All Forum Posts by: Mike H.

Quote from @Masyn Grant Barney:

Utah had a bill passed (SB240) with limited funding (it has been plenty so far) that gives $20k to first time home buyers in a form of a 0% loan that is paid back on refinance or sale. I think it is an awesome program because of the following. 

- Must be on a new construction home 

- Must be under $450k (which can be hard to do on new construction here) 

- Also protects against deflation by saying if the equity upon sale is less than $20k, only 50% of the equity needs to be paid back. Which helps keep the home buyer from being boxed out of a sale if they happen to see depreciation. 

- Is income capped so we are helping those most in need. 

This bill is meant to help first time home buyers while also incentivizing builders to build more starter homes rather than bigger more expensive homes. Addressing the issue on both ends is key and I believe this bill does that. 

I think a similar approach should be taken by states with the biggest issues. Mainly those that have seen sharp price increases without incomes keeping up. I agree that the current proposal by VP Harris is not the right approach. 

 That, to me, is the most wisely crafted way to fix the housing problem. And it doesn't really cost the taxpayers as much money as they're putting out because the principal is getting returned to the taxpayer when that buyer sells the home.

What I really like is that its only for first time home buyers and only for new construction.  We're never going to fix this supply problem for housing unless we can juice the number of builds getting done to where its back to normal (i.e. pre boom times from 2005 to 2008).

The federal government should do the exact same thing to stretch the money.  25k down payment assistance for first time home buyers who buy new construction homes as a no interest loan payable only upon sale or transfer (i.e. if the person dies and someone inherits, that 25k could be called due). 

To me, that would definitely jump start new construction.  And until they do that, this problem is never going to get better.

You are going to have an issue with it being a true log home.  A lot of lenders don't want to touch those.  Are you sure its a true log home and isn't just a stick built home with log siding and tongue and groove on the inside? 

As for rate, it is an investment property so I don't know of anybody getting 6 or below on investment. But 6.5 should be doable.  Maybe 6.25 even. 

Have you closed on the purchase? If yes, then you're stuck. Don't rehab til they're out though. Thats just asking for problems.

If you haven't closed on the purchase, then you need to have something added if you're going to allow the person to stay in the house.  Put a chunk of the proceeds (say 20k) into escrow so that the occupany doesn't get that money until they actually move out in two months. 

That way you can close and know that you own the house.  And that there is a very strong incentive for the owner living there to actually be out in the two months. 

I'm assuming you meant the square footage was 1334 and not 334 like your post stated. If so, then paying 600k seems a bit on the high side or at the very least, it seems close to retail. But the numbers for rents look about right. 2 bedroom cabin should be between 55k and 65k right now.   The bigger cabins took a huge haircut on the rents the last two years but the smaller ones seem to be doing fairly good actually.

Three years ago the one bedrooms were in the 40k to 45k range and now they're doing 50k to 60k - which is one of the reasons why the one bedroom prices have gone up from 450/sq ft to 500/sq ft and more.  Two bedrooms i think have somewhat stabilized so they're still a good bet too.

That being said, Don't worry if your cash flow will break even. That doesn't mean its a bad investment.  For one, I think your interest rate is a little high.  You can do way better these days than 7.5%.  You need to knock a full point off that as you should be able to do 6.5 to 6.75 right now on a dscr loan.  That alone should add 5k a year to your profits.

But keep in mind, your return is more than cash on cash. Lets say you move forward on the 600k purchase and you put down 25%. You've now got 150k into that deal and a loan of 450k. Lets say you end up with a yearly profit of 5k.  You'll also pay down that loan about 5k a year for the first few years anyway.  So that is added to your return.  You'll have depreciation of roughly 20k a year for the next 27 years so that means your 5k profit will be tax free plus you can offset your regular income and maybe save 3k in taxes there. Finally, appreciation at 3 to 5% a year will add roughly 20k to 25k a year to your returns.

So what is your true return on the 125k investment:
5k rent profit, 5k principal paydown, 3k tax benefits from depreciation and 22k appreciation. Total 35k total return on your investment: 28%.

