By now, I’m going to assume that you already have your first property up and running successfully. Hopefully you know the “ins” and “outs” of your business and are earning decent cash flow every single month.
Once you’ve reached this stage and your business is stabilized financially, it’s time to start thinking about expansion.
I understand that not everyone intends on growing their business to 30 or 40 properties spread across different states. The beauty of this business is that you can scale as large as you want—or not. If you’re only looking to operate five properties or so in your local market, then that’s fine.
However, if you’re looking to build a multimillion dollar short-term rental business that generates hundreds of thousands of dollars of income for you and your family, then this is the post for you.
Why Grow Your Rental Business
The main reason for scaling your business is because it will allow you to make more money with less work. The more properties you have, the easier it is to put systems in place, such has hiring a full-time staff to manage your portfolio. This is because you have more cash flow that you can deploy back into your business.
Plus, growing your business will open up doors to you for other business and investment opportunities later on. For example, you can develop good business credit, which will allow you to gain access to commercial products that aren’t available to individuals.
Other opportunities include using your cash flow for alternative investments or even selling your company down the road.
How to Prepare to Scale
Before you set out to grow your business and start acquiring properties left and right, it’s a good idea to prepare yourself for the expansion. You want to expand responsibly, otherwise you may get yourself into a bind—say, where your income can’t cover your expenses and you’ll be in trouble.
One big thing you want to focus on is your mental preparation. Are you ready to start expanding at the moment? Are you stressed or overwhelmed presently? Are you willing to do the time-consuming work to make sure you pick the right property in the right market?
Questions like these are important to ask yourself to determine where your head is at. All success starts in the mind, so you’ve got to make sure you have a winning attitude.
Next, you want make sure that you have the necessary resources to start growing your business. You’ve got to know the market you’re moving into and what the cost of doing business will be. You’ve got to know what your estimated revenue and profit margins will be. This stage is all about getting accurate numbers.
If you’ve estimated that it’s going to cost $5,000 to pick up your next property, then you should probably have a little more than that just in case. A plan is simply a guideline, and life doesn’t usually follow a script. Obstacles will crop up, and you want to know that you have enough cushion to handle them when they do.
When you have a good estimate of what your expansion will cost, you should create a goal to aim for. Our brains are designed to set targets and to move toward them—whether it’s hunting an animal or achieving our financial goals. Setting a target gives you something to look forward to and allows you to track your progress.
Once you have your goal, back it up with a written strategy based on math. If you’ve estimated that each property will cash flow $1,000/month after expenses and your goal is $3,000/month, then you know that you need to acquire roughly three properties.
Having a written strategy gives you an action plan when you get stuck—and getting stuck mentally is pretty common in business.
Stay Local at First
Your first three to five properties should all be in the same city (or at least within the same metropolitan area). The first reason for this is that they are easier to manage. If you have to drive an hour or more from one property to the next, then daily operations will get a lot harder.
The second reason you want to cluster your properties like this is because you can take advantage of a concept known as “economy of scale.” This concept basically means that by grouping your business deals you can save money or maximize profit by operating in bulk.
For example, hiring one local cleaning service to clean all five of your properties is much easier and probably cheaper than having to hire two different companies.
The next reason for clustering your properties is that you know and understand all the idiosyncrasies of your local market. You know what days of the week are most profitable, what submarkets make the most money, and what seasons have the most influx of external traffic. This knowledge is lethal in terms of giving you a competitive edge over out-of-state investors.
Explore Nearby Markets
Once you max out the number of properties you feel comfortable operating in your local market, it’s time to start exploring nearby markets. You know your area best, so use that knowledge to help you narrow down your search to two or three potential options.
From there, you’ll want to do extensive research to find out which city will be the most profitable. You can use tools like AirDNA to get real market data to analyze.
When you pick your next market, you want to start off the process slowly, just like you did when you first got started. You don’t want to over-leverage yourself and take on more work than you can sustain. It’s best to find a single property and run it for two or three months (or until you can make it profitable).
Network to Build Your New Team
Before you acquire your new property, make sure that you have the infrastructure in place to successfully operate your rental business. It’s best to begin with the end in mind at this point, so try to pick partners to work with who you’ll keep once you begin to expand into your new market.
For example, find a local cleaning service that can sustain five or more properties in your new city. Or work with local co-hosts and property management companies, who can handle your expected workload. This way you have the framework to grow into later on when you’re ready.
Making new connections in a foreign market can be frustrating and time consuming. Before you drive out there, get online and start networking on the various available forums and platforms. Below are some of the best resources for finding new business contacts for your expansion.
- BiggerPockets Forum
- Airbnb Forums
- Local Google searches
Repeat the Process
Upon successfully expanding into a new market, it’s time to grow your cluster of properties. This process should be relatively easy since you’ve already done it in your first market. In fact, this time around it should go even more smoothly, because you’ve already got a track record, expertise, capital, and a team in place.
When you approach new property owners, property management companies, cleaning companies, banks, etc., you won’t be starting from scratch this time. You’ve got an existing business that’s successful, and this will speak volumes to everyone you meet.
Leverage this social capital in your favor to get more deals, better rates, and more favorable terms. You’re no longer a beginner, so remember that. Use your current success to catapult your business to the next level.
Once you’ve acquire three to five properties in your second market, you’ve accomplished something most people never will. You’ve not only built a successful business in your hometown, but you’ve expanded into new territory and won. The best part of all isn’t that you’re making more money, it’s that you’ve now got a blueprint for success that you can repeat again and again.
Take this blueprint and apply it to a new market every single year if you want to. Just imagine how many cashflowing properties you could acquire in 10 years if you did this.
And the great things is that every time you do this, it will become easier and easier. The more capital you have to invest, the quicker you can get new properties up and running.
The truth is there aren’t many people doing this right now. Most people renting homes on Airbnb are couples who are 55-plus who have an extra house or two in their retirement. If a hard-charging individual comes along and decides to bring this level of intensity and focused action to your market, they’re just going to win—plain and simple.
Your competition is mostly unsophisticated people who are winging it. By educating yourself with this blog and taking action, I believe anyone who does this will be successful.
Questions about expanding? Questions about Airbnb/short-term rentals?
Let’s talk in the comments!