How To Manage Your Property Without Stress (or at least less stress..) – Part 2

Part 1 of the blog post discussed the fully outsourced option to property management of a short-term rental. Below, we will discuss the self-managed option . Even with the help of property management software, which can facilitate the bookings, communications and invoicing, the most time-consuming aspect will be cleanings, pricing and guest communication.

·       Cleaning – At a minimum, this is the one area we recommend outsourcing regardless of how you decide to handle the rest of the management spectrum. We suggest you interview multiple cleaning companies/maid companies about handling the unit turnover and focus on 1) quality, 2) scale to handle potential multiple turnovers on the same day, as well as turnovers on short notice and 3) price. Remember, short-term-rentals are a different beast and we are trying to create passive income.  If you are inclined to manage your short term rental, stick to only handling the communications and bookings to reduce fees and improve the guest experience, while outsourcing the unit turnover and cleaning. Regardless of whether you have 1 unit or several, the key is to get the units turned over the same day, which can often mean the units need to be cleaned in a 4-5 hour period to achieve this. To avoid having to block the calendar and have lost revenue, the key is to have a reliable and consistent cleaning option. Also, wouldn’t it be nice to have your unit generating revenue while you take a vacation?! Outsourcing cleaning can help with this.

 ·       Pricing  - Having an understanding of the proper pricing is one of the most crucial elements to managing rental real estate and no more important than with short-term rentals, where pricing by day could be different. There are pricing tools to create dynamic pricing (beyondpricing.com and pricelabs.com are two that are out there) that are helpful if you want to be more hands off, but they still have weaknesses, given they rely on your competition and don’t have a grasp on your unit quality compared to other units that are nearby with similar bed counts. Some of these are already integrated with the PMS, which makes them very easy to use. These are helpful as a baseline, but we recommend you still may want to make tweaks based on your rental quality and tweaks for major events that might not be fully reflected in the automated pricing estimates (i.e. big festivals, conferences, concerts, marathons, etc. that draw an exponentially high number of visitors at certain points in time). Websites like airdna will help you understand pricing in your zip code, while just research other nearby listings on AirBnB and HomeAway to see what your competing with is a must do if you want to self-manage.

 ·       Communications – In our experience, this is both one of the biggest strengths and weaknesses of a fully outsourced option. The strength is that they respond quickly, and key communications are standardized (like providing guests check-in/out instructions) and handled with ease. The weakness is that unless there is a local employee responding to the inquiries, they can be very robotic and “distant” while guests might be looking forward to their “host” providing local recommendations.  When you use a PMS, you are going to be handling all of your communications, so you end up being “always on” as guests expect quick responses.

 ·       Advertising – Even if you want to self-manage, your listing and photos need to look professional (i.e. no camera phone pictures!). Pay for a premium photographer and ensure your listing content is accurate and thorough.

 To facilitate the property management process, there are dozens of software options available. The only way to actually determine the best option for you is to 1) take the property management quiz (https://rentalsunited.com/pmsquiz/) and 2) demo two to three options. With the Property Management Software providers, there are options for those with anywhere from 1 rental unit to those with over 1,000. Before finalizing the search, we recommend reading reviews. This site has been very helpful for us: https://www.capterra.com/vacation-rental-software/

a.       For those with less than 10 units, we’d focus on looking into  Guesty, Tokeet, Lodgify, Uplisting, and Orbirental Rentals United. All of these will have pros and cons and it will be based on your rental types, frequency and needed features that can gear you towards one option or the other.

b.       For those with more than 10 units, most investors end up with a combination of Rentals United and a property management provider from what we have seen. This is because Rentals United is one of the industry leaders in linking your listings to all the short-term rental websites, but lacks many of the actual property management functionality like guest communications, accounting tools and website products. Bookingsync and 365 Villas are also highly rated.

 While the management of a short-term rental could be daunting for the first-time owner, do your homework and follow these simple steps and you will be well on your way to a profitable short-term rental business. Any comments, we’d love to hear from you.

Happy short-term rentaling!

How To Manage Your Short-term Rental Property Without Stress (or at least less stress..) - Part 1

After starting our real estate investing focused on fix and flips, we shifted our focus to rental properties. Fix and flips, while they can generate solid profits, are both time and capital intensive with significant market risk. Conversely, rental properties can provide consistent cash flows and long-term wealth creation.

One of the major keys to success in rental property investing is assembling a quality management team and strategy. With short-term rentals, this is even more critical, as your number of customers/guests increases exponentially (from 1 per unit/year to 50 plus).

When we decided to start investing in short-term rentals, we were overwhelmed by the abundance of property management software and management options. Currently, most traditional long-term property managers (rentals to tenants) do not participate in this landscape, so what works for a 12-month rental, likely will not for a short-term one. We quickly realized the property management options for short-term rentals could be split into two main categories: Outsourcing to a vacation rental manager or self-managed using a property management software. In this post, we will discuss the former.

