Mixing Airbnb/Long term rentals in the same building?

Question

I need a quick sounding board... a 5Plex just came across my desk and it seems to have potential, but there are a couple variables in there I haven't dealt with before that could make or break the deal...

Specs:

Purchase Price: $525,000

Operating Costs: ~$1550/mo after PITI

Total Monthly expenses: ~$5137

Unit breakdown:

Unit 1: 4/2, 1270 sq/ft rented at $1500

Unit 2: 2/1, 760 sq/ft rented at $925

Unit 3: 3/1.5, 1300 sq/ft rented at $1350

Unit 4: 2/1, 760 sq/ft rented at $925

Unit 5: 4/2, 1276 sq/ft rented at $1400

All units have been renovated except for unit 3 - which I would make my residence to fix up while there. The numbers don't really work under this structure, but my thought was making both 2/1 units an Airbnb... Using $95 a night and assuming 50% vacancy that increases their income to ~$1450 a month each.

First question, if I purchased it with a conventional loan and made it my primary residence, would I still be able to purchase it using only 5% down? Or is it considered a commercial property that would require 20-30%?

Second question, I would be living in it for 1-2 years and then will likely move and need a property manager. Typical charge is for 10% of rents - but if I am running an Airbnb out of 2 of the 5 units, do they collect payment for those units? Or, would I be able to limit their fees to my 3 long term units in that building?

Third, operating costs seem to be outrageous - utilities in 2017 cost them $20K! Gas payment is the big killer - averaging $800/mo that the owner pays. Water a close second at $560/mo. It has baseboard heating, but can anyone think of a cheap way I would be able to cut those expenses in half?

Fourth, does anybody have a rental right now that mixes Airbnb with long term tenants? What are your thoughts on how it is working? Do your tenants view it as a pro or a con?

Fifth, this building is currently owned by an LLC and it showed a $15,000 net gain for 2017, but when I ran the deal through the BP calculator it came up as a money pit, and I am skeptical about the monthly cash flow. Again, making the Airbnb work and raising rents it shows strong potential - but because of its high purchase price (normal for my area) the 5% for vacancy, 5% cap ex, 5% maintenance, and 10% management equate to $1500/mo which is really what I feel like is killing the deal. The two are contradictory, what is BP's take on the discrepancy? Does it sound like it may be worth investing in?

Basit Siddiqi · Answer

@Jeremy BartlettSorry - I can't provide an estimate on how much it would cost to separately meter the apartments. I would reach out for a couple quotes.

Jeremy Bartlett · Answer

@Basit Siddiqi

Thanks for the info on the conventional mortgage.

We are planning on self managing while we live here, but because I am looking at this as a long term investment I am planning for when I move and will no longer be able to manage it. I don't want it to work for 2 years, and then move away and have the mgmt. fees kill me.

The $5137 provided were simply the operating costs - they did not include savings for capital expenditures, maintenance, vacancy, or management - which is where the cash flow turns negative. While living in the property, it looks like without saving for those things I would pay $400/mo in addition to the money needed to make renovations and other improvements. Do you know what it would cost to separately meter the units? I feel like that would start cutting into my cash on cash return pretty quickly, but I've never done it before so I'm not positive.

@Maurice D.

Thanks for the response. I think it'll boil down to taking a look at the property to see if there is wiggle room in rents. I have a 4plex just down the road from this guy where 2/1s are occupied for $1200-$1300/mo - so there may be wiggle room to make it work.

Basit Siddiqi · Answer

@Jeremy BartlettConventional mortgages are only for properties with 1 to 4 units. As such, this will not qualify for a conventional mortgage.Based on the numbers you provided, this is at least a 1% deal so I am trying to understand why this thing wouldn't cash-flow.

Have you seen if you are able to push the utility bills to the tenants? Possibly get a meter for all the units and charge the tenants appropriately. If the tenants are paying for the utilities; they will utilize as appropriately, If they don't pay for them; they may potentially not care and leave them on 24/7 hence the large bill.

You should reach out to a property management company and see if they handle both long-term and short-term rentals. They may charge more for short-term rentals since they require more upkeep.Why don't you consider self-managing since you will be living at the site.

Maurice D. · Answer

now, if it has potential to reduce expenses and cashflow then maybe.   Have an HVAC expert or energy consultant come look at it, and see if there is room to fix the gas leak (not literally..)  insulation?  windows?  tenants (opening windows?) etc.

you can't get conventional funding on a 5-plex.  this would be commercial.

Maurice D. · Answer

if it doesn't cashflow under regular rents, then it's not a deal.   don't try to justify/make it cashflow by converting some to AirBnB.  that's icing on the cake, but the bottom like if the price doesn't give you flow as a plain rental you are at risk.