortgage.
ways to buy
1) cash - Pay 250k cash for a single home.
2) high leverage -Pay 50k and borrow 200k each for five homes.
3) slight leverage - Pay 125k and borrow 125k for two homes.
4) hedge your high leverage purchase with a cash position - Pay 50k and borrow 200k for 3 homes. Keep 100k in reserve.
Initial scenario
1) cash buyer has 250k equity, $1150 monthly cash flow, and no debt.
2) The highly leveraged buyer has 250k equity, $650 per month cash flow, and 1m debt.
3) The slightly leveraged buyer has 250k equity, $1080 monthly cash flow, and 250k debt.
4) The cash position buyer has 150k equity, $390 monthly cash flow, 600k debt, and 100k cash.
Notice that for the slightly leveraged buyer there is not a tremendous cash flow difference from the cash buyer.
In a good market, let's say after 5 years, home value has gone up 20% and rent has gone up 10%.
1) The cash buyer has 300k equity, $1400 monthly cash flow, and no debt.
2) The highly leveraged buyer has 590k equity, $1650 monthly cash flow, and 910k debt.
3) The slightly leveraged buyer has 375k equity, $1580 monthly cash flow, and 225k debt.
4) The cash position buyer has 360k equity, $990 monthly cash flow, and $540k debt, and 100k cash.
The leveraged buyers (including the cash position) are all far wealthier, even after only 5 years, and two of them already surpassed the cash buyer's cash flow. If the cash buyer were to refinance and pay off 90k of his debt, he would also have higher cash flow than the cash buyer.
But how about In a major crash? Let's say after 5 years home value has gone down 40% rents drop by 10%. With home values depressed, the guy who kept a cash position can purchase 3 homes that will cash flow $320 per month each.
1) cash buyer - 150k equity, $900 monthly cash flow, and no debt.
2) high leverage - no equity (underwater 160k), Losing $600 per month. 910k debt.
3) slight leverage - 110k equity, $580 cash flow per month, 225k debt.
4) cash position - has no equity (but not underwater), $600 cash flow, 900k debt, and 10k cash.
In this down scenario, the cash buyer is temporarily the best, but both the slight leverage and cash position scenarios are in great shape. As the market turns back up the cash buyer will be envious of their positions.
So look at the high leverage strategy, and ask yourself - how would I survive this scenario? If you can not give a sensible answer then that's too much leverage for you. Consider a less leveraged position or keeping a cash reserve as a contingency.
Financed for sure with a healthy equity position. I just closed on a commercial loan last week at 4.5% over 7 years on a property we own outright. Why would I leave a huge amount of cash tied up to save 4.5% if it can make 20% or more invested?
I don't see a risk with healthy leverage. Always buy desireable properties, re-invest into improvements and keep the properties in above average condition, you'll never have to worry about vacancies.
Sidenote: personally I favor LTR over STR. People like going on vacation (when the ecomomy is good), but they have to live somewhere, regardless of economy.
Leverage is a tool. You should use it to the extent that it helps you achieve your goals, but never to the extent that it puts your goals at risk. Ask yourself specific questions to find the right answer.
* What equity and cash flows do you expect to gain if you pay cash?
* How much would your cash flow and equity gains/losses be affected if you bought two houses financed at 50% LTV?
* What about 5 houses financed at 80% LTV?
* How else can you mitigate risk? Should you leverage 2-3 houses and maintain a large cash position?
Imagine some scenarios and compare the different ways to buy. I'll go through some here, where all the homes are 250k, they rent for 2500 with pro forma monthly costs of $1350 with no mortgage, and $2370 with a 200k mortgage and $1960 with a 125k mortgage.
ways to buy
1) cash - Pay 250k cash for a single home.
2) high leverage -Pay 50k and borrow 200k each for five homes.
3) slight leverage - Pay 125k and borrow 125k for two homes.
4) hedge your high leverage purchase with a cash position - Pay 50k and borrow 200k for 3 homes. Keep 100k in reserve.
Initial scenario
1) cash buyer has 250k equity, $1150 monthly cash flow, and no debt.
2) The highly leveraged buyer has 250k equity, $650 per month cash flow, and 1m debt.
3) The slightly leveraged buyer has 250k equity, $1080 monthly cash flow, and 250k debt.
4) The cash position buyer has 150k equity, $390 monthly cash flow, 600k debt, and 100k cash.
Notice that for the slightly leveraged buyer there is not a tremendous cash flow difference from the cash buyer.
In a good market, let's say after 5 years, home value has gone up 20% and rent has gone up 10%.
