OK, I know that “past results don’t guarantee future performance”, however, time and time again has proven that investing in real estate for the long term pays its benefits. And this is the story how B and J are enjoying their profits, while a lot of people were “waiting”.
After purchasing their first home, B. and J. (watch out for the jokes) reached out to me to purchase an investment property. They wanted to put it on airbnb.
At first, we started in the most common places: next to the beach, trendy spots, things like that. It didn’t work. The properties we saw either were too beaten up, to the point that the renovations would be feasible, or they were just too expensive. What did we do?
We started to look into other areas, no so obvious for the naked eye in regards of having an Airbnb operation, but that had potential.
To win in the short term rental game you need to impress with comfort. And I don’t mean filling up your house with services that will make the whole operation lose money. But you need to cause a good impression in your guest AND be in a comfortable neighborhood. That’s how we found Oakland Park, FL.
Oakland Park, at first, doesn’t have the most obvious amenities for people in vacation: it’s not on the beach, doesn’t have a lot of night clubs, and nor amusement parks. But that’s exactly the reason why it’s a great destination.
See, most people think that “vacation" means going to parks, beaches, sightseeings. But a lot, and I mean, a lot of people just want a get-away play. Specially here in South Florida.
During the months of October-May, families from all over the country, specially from the colder states, come down to relax. They don’t want to see Mickey. They are not thrilled to join the tourists in South Beach. They just want to relax and enjoy some peace from their job, family, and everyday life.
After visiting about 5 houses, we find one that would check all the boxes: 3 bedrooms, pool, corner lot. The property was off US1 (for those not familiar with South Florida, it means it wasn’t next to the main street connecting the North and the South). They paid $575,000.00, putting only $5k down and another $20k at closing.
In total, they purchase the house less than 5% down, and leveraging (a.k.a) financing 95% of the purchase price.
With that, their monthly PMI (Principal, Mortgage Insurance and Interest) ended up in $3,386.00
Was that worthy? Let’s break it down.
Other than their monthly payment, their additional costs to maintaining the property are the utilities, around $500 per month, with electricity, water and cable. They spent another $10,000.00 decorating the place.
They rented their house for an average of $240 per night, and their occupancy rate is around 87%.
Through the platforms they use (Airbnb, VRBO, Booking) they charge the guests with a cleaning fee and get charged about 3% for the service.
Their total investment was $25,000.00 (down payment) and $10,000.00 in decorations, totaling $35,000.00.
With a maintenance reserve of 4%, they are netting every month about $5,800, enough to cover their monthly payments on the PMI and leaving them extra $2,440 per month.
This year, after 12 months of their purchase, I did a CMA (comparable market analysis) for them just for knowledge, not that they have any intentions of selling. The current market value for their airbnb property is $695,000, an upside of $120,000.00, which is now built in their equity.
On top of that, with the $2,440 per month of their Airbnb operation, they made another $ 30k in free cash flow, straight to their pocket.
Just on the cash-on-cash return, they are making 7% per month. If we take into consideration a sale of their property today, discounted the realtor’s commission of 6%, they would have made an Internal Rate of Return of 501% in 12 months.
The message here is: don’t wait. The property values may not go up as much as they did in the last 12 months, but they will still keep going. And in the meanwhile, you can still make a positive cash flow operation.
There’s much more than “buy and hold” in real estate. But you can only win if you are in the game.