Higher priced BRRRR or lower priced vacation rental

44 Replies

So here’s where I’m at

I’m going in with a partner (he has the money, I have the hustle and the knowledge) and we’re trying to decide between two options:

We're prequalified for a loan on a minimum purchase price of $225k where we could buy a place in a more expensive market and BRRR it, OR we can buy a place near a lake for all cash and rehab it into a dope vacation rental.

What are your thoughts? I know it’s not a lot of info, but just for the basics.

What's going to give you the best return?

Do you have a firm grasp on the numbers of each, and a high level of confidence that you can meet them?  

Are you more interested in pulling out most/all of your money to deploy into another deal, or are you satisfied with some great cash flow out of the vacation rental?  (or, see what the potential is to refi the VR after rehab - I don't often see VRs that would make good BRRRRs, but if that's the opportunity you have, it's the best of both worlds).  

Assuming the numbers make good sense on both scenarios, it's about what your and your partner's goals are.

Go with the lake house.  No debt is what I like about it.  Plus I feel you can make more money on a vacation house vs. one in the city.  Put in a media room, an outdoor shooting range, a jacuzzi, firepit, horse shoe pit, have wifi and smart tv's, gas and charcoal grills, kegorator, boxing ring, free weights; and you'll have something similar to one of my larger houses.

With all things real estate, it depends.

If you don't mind the extra work a VRBO is more fun than a LTR.

Also having a lake house you can occasionally use is nice.

I have a Vrbo lake house and I keep my boat and jet skiis at the dock so if I'm there I can always go for a jet ski ride!

Most of all of my LTRs have been cash purchases and I definately prefer that.

@Julie McCoy , I do not have a firm grasp on numbers. I’m still looking at markets to buy in for either scenario. BRRRRing a vacation rental would be amazing! You’re absolutely right, best of both worlds. I’ll see if I can find anything that might live up to that. Eventually, I’d like to buy and hold LTRs.

@Paul Sandhu and @John Underwood , I appreciate the insight. I’ve been leaning toward the vacation rental precisely because of the lack of a mortgage. And if advertised and managed properly, I feel like the returns would be awesome. Again, I haven’t run specific properties for numbers. Just getting an idea of LTRs vs vacation rentals.

Thanks again you three. I’ll look again at both options and run the numbers.

@Travis Ward-Osborne a good STR in the right market can generate enough gross rent to pay for the property within 6 months. But in real life, when you include utilities and vacant times, it's more like 12 months. I'm in one of those markets. You wouldn't want to live here, you wouldn't even want to visit.

@Travis Ward-Osborne Success with a vacation rental is 100% about the location (and another 50% about the property and 50% about the management).  I cannot overemphasize how important it is to have a solid grasp of what conservative income might be - because buy in the wrong spot and you've got $225k sitting in an empty house.  Go on AirBNB/VRBO and see what's happening in the area you want to buy in.  How full are their calendars?  What are their rates like?  What's high season/low season?  Don't forget to include utilities, furnishings, etc. in your calculations.  Are there good local resources for reliable cleaners and handy people?  Vacation rentals can be amazing investments, but they are also small businesses, so be prepared for that.

Lack of a mortgage is great for a single property, but think about your time horizon and if/how you want to scale.  Leverage is pretty essential for scaling with any speed, unless you've got a boatload of cash.  Know its power, know its flaws; with that knowledge, you can make it work for you instead of vice versa.

Hey @Julie McCoy , thanks for taking the time to be constructive rather than just making me feel like an idiot. I’m learning as much as I can before diving into this.

I have looked at several markets for VRs to see what people are charging and how booked they are. The spots I’ve seen have had pretty great numbers.

When you say that leverage is important for scaling, are you referring to the ability to refinance? Or something else that I’m missing. Because that was definitely something I thought about as a con to VR vs LTR. The ability to use the same capital over and over to secure more property.

@Travis Ward-Osborne Leverage is just another term for using financing - it does not have to be in reference to refinancing.  In your particular instance, let's say you (and your partner) have $255k in cash.  You can buy one property free and clear - no mortgage, killer cash flow (partially because there's no mortgage), great!  

OR, you can buy a property with a conventional loan for 20% down - or $51k (I'm not including closing costs, rehab, etc. here for the sake of simplicity).  Now you have a mortgage, but if you've bought right, the income that house is bringing in pays the expense of the mortgage, with a little cash left over each month.  Not as sexy as owning something free and clear, BUT:

With your $255k you can now buy FIVE properties in this manner, each bringing in a little cash flow each month, that might add up to the same cash flow you'd get from the one property free and clear.  But now you're diversified, you've got multiple properties with the opportunity to appreciate, and more flexibility in the long run.  

This is why many investors favor leverage as a means to scale (expand their holdings) vs. using cash, which takes a lot longer to replenish. :) 

When studying my MBA in finance, leverage was discussed ad nauseum.  What it really boils down to is that you can make a whole lot of money or you can lose a whole lot of money when you are levered.  Using cash, you're not going to make a killing with the profits, but you have little risk of losing money.

Think of a roulette table.  Leverage is putting all your money on one number.  Using cash is like betting on black or red.

@Julie McCoy I see exactly what you mean. I know what leverage is, I was more asking if you had meant that the advantage to using leverage vs ownership free and clear was the ability to pull your cash out in the form of refinancing. But you’re saying that you can get more properties with the same amount of capital. Which obviously sounds amazing.

The problem is, I’m not working with quite that much money. More like $60k. And I’m in NYC, a very expensive market. Which means I either need to invest from afar, or focus on ONE property first. Which, again, is why BRRRRing is so attractive to me.

Considering my end goal (multiple buy-and-hold) I was gonna start with a BRRRR, but VRs came up as an idea, and I got excited about that possibility as well.

Thanks again!

@Travis Ward-Osborne Okay, I misunderstood your initial financial situation, then.  Working with about $60k you're not going to be able to leverage that much.  If you're able to buy and rehab a lake house that will cash flow great as a vacation rental (or long-term rental or whatever), go for it.  Then save that cash flow until you can put it into the next investment.

Originally posted by @Travis Ward-Osborne :

@Julie McCoy yeah, 20% down on a min of $225k

You said in your original post that an option was all cash on a vacation rental?  That's what confused me.  Were you saying you could purchase and rehab a viable vacation rental for $60k? 

If I was coming with the money I would expect a lot of hustle on your part, as in you would be running a short term rental vacation property.  Done right there is a whole lot more monthly income for us to divide. 

Read this post by a North Carolina STR investor, it will give you an idea.

https://www.biggerpockets.com/forums/311/topics/700529-im-selling-my-long-term-rentals-and-buying-beach-property

Could you do both?.....get the lake all cash, and refinance after a year and get the BRRR property or vice versa. I don't have all of the numbers involved but I am sure if you looked at all the numbers trying this method you will see how it could work to get both versus an either or situation. Especially if they cash flow.

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