BiggerPockets Podcast 114 with Scott Sutherland Transcript
Link to show: BP Podcast 114: How to Invest in (& Have Fun with) Vacation Rentals with Scott Sutherland
Josh: This is the BiggerPockets podcast, show 114.
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Josh: What’s going on everybody? This is Josh Dorkin host of the BiggerPockets podcast here with the big guy, Mr. Brandon Turner. What’s up Brandon?
Brandon: Hey, this is the big guy. Isn’t that Vince Vaughn’s name on Wedding Crashers? Owen Wilson always calls him big guy.
Brandon: How are you doing? What’s new?
Josh: I'm good. Everything’s good man. How are you?
Brandon: I'm good. I was thinking I could use a vacation.
Josh: Yeah? Good for you. Haven’t you taken 20 since you started working here and I have taken how many? I'm just asking.
Brandon: I don’t know whose fault that is. Let’s get audience to chime in. raise your hand if you think josh’s fault. Do you hear rush of hands?
Josh: I when this podcast comes out I will be vacationing in Phoenix Arizona. I'm going to Arizona for three days to hang out with some of my buddies, watch some baseball games. I'm still going to be working but I’ll be away.
Brandon: You should try not to. Again, everyone raise your hand if you think josh shouldn’t work. Look at everyone raising their hands right now. The reason I want to bring up vacation is because today we are talking about vacation rentals. See that connection?
Brandon: We are talking about the other side of it. We are talking about rental side of owning them not going on vacation but I grasp for connections where I can. We are going to be talking about owning vacation rentals and how to find them, how to manage then and how to build solid business that caters to peoples vacation needs. Should be fun.
Josh: Indeed. Before we get into it why don’t we get to days Quick Tip? Be prepared for upcoming entirely new podcast from BiggerPockets. That’s all that we are going to say about it now but the next few weeks we’ve got something exciting coming not just the main BiggerPockets podcast but we’ve got new show coming that you guys are going to love it. With that why don’t we get to today’s trivia?
Brandon: Last week’s show we talked with Jay Papasan the co-author of Millionaire Real Estate Investor and The One Thing, one of my favorite books ever, in this discussion we talked about how One Thing contains analogy to a very popular game that is actually played differently, people play it in two different ways if that makes sense. Question is – What game is it? What game is it that the analogy The One Thing Is based kind of upon? If you know send email to [email protected]BiggerPockets.com for your chance to win digital version of The Book on investing in Real Estate With no and Low Money Down – the world’s greatest book.
Josh: With that nice little plug from Brandon there why don’t we get quick ad from today’s sponsor?
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Josh: Thanks again to RealtyShares for sponsoring the show, we really do appreciate it. They certainly help us to put these things out, continue to keep going so thanks so much for their support. Let’s get to the interview. Today we are sitting down with Scott Sutherland a broker and investor from down in Austin Texas. Scott is going to share story of how he got started in real estate. Now he’s been able to use vacation rentals to build his portfolio. With that why don’t we get to the show?
Scott welcome to the show man. It’s good to have you.
Scott: Thanks for having me.
Brandon: today we are going to talk about few different things but before you get into that maybe you could just touch on your story – kind of get a background what you do and where you’re investing, where you’re from, all that good stuff. Give us background on you.
Scott: Sure. I'm a broker here in Austin, Texas. The way it all started was way back in 2008 I was working in construction equipment industry and I have been doing that for 15 years in corporate world and I decided that I needed something new and I took a years’ off and went on a bit of a walkabout sabbatical. During that time I decided real estate made a lot of sense for me, from my background and interest in construction. When I came back I started by getting my real estate license with idea that I would work with and help other investors to find investment properties and also work into becoming investor myself. That’s where it all began here in about six or seven years ago and I haven’t looked back since.
Brandon: You took a year off to take a walkabout?
Scott: I did. In 2008 if you remember 2008 the economy was terrible and I felt like it was just selfish of me to hold on to a job that I didn’t like when so many other people wanted it. I took year off and started by riding my mountain bike from Canada to Mexico over the year.
Josh: Shut up.
Scott: Yeah, over the Rockies. That was self-supported trip. Took a couple of months and once I got to Mexico I came back and went to South America for about three months and took some time off.
Josh: I walked barefooted across the Sahara. I mean, whatever. You’re trying to get one up on people – you are not going to get that. Keep trying.
Scott: It’s not a competition.
Josh: I just wanted to give my job away because I'm a philanthropist. I walked barefoot on a glass across the world. Whatever man, we don’t buy it.