Outsourcing everything to a vacation rental manager

For 90% of short-term rentals, this will be the best fit. National companies like Vacasa, TurnKey Vacation Rentals, Evolve and Pillow handle the duties from advertising, communications, pricing, maintenance and cleanings. For more local options, Google your city name and then short-term rental management (ie: “Miami short-term rental management”) as regional options tend to be more prevalent given the relative infancy of the sector. The number one downside to this option is cost, as most of these companies (local and national) will charge 15-30% of your revenue for their services. Unless you are managing at least 5 rentals (e.g. beginning to achieve scale), we would suggest this option. This is the main way you are able to not stress over the hands-on responsibilities of the unit without sacrificing revenue. It’s best to ensure that your property manager will place your rental on 5+ websites (Airbnb, Homeaway, Flipkey, Booking.com, among others) in order to maximize bookings and occupancies.

Before we hired a rental manager, we interviewed all the ones we can find, as we wanted to get comfortable with the team that would be managing our property. We spoke to references and even obtained revenue and occupancy projections. Ensure that the company and their cleaning crew can handle same day unit turnovers (guests checking out and in on the same day). We have been surprised at how many people we come across in short-term rentals that leave a 24 hour window after check-outs to prep and turnover their unit for the next guests’ arrival. If you have 50+ unit turnovers/year that translates to blocking the opportunity to earn revenue on almost 15% of the available days.

Tip – Before making a decision, don’t get fixated on the commission percentage. While one company might charge a lower commission, they might offer their cleaning services at twice the price or force a high cost insurance on your guests. While the cleaning fees are typically paid by guests, if you have a lower cleaning fee (say $100 vs $175), you can charge a higher daily rate since guests focus on the total booking cost (daily rate plus taxes plus cleaning fees all add up to money out of their pocket). Additionally, some will force their insurance onto the guests, and while this provides additional peace of mind, it is a huge profit center for the management companies and indirectly reduces your revenue potential.

Unless you are managing a large number of units, we strongly recommend this option. Even for the “do-it yourself” type, the opportunity cost of not having professional cleaning and same-day turnover could more than likely cover the cost of a outsourced management company.

The next blog post will delve into the second management category, Self-Managed using a property management software.

Thanks again for reading. If you have any questions or comments, we’d love to hear from you.

So I bought a Property to STR....Now What?!

First and foremost, congratulations on making this far! Most people only talk about wanting to own real estate and never take action, so well done. That said, there is still work to do.....now it's time to implement the business plan so you can start cash flowing your STR property! How do you do that, you ask? 

If you've been following along with the blog, we started by debunking common myths of STR investing, followed it up by learning some of the industry lingo, and then discussed pre-acquisition considerations. This is part one of a two part series on post acquisition considerations.  With that, let's jump right in!

• Marketing and Listing Placement: While AirBnB gets a lot of press (and deservedly so, because full disclosure, that is where the majority of our bookings come from), there are many different online marketplaces where guests are searching online for vacation rentals, including (but not limited to) VRBO, Homeaway, TripAdvisor, and Booking.com. Thus, if you're only listed on AirBnB, you're missing a large segment of the market. We saw a clear increase in activity once we started listing our units on multiple websites. 

• Professional photography: We will keep this short and sweet - spend the $300-$500 and get professionals photos taken of your property. We love when we see other listings with pictures clearly taken from the owner's phone, as we know we instantly have a leg up on them.

• Calendar Management: Once you're listed on multiple marketplaces, it's critical that your calendar on each website reflects ALL your bookings. While you can do this manually, we would NOT recommend this. For a fee, you can use a 'channel manager' that will automatically update every website's calendar when you get a new booking. This is critical as you don't want to double book guests and then have to cancel, which will impact reviews (discussed below). We use Rentals United as our channel manager, but there are many different companies that offer this service (Orbirental, Lodgify, Hosty, Tokeet, Uplisting, Kigo, Booking Automation) for a wide range of fees depending on unit count and need for ancillary services (accounting, messaging, etc.).

• Decor: When outfitting the unit, mimic a hotel (white sheets, white comforters, white towels). Guests don't want to 'guess' what might be hiding in dark sheets - conversely, there is nowhere to hide in white. Don't overthink it here - just copy the hotel model.

• Pricing: One (of the many) great benefits to STR is your ability to change prices when supply/demand fluctuates. Just like Uber prices increase (e.g. surge) when it's raining out because demand is up, you should be doing the same when demand for your property increases. Big concert in town and you're close to the venue? Your city is hosting a bowl game? St. Patty's day? These are all opportunities to increase prices and thus revenue, as guests generally expect to pay higher prices around tent pole events. A good way to set your price during these periods is to monitor what the major chain hotels are doing, as they have been in this business far longer than you have (presumably).

