Who invests in rental properties, what are your criteria, would you put capital in to buying a rental versus overpaying your own mortgage? If you had the cash to overpay your own and clear it in half the time and purchase a property, would you do both? or clear one before buying another?
What would you consider to be a good rental yield? are you happy to carry multiple mortgages and to be leveraged to own multiple properties? whats the minimum equity you’d want to keep across a portfolio?
Everybody has different comfort levels of risk & cash flow. There is no one right answer.
Personally I don’t mind being heavily leveraged as long as short term cash flow is adequate & long term gains are realizable.
The business model that my partners & I follow is simple: B level properties in A+ locations. We primarily do vacation homes.
Don’t underestimate how much time it takes to be a landlord.
Don’t be optimistic in calculating you cash flow. You are lucky if you have someone in the house for more than a year which essentially means an empty month per year. It’s also hard on a house having people move in and out that much. Most people couldn’t care less about your house and the measly security deposit isn’t even close to covering the possible damages. I’d want mortgage payment to be less than half of what I knew I could get in rent. Given that it is a good tax shelter.
It is much more difficult to buy second homes these days. Don’t underestimate what it will take to qualify for a mortgage on a home like this.
There is a lot of interest in the rental markets right now. We are currrently working with an investor that is buying $3 mil worth of homes (about 15 moderately price homes where I live). Cash buyer, no leverage. He is looking at clean homes in good condition, good school district etc. Basically he does mind paying more for better properties. No fixer-uppers. He will us a management company. He is looking at a 5% cash on cash rate, a 5-10 year hold, and about an 8-10% yield. He usually establishes current market value then discounts another 10-15% for anticipated value declines over the next 1-2 years.
If I was buying now, I would use conservative leverage. If I had cash for one house, I might buy two and get a moderate loan allowing plenty of room for unforseen expense and price declines. Five years ago that might have been leveraged to 3 or 4 homes.
Been there. Good long term investment sometimes, but rental properties are a headache - maintenance costs, lousy tenants, etc, etc. Buy wisely if you get in, but I’m glad I’m out.
could you give me an idea of what you consider to be highly leveraged? debt / equity?
we’ve followed the B level properties in A locations strategy as well. ours are, with a single exception (a vacation rental which is A quality in A* location), slightly dated but close to excellent transport links (less than 15 minutes to central london) and excellent access to local facilities, good publs, bars, restaurants and shops and we’ve gone for accomodation that is suitable for young single professionals, primarily doctos / nurses in one instance and city workers in the others.
We’ve also picked area’s that have not decreased in value / did not decrease post 2007, they either stalled or continued to appreciate albeit slowly.
**He is looking at a 5% cash on cash rate, a 5-10 year hold, and about an 8-10% yield. He usually establishes current market value then discounts another 10-15% for anticipated value declines over the next 1-2 years. **
That’s not a great return for all the potential headaches. It looks realistic but with that amount of cash it’s not great.
He uses a management company, which is factored into the expenses. So, yes a few headaches but no interface with renters.
We always put 20-25% down, and the places we buy are vacation homes in the $500-900k range. When I say leveraged, I mean I don’t mind carrying a bunch of debt, but every house we buy we are buying right—usually from the banks or short-sales–and the last couple have had $200k+ in equity before we closed on them.
We don’t do long term rentals–as they are vacation homes we’ll occasionally do a 4-6 week summer rental at a good rate, but most of our rentals are 4-7 nights. With our model, only 30-35% occupancy annually = zero out of pocket expenses for the partnership outside of maintenance.
We won’t do A properties in A locations simply b/c the risk is too great—the monthly nut on a $1.5-5m house in Aspen/Vail/Park City/San Diego etc is such that unless you have almost 40-50% occupancy, you aren’t cash flow neutral, and one bad ski season/economy (like now) = hemorrhaging money. And there aren’t that many vacationers who are willing to drop $1-2k per night in the non-prime weeks.
We’ve done both the external management company & doing it ourselves—and it really depends on location as to which has a better rate of overall return visa vie the headache factor. Some places, where there are a TON of rentals (Big Bear, CA) having a great management company is a must as the sheer volume of available choices makes for potentially poor return/usage.
15 year mortgage. 4-5 partners per property. Diversify the risk & spread the reward. Each house has a different partnership setup, but the partnership docs are virtually the same for each house.
Its as much a lifestyle investment as it is a business investment (at least from my POV); ski & beach vacations are VERY expensive, mostly from the housing costs, so I look at the short-term cash savings as the return on my initial investment (down payment) & then at the long term capital gains over the next 10-20 years.
One of the partners has been doing these for almost 15 years—he hasn’t paid for a vacation in years thanks to Homeaway & VRBO swaps. I figure we save about $10-15k a year just in vacation housing costs by swapping/trading time in the homes with similar homeowners (sort of like a timeshare trade). If you get really creative/lucky (trading time for airline tickets with airline employees is VERY popular) you can basically vacation for free.
Last I looked they weren’t making anymore beach & (skiable) mountains.
Next one on my list will probably be beach houses (shack) in Pismo Beach and/or San Diego—rent it during the school year to college kids (their parents), then use/rent it during the summer months for income/lifestyle. Different model of business but the end result should be about the same.
