Mr.Frugality

Airbnb Real Estate Investment

We purchased a 1 bedroom and 1 bathroom 800 square feet condominium on foreclosure auction in December of 2018 for $152,500.00 in Scottsdale Arizona. This was done based on our success with renting our basement and a good resolution to our purchasing property in Arizona dilemma.

This purchased was 100% financed by our open line of credit that we have against our house. The current rate on the loan is 5.75%. We decided to make this purchase because the purchase of the price of the condo was within our level of risk. We have been looking to buy a good deal Arizona around Phoenix Area for the last several years but didn’t have a capital to buy something. This is reflected in one of my previous posts.

The condo is located in an exclusive area and offers resort style amenities, such as heated pool, hot tub, clubhouse, and fitness center. This is almost exactly what we were looking for.

Prior to this purchase, I spend a lot of time analyzing that particular area in Phoenix based on short-term rentals occupancy and rates, long-term rental rates, and price growth. The analysis revealed that this area while not the best for short-term rentals but good.

We were ready to purchase if an opportunity came up. We knew that our risk of failure was very low. Of course, the place could have been completely destroyed, but even with only 800 square feet of space, the cost of fixing all up would not be that prohibitively expensive.

Transaction history and some great news:

The overall transaction went very well. The purchasing agent was on the phone with me during the auction and purchased it on my behalf. I wired him the money a few minutes later. That’s said sending $152,500 was a monumental move for us.

A couple of hours later, I started to call around to see if this condo was managed by a management company. After only a few calls, I got hold of the management company. I spoke with the leasing agent and he told me that the unit is empty and that the previous long-term renter has moved out at the beginning of December. I did ask him in what shape is the condo? He stated it still has the old cabinets but otherwise it is in pretty good shape. I was definitely excited about that. The agent told me that if I wanted to, he can rent it out right away for about $1,150 per month. I said that I will not need his services at this time, but I will be in touch.

Before the conversation ended, he told me the last bit of great news. He said that this condominium comes with 1 car garage. This was definitely music to my ears because I thought there is only outside parking in this complex. I estimate the value of 1 car garage to be $10,000.00, which I was not counting on. This news definitely added to our margin of safety.

Cleaning and transitioning to short-term rental:

The condo was purchased at the beginning to December and Christmas was a few weeks away. We decided to hold off on any repairs or inspection until after Christmas to start working on the condo.  For Christmas, we were in Chicago and right after Christmas, I flew out to Phoenix for the first time see the condo.

Since this purchase was sight unseen, I was definitely excited and nervous to see if we made the right decision.

Once, I entered the property for the first time, I was pleasantly surprised that the place was not destroyed and the only really bad thing was a very dirty bathtub. It was not being washed probably for about 10 years. It looked absolutely terrible but salvageable.

On December 26, 2018, through January 5, 2019, I worked from about 6:00 am to about 11:00 pm every single day. This comes up to about 187 hours.  During the time, I painted, cleaned, scrubbed, replaced blinds, replaced sinks, purchased mattresses, purchased a new television, and set up the entire unit for short-term rental.

I honestly, never worked harder in my life. But it was also a thrilling experience for me and I am able to do this all by myself and for myself. I was also very proud of myself that when my family will come on next vacation we can enjoy this exclusive property as owners and not renters. This meant a lot of me. I was envisioning my children swimming in the heated pool while we play with them.

These positive thoughts were definitely important to me while scrubbing and cleaning the bathtub for about 10 hours. The bathroom cleaning was the biggest hurdle for our success. If the bathroom was not brought up to the correct standard, we would have missed a busy renting season.

I had very nice extra furniture in Chicago that was stored in one of my long-term rented condos in the attic of the garage for the last several years. I had it shipped to Phoenix.

The initial out of pocket costs including the purchase of few furniture pieces in Phoenix, all of the supplies for the kitchen, bathrooms, and shipping was $4,907.53.

On January 8, 2019, the condo was listed for rent and nearly immediately got rentals. I used beyondpricing.com (referral link) to help me out with properly pricing this the new venture. They charge a 1% fee and it is well worth it. Unfortunately, Airbnb’s objective is to as many rooms. However, my objective is to earn as much profit as I can. For that reason, I gladly pay Beyond Pricing for representing my interest.

Income and Expenses:

Airbnb.com – Income:

Vrbo.com – Income

So far in 2019 short-term income $10,042.08. Most of our income with form Airbnb.com but there some from VRBO.com. We prefer Airbnb.com because they have many more controls than VRBO.com. We have other income as described below.

We also learned through airdna.co that slow season in Phoenix is from May through August. Thus, we listed the property for rent on a month-to-month basis in May through August. After several weeks of waiting, we got a renter that was needing a place for a few months while he and his family will settle in Phoenix. The rent includes everything and it is for three months May, June, and July at $1,150.00 a month.

The icing on the cake – Garage:

The garage was sitting empty and I didn’t need a garage for anything. So, we listed as well back in March. I got many weird inquiries but in April a very nice gentleman that lives around the area contacted me and asked me if he could store his newly purchased very luxury vehicle in our garage. I later found it was a very limited model of a Porsche 911. I responded, yes. A few weeks later while we in our condo on vacation he contacted me and I rented the garage for $200.00 per month starting in May.

So far the gross income from the condo as of May 31, 2019, is $11,392.08. or $2,278.41 per month. I say this is pretty amazing. We definitely feel very lucky. During this time, we also spend 8 days in own condo in April so we did not have to spend at minimum $1,200.00 to be crammed in a single room hotel room.