• Guest reviews: Just like when shopping on Amazon, in today's sharing community, guest reviews are critical in the STR business. Being responsive, not over-selling the unit (or area the unit is located) in your property write-up, and providing a clean unit are vital to getting positive reviews. On AirBnB and TripAdvisor, the more positive reviews you’ve obtained, the higher up on the search results (think being on the top of a Google search) your listing will appear. Additionally, some sites like AirBnB offer 'superhost' status to the top owners, which will inherently increase your visibility and lead to more bookings.

As always, we hope you found this article helpful. Please let us know what you thought by leaving a comment below. Next week, we will go IN DEPTH on perhaps the most important post-acquisition consideration, property management....

Until then, happy STRing!

I Want to Buy My First STR Property - Where Do I Start?

You're ready to start analyzing properties that you will purchase and rent out under the STR model...so, where to start? 

In this article, we will discuss general pre-acquisition due diligence, as well as financial considerations, one should consider before purchasing a property that you plan to STR.

GENERAL DUE DILIGENCE (DD)

Research target markets (local ordinances and zoning): Rules/local ordinances vary dramatically by market. For example, while one market in Florida may allow all the units in an 8-unit multi-family property to be STRed (yes, we just made that a verb….), as of this writing, Chicago limits the number of units in a multi-family property that can be STRed at 25% if the property doesn't have 'hotel' zoning. Given the variability by market, this should be step 1 of your DD.

Focus on markets with high-travel demand or limited extended stay lodging options: Go where the people go, whether it be leisure or business travel. Perhaps a non-obvious trend in STR is that business travelers are increasingly becoming a larger portion of this market. Having a property on the beach in San Diego is certainly a plus, but don't forget about centrally located properties in large metro markets like Chicago or Boston that have significant business travel day in and day out, as business travelers are generally less price-sensitive than vacationers.

Research competition: Once you've identified your target market, research and call your competition. As you look at the comps on sites like AirBnB and Homeaway (just to name two), you will likely start to notice one or more 'hosts' that have multiple listings. Reaching out and talking to these people can yield incredible insights.

FINANCIAL PROJECTIONS

Revenue: Estimating revenue starts with researching your competition and establishing your conservative ADR estimate (e.g. price). One you have your price estimate, you next estimate your occupancy percentage (e.g. volume). Paid third party sites such as AirDNA.com provide ADR and occupancy stats by zip code and can be very helpful in making these estimates. Note, however, that AirDNA data is limited to AirBnB data only and does not reflects stats from all STR websites. When estimating revenue, keep seasonality in mind. For example, ADR and occupancy should be much higher for a beach front Florida property in January versus July, all else being equal.

Expenses: Unlike a long-term rental, if all the units in your property are being STRed, it is most likely you will be responsible for 100% of the property's expenses. So, whereas a tenant may pay for gas and electric in a long-term rental, you as the owner will be responsible under the STR model. Furthermore, travelers all require Wi-Fi and bedding/towels, but now also expect hotel type amenities like soaps/shampoos, kitchen cookware, as well as smart TVs with cable and Netflix. Research your competition and include these in your proforma if applicable. Lastly, you should generally expect higher repair and maintenance costs in STR vs long-term renting due to wear and tear from guest turnover.

Capital expenditures (e.g. furnishing): While you must get the P&L right, let's not forget that STR properties need to be fully furnished by the owner. For example, we recently spent approximately $11,000 furnishing a 1,300 square foot 3 bedroom / 2-bathroom condo, and while very tasteful, this was only our costs and did not include a decorator, movers, or high-end furniture. Knowing your market and furnishing appropriately is extremely important to maximizing your revenue.

BONUS TIP

When doing your due diligence, make sure the numbers work under a long-term rental strategy and not using STR assumptions only. We will not make an investment where the numbers only work under an STR strategy - rather, STR should be upside to your investment thesis. Why? We do this for three key reasons:

• It is still the 'early days' for STR and regulations are constantly changing. If your local market outlaws STRs or changes the rules, you want to make sure you can still earn a reasonable rate of return on a long-term basis.

• It is easier to make revenue estimates for long-term rentals versus STR due to the sheer volume of publicly available information via sites like Zillow.com, apartments.com, MLS, etc.

• If/when the economy contracts and tourism declines, we want to be able to quickly pivot to LT rentals. Other than the money spent on furnishing (which you still may be able to use), the switching costs are more or less nil.

WRAP UP

Like most things in life, real estate investing involves risk. However, we are always looking for ways to 'manage and reduce risk'. The above actions are just a few ways we manage risk in our STR investing busines.

Did we miss anything? Let us know in the comments below!

As always, happy STRing!

