First deal down. What now?

Question

I recently purchased an investment property in an Idaho college town in February of this year. The property consists of an over and under duplex and a single family home with an unfinished basement and a detached garage. The property has good cash flow and we are just about finished with the basement and other rehabbing. NOW WHAT?

The financials are as follows:

Purchase price: $392,000

Down payment: $117,100

Loan: $274,900 @ 5.00%

Now what we decided to do to capitalize on the properties income was to keep the tenants in the duplex and to finish the basement of the SFH. We charge ourselves rent for the basement and Airbnb the top of the SFH. Financials are as follows:

Rent from duplexes:         $1700/mo

Rent from basement:       $500/mo

SFH Airbnb income:  $1400 - $4200/mo

Monthly expenses: $2522 - $2700/mo

A garage conversion was denied by the city because the total number of allowed units for this block is met. What would you do next to keep the ball rolling in this situation? How do you move onto your next deal when your DTI ratio is maxed out from a deal such as this? Thanks BP for getting me this far, now I just need to get an idea of the next moves!

Timothy Stewart · Answer

@Don Spafford I am pretty comfortable with the income with or without Airbnb seeing as a chunk of the monthly expenses come from myself footing utility bills and other Airbnb related expenses to the tune of around $500 per month. Also Rexburg passed the city ordinance allowing short term rentals for all zoning types just this last year. The property I own is HDR 1 so I don’t think it likely a citywide ban will be put into effect on short term rentals, especially for any zoning  MDR and above. Also the Rexburg market is hot but I think with the growing student base and recession resistance that that provides warrants the higher prices than other cities in the area. I was mostly wondering if there were any suggestions on if a cash out refi would make sense this early on in property ownership or if I should wait for additional equity to be built?

Don Spafford · Answer

@Timothy Stewart Honestly, I wouldn't have done the deal. There isn't enough return on that for me. Rexburg in my opinion is way too overpriced. If you can get the Airbnb to work out then maybe when the tenants of the duplex move out, start using those for that purpose as well. The danger you have is that if the city ever bans short term rentals, then you will likely be losing money since you won't be able to get long term tenants in it at the price you need. Putting down such a large down payment may make it cash flow for you but your cash on cash has got to be very low I imagine. For next moves, I would say just focus for a bit on getting this one to work well enough for you, if the SF is separate from the duplex, compare the two over time and see which is your money maker and sell the other. As mentioned you could refi with a lower down payment of 10 or 15% to get money out but you may also then not cash flow at all and that won't help your DTI.

Phillip Witt · Answer

No great suggestion for the next move except a refi for some of that current equity to leverage....but maybe rent the garage to increase cash flow even more on this property?