Long post, but I really wish someone had told me this when I was struggling to buy single family homes.
Hey y'all, wanted to share what I’ve learned in the past year. I took a promotion with my medical sales job, and move to Wilmington, NC (beach town) in 2017. I started buying rental properties when I was 23 in Columbia SC after the market crash, and ended up with a portfolio of 8 properties, 7 single family, and one duplex. Things were ok, I BRRRR’d 2 of them (I learned from trial and error, didn’t discover Bigger Pockets until 2017) as they appreciated, the rest I bought for 20-30K each, all in I was at or under 35k each, rented from $675-800 depending on bedrooms. I basically looked for brick, decent roof, renovations that put me all in under 35k. Obviously this had me investing in very marginal areas. Great cash flow, but in most cases, I didn’t have an exit strategy for my money. I paid cash, and couldn’t refi unless the 80% LTV was 50k or greater. 2 of these properties eventually appraised for 75k, so I pulled out 55k on each, on another I got an equity line, but again, I was basically on my own trying to figure all this out, and there was a big learning curve.
Ok let’s fast forward. In the past 2 years since leaving Columbia SC, I’ve been through 3 property managers, and basically I’ve learned that the ones that are really good, sooner or later, get really busy, and become really average and then really below average. People make it sound really easy, but it’s just not. Finding a good property manager isn’t that difficult, but finding one that has longevity is different. Basically what I learned is that no one minds my business the way that I would mind my business. Also, because of the type of renters lower income properties house, the cap X expenses really cannibalized a lot of the cash flow. Every time a renter moved out, it was potentially a couple thousand to paint, replaced kicked-in doors, windows, carpet, etc. I never did section 8, but some days it felt like it.
I sounded a lot like some of the newer investors I talk to “I’m making 6k a year off of each of my rentals, once I have 10, that’s 60 grand! Then I can buy 2 a year!” And even though those metrics work for some people, I felt that my time was worth more than what I was making, and that I needed to find a way to put a lot more velocity to my investing to get where I needed to be. I looked at multifamily properties, had a 6 unit under contract, and the deal fell apart. Right about then, I discovered something that changed everything about our trajectory.
Ok, hear me out. I know that Short Term Rentals (STR) has a stigma that people can't shake, but I want to dig into that a little bit. Here's the short version. My wife and I bought a beach house duplex at Carolina Beach just outside of Wilmington. It's a 3/2 in each half. We did some small renovations, flooring, paint, scraped ceilings, etc, moved into one unit, and put the other up on AirBnB. Our occupancy on our island goes from 19% in the winter to 95% in the summer, and we listed on November the 10th, 2018, so we really weren’t expecting much. Our first booking was for November 16th, and amazingly, we did $1250 in gross rents between then and 30th. In December, we did $2400, which is our mortgage. (those are gross rents, doesn’t discount the cleaning fees, but we cleaned it ourselves for the first 3 months) We’ve increased that every month, more and more 5 star reviews push you higher up the list, and the bookings start rolling in faster and faster. Currently, we’re fully booked for the next 3 months, and June-Sep, we’ll do $8,000-$8,500 in gross rents PER MONTH. I haven’t had a house payment since December 2018. On a yearly average, we pay all our bills, and get paid about $1400 a month to live 2 blocks from the ocean. See why my long term rentals stopped looking so attractive?
People have trepidation about STR, "What happens when the market tanks? Aren't all your bookings going to dry up?" Well, no actually. From all the research I've done, in 2008, when the market tanked, domestic travel didn't take a hit. People still take their time for vacations. When they want to save money, they don't cancel their 7 day vacation, they change the destination. Instead of flying a family of 4 to Disney, or the Bahamas, they save $500 per ticket and instead drive to the beach. Also, with AirBnB being a global company, it's easy to find a market with a lot of volatility and see how it reacted. Greece is a good place to start, but again, I found that it didn't really dent the occupancy, average daily rate, or cash flow.
What about seasonality of being a beach destination, aren’t you busy 4 months and year and then just sitting empty? Nope. From November 10th through April, our occupancy is 81%. What we found is that there are still a lot of people travelling to the beach, they can just be really picky about where they stay. So, how did we jump to over 80% occupancy and stay there? One word. Data.