But here's the thing you should remember with real estate.  Your returns actually grow over time. Your rental profits will grow because your payment will stay the same but your rents will go up.  Your principal paydown amount goes up over time as the further into the loan you go.  And your appreciation compounds so 3 to 5% today on 600k is X but 3 to 5% in 10 years might be double.  And btw, if rates fall even more over the next year, maybe you refi down from 6.5 to say 5.5 which would make you another 4k a year in profit.

What I like to do is look at the investment 10 years from now.
1)  20k  Rental profit should go up from 5k to about 20k to 25k a year in year 10/11 if you figure historical rent increases out there and the fact that your mortgage stays the same - even with services like cleaning and property management going up some too.  And all of this pofit will be tax free because your depreciation is still offsetting every penny
2) 10k. Principal paydown in year 10/11 of your loan will be roughly 800/mo so thats close to 10k a year in principal paydown.
3) 35k.  Appreciation. You will now be gaining 30k to 40k in appreciation because your cabin will be worth 850k to 900k in 10 years and you'll be gaining 3 to 5% of appreciation off that number now.

So what does that look like for returns now: 65k return on that 125k investment? 
And what does that really look like.  You will have put down 125k as an investment and your loan will be paid down to 375k and it'll be worth 850k to 900k? That 125k investment is now worth 500k in 10 years and it will be generating 65k a year in returns going forward (and that will continue to increase over time).

I would add that I don't like ever paying retail for real estate as I've always been a believer in the adage that you make your money on the buy side.  But the fact is even if you pay retail, the numbers on real estate work better than any other invesmtnent you can think of - unless you can tell me you know which stock will be the next amazon or microsoft boom.  Outside of that, real estate is far more predictable and reliable with the greatest returns of any investment there is.  

Quote from @James Hamling:

@Emily Poerio you're doing it wrong. 

You're new to STR, never done it before, so that means everything is an unknown. Maybe you love it, maybe it's like dental work, who knows.

And your gambling a LOT of $ on trying something out, via purchasing a property to try the waters.     That's kind of like buying a plan to try out sky diving isn't it. 

So bisect the venture. 

Start with what matters most, the actual operation of being a STR host. meaning DONT buy to try, RENT to try.

Start by trying to lease a property, with sublet rights to run it as STR. Yes, that's a very real thing.

There is a LOT of properties out there that would do awesome as a STR, but are only leased on standard lease, because the owner is clueless on doing STR and has no interest doing the hosting duties and activities.

The most common response I get from these landlords is "yeah, I thought about doing something like that, but ugh, then there is all those move-in/out every week or few days, and checking things constantly, then what if this or that happens, and all that, it's just too much for me, I don't have the time for that". Yeah, well great-fit for a person who IS keen on being a host. 

Now, your capital risk is on the lease, not purchase. 

I see it WAY too often person who got a property, analysis based on STR revenues, found out they suck at hosting, revenues are never what expected, feels like work, and than when try to shift to standard rental there deep in the red because standard rents are a fraction of that hopeium STR revenue, but there "stuck" with a property, a mortgage bill, and are than searching to break even or paying $ to get rid of property......

START by leasing a property and testing your hosting biz. 

Than, when you get good at hosting, like it, your going to know what property is a best fit AND will have that revenue position to better buy the asset. 

Or, who knows, maybe just scale up. 

It can be a great win-win, simply by bisecting the property and hosting operation. It's an OPM model for scalability. 

This eastern tenn area is a different beast. You aren't going to be able to rent a cabin and do arbitrage on it.  Thats just not an option.  If people own a cabin out here, they are not renting them out long term at all.   

To me, this is exactly what he should be doing. Run your numbers and if they look ok, pull the trigger and take action.  That being said, I'm not sure if I'd put down 25% to break even. I don't like that hes paying retail.  Thats not investing to me.

