My Plan: Please poke holes in it :)

40 Replies

Hi BP,

I have been researching, reading and listening to everything I can find in REI for the last few months. I feel that settling on the plan to follow is the biggest hurdle. I am pretty sure I now understand my investment goals. Pipe dreams or possible?

My primary goal is to create generational wealth and future financial freedom by investing in Real Estate, specifically the STR market. My secondary goal is to have a few nice homes my family and I can vacation to several times a year near our home in Austin, Texas.

My background is I own a home with significant equity, a business I started that does not require my personal full time involvement (my husband is full time however which we would like to change), I own the office property that is rented to our business in Austin. We have about 50$k cash saved to invest. We have credit ratings around 830 personally and business credit ratings in the 530s.

My plan is to use our cash to put a downpayment on our first STR in Canyon Lake Texas and pull the remainder of the loan as a cash out refinance on our current home - IF we do not qualify for a standard loan as an investment property/vacation home. AIRDNA shows 40k ARI and the purchase price is $250k.

We would budget about 10k on furnishings. Ideally, I manage to start then turn over to a manager down the road. Assuming it all goes well- buy another in a different city.

Questions and thoughts welcome!

April

Have you already confirmed 250k will buy you a house you'd want by checking listings or finding a knowledgeable STR realtor? Have you confirmed similar homes on Airbnb VRBO, and are do they appear to be getting the nightly rate you want/need? You started a business and own properties already. You can certainly manage one or two or more on your own or give them to someone else as you desire down the road, if you want to.
Finding your first STR should be next, you are ready and have a plan. Research if you haven’t already the resources here, and the tools that make remote managing possible and easy.

@April Clark it is just my personal beliefs so take it what it is but if you want to get into the hoteling business you should invest in a hotel. The STR craze has the opportunity to become at some point highly problematic with so many people buying "empty" houses. Just imagine if everyone that currently owns rental property converts them into STR...The rentals will do great and STR will face massive competition. At some point the margins have to come back in line but right now they are commensurate of the risk reward you prefer to take. I prefer the get rich slow through traditional rentals route as everyone needs a place to live and this method is time tested to withstand the ups and downs of the market. It has worked for so many people and built so many success stories well before STR became so hot.


I tend to stay away from what is hot at the time because I follow the logic of those like Warren Buffet who believe boring is more sexy. For example, tech stocks in the late 90's, or now for that matter will not find themselves in my portfolio. My friends will laugh and tell me I am losing out on sooooo much opportunity because my rents are 1/10th what they could be if I converted to STR but some day I will laugh when they go belly up in the down market while my tenant filled units keep chuggin along. I don't care about today, I care about the long term generational wealth and it seems you might be along the same thoughts so I thought I would share my personal rationale and why I chose long term rentals as my path to building wealth in real estate.

Why would anyone want to stay at Canyon Lake TX?

>>>--------->                      (your idea)

^ (arrow) ^

1. Don't trust Airdna. Run your own numbers by checking other properties on Vrbo and Airbnb.

2. 10k isn't much for furnishings. You will need to be very frugal and buy some stuff second hand.

Make sure your numbers will still work without STR'ing the property. Have more than one strategy available to cash flow. Real estate in evolving and as you can see with government overreach (CDC mandates), your ability to determine how you use your real estate can change with a moment's notice. This power grab will drip down to state and local government's eventually even more so than it already has. The worst thing an investor can do is go into an investment where everything must go as planned in order to profit, including the desired rental strategy.

@April Clark The steps you've outlined are completely possible and many of us on this forum are doing that already.  I don't have any knowledge of the Canyon Lake, TX market so can't speak to whether it's a good market or not - @Nancy Bachety brings up very valid points re: making sure the $250k purchase price will be competitive with other STRs in the area that are bringing in ~$40k annually.  If so, those numbers are solid.

You'll also want to investigate the market - I'm assuming it's a popular getaway destination for the Austin/San Antonio crowds.  What sort of regulation is there on overnight rentals?  How long has that regulation been in place?  (if relatively recent, more regulation could follow; if it's been in place for many years, that indicates some stability)  How long have people been vacationing in the area (is it recently popular, or has it been popular for decades?)  What's the seasonality?  Is its character pretty down to earth or is it going to do a South Lake Tahoe and outlaw most vacation rentals because the wealthy people who own second homes there don't want tourists next door?

My market, the Smoky Mountains in Tennessee, has been an established overnight rental market for generations - long before STR became a "craze". That is the kind of market I want to invest in - where the local economy is so dependent on overnight rentals that it would be harmful for them to be over-regulated. Where the tourism economy has been established for decades. There's more vacation rentals here than permanent residences/long term rentals by an order of magnitude. Is there risk? Yep, if the tourists dry up we're all in some deep trouble. However, they didn't dry up during the Great Recession or during the pandemic (aside from a few weeks of lockdown) so I feel good about the odds.

