I wanted to get a short-term rental over the last two years, but it didn't happen do to realtor snakes. Now prices in my area have climbed 20-100% for anything I'm interested in. I also want my eggs in other baskets until about Jan 2026. But am still considering getting something smaller to live in until then. And then have it as a short-term rental while I'm away (which is a lot of the time). But after this period (2026 onwards) having a mortgage-free $1,000,000 property generating 7% will be something that should sustain basic living for the rest of my life. It seems like the solidest move, even though better gains can be had elsewhere.
I'm curious -- what happened?
I am a real estate agent on the side. Luckily since it is a second income, I get to tell friends when my honest-to-God advice is to NOT buy/sell.
What do you think is the minimum yield a property should generate? And what are you looking at for an acceptable annual return?
My strategy doesn't actually use either of those metrics. I live in a rather high cost of living area. In order to cash flow you need 30%+ down, and I typically don't have that scale of cash. Instead I simply go for break-even properties, and my future depends on appreciation.
The safeguards:
1. You don't buy the next property until the previous purchase has matured; The last one I bought at 5% down, made improvements, it also appreciated, then I appraised to get out of PMI. I think I have 27% equity there now. The previous one is around 50% equity. If you expand too quickly you will be leveraged to your eyeballs and susceptible to a crash.
2. You have to keep your finger on the pulse of local sentiment and demographic shifts. If people want to move there, and they
are moving there, you should have a good investment. If you are in a rust belt type area and people are leaving, you need to sell.
If I was buying in Baltimore, I'd require really high cash flow. There you can actually find cash flow at 20% down, no problem. But then you get to collect rent with a gun and deal with that type of tenant. You'd also have to buy lots of units and hire a property manager. I have a small quantity because they are expensive.
I also want my eggs in other baskets until about Jan 2026. But am still considering getting something smaller to live in until then. And then have it as a short-term rental while I'm away (which is a lot of the time).
I was able to make exactly this strategy work rather well. I bought a small place, remodeled it while living in it, and then set it up to STR and took a two-month trip. Now I'm living elsewhere and STR'ing it 6 months out of the year. It's been an immensely powerful strategy when you consider it pays for most of the entire year's mortgage on those 6 months, and then I get a great place to stay for the other 6 months.
But after this period (2026 onwards) having a mortgage-free $1,000,000 property generating 7% will be something that should sustain basic living for the rest of my life. It seems like the solidest move, even though better gains can be had elsewhere.
My biggest one is worth about that, though with ~50% equity. Annual rents are about 4.3%. It's tough to find a $1M place with ~$6k annual rent unless maybe it's a fourplex or larger.