But if you break even on a 600k purchase and end up with a 450k loan, you're going to get about 20k a year in depreciation to gain about 4k in tax benefits.  You'll have about 5k a year in principal paydown.  And if you get 3 to 5% appreciation, you're gaining another 25k a year in appreciation.  

So whats your true return on that investment? 34k on 150k investment? 22%? Thats pretty good. And here's the other thing.  In 10 years as your rents have gone up and maybe its making 20k a year in profit (tax free after depreciation), and the principal paydown in year 11 is close to 10k a year,  and the cabin is making 40k a year in appreciation, you're talking a a pretty good return.

In 10 years, that cabin might be worth 850k to 900k and he'll owe 375k? I would take that all day long.

I still don't like that he's paying retail. But I don't see how you can go wrong investing in real estate over the long haul.

Quote from @John Underwood:

Quote from @Pete Galyon:

Quote from @John Underwood:

Congrats on your STR.

This is one of the best ways to buy any realestate. Then make improvements to force appreciation.

Many people want to buy turnkey especially in the STR market.

 Thank you my man. It's been successful thus far and I plan on doing it again until it's not. Would love to hear your experiences and next project. 

 Would love a beach house next, but not sure after the increase in hurricanes and insurance. 

Mainly buying up LTR'S for cash at a deep discount.

 I wound't touch a house on the beach/ocean.  But you could do one on a lake.  Almost as good. 

I think some people may be thinking the sky is falling just because the numbers do look tough. But here's the thing. Its a brand new STR. And its a big one. I don't know any brand new STRs that hit the normalized numbers for the cabin size in year 1.

I'm assuming before you bought it the property management company told you a number for gross rent that the property should hit in year 1 and year 2 and then year 3. Hopefully, they were honest about those year 1 and year 2 numbers and set the expectation that your true numbers will hit in year 3 once you start getting repeat customers.

You're sitting on 800k. You didn't lose money in the summer so thats good.  You might be losing money right now but how do you know where you'll be in 3 or 4 months? While its slow time, there's also the factor of people booking later than before so your bookings should increase as you get closer to those months.

What I can suggest is that those monster cabins are struggling right now and new cabins coming online take some time to really hit their revenue mark.  If you can get through til next summer, I think you might have a much clearer picture of whether you should hold or sell.

As for some of the negativtiy, I'm not seeing a huge bust at all.  I think you had a boom in building two and a half years ago when prices went crazy. But prices out there are different.  They're based on rental income.  Rental income has gone down because of supply and covid money being sapped up.  

I believe the area is starting settle back in to normalcy. The starts for new builds are significantly down and have been so for about the past year now. The area is putting up more and more tourist attractions which should continue to drive more growth. And once we get through this batch of cabins that came online, I think occupancy rates will return back to pre-covid levels - which were among one of the better rates in any other STR area I had seen.

Its funny. But I had a guy back in 2010 or 11 ask a question about selling a house at a loss of about 40k or keeping it even though the rental income was barely breaking even if not losing a couple hundred per month.  Everyone - and I mean everyone - in BP told him to dump it and move on.  I told him not to sell because prices will come back.  He ended up holding it for another 3 or 4 years and sold it for a 100k profit. 

I'm seeing the same thing here.  And my answer is taking everything into consideration.  I mean if the cabin was 5 years in and losing 60k, I'd definitely tell you to sell.  But its not. Its brand new.  The revenue will go up.  How much? I don't know that and neither does anyone else here.  But a 2 million dollar cabin should be generating about 200k a year in gross rent out there once its stabilized.  Even with the downturn, I would say at least 180k.  If you're going to lose money at that number,then maybe our investment analysis was off from the get go. 

I'd be curious to know what the property management estimated your year 1, year 2, and year 3 revenues to be.  And what your numbers look like in terms of profit if you hit those numbers.

