Turn your house hack into an "Airbnb product" to sell to investor

63 Replies

Hi everyone.

Its been quite a while since I last posted. I've been working on a few larger deals this past year along with my relocation to the Chicago area, so I've been super busy. But now I finally closed on my last big sale this year so I think I'll start trolling the forums again.

Anywho, So since relocating to the chicago area, in true house hacking fashion I picked up a two flat in the reasonably priced, reasonably situated area of Humboldt Park. It wouldnt be what I would call a class A or even B neighborhood (Maybe B/C neighborhood), but its proximity to the trendy Logan square and Wickerpark/Bucktown areas, make it an ideal location for someone who drives a car and commutes everywhere. 

Looking at the numbers, with me living in one of the unit and renting out the other using traditional rental methods, I figure that I could get maybe a 800/850 per month in rent, which would barely pay my mortgage, let alone any of my expenses. 

So instead I decided to list the apartment on airbnb and gage the response. and to my surprise its been a huge success. 

I've been renting the one unit and living in the other unit now making it relatively easy to manage. Heres a snapshot of the rough numbers since I started doing this in may 2015.

Monthly Rental Income
Daily rental rate average 125/day
average days rented each month 25 out of 30 days.
total monthly rental income on average 3125

Monthly expenses
Cable $67/month
Gas(For whole building) 200/month
Electric 250/month
Water 45/month
Rental Furniture 300/month
Mortgage PITI 1770/month
Lawncare $100/month

Total monthly expenses: $2732/month

Total Monthly Cash Flow: $393/month

Not only does the other unit pay for my living expenses, it also puts almost 400+ dollars in my pocket at the end of each month. On top of that the units themselves get very little wear and tear because guests are using things like the kitchen to cook or putting holes in the walls to hang personal pictures. 

Right now, there are only a couple of unknowns:

  1. Whether or not demand will hold up through the winter months. I'm not sure that Ill be able to continue renting for 3000+ rental income during the winter months. But I figure that if i can at least rent out most if not all the weekends for the next few months in advanced, I'll at least be able to cover my mortgage and I would still be positive cash flow at the end of the year.

  2. Secondly, up untill now I've been turning over the units myself to save on the added housekeeping costs. If I decided to outsource this to a cleaning service I'd likely break even or lose a little money on those months where I dont have close to full occupancy each month.

  3. One things for sure. If I decided to set up both units in the building to airbnb, any money I make from the second unit would be pure profit in the hundreds to thousands of dollars each month. 

Which brings me to my question. 

As an investor, assuming the numbers above hold and i rent out both units, could I package the building as an "airbnb product" that is like a turnkey property that produces way better cashflows than an average rental and sell it for more money than i would get marketing it on the MLS.

I know that anything less than 4 units is not considered commercial, so cashflow methods of valuation using cap rates dont apply. But I dont think using comps to evaluate the property would accurately represent the buildings current value. 

I also think this would be an interesting take on turnkey rental investments, to basically buy and package a bunch of these buildings as "mini hotels" and sell the package to investors as a product of sorts.

Interested to see what everyone thinks of this idea.

I think what you could do is set it up as a business with the property included. That would define your product better since it is not commercial property and also does not fit the standard single family home either. Offer it as a business using AIRbnb as a type of accommodation business. 

Samson, 

Welcome to Chicago and congratulations on the purchase. 

I like your out of the box thinking! I have been exploring the AirBNB/Vacation rental concept.  I never thought about selling them as turnkey properties/businesses and not sure why somebody would want to buy them.  

There is nothing proprietary and you cannot guarantee income.  You don't know how much rental income you will be generating this winter? how much would you pay for your future rental income?  I think you could market the rental as a feature of selling the 2 flat.  Buyers who are purchasing 2 flats that are not occupying both units would be renting it out anyways. You are just taking advantage of the arbitrage between rates of short and long term rentals.

AirBNB and other Vacation Rental sites are open to anyone.

Why would a buyer want to pay a premium to something they can do one their own?  I am not trying to knock your idea, but if you can this, then maybe you are on to something.

Back to your Winter Rental income you should be able to rent your unit, it just depends on the rate your are willing to accept.  

@Ravi P. Thanks for the feed back. Its true, airbnb is something practically anyone can do. I guess I should add the caviat that what we would be selling is a fully automated product perhaps. 

Chicago has the advantage of having alot of services that can automate alot of the tasks and potential issues that come with  starting a vacation rental. 

For example, furniture and decorations can be rented, so up front costs of furnishing a new rental unit goes away and becomes part of your overhead. And there is handy.com which offers a vacation turn over service and handy man services thats hotel quality. Imagine, setting it up so that when a guest has a problem they call the handy man service directly and you just get billed from your operating account. You dont even need to necessarily get involved. And if the vacation rental is purchased under an entity, and all the expenses are paid automatically, and you set it all up so that monthly business transactions happen with out your involvment, you have and almost fully automated rental property maintained from a laptop via email and calendar. 