I am in no way affiliated, but I attribute most of our success to AirDNA.co (not .com, it’s .co) This is a data scraping company that gives back-end data on AirBnB, Booking, and Home Away. I can see what people are booking, what they pay, average daily rate, length of stay, where the people are from, what they like, and what they didn’t. When we staged our house, we didn’t guess on what people would like, we used the data. We used over 10,000 AirBnB reviews to pick out the top rated mattress (zinus memory foam $399 for a king), the best platform beds (Wayfair, $299 a king), the best lighting (daylight LED), basically everything. I’m a big believer in using data. Past reviews and metrics dictate our future performance. Because of this, we operate as a 90% performer in our market (that’s overall performance, not occupancy), and our downstairs is on pace to do 57k in gross rents this year. YEAH, THAT’S RIGHT, I SAID $57,000. Which is awesome, but all of a sudden, I’m an idiot for living in the other unit. Our opportunity cost of another 50 grand has us looking for another house now. Also, we signed on a tri-plex last month, the first unit just hit AirBnb, and that property will do 105k in gross rents per year as a median performer in our market, 130k if we knock it out of the park (We will).
"But what happens when a renter trashes your place, or kids throw a party? I bet you guys are only having success because you live thereâ¦" Well, about that. AirBnb (I use that to mean all STR, for bandwidth, we are across all platforms, VRBO, AirBnB, HomeAway, Booking, Travelocity, etc, our pricing just varies based upon what commission they charge) is a review based system. It's a feedback loop, all tenants review your property, and you review them. So everyone has an incentive to be fair and honest and to try and do right. When a person requests to book, we see who they are, where they are coming from, and every place they have booked before, and we see what that host had to say about them. News flash, if a profile for a 20 year old kid was created yesterday, has no reviews, and they live locally, I would decline that request, they're trying to throw a party. The point is, the data is there, you can pick your guests.
“What about how your property is treated? People constantly in and out sounds like a bad idea.” Nope, so far, on average people are actually in the property 3-4 hours a day, usually they are out enjoying their vacation, checking out local restaurants, hanging on the beach, fishing, kayaking, who knows. We’ve actually found that any time there’s an issue, we find out about it right away. For instance, 2 weeks ago, a shower head broke and was leaking. The guests let us know about it as soon as they checked in. They wanted us to know, so that we didn’t assume they did it. (if anyone ever does break anything, you can charge them through the AirBnB app, another reason people take great care of the property) I sent the info to our handyman, and he coordinated with our cleaner, and went in and fixed it the next time she was in there, boom, back in business.
So here’s the long and short of it. I’m selling off my long term rental properties. Most of them are now worth 50-70k, I’m taking that money, and putting it to work here at the coast. Here’s my barrier to entry, in order to pick up a property, I need to cover the mortgage, taxes, insurance, and profit $1000 per door, per month. Sounds unrealistic, but so far we’ve averaging 15k per door per year. So basically, I get an equity pay down, I get really really strong cash flow, and unlike in Columbia, I’m in a market that should appreciate over time. Equity, Cash flow, and Appreciation? Find me a better investment and I’m all ears. As for now, my wife quit her job in medical sales and became a real estate agent here at the beach (Shameless plug, anyone need help investing at the coast?), we’ve started a boutique property management company, and we’ll be scaled to 10 doors by the end of 2019. Just so we’re clear, that’s 120k in cash flow, not counting the equity pay down. Also, before it comes up, I manage our listings from my phone, and it takes me about 5-10 minutes per day. I sell and implant pacemakers and defibrillators for a living, so we use automated technology for 90% of our communications with guests and the cleaners.
Ok, rant over. Anyone struggling to scale a long term rental portfolio and thinking that you need to invest in marginal areas to try and achieve that elusive 2% rule, there is a better way.
@Clint Harris ; Great post, thanks for sharing.
Are any of your STR in Wilmington in the Old Wilmington area? Do you know what their stance is on STR? Absolutely love that area, & have considered something down the road.
Looking at Old Wilmington, Zillow has listings of 'condos' which are some of the older houses, & sometimes they are listed as apartments. From a remote view, it's all very confusing.
@Clint Harris , great write up man. I am in the same boat, just not on the same beach yet. We are converting our traditional rentals in D neighborhoods into STRÂ´s in A or B- ones, started that journey almost 3 years ago. Your data driven approach is intriguing. Do you get mattress information from AirDNA?