Scott: I understand. That’s fair. At the end of the trip I always thought I wanted to become financial advisor and I have background in finance and I thought that would be a good fit. One of my professors in our portfolio theory class after many classes of technical analysis one of the students asked him “What do you put your money in?” and he said index funds. You can’t predict this stuff. At that point I realized in my opinion there wasn’t a lot of value to be added by picking stocks or rebalancing portfolios when the opportunity came up to be involved in local real estate It seemed first chance to take control of the situation and actually gain knowledge that puts you in a positon to make decisions. The arbitrage, the local knowledge the things that allow you to create wealth by being a little better than the next guy exist in real estate where they don’t exist in stock investing.
Josh: That’s one of the biggest things that we talk about is the idea of control. With real estate you have far more control where’s in these other things you are at the hands of other people completely with real estate you are still at the hands of other people you have tenants that can do things and market make certain determinations but if you go make right decisions, make improvements, things like that udo can really affect stuff. By the way I gave you a lot of crap about what you did and I'm like wicked impressed and totally want to be you. I'm jealous as hell so take my giving you grief as complete and utter jealously.
Scott: Appreciate it.
Josh: How did you go from where you were to become this vacation rental guy? How did that transition happen?
Scott: We started out in long term buy and hold finding homes that were beat up and needed some improvement and put tenants in them and we created cash flows. Back in 2008-2009 it was a terrific time to do that. We were seeing returns of 30% which is just fantastic and Austin wasn’t quite the super-hot town that it is today even just five or six years ago. We were going on that path, returns were excellent, it was a very low risk and a low passive endeavor. That’s how it all began in creation of long term rental portfolio. Then as things evolved returns started to get squished out as prices came up and rental rates stabilized and construction started to catch on so we were looking at ways to generate additional cash flows from properties that wouldn’t traditionally cash flow.
What actually happened my wife and I had purchased foreclosure duplex in near downtown Austin, we are living in it, we are renting other side and we went off for 40th birthday party for me in Colorado with group of friends and on the way back driving home from Colorado my wife looked at me and said “You know I was looking at that house we were staying at for your birthday and I get it. I see what they’re doing. It’s really not that complicated. I think we can do that with our home.” On the way home from my birthday we hatched a plan and two weeks later we had house prepped, photographed and I was off shopping for RV so we would have a place to live.
Josh: You talked about properties that don’t traditionally cash flow. What did you mean by that exactly?
Brandon: What you’ll find is the best cash flowing properties are typically the ones that cost the least. There is delicate ratio if you buy a house in a really rough part of town that no-one wants to live in you deal with all kinds of tenant headaches and the cost of collection. The time involvement when you compare it to the amount of income you are generating doesn’t quite make sense so you try to hit sweet spot where it’s a decent neighborhood, the rental rents are still good enough to make it worth your while buy as you move into core of many cities as Austin or Denver those hot and up and coming towns what you’ll find is there is no longer linear relationship between purchase price of the home and rental rates.
Rental rates start to flatten out and as a result ROI start to drop off. A lot of people when I first come to real estate say “I’d love to have cash flow rental property and it would be really great if it was in a cool location” sometimes that’s hard to achieve but with vacation rentals you almost have to buy in area that is cool to be because when people come to town to visit and they choose to rent your house instead of staying in hotel a lot of what they’re looking for is access to your city. They want to be able to walk, they want to be close to restaurants and bars and activities and festivals and things like that.
Josh: That makes sense.
Brandon: This might be very basic question but a lot of people might be wondering. What exactly are we talking about when we talk about vacation rentals? The thought that people have in their minds is house sitting on the beach in the sand and everyone’s in the white walking on the sand together.
Josh: Is that how you dress when you go to the beach?
Brandon: That’s beach thing. I have a beach town near my house it’s called Seabrook and everybody wears clothes like that and walks around this beach town. That what people think envision a lot of times as vacation rentals. Is that what we are talking about here?
Scott: It certainly can be and there is very strong vacation rental presence in all the coastal towns but vacation rental in short term rental which are the same things, works interchangeable, its competitor to a hotel and it’s essentially any place that people rent fully furnished for short periods of time. Short can be couple of nights just coming for a weekend, can be weekly, we do monthly rentals for a variety of situations. When we first stated we hit the big events. We knew that people wound want to come here for the Formula 1 car race, we knew they want to come for music festivals. What we didn’t know why would people come on just a random weekend. What you learn that any reason someone would stay in a hotel they can stay in a house. There is a lot of advantages of saying in a home over staying in a hotel and I think that’s why there is a huge growth in vacation rentals. People are becoming more comfortable with staying in someone else’s home and they like all the benefits of having a place where they can have multiple groups of friends in multiple bedrooms and all be in the same place and have easy parking and there is litany of reasons.
