Should I buy this as my 1st investment property?

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Should I buy this as my 1st investment property?

Cameron Calvert
Rental Property Investor · Asheville, NC · Member since 2019 · 17 posts · 15 votes

I'm currently renting for around $1000/month and am looking to get into investment properties. I'm currently in talks with a seller who has a 4 unit (2 duplexes) for sale that is being used as a vacation rental banking $98k/year in revenue between the 4 units. The asking price is $610k. My plan initially would be to live in one of the units while managing the other 3 vacation rental units. I would be using an FHA loan so I would only put down 3.5% plus closing costs.

I would manage the property and take care of landscaping that first year while living there and should cashflow at least $5-10k while living for free. After I moved out, I would be getting revenue from 4 rentals instead of 3 and would continue managing the property and doing landscaping. In that scenario I would be cashflowing $27k-$32k per year. The place is well taken care of, has been remodeled, and comes with high quality furnishing. It's considered a "turnkey" property aka would be ready to earn me money without having to do anything to it. I live in a booming market where tourism is big and retirees are moving to in droves.

The cap rate renting all 4 units is around 11% and is 7% when I'm living in one of the units. I would have my cash back within 2 years. I've calculated all my expenses and have even been conservative with my numbers. I'm pre-qualified to buy and I wouldn't pay the full asking price.

My question to you is this. Is this too big of a leap for my first purchase? Are the numbers too good to be true? Will I struggle to run successful vacation rental cottages out of the gate?

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Lauren B.
Asheville, NC · Member since 2017 · 170 posts · 242 votes
6y

is 98k gross revenue? It almost certainly is gross not net and it sounds like he's selling a business not just real estate. You need to know why the deal has fallen though 3 times. I strongly suspect this is priced as a business and not real estate, meaning it won't appraise for an FHA loan. That's what I see as your biggest hurdle. Do you have a realtor?

Something else to consider. If the Airbnb algorithm changes and you can’t Airbnb as successfully as it was previously (over $100/night per unit at 66% occupancy) can you make the mortgage? Can you sell it as real estate without the business or will you lose money on this deal?


as a previous person posted... lots of savvy investors here. If it’s on the market and others have passed, you should find out why. 

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  • Damian Bialonczyk
    Investor · Marlborough, MA · Member since 2017 · 150 posts · 74 votes
    6y

    @Cameron Calvert

    Sounds like a good investment, but difficult to tell based on the details provided. Since you'd mentioned landscaping I assume you've taken all expenses into account (e.g. water/sewer, repairs, etc...)? What are the current rents on for each unit?

    Is it technically two separate properties/duplexes? If so you I anticipate you'll have a difficult time obtaining an FHA loan for both properties.

    0Reply
  • Cameron Calvert
    OP
    Rental Property Investor · Asheville, NC · Member since 2019 · 17 posts · 15 votes
    6y

    @Damian Bialonczyk

    Yes I’ve taken all expenses into account, which the seller provided to me. I don’t know the rental breakdown or occupancy rates between the units. The numbers check out for me but I guess I’m just more concerned with jumping into this big of an investment as my first go around.

    And yes getting the FHA loan will be possible. The tricky part will be getting an appraisal that matches my offer due to the uniqueness of the property.

    0Reply
  • Morgan Klein
    Rental Property Investor · Jefferson, GA · Member since 2017 · 95 posts · 145 votes
    6y

    You’re really the only one that can say if the investment is too big for you. If leveraging that amount of money is going to stress you out and keep you up an night, don’t do it. But if you’re confident in your numbers (you better be confident in your numbers) then I wouldn’t have any hesitation. Bigger is better.  


    That said, from 32,000 feet, I’d have a lot of questions. 1) Asheville is definitely not a secret, the boom started many years ago. Real Estate is through the roof. 2) There are a lot of wealthy and savvy investors in Asheville. Those numbers look pretty good, so why isn’t anybody else jumping on this deal? 3) Why is the seller getting out? 4) Asheville may be the Air BnB capital of the southeast. I just glanced at next weekend and there are 300+ rentals on Air BnB, in FEBRUARY.  What’s the competition going to look like come spring? 5) What, if any, ordinances are being considered (or have passed) regulating STRs? 6) Looking at $73,500 in rents/annually (taking into consideration you’ll be living in one unit) and a 60% occupancy, that’s $112/per night, at the tip-top of the range for the nicest Air BnBs in Asheville. Does this property command that type of rate?