If Canyon Lake or another market you like has similar characteristics, I think your plan is a good one!

@April Clark

I think it always helps to think through backup plans and contingencies. With STR many cities are still slow to regulation. Does Canyon Lake have rules similar to Austin with registration? https://www.austintexas.gov/department/apply-short-term-rental-license

If not it’s more profitable but it also carries the risk of new regulations being passed which would really change the math for you. Check out New York state’s “anti airBnb law” if you haven’t already.

I’d run the numbers to see if the property could also be a regular long term rental as a backup down the road. Always good to know what your options are.

Originally posted by @John Underwood :

1. Don't trust Airdna. Run your own numbers by checking other properties on Vrbo and Airbnb.

2. 10k isn't much for furnishings. You will need to be very frugal and buy some stuff second hand.


Airdna is actually really useful if you pay for the neighborhood report. It'll show you what properties it's using as comps, including how many days they were available, occupancy rate, and gross revenue. But yeah, without knowing the comps it can be dangerous. I've definitely seen projections that were using unreasonable comps when I dug into them.

Originally posted by @April Clark :

Hi BP,

I have been researching, reading and listening to everything I can find in REI for the last few months. I feel that settling on the plan to follow is the biggest hurdle. I am pretty sure I now understand my investment goals. Pipe dreams or possible?

My primary goal is to create generational wealth and future financial freedom by investing in Real Estate, specifically the STR market. My secondary goal is to have a few nice homes my family and I can vacation to several times a year near our home in Austin, Texas.

My background is I own a home with significant equity, a business I started that does not require my personal full time involvement (my husband is full time however which we would like to change), I own the office property that is rented to our business in Austin. We have about 50$k cash saved to invest. We have credit ratings around 830 personally and business credit ratings in the 530s.

My plan is to use our cash to put a downpayment on our first STR in Canyon Lake Texas and pull the remainder of the loan as a cash out refinance on our current home - IF we do not qualify for a standard loan as an investment property/vacation home. AIRDNA shows 40k ARI and the purchase price is $250k.

We would budget about 10k on furnishings. Ideally, I manage to start then turn over to a manager down the road. Assuming it all goes well- buy another in a different city.

Questions and thoughts welcome!

April

Seeing as how it was your first goal listed 

 What does generational wealth mean to you 

I am so grateful for the insights of this community. Thank you to all who responded, gave me a lot to think about.

@Nancy Bachety I do need the realtor. I have found a few properties that I have liked for different reasons and they do align with the budget-for-cash. I feel like I need to get my loan secured first or at least pre-approved next before pulling in the realtor. Every time I fall in love with a new property that hits the market it goes pending the next day. Frustrating but good sign.

@Stephen Stokes I would have no idea on how to invest in a hotel but that is interesting. This town is a sleepy lake town between San Antonio and Austin, only one hotel that I know of in the area. I agree slow and steady is likely the best route but we are also looking to acquire vacation rentals for our family to use as well so that is a personal draw.

@Paul Sandhu I always love your comments in this forum. You get straight to it. Why would people go to Canyon Lake People need to get out of Austin and San Antonio (two of the country’s top 10 largest populations) this is the best boating lake in Central Texas, blue water and laid back. Honestly we have a hard time booking rentals there for ourselves which is a good indication of demand.

@John Underwood I appreciate your steady thinking on here as well. I have been stalking AirBNB and VRBO as well as having purchased the city package from AirDNA. I don’t fully trust it but I feel that it is generally accurate. I would be interested in hearing if others find the revenues noted actually match what they see. Do you think 10k is too slim for 2000sqft? What number do you use? I have no idea.

@Guy Gimenez I completely agree. We could afford it as a straight up 2nd home if it flopped, I am not as sure what the LTR would be it is hard to tell how many live at the Lake full time. I need to analyze that market too.

@Julie McCoy I appreciate all the tips especially around regulation. The city is largely a tourist destination city though some parts are changing. Some HOAs do not allow STRs but most seem to. I assume HOA restrictions can't just change on you once you own without grandfathering you but I don't know that for sure. We first got interested in STR staying in Gatlinburg 4 years ago and looked into it there but the buy in price was too high for us.

@Becky Lai I am an architect in Austin and know the regulations well. It is crazy here. Canyon Lake is a very small town and from what I can tell there has not been any political movement to stop it though you are right - that can change at any moment. I think that is the biggest gamble here. Appreciate your thoughts.

@David Stokley I appreciate it I have bought the city wide data it is very helpful to understand the comps and also to see how many days have properties listed and revenue. I am still unsure how accurate it is though against owners reality. Do you have experience with that?

