Good Deal? - Property in Austin, TX

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Good Deal? - Property in Austin, TX

M T Naughton
Member since 2019 · 16 posts · 3 votes

Hello,

I hope everyone is well!

I'm in the middle of closing on a fairly large property in a fairly central part of Austin, TX. Since I still have 8 days to make a decision, I thought it would make sense to share the deal with my larger real estate network to see if it really made financial sense.
Here are the details.

Purchase price: 1.238M

Loan: 10% down with a 3.65% interest rate. My downpayment and closing costs will be $138,878

Location: 1.5 miles from Downtown Austin in "A" Neighborhood - House is on the side of a freeway but there is a wall barrier

Sq Ft: 4400

Beds/Baths: 9 beds / 9.5 baths

Kitchen: 1 kitchen - needs to be remodeled

Living room: Non-existent - there is an attic space that could be renovated, I could convert a larger bedroom, or I could create nooks in each room or in the halls

Zoning: Zoned as a duplex but currently a single-family home (not up to code)

Year built: 1981

History: Inspector says the house was "overbuilt" - The structure is very solid with no signs of damage. The home was initially a duplex for a father and his adult daughter - The daughter then turned the home into a Bed and Breakfast - Currently being rented out room by room ($1,000/per room but not all rooms are rented at this time) 

Repairs: Needs a new central AC and heating system - Roof is 14 years old - Kitchen is outdated - common area

Plan: There are a few different options I am exploring. The top runner is to turn it into an airbnb and rent each room out individually. I will create a "tiny home" in the house (with private entry) and I will find a short-term rental property manager to run the operation with my oversight. Note: to run an Airbnb in Austin you have to live in the house. I think that by making improvements on the property I will be able to increase the valuation by ~400k (meeting with an appraiser to discuss tomorrow). The Zestimate for this house says it should be 1.7M but I am getting it for 1.238M.

Detailed cash flow analysis **Notes:1) I ran a few scenarios before landing on renting it out room by room 2) Year one rents are the result of waiting until current tenants' leases run out and I slowly replace moved out tenants with Airbnb guests


Annual numbers aside from cashflow:

Loan paydown20,736
Appreciation36,900
Forced appreciation462,000
Depreciation21,716



Question:

  1. Is there anything in our strategy you'd recommend modifying? Maybe doing some other type of rental or something more creative?
  2. Any blind spots we are missing?
  3. Would you do this deal?
  4. Any other advice that I'm not asking for but you think I need? :) 

Thank you so much for taking the time to review all of this. It means a lot!

Best,
Matt

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Ryan KellyBusiness Member
Real Estate Broker · Austin, TX · Member since 2018 · 1k+ posts · 1k+ votes
4y

@M T Naughton just to be clear, do you plan to live in the property? If not, it would be illegal per city ordinance to operate a short-term rental in a residential zone. The city is no longer issuing the STR2 license, which was required for non-owner-occupied short-term rentals. The property also doesn't sound like it conforms to the land use, so you could need a variance from the city as well. You can find out more detail here:

https://www.austintexas.gov/de...

[email protected]512-674-5478
Ryan Kelly Group - Keller Williams5110 Reviews
WebsiteView Page
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  • Glenna Wood
    So MD · Member since 2019 · 294 posts · 191 votes
    4y

    Couple of questions come to mind... Is it currently a legal operation? Communities I'm familiar with have zoning laws about the number of unrelated adults living in a single unit so it would possibly fall into a group living or boarding house so hotel regs might apply (fire code inspections, sprinkler systems, hotel permit, etc). The "over built" but "not up to code" seems an oxymoron?? For any property off the norm for the neighborhood, what's your exit strategy? Who's going to buy it from you? If I'm looking for a place to stay in Austin, why would I pick your place? What will make it most attractive to rent a room with 8 other guests present? Enough parking? HOA? You state the Austin regs that it must be owner occupied to rent on AirBnB, how is having an on site property manager meeting this?

    0Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    4y

    Based on your analysis what is your annual gross income and net income? What's your COC return?