    3Reply
  • Bryce CutlerPro Member
    Investor · Wynantskill, NY · Member since 2013 · 180 posts · 77 votes
    6y

    @Cameron Calvert was the property used as a short term rental and are there regulations/restrictions in place in Asheville that you will need to live by. Really important to know these up front.

    1Reply
  • Cameron Calvert
    OP
    Rental Property Investor · Asheville, NC · Member since 2019 · 17 posts · 15 votes
    6y

    @Bryce Cutler Yes, it's been used as an Airbnb/VRBO since 2016 at least. There are restrictions on short term rentals within Asheville city limits. This property is under county jurisdiction south of Asheville and there doesn't seem to be any restrictions coming, although that would be something I would have to make sure of during Due Diligence period.

    @Morgan Klein Thanks for the honest feedback. You've voiced some of the same questions that I have.  1) You're right. This location is in South Asheville and is an area that is on the come up as the area between Asheville and Hendersonville populate. 2) This is a valid concern of mine too. This property has been under contract 3 times and has fallen through for various reasons. 3) The seller now lives 6 hours away and is burnt out on running this property from afar. 

    4/5) The only response I have for this is that this property has historically earned $98k/year on short terms. There are also restrictions on running an airbnb within the city (which this property is not). Although there are talks that this may be lifted. A study just showed that Asheville is the 6th biggest airbnb market in the US too. 6) Another good point...That aspect does seem like a lofty goal. This place has gotten excellent reviews on Airbnb/VRBO and has been charging near that rate. Although the different units rent for slightly different rates. 

    Thank you for taking the time to bring these up to me. It's been super helpful.

    2Reply
  • Lauren B.
    Asheville, NC · Member since 2017 · 170 posts · 242 votes
    6y

    is 98k gross revenue? It almost certainly is gross not net and it sounds like he's selling a business not just real estate. You need to know why the deal has fallen though 3 times. I strongly suspect this is priced as a business and not real estate, meaning it won't appraise for an FHA loan. That's what I see as your biggest hurdle. Do you have a realtor?

    Something else to consider. If the Airbnb algorithm changes and you can’t Airbnb as successfully as it was previously (over $100/night per unit at 66% occupancy) can you make the mortgage? Can you sell it as real estate without the business or will you lose money on this deal?


    as a previous person posted... lots of savvy investors here. If it’s on the market and others have passed, you should find out why. 

    3Reply
  • Jeff Ronningen
    Investor · Cincinnati, OH · Member since 2015 · 242 posts · 182 votes
    6y

    @Cameron Calvert. Full disclosure....I’m not an expert in AirBnB and vacation rentals.

    The numbers look pretty good. Have you developed a complete understanding of the time and effort required to manage your turns? Have you considered the impact of an economic downturn on vacation rentals, especially since you’ll be highly leveraged?

    If you do it, aggressively build up cash reserves and pay down principal. Also do the math if you convert from vacation rental to long term primary residence rental.

    0Reply
  • Cameron Calvert
    OP
    Rental Property Investor · Asheville, NC · Member since 2019 · 17 posts · 15 votes
    6y

    @Lauren B. yes, it's 98K gross revenue. The deal has fallen through for the following reasons 1)two business partners weren't totally in agreement and decided to go with cabins as their investments 2) a couple backed out after learning of the expansion of I26 and they decided to move somewhere else after finding out about Asheville's growth. 3) a couple couldn't get financing. 

    I have a realtor and he agrees with you in that getting an accurate appraisal will be the biggest hiccup since there are not good comps. If I lost the ability to airbnb, I don't think I would be able to pay the mortgage with long term rentals. That's interesting that you bring up that it is being sold as a business because the property is not worth that without the rental income. 

    @Jeff Ronningen Why would I pay down principle with my cash reserves if I'm preparing for an economic downturn? That's good advice to calculate the numbers based off long term rentals as a Plan B. 