I guess that is really what people would be buying. Like buying a dunkin donuts after its already been established with all the employees and vendors. Just need to focus collect money and attract new customers.

good post @Samson Kay

I looked into AirBnB and I was shocked what people pay on that site in Chicago considering you could get a hotel for the same price in most instances.   

So $125 in Humbolt...good for you. 

Have you had any repeat customers?  I know the reviews on that site are key to filling your property 

Welcome to Chicago @Samson Kay .  Like @Ravi P. said, I like your thinking. I wish I could give you some insight but I'm quite new to the game myself.

@John Weidner No I haven't gotten any repeat customers yet. But I've been booked solid during these past 3 months. And asside from the learning curve I had on the customer service side, My rating has been floating around 4.5-5 stars from every guest we had. 

And I havent had to meet a single one of them. Or drop off a key. Or deal with maintenance call. 

My unit isnt even in a convenient area (ie. close to train, highway, downtown) but I've had bookings none the less. 

Id like to pick up a few more buildings maybe in more quality areas and do the same thing. I found that in the gentrifying neighborhoods, conventional rent doesnt make enough to satisfy the 1-2% rules. But with a vacation rental it makes that no problem. 

@Samson Kay

My understanding is that you will be flipping short term rentals and retain the operating agreement with the buyer to manage the property?  This is similar to the Condotel model that was popular 10 years ago.    

Also based on your numbers you did not include cleaning and maintenance. Which can add up quickly, considering that these are short term guest you would need to service the unit after each guest's stay and possibly during their stay.   You also mentioned that you began this in May.  Hotels in Chicago also tend to have the highest occupancy and ADR from May-July.  This summer was banging for hotels in the Chicagoland area.  I will also make the assumption that majority of AirBNB travelers are leisure travelers and not business travelers.  As hotels will continue to be busy until October, I am curious to see how well your ADR and Occupancy will be.  

I included a link below to ChooseChicago.com. It will give a better idea of rates and occupancy for Chicago hotels.  You can piggyback on their rates.

http://www.choosechicago.com/articles/view/monthly...

I am still not sure how much a premium I would pay, and how much a bank would be willing to lend on this without historical and projected income.  This may also be why banks cautious to lend on independent hotels/motels.  

Perhaps someone with Vacation rentals can chime in and provide some valuable BP insight

@Samson Kay

I like the idea, but I don't know how much value a buyer would place on the business side of things.  You could set this up and then sell it for a small premium as an in-place "system" but it may be 50/50 as to whether the buyer will value the process you have OR prefer having in place long-term tenants with locked-in leases.

One note, if you are going the business route and selling it as such, make sure to go legit on taxes, fees and permits.  I don't see any line item in your expenses for hotel taxes.  Also, zoning laws and permits will apply...

@Samson Kay

When I spent time looking a few weeks ago people were killing it in Wicker Park and Lakeview.  

Frankly I don't get the attraction when you can stay in a hotel for the same price with better amenities and location but I'm not the clientele 

It's a good model.  I'll be interested to see how your business is in late fall through April 

Good post and I'm happy to hear of your success 

Originally posted by @John Weidner :

good post @Samson Kay

I looked into AirBnB and I was shocked what people pay on that site in Chicago considering you could get a hotel for the same price in most instances.   

So $125 in Humbolt...good for you. 

Have you had any repeat customers?  I know the reviews on that site are key to filling your property 

Samson never indicated what type of rental he has. 1BR or 2BR.  $125.00 for a 2BR or even a 3BR would be a great rate for a family or group visiting DT Chicago, Cubs Game, or even Lollapalooza.    Also, Uber and Lyft make everything convenient.  I figure a Uber from Humboldt to DT Chicago is less than $20.00.  CTA is now $5.00/person/trip. All day pass is now $10.00. And you don't need to worry about getting mugged. 

Congrats Samson! Please keep us posted on how your AirBnB unit hold up during the winter. I'm curious. If it continues to be highly occupied even during the winter months, you found a winning formula here. :-)

Originally posted by @Wendell De Guzman :

Congrats Samson! Please keep us posted on how your AirBnB unit hold up during the winter. I'm curious. If it continues to be highly occupied even during the winter months, you found a winning formula here. :-)

 Thanks wendell, I'll update everyone as the months progress. Hope all is well on your end.

Originally posted by @Ravi P. :

@Samson Kay, 

My understanding is that you will be flipping short term rentals and retain the operating agreement with the buyer to manage the property?  This is similar to the Condotel model that was popular 10 years ago.    

Also based on your numbers you did not include cleaning and maintenance. Which can add up quickly, considering that these are short term guest you would need to service the unit after each guest's stay and possibly during their stay.   You also mentioned that you began this in May.  Hotels in Chicago also tend to have the highest occupancy and ADR from May-July.  This summer was banging for hotels in the Chicagoland area.  I will also make the assumption that majority of AirBNB travelers are leisure travelers and not business travelers.  As hotels will continue to be busy until October, I am curious to see how well your ADR and Occupancy will be.  

