Rental Property Investor · Los Angeles, CA · Member since 2021 · 8 posts · 1 vote
There's an incredible, one-of-a-kind mid-century home for sale in my area in Los Angeles. I think it would be such a cool Airbnb, but I have no experience in short term rentals. It definitely pencils nicely as a STR (more on that below), but I'm worried for two reasons: 1) Entering the LA market with a STR since they require it to be your primary residence, and 2) The "backup plan" of converting it to a LTR doesn't look super pretty.
I'm thinking it's a pass, but wondering how others would approach this?
Scenario 1: Short Term Rental. $1m purchase price (30Y Fixed @ 4.5%, 80% LTV)
Y1 NOI: $54k, Debt Service: $49k. DSCR: 1.09(!)
Y10 NOI: $93k, Debt Service: $49k.
Exit at year 10 and make $1m in profit, including cashflow over life of the deal, resulting in a 19% IRR.
Scenario 2: Long Term Rental (backup plan)
Y1 NOI: $30k, Debt Service: $49k. DSCR: .6(!!!!)
Y10 NOI: $50k, Debt Service: $49k.
Exit at year 10 and make $470k in profit, including negative $113k cashflow over life of the deal, resulting in a 7.8% IRR. Or hold forever and watch the profit gradually increase.
I feel like I could accidentally find a STR with over 2 DSCR these days. But if you're not concerned with cash flow, make sure you're happy with the profit from appreciation and mortgage paydown.
I think that's backwards though - with STR cash flow is king and appreciation is icing on the cake.
I feel like I could accidentally find a STR with over 2 DSCR these days. But if you're not concerned with cash flow, make sure you're happy with the profit from appreciation and mortgage paydown.
I think that's backwards though - with STR cash flow is king and appreciation is icing on the cake.
Not to mention those regulations.
Depends how much time, if any, you're planning on spending in the property. If you want to live in the house and rent it out a bit to cover some of the costs, seems like a great idea. If you want to buy it strictly as an investment, then to the above comment, the name of the game in STR is cash flow, and this property looks like it could be tight in that department.
What is your ROI in year 1,2,5 and 10? How difficult would it be to find a better deal in your market? Are you trying to park you money somewhere? How much resources will this deal required (time, money)? Will this requirement hinder you're long term goals?