Josh: I’ve got a piece of property I'm looking at. It’s at great part of a city and I can go and rent this out on the long haul, get a steady tenant who is going to be there or I can go vacation rental route and cater to that audience. Without knowing much about this I might say well I’ve got to deal with someone who’s here for three days then I’ve got to turn it around somebody who’s here for a week, turn it around I'm probably going to have vacancy’s in between then I'm going to do all this turnaround, cleanup and it’s kind of a headache. The net, I'm assuming, is going to be considerably higher than a long term rental but the work that goes in seems to be a lot higher and I think people who are looking at these things a lot of them don’t necessarily want the one only rental they just want the package that comes with it, what are they cool places to eat nearby? Where do I hang out, what’s the transportation like, can you help me with this stuff? Almost like being innkeeper. Those seems kind of like downsides on higher workload types things. Tell us a little bit about all that stuff.
Scott: Just like investment property there is extremely passive opportunities and there’s opportunities that require more work. There’s people who are handyman at heart who like to buy properties that are banged up and there’s others that like to buy turnkey property that is as minimally involved as possible. There is no doubt that short term rental is more time intensive but there is higher returns to be had from that and there is ways to mitigate those things. You can automate that process,, there is some things you can do to in a scalable as you get more properties you can get your cleaning service coordinated, you can start to create formula that works then it becomes far more passive endeavor than it at the beginning. My advice was thinking about getting into this or getting interest in this if they have a home that already is in a desirable area it would be a great way to test it to make their home a rental. I think that kind of people who freak out about that a little bit. There’s going to be somebody in my house. I can tell you we rented four different properties for about 200 nights a year a price for four years and we never had any damage to speak off. Any more than just a messy house.
Josh: That’s awesome. I know more than I'm asking and I'm asking the question because I know the audience wants to hear the question. I’ve got friend of mine in New York in particular who make a lot of money. They went from long term rentals to vacation rentals and they are doing exceptionally well with doing it. A cool strategy for starters for some people who had tried it out is this – when they go on vacation they rent out their house. I'm going to Orlando with my family, during that period of week ill use my home as vacation rental and I’ll use one of the sites to get it rented out and offset my cost which is really cool strategy. Have you tried that before?
Scott: Sure. We actually do it all the time. We did it this Christmas in New York. We actually rented from someone in Chelsea and we rented out home back in Austin while we were gone. I mention before the RV piece of it that was personal decisions my wife and I always talked about. Got older one day, get RV and travel around the country. We thought why not now? Rather than having to stay with family and friends or book a hotel or come up with a place to get you always have a place to go. We always take paid vacations all the time.
Josh: That’s great.
Brandon: One of the reasons I wanted to have you on this show is reason I put on the forum I just said does anybody have experience with vacation rentals and you reached out to me and we started having a conversation which just as a side note is a coolest things about the forms people are not engaged in here the conversations like this happen not just on the podcast but in real life. I wanted to by a vacation rental. My wife and I went to Hawaii few weeks back and we talked a lot about it then and I don’t know if I’ll but in Hawaii but just in general I love that concept. I love idea of also of potentially moving somewhere. Maybe josh will be happy if it’s Denver. Moving somewhere and then renting my current house here as a vacation rental and then coming back if I wanted to and then renting other ne as vacation rental. Just like you said town you live town you rent yourself.
Josh: You own the two Nirvana houses. You own two of Kurt Cobain’s houses. You should kick out your tenants and use those as vacation rentals. I guarantee you if you decorated that stuff with Nirvana memorabilia and stuff like and be they come stay in Kurt Cobain’s house there’s thousands and thousands and thousands of fanboys and girls that would kill to go and stay there.
Brandon: You are probably right. My tenant in the back house, it’s a little one bedroom house because there are two house in one lot and he lived in both of them when he was a baby. Anyway the lady in the back house is dying and that’s actually a whole different conversation that were dealing with right now. I don’t want to sound insincere, it’s very sad, she’s my favorite tenant but from business standpoint I don’t know what to do. She’s in a nursing home in a vegetable state now, she has no friends or family, nothing and the house is sitting empty with no rent coming in. I have a thing in a form there is a conversation right now in the forums that people are helping me work through it but it’s fascinating.
I have never heard of anybody going through this issue before, who do you talk to? There is no power of attorney, there is nothing. Do I evict the lady who is on her deathbed? I don’t know. I won’t do that. Month after month just losing rent and it’s interesting. Anyway that’s Kurt Cobain house so if she does pass and if we get the house back I probably will test that out and see what we can get. See if there is an interest on Airbnb or HomeAway. Bringing it back it. Why own the vacation rentals? Is it just the money? What else do you think?
Scott: Obviously the money is the primarily reason but there’s been a lot of advantages we’ve met a lot of really cool people. We become somewhat ambassadors to Austin and people look at us to provide that customer service and that concierge hosting role we are there to make user that people can get there and settle quickly and enjoy their stay and know how to get around and where to go and we make suggestion and we try to add some touches to make their stay better and to also pays off in form of positive reviews which in maybe of the renal sites reviews drive your rankings, it obviously drives impression of you and they will build your business going forward. That’s been a big piece of it. The other thing that is nice is we’ll actually reinvest money into upgrades into home and there is immediate gratification from these upgrades because if you decide that you are going to use some of this to renovate your kitchen you can take a photo of it the day after its done and you can upload it to the site and you can immediately increase your rents or increase your occupancy.