Love this group and appreciate your time - if anyone is investing in Austin and has questions I am happy to return the favor I know the zoning and development codes inside out.

Thanks!

@Michael Plante thanks - it’s a good question because it is relative. Honestly I define generational wealth as a start. Enough financial security that our kids don’t have to worry about taking care of us, and have the money to go to school, start a business or buy a house. Enough to be able to breathe. We are not looking for the house in Maui but wouldn’t mind the vacation there from time to time. Think that’s about it.

One thing to keep in mind with STR. Unless you are already a Super Host it may take a while to get your listing to be front in the Airbnb feed. I am finally doing quite well on ours in South Lake Tahoe, but it took a few years. I would have marketed it much more outside of Airbnb if I had it to do over again. Good luck and keep us updated!

Thanks Lisa - we were just talking about that. We are not super hosts but are pretty savvy at marketing for our other business, just going to run it the same way. 

Many cities are changing the laws and are putting too many restrictions on the STR's. Purchasing a 3 or 4 bedroom home and renting each room to 2 students is much safe, lucrative and many students will stay for 2 to 6 years meaning you don't have to hassle with daily management issues.

The most important factor for every investment is the risk, the risk and the risk while most investment decisions are based on potential and profit. There is a book on Kindle for $9.99 called 50 Real Estate Investing Calculations.

I like this book because all the definitions are condensed into one neat little package. The explanations are easy to comprehend and there are website links for calculators. Every investor should know every definition and how to do every calculation. 

The book explains the Gross Multiplier, but it does not teach the math to project the profits you can earn by increasing rents over a number of years and then factoring in the profits from both rents and appreciation. BP has a calculator that does these calculations for a few years and they are very critical, but I like to see the numbers 1, 10, 20 and 30 years out because the results are usually amazing. 

If I had dreams about owning STR's I would look at other real estate opportunities and crunch the numbers for hundreds or thousands of properties. Especially, since my investment capital is in short supply and I may get only one shot at making the right decision.


@Jack Orthman I appreciate the book recommendation I will look it up. It is all about the risk in the end- you are right and crunching the numbers puts the risk in perspective. STRs are harder to number crunch for than LTR I feel the data and unit stock is so diverse. We have several clients that are killing it in STRs and having fun with owning properties in various places. I honestly would love to hear stories from folks who tried it and failed for whatever reason.

Hey @April Clark , I did a bit of a run down on properties available for sale, what's on VRBO and their nightly rates and calendars.

Calendars are pretty low occupancy for the upcoming summer. I don't know exactly the season there, but the places doing the best are the homes right on the lake and are over $400 a night. Their calendars are over 60% full for 2021. Anything in the $200 range have calendars in the 30% range.

Now that could mean they get most of their bookings last minute. Our home on lake Coeur d'Alene in north Idaho has been fully booked for summer since Dec 2020. The early bumper time (April-May) is 70% full now and the after bumper time (Sept-Oct) has only on week right now.

Now, home prices are all over the place, but the high performance places are on the lake and those are in the 750k - 1.5m range. The ones in your listed price (250k if I have that right), are off the lake quite a ways and they are fixers.

I am with @John Underwood on the AirDNA. I don't see the 40k on a 250k property in that area. At least the 5,000ft view I just gave it doesn't support those kind of numbers. Now I can't see previous calendar dates for properties. They could be jammed, but I wouldn't be so sure.

And @Michael Baum does not even charge for his research. Tried and true markets give you the return you’ll need to vacation anywhere, but if your goal is to cover your costs in the location you place value in, that can work too.

@Michael Baum That is interesting and feeds my suspicions on the data from AirDNA. The comps it is giving me are in the same HOA and not on the water. It says bookings are 26 days out typically for a 60% occ and 40k revenue. The property is fixed up but the neighbors are hit or miss. I found a string in this group of a similar property from a few years back that the owner was confirming the numbers after a year. It's tricky - much easier to tell with LTR. I appreciate the feedback I'm going to dig more.

You are welcome @April Clark . I have a tendency to drill down on things. I am a bit of risk taker so I like to temper my enthusiasm with doses of reality. It took me quite a while to find our home and it has been doing well.

I would just hate to see someone else make a mistake. You are in the same kind of boat as us. We wanted a place we could use (I grew up in north Idaho) and maybe make it pay. Ours is farther away at 360 miles but we use it a couple of times a year.

Whatever you decide, make sure it is over 65 miles away from your home so it qualifies as a second home or vacation home. If you buy another, it needs to be 65 miles away from both. That sort of thing.

That Canyon Lake area looks interesting but it has been all over the place with water usage issues. Not sure if those have been resolved. I have read that the lake levels are getting lower due to San Antonio and Houston pulling water from the district.