Yesterday I wrote about how I want to diversify into real estate as part of my 2023 goals. That's partly investing and partly personal. I want to buy some land up in the mountains just for myself.
Regardless of whether it's investing or personal use, I definitely want the best deal. On top of that, I want to use my funds most effectively.
So today I was doing a little shopping on the MLS.
I found this property which is relatively local and put it through a short term rental analyzer (airdna.co):
The cap rate is 11% assuming built in management. That's not terrible. Short term rentals will tend to generate more income with the flip side being more intensive management. But I have systems for that, so the management should be... manageable.
The next question becomes what is the cash-on-cash return here? How much do I actually have to put out and how much do I get back monthly?
Let's say I put 50k as a down payment + 30k + 20k for improvements and repairs.
Principal and interest on a 200k loan would be somewhere around 1400/mo or 16,800/yr.
So I'm out 100k generating net operating income of 33k and paying 17k in mortgage costs. Altogether that creates free cash flow (FCF) of 16-17k.
On 100k of capital that's a 16-17% cash on cash return. In some cases that might be good, in others it wouldn't be. It depends on what your options are - that's your opportunity cost.
Here on Hive I can put HBD in savings for a 20% yield. The yield is somewhat reliable. It can be changed by witnesses at any time, but they are unlikely to do so in the near term. The principal value is somewhat reliable. We could see a depeg event, but I'd be confident of getting back to peg in 6-12 months. Access/liquidity is medium-good these days. You could probably cash out 10k/day without too much trouble.
So on all those fronts, I'd rather have the HBD in savings or in the CUB pool making 20% than the real estate.
Of course, there are volatile cryptos that could do much better, but those are volatile. I'm trying to compare apples to apples here.
For this particular property I'd want to see my cash on cash return over 30% in order to entice me into exiting HBD. Either price needs to come down, revenue needs to go up, financing/capital costs need to come down, or some combination.
On that last piece, I think subject-to deals will be making a comeback here in 2023.