    0Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    4y

    Running a boarding house sounds like a lot of work and a potential headache. 

    0Reply
  • Ryan KellyBusiness Member
    Real Estate Broker · Austin, TX · Member since 2018 · 1k+ posts · 1k+ votes
    4y

    @M T Naughton just to be clear, do you plan to live in the property? If not, it would be illegal per city ordinance to operate a short-term rental in a residential zone. The city is no longer issuing the STR2 license, which was required for non-owner-occupied short-term rentals. The property also doesn't sound like it conforms to the land use, so you could need a variance from the city as well. You can find out more detail here:

    https://www.austintexas.gov/de...

    [email protected]512-674-5478
    Ryan Kelly Group - Keller Williams5110 Reviews
    WebsiteView Page
    2Reply
  • Conner Olsen
    Real Estate Agent · Austin, TX · Member since 2020 · 1k+ posts · 941 votes
    4y

    @M T Naughton STR's are hard to get licensed. I target monthly rentals, so 30 days or more. I have a higher cashflow than if I rented my property by the room. It could work well for your property!

    0Reply
  • M T Naughton
    OP
    Member since 2019 · 16 posts · 3 votes
    4y

    Hi all, 

    Thank you everyone for the thoughtful responses :) 

    Regarding me living there. Yes! I said in the plan section "I will create a "tiny home" in the house (with private entry) and I will find a short-term rental property manager to run the operation with my oversight. Note: to run an Airbnb in Austin you have to live in the house." 

    Gross: 175,200

    Net: 58,056

    We heard that as long as you have a short term rental license, unknown parties under the same roof does not apply. It only applies to parties for which you have written a lease. (If we did want to do long term, we'd have to get a boarding room license but we are not interested in that for reasons that you all listed.) 

    We already found a management company (hopefully they are good) but otherwise I imagine we can just create a system and hire out the cleaning and booking questions. 

    Another thing that I thought about was creating a duplex and renting out one side and living on the other. @Ryan Kelly would that be legal? I'm reading on the STR application that "NOT PART OF A MULTIFAMILYUSE" (3rd requirement).

    0Reply
  • Brad S.
    Investor · Pasadena, CA · Member since 2017 · 612 posts · 523 votes
    4y
    Originally posted by @M T Naughton:

    Hi all, 

    Thank you everyone for the thoughtful responses :) 

    Regarding me living there. Yes! I said in the plan section "I will create a "tiny home" in the house (with private entry) and I will find a short-term rental property manager to run the operation with my oversight. Note: to run an Airbnb in Austin you have to live in the house." 

    Gross: 175,200

    Net: 58,056

    We heard that as long as you have a short term rental license, unknown parties under the same roof does not apply. It only applies to parties for which you have written a lease. (If we did want to do long term, we'd have to get a boarding room license but we are not interested in that for reasons that you all listed.) 

    We already found a management company (hopefully they are good) but otherwise I imagine we can just create a system and hire out the cleaning and booking questions. 

    Another thing that I thought about was creating a duplex and renting out one side and living on the other. @Ryan Kelly would that be legal? I'm reading on the STR application that "NOT PART OF A MULTIFAMILYUSE" (3rd requirement).

    ******************************************

    How much is the mgmt company charging? Have you signed with them already? I have a company I am happy with so far (since April), if you want a referral.



    0Reply
  • Conner Olsen
    Real Estate Agent · Austin, TX · Member since 2020 · 1k+ posts · 941 votes
    4y

    @M T Naughton STR's are hard to get licensed. I target monthly rentals, so 30 days or more. I have a higher cashflow than if I rented my property by the room. It could work well for your property!

    0Reply
  • Aaron Gordy
    Real Estate Broker · Austin, TX · Member since 2012 · 1k+ posts · 1k+ votes
    4y

    @M T Naughton STR 2's are being discontinued in the city in 2022. Personally, I would not wager a big bet upon str use in Austin. In fact I did a few years ago with several rent houses in south congress corridor. The long term rents were not high enough to cover the expenses. The best and most profitable avenue was the STR. Once I found out that the str's were being discontinued I sold them. STR's in the city of Austin is a big gamble. I have helped several folks sell their str's who had the same realization that I had. Some of them were in primo locations too. If I were you I would network with folks that are actually doing str's in similar situations as you and ask for their feedback. I have a STR expert that works under my brokerage sponsorship and that is what I am hearing from her too.