The old Wilmington area does have some regulations, I think you have to live within 15 miles to have a short term rental there. Theres some pressure from the hotel lobby, one of the reasons I like Carolina beach is the town started taking a tax on it, they get addicted to that revenue very quickly, and it’s not going away. It also is helping our town get better and it’s improving things on the island.
AirDNA used to offer data on what the top reviews were for, and it was usually people commenting about the mattress. That information is not available anymore, but you can still Google beat rates AirBNB staging and a bunch of articles come up
Dan, whenever possible, I always suggest using data. We basically used that information to create a winning recipe, and then we just repeat it. Similar staging, good lighting, great photos, and you’re in business
Congrats on your successful STR! Sounds like it is doing amazingly, and given the rent to price ratio on your long term rentals, I agree it makes sense to cash those out.
Makes me think I ought to get some STR's myself - I still plan to hold onto my long term rentals, but this could provide some nice diversification.
You might have already mentioned, but did you find that duplex (and triplex) on the MLS?
And would your STR's still cover expenses if at some point the market dries up and you need to convert them to long term rentals?
The duplex was on the MLS, The triplex was listed on the MLS, but then it expired and I called the owner. It was performing poorly as a long-term rental, so wasn't worth the 470k he was asking. However, as a STR, I knew it wasn't over-priced, just under-performing. We'll do over 105k in gross rents this year in those three units, which is what the data says it will do as a median performer in our market. And YES!!! I always have an exit strategy, all of our properties will cover all expenses and provide a few hundred dollars in cash flow if we were forced to convert them to long term rentals. But as is, the town takes and tax and is addicted to that revenue, meaning STR isn't going away, and we'll just keep on crushing it and adding doors. In 15 years, should be sitting on a couple million in beach property that's paid for, and I won't ever have made a payment, not to mention the cash flow on top of the equity pay down.
Great Post Clint.
An excellent example of Buying Grade A Coastal property that appreciates and cash flows, Starting a business with great potential, and loosing all of the $100 / door OOS Turdkeys that you have no control over and that only profit the sellers /caretakers of such properties... All in one fell swoop.
Keep killing it.
More effort than a long term rental, but more than worth it.
Good work! Thanks for posting.
Yep Lee, you’re right. It’s not “passive” income, but by leveraging technology and management software, we have just about everything automated. Also, because people aren’t really living in the properties, my suspicion is that we’ll actually see a reduction in cap X expenses versus our long term rentals. Auto-thermostats adjust the temp so your AC isn’t constantly running in between guests, your floor isnt getting constant wear and tear, people hardly ever use the appliances, I think it will be pretty easy to show down the road that the little bit of extra work it takes to get a property staged and up and running is more than worth it.
@Clint Harris Great post Clint, and thanks for sharing your experience.
I'm wondering if STR is at a point where it's difficult to enter into a market due to the saturation of STRs/competition. Did you realize or encounter this even just a year or two ago? Also, you mentioned that the local regulation requires that you live within a certain distance to be able to own an STR. Is that true for most regulations? We live in Massachusetts, which isn't necessarily a "beach destination" for many. As a result, I'm wondering what it takes to own STRs out of state.
It's not too saturated to enter into the STR market, I'm still actively picking up multifamily units. We are starting to see people realize the value of the STR market, so prices on great STR properties are starting to go up, and it's starting to be more competitive. The good and bad about my market is that there is a fairly high barrier to entry with prices in the 350-550k range, so it's tough to get your first one going (although arbitrage is a great strategy that worked for us when we couldn't afford to buy a second property, and we still make 80k a year off of that arbitrage deal). But the good news is that if you use the data and get into your first property correctly, you can easily net 50-80k a year, so that can quickly generate enough to keep investing even at 80% LTV. Remember, this is a feedback loop. The properties that are staged really well, clean, and managed the right way will do great. The cream rises to the top. A lot of people think they can slap a property together quickly, but without the systems in place to manage it, they quickly end up with frustrated guests, get a couple bad reviews, and if they dont quickly make corrections, that can be the beginning of the end. In terms of regulation, every market is different, but no, in most markets you don't have to live within a certain distance, that's only in a few places like Charleston, SC. All cities, and often historic districts have their own regulations, always look at local regs. Also, AirDNA.co is a great place to get an idea on regulations.