Josh: We use them a lot when we go to the mountains. It’s just a great path. It’s way cheaper than going to the hotel, particularly when your family is in town and things like that. It’s very convenient, it’s a great way to go and frankly I know I'm not alone and I know Brandon and I always talk about this if we ever travel – I wish I had a place there. That’s the dream, right? If I go to California I have vacation home in California and New York and Hawaii and what if I had portfolio of 25 vacation rentals that I'm Airbnb-ing and I could travel around the world and stay in my favorite cities. It’s a pretty good ideal.
Scott: It is. My wife and I actually talked about potentially purchasing vacation rentals in other towns and what we come to no one can run it quite the way we do. If you have a property manage running a property manager for you they are going to, no one looks after your money the same way you look after it. We think we do a great job of providing exceled customer service and very clean well organized homes at very good rate. We really focus on trying to respond quickly to inquiries. What our plan has been we feel like why pick the places that you want to travel to because those may change, why not just make a portfolio where you live and work and in a market you understand and as you travel we always book and join the community by staying in vacation rentals as we go from town to town. Up to this point we decided that’s better strategy for us and owning multiple locations.
Brandon: Financially that makes sense, too. If you are going take a vacation to Hawaii and you have a rental there. Normally you rent for $500 a night and then you go stay there for five nights you don’t get paid from your rental income so you might as well pay to stay somewhere else and not even have vacation rental there necessarily. In guessing there is tax benefits to going there and check in on your property maybe, I don’t know. That’s kind of another thoughts. That’s actually one of my fire round questions for alter was and maybe we can touch on that now – should I buy based on great locations or based on numbers? I think the numbers thing makes more sense.
Scott: I think they go hand in hand and the numbers is more important. You have to strike that balance between being in a place where people want to be but not such a hot area that you force yourself to bring in huge numbers constantly in order to make money. We tend to just like you would if you buying a property to rent we tend to look on the fringe, where’s the growth going, where is the close to the hot area that’s still affordable because you have to strike that balance between acquisition price and rental rates.
Josh: You talked about doing rentals for months at a time. I can’t seem to think about but there is some disadvantage to that, I don’t know what it is I just can’t think of tit right now. Once you exceed 30 days and I know there was a big story in news couple months back something like that in Airbnb and some woman something happened. Do you know what I'm talking about?
Brandon: She’s on BP, I was reading the story today.
Scott: I think that was a California story wasn’t it?
Brandon: Maybe she was from California and he was from Nevada or they’re both from California. He stayed forever and wouldn’t leave and they couldn’t evict him.
Josh: That’s what it was.
Scott: I remember that. I guess that is where we caution to understand the regulations in your respected area and state Texas is relatively landlord friendly so we don’t run into those king of things very much. Austin is little bit more honorees when it comes to local short term rental regulations and we also touched on New York. New York actually has restriction, it might just be Manhattan, against running for periods under 30 days.
Josh: They lifted that. I know it’s in the news, google it. I seem to remember there was I know again I was saying to my buddy this stuff and he was like “Dude be careful they are going for anybody who’s doing short term rentals” and then I seem to recall it being lifted. You need to know to know local laws like you would with any rental property. This is not a game, this is not something to be trifled with, right?
Scott: Sure. The 30 day rule for us we really like the monthlies. The disadvantage to monthly rentals is that you are receiving less per night than you would typically five nights equals a week and three weeks equals a month so you might get if you can feel it every weekend or every day you are going to yield much per night rate then monthly you have 100% occupancy for that month. Also in our area there is no hotel tax collected for stay over 30 days so it’s a win-win for both tenant and the owner. Obviously its less time intensive as well.
Brandon: You are saying hotel tax. That is something I didn’t even realize. If you have less than 30 days you have to pay a tax. What is that tax in Austin?
Scott: Tax in Austin is 15%.
Brandon: It’s a chunk. It’s bigger than my maintenance budget. What other expenses you have to take into the account to have a vacation rental?
Scott: Ill contrast it to traditional rental that most people are familiar with. You have all same expenses as far as property taxes and your mortgage payments and whatever maintenance involved but you also have utility piece that you don’t normally have. You have to not only provide electrical water, sewer, gas but you can’t forget about television and internet as well. Other thing you’ll have are some consumable expense which is depending on the level, we keep it pretty simple, we usually put a bottle of wine on the counter and we’ll throw some spices in the kitchen but you have to provide toilet paper and soaps and shampoos and you have to think of this more as a hotel that you would expect when checking in to a hotel. Then the final piece of it is clearing. Cleaning in between.
Josh: What does that amount to? We talk about the 50% rule on BiggerPockets, what would you say total expenses are on a vacation rental?