This Lingo is Confusing - is there 'Rosetta Stone' for STR?

ADR? Occupancy? RevPAR? Is this some kind of foreign language I've never heard of?

Similar to other industries, the short-term rental (STR) business has it's own 'lingo'. To be successful and seen as knowledgeable, one must understand the basic terminology. 

Before diving into the specifics, you must understand that the STR business IS the hospitality (e.g. Hotel) business. Thus, if you want to really go deep on the hospitality terminology, I'd encourage you to read the 10k or 10Q of one of the large hotel operators (such as Marriott or Hilton). But I digress...for purposes of this article, let's focus on the basics:

• Short-term rental: Defined as a stay that is less than 6 months; however, these stays are often a week or less.

• Occupancy:  The number of nights the property is occupied in a given period as a % of the total nights it could have been occupied (15 days rented per 30-day month = 50% Occupancy).

• Average Daily Rate (ADR): average rental income per paid occupied room in a given time period (source: Wikipedia). In other words, this is the nightly rate that your guests pay you to occupy your unit. if you have a 5 unit building and you generated $10k of rental income for 5 nights at 100% occupancy, your ADR was $400 ($10,000 divided by 5 units divided by 5 days).

• Revenue per available room (RevPAR): calculated by dividing a property’s total revenue by the total number of days in a given period. Said another way, it tells you the amount of revenue you made per day on average, regardless of whether the unit was occupied or not [Note: ADR * Occupancy = RevPAR]. Continuing the above example, if your occupancy was 40% instead of 100%, the RevPAR would have been $160 ($400 x 40%). The ultimate goal is to maximize RevPAR, which is accomplished through a proper balance of occupancy and daily rate (ADR).

• Capital Expenditures (capex): If you are buying a turn-key property for STR, you will still need to spend additional cash furnishing the unit with couches/beds/chairs/etc. This is often referred to as 'capex' and needs to be included in your financial analysis to quantify 'total investment in the property'.

• Furniture, Fixtures and Equipment (FF&E) Reserve: Short-term rentals will create higher than average wear and tear. If you are operating a short-term rental, you are operating an independent hotel and with that comes an increased requirement to fund upgrades or replacements to furnitures, decorations, household items (glassware), appliances, etc. There are things you can do to combat the amount of expenditures like protecting furniture with Scotchgard or using mattress protectors on all mattresses. These are $30-40 expenditures that should extend the life of furniture by years

This certainly isn't an all-encompassing list, but it's a good start and will elevate your knowledge when talking with other industry experts. Anything obvious you think we missed? Let us know in the comments below.

And as always, happy STRing!

Debunking the myths of short-term rentals

But isn't managing a short-term rental (STR) unit a ton of work? How do you know people will even come? The economy is good now...what about when it declines? But aren't the expenses and fees really higher?

Sound familiar?!  These are a few of the objections we had before entering the STR business. Ready to hear how we addressed these questions, as well as one additional bonus objection? Let's go!

Isn't it a lot of work?
Like most everything in life, the short answer is that it depends. While it takes a sizeable amount of effort to furnish the unit (unless you outsource it to a third party), the level of ongoing work is dependent upon whether you have full-service property management or not. If you manage the property yourself, it will absolutely be a lot of work, but of course, your profits will be higher. If you use a full-service property manager, your level of involvement can be minimal and not too different to using a property manager in long-term (LT) rentals. This is a business decision you must make.

How do you know people will come?
The short answer is you don't, but you do your best to answer this question by doing extensive due diligence, such as calling hosts with comparable properties in your area and researching third party websites (such as www.AirDNA.co) to get market data on occupancy and average daily rates for your zip code.

What happens when the economy contracts and tourism declines?
The number one rule of investing is to not lose money, and we seek to do this by ‘protecting the downside’. When you are underwriting an STR for purchase, we cannot stress enough that the numbers should work on a LT basis when you need to pivot because the market has contracted. In other words, STR should represent upside to the property's investment thesis.

Aren’t the expenses and fees really high?
Yes, relatively speaking, but you should have also have higher revenues that will offset the additional expenses!

Bonus objection...But aren't short-term rentals taxed at higher rates than long-term rentals?

Nope. As long as you don't provide 'substantial services' as defined by the IRS (examples include in-stay concierge services, cleaning of the sheets daily, or conducting guess tours), STR income is reported on Schedule E of your tax return, just like LT rental income and expense.

People will always question ideas and strategies they haven't implemented themselves (especially family, so watch out), so when faced with these objections, it's good to understand the facts. Have said people done STR before? If not, you may want to question them on their credibility to be giving such advice... 

Were you ever faced with these questions when you started pursuing an STR strategy? Or maybe different questions? If yes, please comment below - we'd love to answer them. And of course, if you found this article helpful, we'd love to hear that, too. 

Happy STR-ing!