Is FI through buying a property with cash worth and upfront cost?

[stevens]

Hi everyone. A precursor: thanks for reading this. It's a tad complicated.

My situation: I have the opportunity to do a 1031 exchange which could bring me FI, but will require some serious leverage (cash out + a small biz loan) to get the deal done. Is it worth it?

The details:
I have a rental property worth about $440K. ($180K left on the mortgage.)
The house generates about $2.5/month (gross). It is on Airbnb. (Net is significantly less.)
The property I'm trying to get: $555K.
$5K/month on Airbnb. (The houses are in different states. The new one close to where I live.)

I make decent money at my day job (not real estate related), but I am self-employed and thus taxes make me look like I make very little. Ergo can't get a traditional mortgage. They just laugh at me when I go in there. :)

I can scrape together enough cash to pay off the mortgage ($180K) and pay for the balance ($555K-$440K AKA new house - existing house) via taking $80K out of my Roth (no penalty), a $50K loan from my 401K, and taking the remainder as a small business loan.

It's a lot. And would leave me rather cash poor. And stressed. And hoping Airbnb doesn't get shut down in that town. --no threat that I've heard of this happening, but just sayin, people!

The cherry: This new house has been on Airbnb since 2012 so is has "regulars" who stay every year.

Post all of this, I would have $170 left in retirement, no cash to speak of, and $120K of equity in a different rental property I own. And maybe $40K I could access via credit cards. Plus my day job.

I would achieve FI after I paid off the business loan (5 years). Less if I made bigger payments.

Would you do it?

[cchrissyy]

what is it worth as a long term rental?  You need to have that figure, what rent would it make if your town outlawed airbnb, or if you couldn't get enough short term renters at short-term pricing and had to turn to normal 12 month leasing?

I'll guess, 2/3 or 1/2 that $5k figure

anyway, seems stressful. I guess depending on your day job, it could still get you FI, so, that's cool...

[Bearded Man]

No, I wouldn't. Your entire plan is hatched on 1) ABNB not being shut down in that area, and there is some reason you are concerned about this, and I know it has happened in other town across the US. 2) A lot can happen in five years. Also, part of the advantage of real estate is leverage. If your self employment is standing in the way of getting loans, find a way to get a regular job that you can do at home or nights, with sufficient income to qualify to buy. Otherwise, I'd invest in other assets.

[Mother Fussbudget]

No, I wouldn't. Your entire plan is hatched on 1) ABNB not being shut down in that area, and there is some reason you are concerned about this, and I know it has happened in other town across the US. 2) A lot can happen in five years. Also, part of the advantage of real estate is leverage. If your self employment is standing in the way of getting loans, find a way to get a regular job that you can do at home or nights, with sufficient income to qualify to buy. Otherwise, I'd invest in other assets.

+1.  No way.  You would be saddling yourself with excess debt when you should be ridding yourself of debt, or bringing in assets that generate positive cash flow.  True, the 401K debt would be "paying yourself back", but the rest of the debt doesn't make sense.  Find some other less pricey cash-flow investment to make.  Have you considered buying mortgage notes instead?

[NoNonsenseLandlord]

AirBnB is no guarantee.  It is a new business, and many cities are trying to eliminate it.  In HOAs, it is probably against the rules.

You will not be FI after you purchase it...

[kiwichick]

I agree with the others. You would be taking on a heck of a lot of risk - throwing all your eggs into one basket. Airbnb seems like a fad to me, though admittedly I've never used the service (I've heard a lot of horror stories about dodgy apartments, which over time may colour peoples' perception of the service).

If I'm reading this right, you currently have 2 rental properties plus $130K in retirement savings. If you purchase the new place, you'll have 2 rental properties and no savings. What happens if the rental market crashes, or if there's another terrorist attack that causes a significant cut to US tourism? Very risky.

[Fuzz]

Also, $550K purchase price and $5K/month in rentals seems risky. Your gross monthly rent is less than 1 percent of the purchase price. For a single family rental, it's better to be above 1 percent, unless you're making an appreciation play.

[SwordGuy]

In my market, I'm spending less than $50k to make $750 to $850 a month.

$5000 goal / $800 avg rent = about 6.25 houses to gross that much.

6.25 * 50k = $312.5k investment. 

And my eggs are in 6+ baskets, not one, with the added advantage I don't have to buy all 6 at once...

I wouldn't do what you're thinking about on general principles.

Plus the payback you mentioned for that size investment sucks.  It's less than 1% and you want to be aiming for 2% (and settling for less only when you have to).