Scott: We are on about all total 35% rents is what we typically run and that does not include any principle payed down but it includes things like property taxes. That’s the number that we pulled of our tax return last year and just look a look at. If you bring $100,000 you might net out 65.
Josh: What makes a good vacation rental? Does it matter if it’s a condo or single family house? You talked about proximity to festivals and things like that. House in the suburbs would that make a good vacation rental or does it really have to be close to downtown, walkable to downtown? Talk about that.
Scott: The reason most of the hotels are located downtown is that’s where most people want to stay. You can be on a fringe a little bit but you still need to have especially if you have a lot of traffic you need to be in a place where people can get to and from the types of activities that they want to attend. If you have things like lakes and oceans that’s a totally spate market obviously if you are on a beach that’s great, if you are on the lake that’s great for long as lake is warm. You have to consider that. We haven’t done any lake rentals we focus on the core because its year around business in Austin. If you focus on area with seasonal trend then you won’t realize revenues during those off periods.
Brandon: That’s what we should talk about that a lot of areas are seasonal. They don’t stay rented all year long. Someone might think I will buy this vacation rental here on the beach in New York, Is there a beach in New York? I don’t really know.
Josh: Are you really asking? Is it on the coast?
Brandon: Yes it’s on the coast.
Josh: How the hell are you my co-host? That’s ridiculous is there a beach.
Brandon: Beach is not the same as ocean. There is no beach south of me for hundreds of miles. There is ocean, there is no beach. You don’t go and stay there because it’s just woods.
Josh: Can you ask a real question please?
Brandon: That’s not even a question that’s a comment. The comment it people should be aware that there is winter, there is seasons and there is times that things are more. I'm going to move on since you are so mean to me Josh.
How do you market a vacation rental?
Scott: We market exclusively through HomeAway, VRBO and Airbnb. HomeAway and VRBO are actually the same company now. Airbnb is separate and is stronger on the west coast. I would guess that 90% of all vacation rental traffic in the US goes through one of those three sites and they’re excellent for bringing visitors and they also really good tools for credit card processing and tracking and we really have liked it.
Josh: What about the costs for posing on these places and are there advantages of putting it on one or do you just go ahead and blanket on all three of them?
Scott: HomeAway site is annual subscription. You pay one time it can range from $400 per property to $1200 per property depending on the package you choose. Airbnb is per booking – they just take a slice. If I were getting started I would start with Airbnb so you don’t have to pony up $1000 and then decide it wasn’t for me. Once you start to do it in earnest full time I would be on all three of sites.
Josh: What about VRBO what’s the cost structure there?
Scott: Once you are on HomeAway it’s an all a cart for another $300 a year or something.
Josh: In terms of traffic do you know which one has the most?
Scott: I would have to see what happens in your local market if you are on west coast I think you could previously just get by with Airbnb and stay pretty booked. We see a lot of HomeAway and VRBO until we start having west coast attended events in Austin and we see a big spike in our Airbnb bookings.
Josh: I'm actually looking as we’re talking. It looks like, I'm using the website Alexa to get some numbers, looks like Airbnb flowed by VRBO followed by HomeAway in terms of traffic but those numbers aren’t totally accurate.
Brandon: Depends on where you are at, obviously. Let’s say you’ve got your listing there and they submit an email or whatever the communication method is trough that – how do you screen them? How do you pick up a good tenant? Tenant screening with rentals is one thing and I'm harping on all the time but how do you do that on vacation rentals?
Scott: We use a mix of phone conversations and social media to get a feel for why are they coming to Austin and what their plans are. If we think they’re rock band and we think its 20 people and the house is setup for six then we might decide that’s not a fit. We took a lot of deposits in our first year. We were taking $300 to a $1000 per stay and holding on to it and forwarding it back and after so many times just returning we didn’t keep a single deposit for first two years we actually just stopped. We figured eventually something is going to happen, we have insurance policy for home, we have general liability policy that covers everything and we just had good luck with it. If it does happen it will average out.
Josh: I’ve got two question that come to mind. Do you inventory everything in the property? Do you have properties and itemize inventory or is hat something that you have turnover people look for each time?
Scott: When we first prepare a house we have it setup and we have professional photographer come have it done. I highly recommend if you are going to do it right pay the $150 have the professional photographer come out, get the lighting right, really shine the place up because it is as huge driver for traffic. At the same time we do that we go ahead and bring our cleaning and prep people trough and explain to them how everything is supposed to look. Here is where the spices go, here’s how the towels are wrapped. We try to be really consistent with that outcome. As far as inventory there isn’t a lot in the house of value per se. I don’t worry about people running away with a couch. There is TV or two but LCD TV’s aren’t terribly expensive and the other nice thing about the sites is as opposed to doing a Craigslist ads is people have profiles. People have to sign up. If someone were to do something malicious then they would likely be found out. There would be a way to track that. Everyone’s pretty much been on their best behavior.
