Airbnb vs. House Flip: A Real Estate Investment Case Study

A real world investment property analysis showing how financing costs, operating expenses, and cash flow projections can change an investor’s strategy.

By Kendall Maccagnan, CPA, CFP® and Financial Advisor in Tampa, Florida

Adaptation in Real Estate

This case study is based on an actual investment property analysis and details have been rounded and simplified for educational purposes. An investor purchased an investment property initially thinking they would rent it through Airbnb. Real estate moves fast. In a competitive market, buyers may be working with quick math, quick comparables, and an initial belief that the deal makes sense. Sometimes that initial belief is correct, but sometimes when you break down the costs, the numbers can point to a different conclusion.

Property Overview

Property Assumptions

• Purchase Price: $310,000

• Estimated Renovation Budget: $45,000

• Total Project Cost: $355,000

• Estimated After Repair Value (ARV): $440,000

Financing Structure

The property was analyzed using a 12-month interest-only bridge loan with the following terms:

• Interest Rate: 11.5%

• Down Payment: 10%

• Points: 3

• Loan Fee: $550

• Loan Term: 12 Months

  
  

Originally, the investor was planning to complete a quick cosmetic renovation before refinancing into a DSCR loan and renting the property on Airbnb.

Evaluating the Airbnb Strategy

After the initial deal terms were in place, the investor reviewed a more detailed financial model and evaluated whether the Airbnb strategy met the investor’s return objectives. A breakdown of how that analysis was put together is included below.

Basically, three scenarios were modeled: best case, middle case, and worst case. Each scenario has revenue and cost assumptions included based on local market research. Under the assumptions modeled, the Airbnb strategy produced projected negative annual cash flow in all three scenarios.

DSCR Assumptions

The analysis assumed the property would later be refinanced into a DSCR loan using the following assumptions:

• Property Value: $440,000

• DSCR Loan Amount (75% LTV): $330,000

• Interest Rate: 6.5%

• Loan Term: 30 Years

• Estimated Monthly Mortgage Payment: $2,085

Under the assumptions modeled, the DSCR refinance was projected to provide around $10k of cash back at closing after paying off the initial loan. This cash would be used to help furnish the Airbnb.

Scenario Analysis performed

Even in the best case scenario, the investor would be operating with projected negative annual cash flow. The best case also produces a projected cap rate of 4%, which falls below the 6.5% DSCR loan rate on the property. Comparing the cap rate and loan interest rate together could help highlight when financing costs may put pressure on an investment strategy.

These figures are projections based on the assumptions listed. They are not guarantees and should not be interpreted as expected results. Actual results may differ materially based on market conditions, financing terms, renovation costs, resale value, occupancy, expenses, and execution risk.

Back To The Drawing Board

Because the property required primarily cosmetic improvements and could potentially support a shorter holding period, the analysis also considered whether a fix and flip strategy could generate a more favorable projected outcome for the investor.

Evaluating the Fix and Flip

To stress test the opportunity, three scenarios: best case, middle case, and worst case were again modeled for the fix and flip strategy.

The total loan amount is $319k and cash needed to close is made up of the following:

• Down Payment: $35,500

• Points: $9,585

• Closing Costs: $4,000

• Fees: $550

• Total Cash Needed Today: $49,635

Again, total renovation costs are anticipated to be $45,000 and this number is baked into the loan costs in the model below.

Each scenario models a different holding period ranging from 4 to 12 months and factors in carrying costs including utilities, property taxes, and insurance throughout. Across all three scenarios, the analysis produced a positive projected pre-tax profit.

Because the scope of work is limited to cosmetic updates with an estimated completion timeline of six weeks, the investor may have a path to recycling their capital relatively quickly and redeploying it into a different opportunity.

For simplicity, ARV is held constant across all three scenarios. In practice, a true worst case might also assume a lower exit price, higher renovation costs, longer holding period, additional selling costs, or changes in market conditions, which would compress profits further than what is shown here.

These figures are projections based on the assumptions listed. They are not guarantees and should not be interpreted as expected results. Actual results may differ materially based on market conditions, financing terms, renovation costs, resale value, occupancy, expenses, and execution risk.

Lessons Learned

1. Multiple Exit Strategies Create Flexibility: Although having more than one exit strategy in mind before jumping into a deal can create flexibility to pivot, generally it would be better to underwrite your deal prior to signing the contract and paying the deposit.

2. Adaptability Is An Underrated Investing Skill: Being able to slow down and look at the full picture in order to adapt to problems is important. It is not always a question of if there are going to be problems, but what problems may pop up and when. There are often issues that arise, and an experienced investor may need to work the problem rather than rely only on the original plan.

3. A Positive Cash Flow Projection Is Not The Same As A Good Investment: Although the fix and flip strategy produced a positive projected pre-tax outcome under the assumptions modeled for this investor, positive cash flow does not always mean an investment is attractive. Investing is about trading risk and return and attempting to earn an appropriate return for a certain level of risk. Even though there is positive projected cash flow, the investor also has to consider whether the cash could have been deployed into another deal with a higher expected return, lower risk, or better liquidity.

Important Disclosure: This case study is provided for educational and informational purposes only and should not be construed as investment, tax, legal, accounting, or financial advice. The figures presented are based on assumptions, estimates, and projections specific to this analysis, and actual results may differ materially. Investing and real estate ownership involve risk, including the potential loss of principal. Any financial decisions should be made in consideration of your individual circumstances, goals, risk tolerance, and time horizon. This case study is not a recommendation to purchase, sell, finance, or pursue any specific real estate investment strategy.