    0Reply
  • Jon A.
    Asheville, NC · Member since 2017 · 385 posts · 274 votes
    6y

    Even though rents in Asheville are high, I think you will find that most asking prices do not support rent rates for long term tenants. If you are going with an FHA loan with that low of a down payment, wouldn't mortgage insurance be required? And have you factored that into your numbers? I think I-26 is a big concern and they won't stop working on it anytime soon. That being said, if you like the property and think it is doable, just make an offer that works for you, not the seller. Have you considered partnering up with the existing owner if that owner is having a problem managing it from such a long distance and that is the only reason the are selling?

    1Reply
  • Jeff Ronningen
    Investor · Cincinnati, OH · Member since 2015 · 242 posts · 182 votes
    6y

    I said aggressively build up cash reserves AND pay down principal. Like get to $10K or even $20K cash reserves and 80% LTV on shortest timeline possible. Ideally have 3-6 months expenses saved up and liquid. Both help you weather a storm. Cash reserves get you through unplanned repairs and vacancy. Paying down principal gives you freedom to restructure loans or sell. You'll essentially have no equity at closing. FHA requires less than 5% down and allows you to finance closing costs, but it costs 8-10% at closing to sell if you use a realtor. This property seems like an oddball that's difficult to sell, as the current owner is finding out, despite the strength of the Asheville real estate market. I'm conservative and like to prepare for worst case scenario. Everything from there is upside. If you have to pull the rip cord and get out of this property, better to get out taking a loss and having learned a lesson than going through foreclosure.

    0Reply
  • Cameron Calvert
    OP
    Rental Property Investor · Asheville, NC · Member since 2019 · 17 posts · 15 votes
    6y

    @Jeff Ronningen Could you further explain why it costs 8-10% at closing to sell with a realtor? How does using an FHA play into that?

    Are you unable to refinance until you get to 80% LTV?

    0Reply
  • Cameron Calvert
    OP
    Rental Property Investor · Asheville, NC · Member since 2019 · 17 posts · 15 votes
    6y

    @Jon A. I agree that buying at asking price will not cash flow with long term leases. I have factored mortgage insurance into my numbers. I26 is not close enough to affect this property, but there are other roads that could be expanding into it in the next 10-15 years. I hadn't considered partnering with the seller. I feel like they're looking to unload it. 

    1Reply
  • Jeff Ronningen
    Investor · Cincinnati, OH · Member since 2015 · 242 posts · 182 votes
    6y

    When you sell a property your proceeds at closing generally will be 8-10% below the sale price due to 5-6% realtor commission, settling escrow accounts, county deed recording fees, etc.

    At 80% LTV you can get the mortgage insurance payment dropped, you open up the possibility of other non-FHA and non-owner occupied financing, you give yourself a cushion to sell if needed, and you reduce the possibility of being upside down if values pull back. It puts you in a safer spot.

    0Reply
  • Account Closed
    Rental Property Investor · Glens Falls, NY · Member since 2016 · 176 posts · 169 votes
    6y

    Are the properties on the same deed? I don't believe FHA will lend on 2 structures as a primary. I could be wrong but I remember I tried to do something similar and was unable.

    0Reply
  • Cameron Calvert
    OP
    Rental Property Investor · Asheville, NC · Member since 2019 · 17 posts · 15 votes
    6y

    @Account Closed FHA will lend on 2 structures. The tricky part will be getting the property appraised as there are basically no good comps on it.

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  • Account Closed
    Rental Property Investor · Glens Falls, NY · Member since 2016 · 176 posts · 169 votes
    6y
    Originally posted by @Cameron Calvert:

    @Account Closed FHA will lend on 2 structures. The tricky part will be getting the property appraised as there are basically no good comps on it.

    Shouldn't be tricky. The appraiser will use like sq footage 4 unit's in the area. I'd double confirm with your lender- maybe if it's zoned residential it is fine. I don't remember the specifics of my deal as it was years ago, maybe the other structure was zoned commercial. 

    Good luck.   