Josh: That’s great. What about the concept of discrimination? I don’t want to guy with tattoos on his face necessarily renting my house. Do the same things kind of come into mind with vacation rentals?
Scott: Sure. Absolutely. You have to consider anyone who is a protected class and obviously you can’t discriminate on anyone based on age, sex, and race.
Brandon: Tattoos on the face.
Scott: Tattoos are not a protected class. You can discriminate against pets, they are not protected class. That being said we are very pet friendly and we think it’s one of the reasons people choose to stay at the house as opposed to hotel. People who travel with pets constantly have issues.
Josh: Makes sense. Let’s talk about the actual operations of the rentals. Is there some kind of lease? I'm assuming it’s just thought the rental site, how do they get the keys, what is the kind of move in and move out situation?
Scott: There is rental agreement that you can write, draft and add to documentation with the sites so when they accept the rental they also accept the rental agreement. If you have any house rules you can tie those in. We also create a manual for each property and the manual is don’t smoke in the house, here is the internet password, it’s a mix of rules and also helpful tips for people to enjoy their stay. I'm sorry what was the second question Josh?
Josh: Just move in move out process and getting the key.
Scott: What we do once a booking comes in we send an email to them just telling them thank you for staying with us and we’ll get back to them within the week before their stay with the details. We usually don’t go blasting out property address if its two or three months out its not relevant at the time and they know roughly where the property is, they’ve seen the photos and week before we’ll send them the details on here is where the property is and we put the key boxes on the doors and we rotate codes on those key boxes as people’s check in and out. We also have re-keyable door locks and we periodically especially every so often or certainly after big events where we fill like there is a good chance that the key was taken then we just do a re-key and rotate just to make it little more secure.
Josh: That’s a great idea. Something I would have never thought of by the way.
Brandon: I know they have new things. Have you used any new things like deadbolt that has smartphone connection and you can change the code right there for the people?
Scott: I tried that. We played with it a little bit obviously there a little expensive and other the problems with them is a lot of mechanisms are weak so if your doors aren’t perfectly aligned then it dents to jam and our biggest fear and reason we didn’t go that route is we had this fear we’d be in another state and with everything setup and ready to go and they would have the code and the battery would die. Other thing we did, I’ll throw a little recommendation in, the thermostats. We started with Nest and now we are moving over to Honeywell just because we can run more thermostats on a single account. Nest has a silly little limitation of four thermostats and two addresses per account. You have to log in and out multiple times and setup multiple accounts and if you are using it on your smartphone it’s kind of a hassle but you can get 30 with Honeywell. It’s really nice because if someone checks out and we are not going to be around for three or four days we don’t have to worry that they left AC on freezing cold or heat on high and the ability to just quickly pull up your phone and dial the thermostat can be a big money saver.
Josh: Scott, how do you elevate fears of people who are maybe inexperienced doing vacation rentals from renter side? I’ll take for example I know first time when I was about to go and do it I was going cross country and all of the sudden hey I'm going to fly, I'm going to get rental car, I'm going to show up and I'm not going to be able to get the key from this guy. What if this guy is bamboozling me? You go to the hotel – its hotel chains reputation, obviously they try to build that into these websites but is there anything more than just building solid reputation to get past that? I know that other people probably face the same thing.
Scott: You are speaking from the renter side, right?
Scott: I think your raking and your presence online is big deal. We are very reachable as well. You can call us and talk to us. It would be pretty complicated endeavor to craft a profile on one of these sites with 28 reviews all with purpose of taking couple thousand dollars from somebody. In the same way on eBay you buy from somebody and you look at their stars and you assume that when you pay them they are going to mail it to you. I think that’s process created.
Brandon: What about when they move out you got cleaning crew to come in. You don’t do the cleaning yourself, correct?
Scott: That’s correct.
Brandon: How do you find someone to do the cleaning? Who do you use and how should people go about that?
Scott: We found someone who was just a referral who was doing cleaning work for another vacation rental owner and we went ahead and added our properties to portfolio. We just knew that they were reliable and that they had vacation rental mindset. My wife does most of day to day operations and she fortunately is somewhat OCD so it’s a really good fit for vacation rental business. The house and this is the difference from just cleaning you own house or cleaning a house or even doing a make ready on a long term rental when people show up they expect it to be hotel clean. Everything needs to be in its place and it needs to feel like that experience. It’s fine to have if you want to depersonalize the house a little bit. You want it to feel a bit more like a hotel. I recommend that if you have a closet you can throw a deadbolt on and move all your personal stuff in there, that’s great. Another thing that we do is all the houses we have all white sheets and linens separate. If it was the house we were living in we would strip all the linens off and throw them into storage and we’d bring all the sheets that were for the rentals and nice thing is using all white liens you can bleach them every time and make sure everything is as clean as possible.