1) The cash buyer has 300k equity, $1400 monthly cash flow, and no debt.
2) The highly leveraged buyer has 590k equity, $1650 monthly cash flow, and 910k debt.
3) The slightly leveraged buyer has 375k equity, $1580 monthly cash flow, and 225k debt.
4) The cash position buyer has 360k equity, $990 monthly cash flow, and $540k debt, and 100k cash.
The leveraged buyers (including the cash position) are all far wealthier, even after only 5 years, and two of them already surpassed the cash buyer's cash flow. If the cash buyer were to refinance and pay off 90k of his debt, he would also have higher cash flow than the cash buyer.
But how about In a major crash? Let's say after 5 years home value has gone down 40% rents drop by 10%. With home values depressed, the guy who kept a cash position can purchase 3 homes that will cash flow $320 per month each.
1) cash buyer - 150k equity, $900 monthly cash flow, and no debt.
2) high leverage - no equity (underwater 160k), Losing $600 per month. 910k debt.
3) slight leverage - 110k equity, $580 cash flow per month, 225k debt.
4) cash position - has no equity (but not underwater), $600 cash flow, 900k debt, and 10k cash.
In this down scenario, the cash buyer is temporarily the best, but both the slight leverage and cash position scenarios are in great shape. As the market turns back up the cash buyer will be envious of their positions.
So look at the high leverage strategy, and ask yourself - how would I survive this scenario? If you can not give a sensible answer then that's too much leverage for you. Consider a less leveraged position or keeping a cash reserve as a contingency.
Kody,
Thanks for this short master class for me. This is exactly what I was trying to put down on paper but couldn't quite figure it out.. I had all the numbers but breaking it down into these scenarios really cleans it up for someone like myself. I appreciate you taking the time to throw this together.
I would be more inclined to do the Cash or Slight Leverage scenario as my risk would be about the lowest. I don't want to carry too much debt even with Cash in the bank like in scenario 4. I think the slight leverage option may be best for someone like myself since these would be my first STR units. I have an LTR now with about 40% equity in Milwaukee and I feel comfortable with that unit.
-Chris
Why would you not pay $500 to help inform your decision? That's .1% of the amount you are looking to invest. No reason to keep the service for more then a month.
That is true, not saying I don't want to use it. It is just a big number to shell out for a software you will use for 1 month. Being in IT paying $500 for a monthly subscription is against my religion. I also won't pay $500 for a bottle of bourbon. So as you can see, stubbornness plays a huge role. I likely would bite the bullet as I do see the value. Have you used it? I used Mashvisor and was not impressed as I believe all of their data is projections. I want to know if AIRdna is factual.
Financed for sure with a healthy equity position. I just closed on a commercial loan last week at 4.5% over 7 years on a property we own outright. Why would I leave a huge amount of cash tied up to save 4.5% if it can make 20% or more invested?
I don't see a risk with healthy leverage. Always buy desireable properties, re-invest into improvements and keep the properties in above average condition, you'll never have to worry about vacancies.
Sidenote: personally I favor LTR over STR. People like going on vacation (when the ecomomy is good), but they have to live somewhere, regardless of economy.
Marcus, this makes sense. I have an LTR in Milwaukee and I have been lucky enough never to have to even get a phone call from my tenants in 26 months but I know that I won't always be that lucky. The idea of an STR attracted me as I could do it somewhere with good weather, I am sure living in MKE you know that it is not a great market for STR properties. I know I will be losing 20%+ in PM but I have come to terms with that. I just don't know enough about multi-tenant or the commercial real estate business to take the leap.
Multiple properties. As long as they are decent properties and cash flow nicely, your Cash on Cash return will be much better. You'll gain appreciation on multiple properties instead of just one, and if you want to sell one off in the future, your able to still have cash flow from the other properties.
@Chris Elkendier It is better to buy with some leverage and scale up with more units.
@Kody Crouch love the breaking down. We need to connect
@Chris Elkendier
Good answers here already. Pointing out the obvious but yes you generally realize the best returns in real estate when using leverage (debt) esp when your tenants are paying off the debt for you.
I have been a full time STR investor and property manager for 6 years now. Here are my observations:
- I operate in SF Bay Area and Sedona AZ
- in both markets the amount of STR units has exploded which has brought down the overall rates and created some more vacancy in slower periods
- More and more regulation is happening every year. Most voters (with the help of hotel lobby) will choose to restrict STR rentals especially if it's not your primary residence. You mentioned Palm Springs. Non- resident vacation rental permits are no longer being accepted for vacation rentals there.