Plus you have cool places to stay whenever it works out.
On the central coast, you may want to take a look at Avila Beach. They have some condos there that you can do $2500/week during season for $500,000. I block from the pier. Kind of the hot spot over there right now.
Cayucos probably has more “beach houses” or water-front homes than anywhere over there.
Do you know all the partners or are you doing this all through an external business? its seems to be not a bad way of doing it, you can probably get to 1/5th of 25% down fairly quickly as opposed to having to find it all yourself.
Is your long term goal to hold them and use them as a source of income or to dispose of them? do partners drop out / sell their shares on?
The cash saving, is not really a saving though, as if you’re using it, or trading it, thats the loss of weeks income correct?
If you take a peak week for vacation, how do you figure out how much it costs you? do you pay the weeks rental cost? do you pay a discounted rate? do you get so many weeks per year in your contracts?
Thanks, I’ll check it out.
Myself & one other principal partner have been doing business together a long time. The others are basically friends, or friends of friends, or business acquaintances who come in for minor shares. We open these to 2-4 different people that we think will be a good fit & then see what happens—the shares are usually bought up right away.
Both. Partners can drop out/sell shares at any time, however they do so at the lowest of 3 market appraisals which they pay for & are responsible for all closing costs/attorney fees if they want to sell.
True on the not-really-saving, however on an annual basis I look at it as not having to pay $5-15k in vacation costs to someone else, I am paying myself, one way or another. As long as they are cash flow neutral, after initial investment/fix up, and I’m able to use them 3-4 weeks per year, I really don’t care too much. The 15 year appreciation is what is sweet. If I relied on rental income as a primary source of income I wouldn’t be doing vacation homes at this price point…and I have no desire to be a full time landlord.
Coming year’s weeks are drafted by all the partners in the fall. The partnership “keeps” 5 prime weeks a year (Thanksgiving, Xmas, New Year’s, Presidents/Valentines, (Sundance (Park City), Aspen Food & Wine, etc) & the revenue from those weeks goes to cover all overhead (usually about 50-65% right there). What is left over are what are drafted. What they do with them is up to them. Partners are responsible for their share of the annual expenses—how they pay their share is up to them. Traditionally most rent the peak weeks (covering their nut), keeping one for themselves, trade the shoulder weeks, and then use/trade/barter the soft weeks. From a small business owner, they are great incentives for my employees/customers—a free week in Vail, Park City, Big Bear etc during the summer is a nice gift/incentive/thank-you to most people.
Having 3-4 partners in each property guarantees that everyone has plenty of week’s to use for themselves, nobody gets hurt in a bad year, & that the quorum for a consensus is 75%. Doing these deals with people we know makes it easier than if there were total strangers where not everyone is likely on the same page.
Taking a peak week & using it vs renting it out is a simple equation—for example, our place in PC rents for $7k a week over spring break. I can pocket that $$, or use it against my overall expenses on the house. As my other drated peak weeks (usually) cover the rest of my % of expenses, and b/c I only buy in locations that I want to visit/vacation in, I don’t worry about the “loss” of rental income. As I said, for me this is as much a lifestyle investment as it is a business investment. That being said, with kids in school, its not like we can travel 20-30 weeks a year, so I’m about at the point where they’ll be generating actual cash flow with one or two more acquisitions (hopefully).
Thanks, but we don’t do condos—just not the same upside & plenty of downsides. Ditto Mello Roos or similar homeowner association fees. Plenty of SFR without playing stupid games/fees & dealing with owners associations. That being said, the 3b/3.5ba 2800 sf condo in foreclosure just a couple of blocks away sounds like a better deal. Auction next week.
I don’t know if you know Avila but it has a very cute boardwalk area with restaurant and winery tasting rooms, pier and mostly upscale housing. Definitely on the rise and not much to buy. Definitely will always set the high end for the central coast.
After the Peaks have gone, how do you distribute the remaining weeks amongst the 5? via discussion, a draw / lottery, does everyone get the same number high, mid and low season weeks.
Who manages them out of season, i.e. close them up, maintenance etc?
Snake draft. Initial draft slots/order based on when each partner committed to property & # of shares (i.e. lets say MP took 2 of 6 shares 1st, then GP #1 took 2 of 6 shares, then GP#2 took 1 share…etc, draft would go MP, MP, GP1, GP1, GP2, GP3, GP3, GP2, GP1, GP1, MP, MP, MP, MP, GP1…etc). Up to them to take whatever weeks they want/need. In the Park City house we recently did the MP was from the south & took 3 of 8 shares, but used his 2nd round of draft choices to take a block of 6 weeks in the summer to get away from the southern heat.
As I said, depends on the area. MP is managing PC himself, with local cleaner & handyman available. If there is a rental agency, they handle all the cleaning crews & general maintenance, but there ends up being work that each partner does, to some degree, each time they visit the property…whether it be changing batteries/light bulbs before each busy season or full oversight of a construction project. One of the partners owns a block of properties in Belize—he has a full time local caretaker on site to manage the compound (3-4 houses). With the available software via VRBO & other similar sites, its relatively easy to manage the rentals IF you can market the properties well enough to drive traffic.