Josh: Do you carry a blue light when you rent a house to people? That would be another fear of mine.
Brandon: You don’t use the same sheets.
Josh: It’s not just the sheets. People are nasty. There are some dogs out there, kitchen table.
Brandon: Moving on. Let me ask you this Scott – how much does it usually cost to transition in between? What does that cleaner cost you to go in and get a unit ready again?
Scott: I’d say about a $100. 80 for two bedroom and 100 to 125 for three or four bedroom.
Brandon: You charge tenant I know when I stayed with Airbnb they charged me $100 cleaning fee or something.
Scott: That’s correct. Everyone’s charged for the cleaning fee and then the taxes if collecting if they’re staying longer than month. Those are only two line items other than the actually rental stay.
Brandon: Do you have any other final tips for people looking to get started with vacation rentals? Anything you have written down that you wanted to make sure we covered in the show about vacation rentals?
Scott: One thing I would say when It comes a time to acquire vacation rentals if it’s not in a place where you already live and you are thing to get into this business is I would always consider a plan b. in other words we try and buy properties that can rent long term for enough to cover the payment or we look at properties that can potentially be used as a flip or some other exit strategy. The issue I have with and risk involved with vacation rentals in a town that has regulations is it’s a regulated environment. There is always a chance like a New York situation or Austin situation that he winds change blow and someone says “You know what, that’s just not what we want here anymore” in that case its always good idea to buy with idea “if that happens I’ll just go do this”.
Josh: That’s a good advice.
Brandon: I especially like idea you said about potentially use it as a flip. Kind of formulated in my head a plan how I want my life to go. You guys hear it first. I'm going to buy crappy looking houses that are in good location, I'm going to fix them up then I'm going to turn them into vacation rental. Now I have built in equity into them I also bought them with intent that they will cash flow if I had to rent long term and then bought in good area and good market therefore you get appreciation as well. You take advantage of five different types of investment right there. What are your thoughts on that?
Scott: The big thing there and the great opportunity you have with vacation rental is you don’t have leases that stop you from selling it to owner-occupant. It’s always ready to sell. It is not only always ready to sell it always looks great. You are in there every week, you are touching things up, you are making it look beautiful, you have professional photos and not only if the market suddenly feels like now is the time or you are in a situation I really need those to be sold you can pull that trigger on moment’s notice and you can rent property up until the day of closing.
Brandon: I love it.
Josh: That’s great.
Brandon: I definitely hope to get into vacation rentals. That’s why I wanted to get you on a show because I use this as my own personal for improvement.
Josh: This is my co-host that takes advantage of his position of power. You are a horrible person.
Brandon: That is how I roll. Moving on to the world famous fire round sponsored by 99Designs.
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Josh: Good stuff. Big thanks to 99Designs. We are big fans of theirs.
Brandon: Yes we are.
It’s time for the Fire Round.
Do you know where person can find data on local markets related to vacation rentals such as rents or number of units in the area, vacancy rates? How does someone do that research?
Scott: You really have to do it through the big three sites. Honestly I would look to see who in the neighborhood you live in is renting, what they’re renting for and I would pull up their calendars and see how full those calendars are and that will give you that feel what the nightly rental rates look like and you extrapolate that and do a one year plan just by estimating what your occupancy will be.
Brandon: I love it.
Josh: Great idea. What number of weeks do you rent your vacation rental out for? What kind of vacancy rate you are finding across the board what’s your average? On a typical month how many days do you have your units filled?
Scott: We have some seasonality here but over the course of year were between 200 and 250 nights.
Josh: How does that fare compared to typical hotel?
Josh: That is lower than a typical hotel.
Scott: I believe it is. It depends on your market. We see hotel occupancies in 80s in Austin so I think it just depends on what hotel and what city.
Brandon: Is it possible to get stated investing in vacation rentals in the under 100k price range? If you don’t have a lot of money you want to buy a $100,000 property is it possible to get started in your niche?
Scott: I don’t know how to do it in Austin but Austin is a little bit more expensive than many towns. I think it would depend on the city. I think it also look into one bedroom condo. Condos are really inexpensive to acquire and can be in a core of town. The one caveat once again is before you get too far down the road for purchase make sure and check condo rules and regulations regarding short term rentals.
Brandon: I stayed in short term rental once it was a condo and there was this weird don’t tell you neighbors that you’re renting here. You are just a friend staying here. Cleary because you weren’t supposed to have vacation rentals there we didn’t know that until we got there.
Josh: Where should I look for vacation rental? What would you say if you are somebody generically saying “I want to get into this space” what would I do?
Scott: I would go ahead and search to see what exists in your city. I would throw it on the map and see where the density occurs and then I would overlay that with sale prices and try to find that point in which you still in the circle of vacation rental properties but where the prices are starting to decline from dollars per square foot.
Josh: Makes sense.
