STR Profit, what to do with cash?

Question

Hi all,

Not sure if this is the right place for this, but figured I'd start here.  We're coming up on the 1 year anniversary of our first AirBnB, short-term rental.  We're in a seasonal market and since closing, we haven't had to put any additional funds in, we've been able to float all mortgage payments + costs w/ our rental income.

Post-high season we're going to be sitting on a decent amount of cash but even after accounting for our monthly costs in the low months, we'll have a good amount of cash on hand.  I've been researching what the best thing to do with this cash is, but haven't been able to find any good resources?

1. Pay down mortgage faster?

2. Invest?

3. Park it in savings in case of emergency? (if so, how much)

What do other STR owners do with the cash their properties spin off?  I appreciate any and all advice or if you can point me in the direction of good resources.

Thanks,

Sean

Chai Xiong · Answer

Always be expanding your empire..

Lori Lusk · Answer

I agree with @Kevin Murphy. Keep some reserves in case something happens, but reinvest after that. Please don’t let it sit in a savings account making an 1/8th of a percent. And depending on what your interest rate is on your loan, I.e. 4%, as long as you think you can get a better return than that on your money, don’t pay down your mortgage.

Joe Splitrock · Answer

Also remember your mortgage interest is a deductible business expense. That means it is reducing your taxable income. Say for example you are in a 25% tax bracket, for every $100 in interest, you are essentially reducing tax burden by $25. That means your effective interest rate is about 25% less, so a 3.25% mortgage is more like 2.43%. Even if you invested in a whole market index fund, you could easily double that return. There is risk of a market correction affecting return, but events like that you can recover within a couple years. The average over time is still far greater.

In my opinion a better strategy is buying more STR. It seems you are finding success in the business, so why not multiply that success?

Here are three additional things to consider:

1. Likely with startup costs, you had a tax loss in your first year. Many of these costs are not recurring, so expect more taxes for 2021. Plan accordingly by putting some of your money in assets that are easy to cash out.

2. This was a sensational year for STR. The pandemic scared people away from hotels and resorts. COVID restrictions combined with stimulus actually resulted in people having extra money to spend. People had no issue dropping big dollars on a STR vacation as an escape.

3. CAPEX is happening every day. What that means is large capital expenditures are in your future. Roof, HVAC, appliances, etc. all wear out over time. Plan for these expenses and be more proactive to offset in the future. For example, don't wait to paint the house until the siding is rotting. Don't skip annual HVAC service calls to save money, when it could speed up the need for replacement.

Kevin Murphy · Answer

I like to keep ~3months cash reserves to cover all expenses (assuming income goes to $0) but with a highly seasons location maybe expand that a bit... after that, reinvest

Bruce Woodruff · Answer

I'm an older guy so maybe more conservative in my approach, but I like being free-and-clear. I knwo you can technically get a better return in other ways but it's a great feel to have no mortgage payment on the 1st!

Maybe split your profits into 3:

1) 20% in account for future maintenance and taxes

2) 30% goes towards down payment on next STR

3) 30% extra pay-down on mortgage

Enjoy the rest

John Underwood · Answer

Definitely keep so.e cash reserves first. Then I would personally come up with a plan to invest extra money after that.

Paying down the mortgage is only going to save you the amount of interest your mortgage is financed at. You can invest and make much more. I.just bought a house for 12k. Once I fix this up and rent it my ROI is going to be through the roof.

Leora Merrell · Answer

@Paul Cox

That’s awesome! We’re doing the same thing with a farmhouse in Delaplane. Hoping to be listed in June sometime. Good luck!!

Brian G. · Answer

@Sean Flanagan reinvest and buy STR #2

Paul Cox · Answer

@leora merrell,

Picking up a 4BR/2BA over in the Massanutten resort area. It's a cosmetic fixer upper for the most part. Should be closing on it at the end of the month...got it for 287k 2nd Home Loan at 3.62%. Need to put some mini split units in, rip carpets up and put new flooring in, some new windows, paint and furnish. Hope to get it ready to go by June, but we'll see.

Leora Merrell · Answer

We have reserves then we save to buy another STR. Maybe pick up a few LTRs if you don’t want more STRs?

@@Paul Cox- yay for a 3rd! Where’s this one at?

STR Profit, what to do with cash?

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