- STRs are much more management intensive than LTRs. Can be more fun too, but much more work for sure
- Once you factor in all expenses on an STR (utils, consumables like towels and linens, extra cleanings) it's not always more profitable than an LTR. You'll want to make sure that the STR has a large profit margin over an LTR esp if you have a property manager you are paying.
Good luck!
@Chris Elkendier
Good answers here already. Pointing out the obvious but yes you generally realize the best returns in real estate when using leverage (debt) esp when your tenants are paying off the debt for you.
I have been a full time STR investor and property manager for 6 years now. Here are my observations:
- I operate in SF Bay Area and Sedona AZ
- in both markets the amount of STR units has exploded which has brought down the overall rates and created some more vacancy in slower periods
- More and more regulation is happening every year. Most voters (with the help of hotel lobby) will choose to restrict STR rentals especially if it's not your primary residence. You mentioned Palm Springs. Non- resident vacation rental permits are no longer being accepted for vacation rentals there.
- STRs are much more management intensive than LTRs. Can be more fun too, but much more work for sure
- Once you factor in all expenses on an STR (utils, consumables like towels and linens, extra cleanings) it's not always more profitable than an LTR. You'll want to make sure that the STR has a large profit margin over an LTR esp if you have a property manager you are paying.
Good luck!
Carlos,
Thanks for the feedback, it is much appreciated. Where did you see that they are denying STR permits for non-residents? I didn't see that. I thought there was a max of 1 per person to limit investors buying up everything. Let me know, I am very interested in that info.
Thanks,
Chris
This is from the city government website of palm springs. I think you are right you can have one permit:
This is from the city government website of palm springs. I think you are right you can have one permit:
Thanks, that is the first time anyone has ever told me I was right. I am getting married soon so I am pretty used to being wrong, it feels good to be on the other side for once. You scared me there for a second.
Buy multiple! Especially with how low rates are right now. Your long term return will be much greater by purchasing multiple deals with your equity, as long as you buy right. Don't have much experience with short term rentals but seems to be reliant on the service provider.
@Chris Elkendier I'd leverage while lending is affordable. I see OOS investors target OKC for a stability and cash flow perspective. You could guy a few 100k rentals and cash flow every month. In a downturn, because we hold value so well even during economic distress you might be able to pull cash out to pursue deals when it might be harder to play with equity in other markets at that time.
Financed for sure with a healthy equity position. I just closed on a commercial loan last week at 4.5% over 7 years on a property we own outright. Why would I leave a huge amount of cash tied up to save 4.5% if it can make 20% or more invested?
I don't see a risk with healthy leverage. Always buy desireable properties, re-invest into improvements and keep the properties in above average condition, you'll never have to worry about vacancies.
Sidenote: personally I favor LTR over STR. People like going on vacation (when the ecomomy is good), but they have to live somewhere, regardless of economy.
Marcus, this makes sense. I have an LTR in Milwaukee and I have been lucky enough never to have to even get a phone call from my tenants in 26 months but I know that I won't always be that lucky. The idea of an STR attracted me as I could do it somewhere with good weather, I am sure living in MKE you know that it is not a great market for STR properties. I know I will be losing 20%+ in PM but I have come to terms with that. I just don't know enough about multi-tenant or the commercial real estate business to take the leap.
AirBnB grew in Milwaukee some 700% last year - not sure what's driving that, certainly not the long winter lol - but if STR is your thing, I'd investigate that some more. My main concern with scaling STR would be its dependence on the economy and conumer confidence. I remember parking lot E at O'Hare completly empty in 2010 and I was one of the few individuals left in my company who still were allowed to fly... everyone else had to skype and safe money.
You don't have to go into multi family if you don't want to. I have built my portfolio with the gola of ultra low management and therefore they are all single family homes. This was driven by my corporate job at the time - lots of international travel and little to no ability to take care of a tenent needs. I had to find a way to scale without constant property and tenant engagement. Needless to say, ten years later I am happy I did.
@Chris Elkendier also local in Milwaukee and have very similar scenario. Have invested in several ORLANDO properties to date but continue to explore options. This is a great thread / thanks for posting your question.
Hi Chris.
Most people would tell you to diversify with multiple investments, because diversifying sounds good, right? Well, bottom line is, the wealthy do not worry about diversifying- they simply pick the best cash flow/return option and do that. So get to it ;)
The other part- finance or use cash?- Always finance as much as possible with the best possible terms, and still require conservative and positive cash flow. When the timing is ideal to 1031 exchange into another opportunity, hit it. At least that is my strategy. Then again, to each their own.