Brandon: What is your favorite real estate book?
Scott: Rich Dad.
Brandon: Good choice.
Josh: Business book?
Scott: Four hour Workweek.
Brandon: Nice. We are supposed on this so I am going to ask why.
Josh: I'm not even going to expand upon it he pick two books that they picked up 48 times from people.
Brandon: Good thing you are not a guest.
Josh: Give me another book you like beside those. I'm hostile today. I'm sorry Scott its Brandon’s fault.
Brandon: I was dealing with customer service trying to get my cable upgraded – man, what a pain. Anyway that’s a different story.
Josh: You did mention it on the show.
Brandon: I didn’t say their name. I had cable and their name rimes with… What about those two books stood out to you?
Scott: Honestly both those books I read them at the time when I was transitioning into the business and I think they just because jumping off point for everything else I’ve read. You go out and you talk to people and ask them where should I start and The Four Hour Workweek that was really the very first one before I even got into real estate. Someone handed it to me and it just opened my eyes to the fact that there is another way to take control and I think it made me value my time more and be much more strategic about my ROT as well as ROI on my investments.
Brandon: You described it the same way I describe both those books – they hit me just at the right point. I was moving in that direction and I didn’t have words to define what I was feeling and thinking and when I read that all the sudden it put words to what I was feeling suddenly. I love it for those reasons.
Josh: Good choices.
Hobbies – what do you do for fun? Besides mountain biking across Rockies.
Scott: That’s pretty much it. We load up the running shoes and mountain bikes in RV and we take them out for the weekend and we’ll do some riding. Usually in the summer when it gets really got here in Austin we’ll try and get all vacation rentals on longer term bookings and head up closer to where you guys live.
Brandon: What do you believe sets apart successful real estate investors from those who give up, fail, or never get started?
Scott: Obviously persistence is a big part of it but also I think patience if I can put those two together. When we first started thinking doing this we looked at 20 or 30 different properties over three or four months and it was just driving us crazy to not buy anything. When we finally realized what it was that we were looking for and we found it we were able to move quickly to make that move. Other thing I’ll say we started in long term rentals because we felt it was safe and we understood it and it was great place to start.
My personal philosophy is do what you know and stretch yourself a little bit and when you get that figured out go throw something new into the challenge so you can keep growing but growing progressively. If you stretch yourself too far in the beginning you risk setting yourself back financially in a quite a bit. I would say go out there, write some offer but before you write the offers really learn your market and pick a segment you want to be really educated on.
Josh: Great advice. Scott thank you so much for being on the show. Where can people find out more about you?
Scott: They can find me at www.realtystake.com.
Josh: You are also active on BiggerPockets so they can reach out there.
Scott: Of course I'm on BiggerPockets. Please connect to me.
Josh: This is show 114 of the BiggerPockets podcast. Anybody listening can check out the show notes at BiggerPockets.com/show114. Scott thanks for being on the show, really appreciate it. We learned a lot of stuff and good luck you going forward with your rentals. If you’ve got anything really cool by Disney just let me know, hit me up if you want to help a brother out. I'm down.
Brandon: Now look who’s using the podcast.
Josh: I'd never do it.
Brandon: Yeah, whatever. Scott thank you so much.
Scott: Thanks guys.
Josh: Alright guys that was Scott Sutherland. Big thanks to Scott for coming on the show, lots of cool information about vacation rentals. I need to go on vacation and pick up some vacation rentals.
Brandon: I need to go on vacation and pick up some vacation rentals. Let’s do it. Right now.
Josh: Where are we going, where are you buying?
Brandon: I would choose Orlando first shot.
Josh: You are going to fly me to Orlando? You heard it live on the show – Brandon is taking Josh, his wife and three kids down to Orlando. Not only that but he’s paying for our passes to Disneyland.
Brandon: I'm a nice guy.
Josh: How do I find guys like you to work for me? That’s amazing. So sweet.
Brandon: Moving on. Let’s get out of there. Wrap this up.
Josh: Alright guys thanks for being party of BiggerPockets. Thank you for listening to the podcast we really appreciate it. If you love us or if you hate us, only do this if you love us, we love your reviews we love your ratings on iTunes. It helps spread the word so go to iTunes, look for the BiggerPockets podcast and leave some feedback.
Again that’s really helpful for spreading the word about what we’re doing here on BiggerPockets. Otherwise if you don’t yet have an account on BiggerPockets.com get out there, make it happen, join the site, engage, connect, link up with people and build your business. That’s it. That’s what I got for you. Thanks so much. Hopefully I’ll have a vacation one of these days a real one. C’mon Brandon – Orlando. I'm holding you to it.
Brandon: Alright we are going.
Josh: Listeners raise your hand if you think this was the worst outro ever.
Brandon: I don’t hear any hands.
Josh: I don’t either. Thank goodness. I'm josh Dorkin, signing off.
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