    1Reply
  • Doniel WinterPro Member
    Asheville NC · Member since 2019 · 52 posts · 41 votes
    6y

    To Lauren B's point, this sounds like it's being priced as a vacation rental business, one in which you'll be doing most of the work. Consider this, brokers that specialize in selling inns and BnB's consider most properties 5 units or smaller a "hobby" - not a real business. You need to be grossing $300k+ for the goodwill value to be considered worth anything. Within the last two years, even established 5 room inns near downtown Asheville, with income histories in the $250,000+ range, have sold for real estate value only. I would take another look @ this.

    Whatever premium above fair market value they're asking may be not be worth anything, at least by established metrics in the hospitality market. To Jeff R's point - $98,000 gross doesn't seem unreasonable, but parse that number a bit. For example, does that include cleaning fees? If it does, that is not income, IMO. Professional AirBnB hosts charge up to 25% for managing STR's in Asheville (excluding expenses) - it's a lot of work. Consider including that expense for yourself or a professional when evaluating the income potential.

    0Reply
  • Cindy Coker
    Rental Property Investor · Asheville, NC · Member since 2016 · 32 posts · 17 votes
    6y

    @Cameron Calvert

    We have had a duplex in N Avl since 2014, that we Fully renovated and rented one side as a 30day furnished rental on vrbo, and the otherside longterm.

    I would also be Very concerned that I26 work may be a detriment to the gross AirBnB rental picture the sellers are putting out there. Would be happy to look at their listings and offer comments, should you have them handy.

    Our’s is going to go longterm on both sides, perhaps by summer. Before we removed furnishings this past Fall, we ended up with a delightful travel nurse who wants to stay a few more months.

    Personally, I would want the margin to house hack it with longterm rent as a viable option, not only be dependent on vacay business to make the deal work. There’s no room for you to retreat, if longterm is not doable. If it IS doable, then vacay guests would be gravy cash flow. This makes me cautious for you...

    1Reply
  • James Carlson
    Real Estate Agent · Colorado | stan.store/JamesCarlson · Member since 2014 · 2k+ posts · 2k+ votes
    6y

    @Cameron Calvert

    Sounds like a great property Whether it's a good house-hacking opportunity for you or too big a bite is really up to you. I have the same questions as everyone else. 

    • How did you find it when no one else did? Are you including all costs (capX, repairs, utilities, cable/internet, etc.)? 
    • Are management costs included in that? Here in Denver and Colorado Springs, an Airbnb management company charges 20% minimum for short-term rentals. (More like 40-50% in the mountain towns like Breckenridge and Keystone.) 
    • And always, always have a plan B. What happens when the STR market floods and you see price compression? What happens when you get tired of scrubbing a toilet every third day and need to start paying that property management fee?

    We've had decent luck ourselves and with our clients transitioning Denver STRs into medium-term rentals when the situation demanded it. So that's always an option. 

    I don't mean to discourage you. Just go into it with open eyes. Good luck!

    2Reply
  • Cameron Calvert
    OP
    Rental Property Investor · Asheville, NC · Member since 2019 · 17 posts · 15 votes
    6y

    All - Thank you for the different perspectives. It really helped me come to a decision on this. If you're interested, I decided to stop negotiations for the following reasons:

    - This was a deal that would get me virtually no equity. Only way I could build equity was to put the cash flow back into the principle, which would restrict me from building my portfolio further.

    -This was too big of a leap to sign up for managing a property this size not knowing if I even liked managing short term rentals. 

    - To the points above, property manager would be 25%, which would not make this deal profitable. And also, the fact that they're selling it at a business price as opposed to the real estate, which does not fly in this market. 

    -Lastly, this deal would not work (at least not well enough) with long term renters, leaving me no fall back plan.

    Thanks again for all of the input. This has been truly educational for me. 


    Also special shoutout to the Asheville people who gave market insight, @Doniel Winter, @Lauren B., @Cindy Coker, @Jon A.

    2Reply
  • Cindy Coker
    Rental Property Investor · Asheville, NC · Member since 2016 · 32 posts · 17 votes
    6y

    @Cameron Calvert - Cool, Cameron! Thanks for updating us on your thinking. Best wishes for the next deal to be a super good plan for you!

    0Reply
  • Jon A.
    Asheville, NC · Member since 2017 · 385 posts · 274 votes
    6y

    Really appreciate the update. Best of luck in your future endeavors!

    0Reply
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