But I'm not buying the sky is falling just because it fell in the past.  Everybody is experience a reduction in STR rents across the board.  This area had a boom of building and now there's probably a bit of an oversupply adding to that.  But the last year the building has come to a screeching halt - and I know this because we're a builder and we talk with the permitting offices and get feedback on it.  Not to mention things like septic permits that used to take 6 to 8 weeks are coming back in 1 or 2. :-)

I like it slow and steady. And with interest rates decreasing and supply normalizing over the next year or so as the area adjust to the new batch of cabins that came online recently, prices will start to go back up again. They're not going to crash because the prices of rental cabins are driving by ROI and ROI will go up as rates drop and occupancy goes up.

Quote from @Gregory Schwartz:

I'd rather buy new than, build new. Less risk in the development process. Builders are providing a lot of incentives because they're hurting right now. Those incentives can be great opportunities 

But do the numbers come close to working if you're buying new construction from a contractor?  You're paying retail again which I just don't like.  If you gc it you should save 20% and be all in around 80%.  In some markets, its even more than that. 

I get the mitigation of risk big time though.  But again, how do the numbers work if you're paying retail? 

Tell them to go pound sand. Youre not paying a penny more in fees than what they should have given you in the initial terms agreement. And if the appraisal came in at what you had given them and if they're going off actual rents which they had from the get go, then tell them you need 75% LTV or its a no go too.

Sometimes its better to walk.  You'll be surprised at how fast they come back to you with better terms.  Now if there's a reason why they have to go 70% ltv, then thats something that they won't have much leeway in.  But the fee thing is an outright bait and switch and I wouldn't pay it.   Its cheaper to get another appraisal.

Quote from @Austin Wolff:

Building a new SFH (and then holding it as a rental) appears to be a better option than buying an existing SFH. If you build (via managing a general contractor), you should (ideally) know more about how the property was built than if you bought an existing home--you know what's behind the walls, and ideally you might avoid anything wrong with buying an existing home with issues you and your inspector didn't catch.

I understand there's risk to building--it just seems right now that the risk is lower than buying an existing house--a house where you simply cannot know every detail without tearing it down to the studs and doing a complete remodel. If you bought an existing home and it had a massive problem your inspector didn't catch, your deal could go under.

Am I wrong to think about it this way?

 You definitely can't build in the lesser areas.  Your costs to build are too high even if you're getting the land for free.   That being said, there are some significant benefits to building versus buying and rehabbing.

1) If you're building, you should be able to come in at 80% LTV or better assuming you're acting as the GC. If you can't do that, then something is wrong and you're not finding the right subs.

The benefit to that though is that when you refi you could refi at 75% ltv and only have 5% of the cost in the house.  So lets say you build a house thats going to be worth 300k and you can be all in at 240k and you refi at 75% or 225k.  That means you'll only have to be out of pocket 15k and you you'll have 75k in equtiy.    So if you had 150k, you could build and own 10 houses.  Versus if you buy a house for 240k and have to pay 25% down, you're looking at 60k out of pocket.  That 150k will only get you two houses.

The question there becomes will the property cash flow with a loan of 225k. If yes, thats good. If no, then thats a non-starter.

2) But it brings you to the next benefit.  Brand new construction rents at a premium.  I would say a 3 bed, 2bath, 1500 sq ft home that was 20 to 30 years old here might rent for 1750 to 1800.  But if it was new construction, I could get 2,000 to 2,100. I would estimate a 10 to 15% premium for rent for new construction so that helps overcome a little of the price difference.

3) Less repairs.  So thats the other benefit in terms of cash flow. Older homes have more problems.  New construction shouldn't have any major repairs for several years. And some of the biggest repairs not for some time (roof 20, hvac 10, etc) .

To me, building a new sfh should allow you to get a bigger discount than what is typically available these days unless you're really getting lucky.  But it requires way more work and way more risk as you have to manage the subs yourself and hope that they don't pull a fast one.  It also takes a lot more time than simply buying an existing house and rehabbing it.  2 or 3 months for a rehab? 9 to 12 for a new build? 

The key is to find the numbers in the areas that work best for new construction.  Find the balance where land is decent, but rents are high.  And I would probably look at the smaller houses where you can keep your unit costs down but still rent them at a higher price point relatively speaking.