Expenses:

Initial repair and prep costs – $4,907.53 (Start-up costs.)

Association – $1,559.32 (Back payments and miscellaneous transfer fees.)

Cable and Internet – $733.19 (Outrageously high, I will write about this later.)

Electricity – $452.90

Day Laborer – $80.00

Locksmith – $136.50

Real Estate Taxes – $407.21 (Taxes are about $850 per year.)

Reservation System – $110.37

Interest Expense – $2,634.68

Insurance: $458.00

Total Expenses: $11,479.70

Net Loss as of May 31, 2019: ($87.62)

Line of Credit:

We started with an initial $152,500.00 outstanding loan balance. Currently, we have an outstanding $142,170.29. We want to make sure that we pay this property off as soon as possible, so we have been paying down the principle from all of the money that is coming in. On the onset of this transaction, we never put the put any money down.

If this would have turned out a very terrible investment, we have the leverage of taking a loss and closing on out on this transaction. We would only pay on the back end if we had to.

Currently, we are only required to pay interest but we really don’t like loans. We also like to use a 0% credit card offers to save on interest. We take out the money pay the minimum on a monthly basis and pay off the remaining amounts a few days before the huge interest sets in. All my friends tell us that this is a risky move but I have found no other way of getting very cheap capital. We keep a significant amount of money in savings that earn above national average interest in capital one just in case we need to pay it off. At one point we had about $160,000 dollars floating at zero percent because we bought a rental condo with it. We, of course, paid that off. We got an income producing condo and while paying 0% in interest with the exception with balance transfer fees about 3%. We do this all of the time to save on interest costs. I will write about this later.

First costs are always high.

One of our biggest issues was expensive cable and internet. One month we got a bill for close to $262.00 dollars. We thought that was outrages, so we switched to DSL which to our surprise works perfectly fine. We then turned off the cable and purchased a small digital antenna to get local channels and installed Xumo app on the television that feeds about 100 plus channels for free. Guests can log in to their Netflix and we provide our Amazon television. So, went from about $262.00 per month to $65.00 per month or 23% of original costs. I wish we could get costs down on everything in life like that.

We don’t expect any other high costs in the near future with the exception of monthly association -$215.00, real estate taxes $70.00, electric $100.00, internet – $65.00, linens and supplies – $80.00 for the total of $530.00. Cleaning is variable and it is paid by guests so nothing to worry about.

2020 will look much better it relates to costs. The simple math of estimated gross income of $20,000 with estimated total costs of $12,300 gives us $7,700.00 or $641.00 per month. The estimated costs include mortgage payment and real estate taxes. A return of 5.06%.

All of our profits will go into paying off the line of credit. In short-term our benefit will be usage for about three weeks per year plus appreciation on the value.

Future Plans:

We will stay with short-term rental for as long as we can because it will provide us with the highest return of about $20,000. Note this is a middle of the road estimate. In this complex condos rent for about $1,150.00 per month, so based on annual income would be $13,800.00. The garage rental will bring another $200.00 per month for a total of $2,400. Thus, a total of long-term rental could be brought about $16,200.00.

Our worst case scenario is renting on a long-term basis and still make money. $1,350 per month minus $700.00 in mortgage and $300 in association and taxes, we are still net positive $350.00. I think that is pretty cool since we didn’t have to put anything down to have the right to own the property.

One important item is that we currently live in a cold climate and went already to Phoenix about 3 times a year previously. Now, we can go Phoenix to our own home and stay that without actually paying a premium for hotels.

There is one additional benefit of keeping the condominium on a short-term basis. The cleaning fee that is currently charged is $100.00. Once, we move to Arizona in the future, we can go and clean the place ourselves, which in turns provides us with additional funds. On a monthly basis let’s say turning the condominium 4 times would give us an additional $400.00. Or we could lower the cleaning rate.

The beauty of running this rental that we have many options.

Estimated Value:

These condo estimates are good. Ove the last few months Zillow has been bringing their projections and estimates down a little, which is a good thing. Most of the 1 bedroom condos do not have a garage with them but a carport. Thus, we have about $10,000.00 of additional value. Our condo is not updated like the ones currently selling. We estimate that our condo is worth about $162,000.00. As a comparison to our purchase price, we have a margin of safety of $10,000.00.

5 Year Plan:

Pay off the loan. We will then have a yearly cash flow of between $16,200.00 and $20,000.00. After the loan is paid off we will replace the windows, air conditioning, and start a remodeling project on the kitchen and bathroom. The windows are in pretty poor shape. We will replace them with triple pain ultra-efficient ones. These types of windows are very expensive. This condominium has south facing windows and patio which can get very hot in the summertime. Plus, I like the added benefit of a very quiet room.

Note to my kids after reading this article in the future:

When making a valuation of future investment look for the following. Can you make money from the purchase? Is the decision that you are going to make based on your independent analysis? Are you in control of this investment? Is the area of relative growth? Is the purchase price below the market value? Are you buying at a premium and have good reasons in doing so?  Do you have enough capital to bridge you in case there are initial losses? Is the interest cost low? Are your transactions costs low? What other things can you do to add value to the property or the people using it? Can you divide the property to create different streams of income? Lastly, I want you to envision this investment in 10 years from now? Was it worth it? And Why? Would you make the same purchase again if an opportunity presented itself?

Thanks for reading.