I included a link below to ChooseChicago.com. It will give a better idea of rates and occupancy for Chicago hotels.  You can piggyback on their rates.

http://www.choosechicago.com/articles/view/monthly...

I am still not sure how much a premium I would pay, and how much a bank would be willing to lend on this without historical and projected income.  This may also be why banks cautious to lend on independent hotels/motels.  

Perhaps someone with Vacation rentals can chime in and provide some valuable BP insight

 Yes I forgot to mention that it is a 2 bedroom, but it comfortably sleeps 6. You can find my listing here. 

@Samson Kay ,

Its a nice property.  Everything a short term rental would need. Does it include a Washer/Dryer?  I see a $300.00 furniture rental  in your OP, what does that include.  You don't have to disclose it, if you are not comfortable.  

I am just trying to get a better idea of about ST rentals.

Ravi

@Ravi P.

No Problem. yes there is a washer dryer on the premises for them to use. I also give them an option to use the parking garage for an additional fee But no one has taken me up on it.

the 300 rental furniture includes:

  • A convertible couch 
  • coffee table
  • end table 
  • lamp
  • tv stand
  • love seat
  • dining table 
  • 4 dining table chairs
  • a desk
  • a desk chair
  • desk lamp
  • queen sized bed
  • dresser
  • side table

Its quite a bit of stuff. I'm actually thinking of reducing the amount of stuff to open up the space a bit and reduce the cost more.

Samson

Have you factored in how your AirBnB income will be taxed ?

I ask because I have a condo in Lincoln Park I was considering using for same.

Also who is cleaning your apt after the guests move out ?  Typically how much does that cost ?

Do you have a minimum stay ? I would imagine it would be favorable to have a 2 or 3 night min stay to cut down on the cleaning services.

Thanks

@Ronan M. Airbnb provides a 1099 at the end of the year. I have the property purchased under an entity, so I'll reduce my taxable income by taking into account all my operating expenses including things like cable and electricity for both units.

Occupancy taxes get deducted automatically before the gross amount ends up in your bank account.

Cleaning fees I've contacted several made services in my area and found that vacation rental turn over can range between 65-100 depending on the scope of work. but it isnt terrible. What I do is tack this cleaning fee onto the final cost of the rental. So Technically the guest pays it. If your having the cleaning lady do things like laundry and folding expect it to cost closer to 100-125. 

I have a 2 nite minimum stay mid week, and 3 nite minimum for any stay that includes friday, saturday, sunday. On average everyone rents for 4-5 days though.

Many thanks for the reply Samson.

Good thread and good info.

Best of luck with it. Sounds like its working out very well for you.

I'm running several of my properties as Airbnb rentals now in Indy. Best decision I ever made. 3 of my multifamily properties have been converted to Airbnb. 3-2 BR, 3- studios, and 2-1 BR. I have slowed down purchasing more properties as I convert the remaining 12 properties to Airbnb. I hadn't thought of selling them because I have never sold any of my properties. I buy and hold. If I could sell based on the income I bring in I would have to. Great Idea!
Congrats on finding a sweet niche! If you haven't already, I'd encourage you to research your local tax laws on short term rentals. It can be as high as 15%. Short term rentals are usually taxed at both the state and county level. I'm currently paying 12% in Florida. Best of luck with your rental unit! Thanks, Brit.

Hi - yep, an acquaintance just sold her vacation rental as a business earlier this year, for about 3x the price of the property alone. She was not forthcoming on details, but yes - it's been done -  she mentioned 3-5 year track record was needed. 

BTW definitely check out some of the tools available to help with forecasting, yield management, analytics for AirBNBs, here's a non-exhaustive list : http://travlpeer.com/2015/02/28/15-startups-supporting-the-short-term-rental-host/

@Samson Kay I love this concept and can't wait to hear more about how it goes in the winter months. Have you considered looking around for permanent furniture for the units. I think the lower the amount of fixed costs each month the better. If you do end up selling it as a business investment adding $300 a month to the cash flow would have a large impact on what it could sell for. I know in my area you can pick up some nice furniture with little effort for a steal by subscribing to some of the Facebook garage sale sites.

I live at the beach and have been thinking about going that route.  The part that concerns me is scalability.  If you have one unit and you rent it out, the local jurisdiction will probably look the other way.  On the other hand, if you are a company with many rentals they may not.  In Florida, any rental under 7 months of rental by the same person is technically a hotel, which carries zoning and tax implications.  I believe that airbnb lives in a gray area that needs to be resolved.  

I've Airbnb'd in Chicago for a couple of years now (and in Uptown, a slightly more established area on the northside). The winter months are much harder; I typically cut my pricing by 40% or so for winter rentals and still end up with a couple months of vacancy (with admittedly little marketing effort on my behalf). This is for a room in my personal unit, so I only rent for 1+ month long periods. YMMV with higher short-term rates but fewer short-term visitors during these months.

Also, Airbnb has started collecting hotel/occupancy taxes for Chicago now and I believe such "transient" usage is defined as any stays less than a month. This may impact your bottom line depending on your target tenant.

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