Do non-traditional rental properties align with BRRRR?

Question

My wife and I have been talking about buying inexpensive land and building a unique vacation / getaway experience, e.g.: Treehouse, Tepee, Yurt, Firetower, Lighthouse, etc., and putting it up on Airbnb.

We've looked at a number of Airbnbs fitting this description and when done well, they appear to have consistently high occupancy (year round no less) and rent from $200 to $400 per night.

So the cashflow opportunity appears to be legitimate. Do you guys think this aligns with BRRRR?On the surface it meets some of the criteria:

- An undervalued asset is bought.

- Said asset is improved.

- Said asset is rented.

I suppose the big question I have is in the refinancing part of this. Would an appraiser value an asset like this without having traditional assets to compare it to?

Thank you for all of your help!

Scott K. · Answer

Thank you for the additional context, @Evan Polaski.

Evan Polaski · Answer

@Scott Krause, to add some color to this, not only is the property unique and there is appraisal risk, but there is also "lender risk" in that a lot of lenders were never too keen on vacation rentals as a business in the first place, and then add in COVID and travel risks still associated with it.  While a lot of Airbnbs are booked solid these days with people wanting OUT of their houses, lenders generally don't view it the same.  They see travel bans, forced refunds, etc and that adds a lot collateral risk.

Then make it a novel product that would likely have trouble selling if the income falls off, and you get an sticky situation.

Scott K. · Answer

Sounds good @Andrew Postell, appreciate the pointer.

Andrew Postell · Answer

@Scott Krause sorry, I cannot help in this area but there is an entire commercial forum that is dedicated to this sort of thing.  I would bet there's a person or two that could help with it in that forum.

Scott K. · Answer

@Andrew Postell - do you have a sense of the math involved in the commercial/portfolio loans that base value on rental income?

Let's say the property demonstrates $100,000 in net income for 5 straight years. I'm wondering if there's a quick and dirty formula I can use to ballpark property value based on this.

Thank you in advance for any help!

Scott K. · Answer

@Joseph Cacciapaglia - I think I will want to model this out with best case/worst case/most likely scenarios. You could very well be correct in that the cash flow ROI compensates for a lower refi cash out.

Scott K. · Answer

@Andrew Postell - the loan which bases the value on the rental income seems like the more appropriate route in this scenario. I appreciate the insight!

Andrew Postell · Answer

@Scott Krause agreed that financing will be the biggest issue here and specifically the appraisal concerning such financing.  For example, if I'm buying a log cabin in Texas....there are very few comparable properties to choose from and likely none.  But if buying a log cabin in the mountains of Denver then there will be comparable properties to choose from.  When choosing to finance a "unique" style of property you will need other properties to run comps off of.  OR you'll need a loan type which will support not finding those comps...meaning, some commercial/portfolio loans will base value on the rental income of the property.  But those loans will have very different terms - likely a 20 year adjustable rate for loans of that nature.  Hope this helps in some way.

Joseph Cacciapaglia · Answer

This is going to be a difficult task for appraisers, which creates a lot of refinance risk for you. I've been involved in a lot of non-traditional property deals, and in general appraisers are hesitant to give them the value that you might want or need in order for your strategy to work. I think your strategy could work, as long as you're OK with only being able to refi out a lower portion of your investment. I have one client that buys his vacation rental properties all cash. Because of the large income, you can still make good returns with low or no leverage in many cases.