    1Reply
  • M T Naughton
    OP
    Member since 2019 · 16 posts · 3 votes
    4y

    Hi all,

    Thanks so much for the comments! Based on feedback, I've decided to change my strategy. Instead of renting out the space room by room, I'm going to turn the property into a duplex and rent each side (4 bed 4 bath) on Airbnb.
    I will be living in the house so I would qualify for an SRT 1 license. Note that I can technically only rent out the side that I live on but I have spoken to folks in the "Austin Airbnb Hosts" Facebook group and as long as the property is registered as my homestead, they currently do not have the ability to track it I'm renting out one or two sides. Of course, I've also ensured that it still makes sense if I do have to rent out one side to a family.

    Here are the updated numbers:

    - Scenario 1: Cash-out refi + Airbnb duplex. The house is currently under market. Comps suggest the actual value is $1.7m. I am paying $1.2m

    - Scenario 2: Airbnb duplex (no cash-out refi) 

    - Scenario 3: Duplex 1/2 rented out by room and 1/2 Airbnb

    - Scenario 4: Regular good old duplex

    Kindly share your thoughts!

    Best,
    Matt

    0Reply
  • Quinn OlivarezBusiness Member
    Real Estate Agent · Houston, TX · Member since 2021 · 115 posts · 131 votes
    4y
    Originally posted by @M T Naughton:

    Hi all,

    Thanks so much for the comments! Based on feedback, I've decided to change my strategy. Instead of renting out the space room by room, I'm going to turn the property into a duplex and rent each side (4 bed 4 bath) on Airbnb.
    I will be living in the house so I would qualify for an SRT 1 license. Note that I can technically only rent out the side that I live on but I have spoken to folks in the "Austin Airbnb Hosts" Facebook group and as long as the property is registered as my homestead, they currently do not have the ability to track it I'm renting out one or two sides. Of course, I've also ensured that it still makes sense if I do have to rent out one side to a family.

    Here are the updated numbers:

    - Scenario 1: Cash-out refi + Airbnb duplex. The house is currently under market. Comps suggest the actual value is $1.7m. I am paying $1.2m

    - Scenario 2: Airbnb duplex (no cash-out refi) 

    - Scenario 3: Duplex 1/2 rented out by room and 1/2 Airbnb

    - Scenario 4: Regular good old duplex

    Kindly share your thoughts!

    Best,
    Matt


    As others have said, it seems incredibly risky to have that kind of money tied up in a project that is operating outside the letter of the law. They will have difficulty tracking it, yes, however, your neighbors might not like what you’re doing and report it to the city. 

    [email protected]832-607-2941
    Quinn Olivarez @ J. Lindsey Properties57 Reviews
    WebsiteView Page
    0Reply
  • Ryan KellyBusiness Member
    Real Estate Broker · Austin, TX · Member since 2018 · 1k+ posts · 1k+ votes
    4y

    @M T Naughton as @Quinn Olivarez stated it's the neighbors, not the city, that I would worry more about. I had a client purchase a single-family home where the previous owners had converted part of it into a separate mother-in-law suite. When he went to rent both units, the neighbors immediately reported him to the city and he's spent a year working through permits to "undo" the conversion. Austin is known for strong and vocal neighborhood groups especially in the older, core neighborhoods near downtown. If your property is not property zoned as a duplex - beware. 

    [email protected]512-674-5478
    Ryan Kelly Group - Keller Williams5110 Reviews
    WebsiteView Page
    0Reply
  • M T Naughton
    OP
    Member since 2019 · 16 posts · 3 votes
    4y

    The property is zoned as a duplex. The part that is shaky is renting out both sides on Airbnb. The numbers I shared show 4 different senerios. 3 of which are 100% by the books and float from a cashflow perspective :) 

    0Reply
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