Deal Analysis - Requesting feedback

[Brad Morrison]

Seeking a second look for "blind spots" in my deal analysis, I appreciate your time -

Situation: My wife and I recently sold our primary house and moved to Florida, primarily for a healthier lifestyle and better quality of life. We also want to use the proceeds from the sale of our house to begin building a balanced real estate portfolio of short, Mid, and long-term rentals.

Market: We are in a coastal market that is primarily short-term rental heavy and as you probably know that puts upward pressure on prices and affordable long-term housing.

The Deal: I've calculated 2% COc as long-term rental under a best case aggressive offer with 20% down on a fixed 30 conventional loan. As a medium term rental the COc is 6% using the calculators. The property is very close to a hospital and market research indicates demand for medium term housing. The property is in a sparsely built area with many un-built acres. Air BNB calculator indicates a potential 44% Coc although I'm skeptical given that the property is not on the beach, it is centrally located between the beach and bay on a side street, in a residential area (about 13 minutes +/- from the beach) so probably would result in a higher vacancy than beach homes as vacationers are looking for walking proximity to the beach.

The Plan: Our plan is to purchase the property as our primary residence, live in it for the next two years until our son graduates from high school and turn it into a rental. This property is well suited as a turn-key, long term buy and hold with decent appreciation.

The issue: I'm not sure it's wise to make any investments with such a low yield given the current market conditions and there seems to be an increasing likelihood that prices will decline and supply will increase (who knows, but sold prices are trending downward). But the opposite may be true in that prices may go up as more affordable inventory becomes available and more buyers jump back in. Many of the trusted forums and podcasts preach that you should not accept anything less than 8% yield. It is close to impossible to find that yield in this market. On the other hand, we're throwing away $2600 a month on apartment rent. After the purchase of this property, we have more than a year's reserves which helps mitigate risk and we can cover the monthly mortgage with our current income.

Is it a wiser decision to keep the cash ($110k) in a 5% yield account and wait for market adjustment or make this purchase?

[Zach Edelman]

I personally don't think you should put so much pressure/emphasis on the low CoC return that the property holds as an LTR. If the asset is in a true vacation market, then there is less risk than that of an urban market for possible regulations. In Vacation Markets, the local economy is heavily reliant on STRs for the revenue the tourists/guests bring. From just strictly a CoC perspective, I personally feel strongly about this deal. With that said, it is also important to triple check the revenue estimates you are using for underwriting. Are you strictly using Air DNA?