Go into big debt for a S.T. Rental or get less for a LT Rental?

Question

Help! I recently bought a single family property in Scottsdale, AZ.  (This is my second investment property and it was at the top of my price range).  I had intended to make it a Short Term Rental because I want the higher cash-flow.  Now that I have priced everything with contractors, pool builders, etc. I realize I have to spend much more than I had anticipated to bring this place to where it needs to be as a successful VRBO/AirBnB.  Another option is to find long term renters for much less money per month and also less debt to pay for the rehab.  Or maybe flip it??  I'm just not sure which way to go.

Luke Carl · Answer

@Collin H.

Yup.

Thing that stood out to me was “debt for rehab”

Tough love: if you don’t know whether this is a short term or a long term you can’t afford the rehab out of pocket -you’ve got a lot of learning the hard way ahead of you.

Collin Hays · Answer

It’s difficult to advise without actual numbers.  Loan amount, home value currently, home value post renovation, STR projected rent before and after, how much disposable income you have, projected LTR rent before and after renovation.

So there’s about 9 critical pieces of info that are needed to give you any meaningful advice, and probably a few other details.

Paul Sandhu · Answer

Have you ever successfully marketed and managed a short term rental before?  Do you know how?  Do you know how to do your own maintenance?  If you answer "No" any of these 3 questions, go with a LTR.

Nicole Lee · Answer

@Angelique Craig one route you could take is making it a long term rental on a month to month  while you repair and fix it up. This allows money to still come in until you’re ready to make it a STR.

Jonathan Stone · Answer

@Angelique Craig

If you did the 200k Reno and couldn’t STR for some reason it seems like you would be quite upside down. Possibly check all of the numbers and either do the smaller rehab and get a solid ARV and decide to Flip or LTR, or see if there is demand for a STR without all the extras.

It would seem to me, who is not in the AZ, crazy to put that amount of money into a STR given that the tourist market is not always consistent and has been very hot lately. Even if you STR for the next season or 2 then moved to LTR with the lower rehab it seems possible to get your capital back much faster.

Don Konipol · Answer

@Angelique Craig

I’m afraid you paid over retail for an investment property.  Even a user buyer would want an incentive to buy a property needing extensive rehab.  Why pay $490k for a property that needs $200k rehab and will be worth no more than $685k at completion?  Why not just buy a completely renovated property for $690k?  So even a owner user would probably pay no more than $450k.   You may need to hold with no cash flow for quite a long time so inflation can hopefully bail you out.  Since you apparently totally missed rehab costs, etc. I would triple check your assumptions concerning rental rates, occupancy, and expenses, being sure to include an annual repair allowance in your calculations.  Good luck

Angelique C. · Answer

Thanks so much for the input, tough love, etc.

Here are some additional details:

- This is our second investment property. The other is an LTR that cashflows 300/mo

- Loan amt: 348K (bought for 490K and put about 30% down)

- Current value: 490K

- Home value post-reno: $685ish. Comps with no pool have sold for $665.

- STR projected monthly net income (before taxes): $1700/mo. (with $200K in reno. Estimated 4.5 years to recoup the 200K)

- LTR projected monthly net income (before taxes): $611/mo. (with $60K in reno. Estimated 11.7 years to recoup the 60K)

- Disposable income, roughly $2600/mo. which gives me peace of mind in terms of covering the mortgage and the $60K if we do the smaller reno for the LTR.  But does fall short (by about $800) of covering both the mortgage AND the loan for $200K (if we decide to go 'Full Monty Renovation' and make it a STR with pool, etc.).  The 200K is money borrowed off the value of another property @4.5% for 20 years.  So that's why I'm leaning a bit toward LTR even though I will get more cash from STR.  I don't want to be overextended. But I also want to maximize cash flow so we can buy another property soon!

This is all pretty new to me and I'd love input from other investors.  Thanks again!!

Collin Hays · Answer

No, but I did stay at a Holiday Inn Express last night.

Go into big debt for a S.T. Rental or get less for a LT Rental?

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