Last thing, don't be fooled into thinking STR is for beach towns or NYC, this is happening EVERYWHERE. From campers, to TeePees in the desert, mountains, ski towns, and even in Massachusetts, it's happening. It's really hard to start off long distance. If you think you want to give it a shot, pick a local spot. Use AirDNA.co to run a rentalizer analysis, and use that property to get all your systems and automation in place. Once you spend a few months getting things spinning like a top, THEN you can go rubber-stamp that in other locations. Build the machine in your backyard, and after it's built, then send it out to other markets.
Great thread. I have mixed feelings about AirBnb.
On the down side, it takes apartments out of service for residents and turns them into hotel rooms, thereby screwing with supply and demand and making housing less affordable for people who live there. It allows people to run unlicensed hotels, and there are a lot of reasons that hotels have so many rules in their licensing and zoning, which will someday blow up with epidemics of bedbugs, bad fires that kill people, etc. It brings tourists into what used to be residential neighborhoods and really messes up the dynamics of the neigbhorhood (I see this in my own neighborhood, which has tons of airbnbs). Tourists don't contribute to a thriving community the same way long term residents do. For these and other reasons, I expect there to be a continued backlash against short term rentals across the country as more and more residents get fed up with higher housing prices, loud parties, parking issues, general disrespect for the community, etc. And very few STR landlords are doing a good job managing their properties, so issues are rampant.
On the up side, hotels have created this problem by going for higher-end properties in huge anonymous towers. There are lots of people who want more affordable places to stay, want to have large groups that aren't conducive to hotel rooms, want to experience the local feel of a place and not stay in an area zoned for big hotels, etc. These people used to stay in bed and breakfasts, but STRs have opened up a whole new world of travel. I (reluctantly) stay in them now that we have a kid and want to do family trips with the grandparents and other family. But I always stay in hotels when I'm traveling solo. Another upside is that they are profitable for property owners (although that's a downside for renters and people who want to buy a vacation home for personal use).
Am I criticizing you for doing this? Not at all, you are acting in an economically rational way and it sounds like you are being a responsible property owner. I hope you make a ton of money. But I don't think everyone should just go all-in on STRs. There are legitimate concerns about their impacts on housing markets and neighborhoods, and those concerns are starting to be addressed through legislation that could really impact investors who find that the rules have changed after they buy.
I would also caution about getting too deeply invested in Wilmington. One good hurricane and you could lose everything. Insurance might help, but it won't make you whole and it won't replace all that lost income. Keep a few properties in an area a couple of hundred miles away as a backup.
Thanks for posting that. I have one question. Did you need to get any kind of hotel permit or license to be able to do STR's? Also, do you have to collect and pay sales taxes?
@Clint Harris - Awesome! I do the same thing in Chapel Hill.
You answered one question that my wife and I had. We noticed an uptick in beach traffic around Carolina Beach in May. Our guess is that will continue due to increasing growth in Raleigh-Durham.
What is your plan for recession proofing? Back in 2008-10, a lot of builders got hit hard with spec houses. They were trying to expand too quickly in order to modernize CB (Wrightsville Beach was the hot market then). It took a long time to recover.
@Jason Turgeon I understand some of your concerns, but the data is not set on causation or correlation right now- don't necessarily just read the Hotel Marketing briefs. In my area, hotels are up YoY in all major categories over the last 10 years despite AirBnb having multi-factor growth. For me specifically, roughly 30-40% of my guests are "locals" staying 1 week to one month for various reasons (moving to Triangle and testing out neighborhoods, renovation a home, buying / selling house and need a temporary place, in-laws in town, etc...). STR's have been around forever. It's just different now with technology. What I'm wondering is if this target market is fulfilling an unmet need. As a realtor, you could probably get full occupancy just by letting your clients use your place in between moves.
I actually just bought a 2 bedroom condo in surfside beach, near Myrtle Beach to live in, fix it, and then potentially put it up as a STR. I'm currently looking now for something else. Would love to connect and maybe see this project you have. Awesome stuff.
Great discussion here, a lot of key points made
You are reading my mind! I currently LOVE my Long term rentals because hey are in my home town where my family lives BUT. I contemplate selling them everyday! STR I have 5 now and say all the time that we need to sell the others. How much revenue I make compared to the 4 LTR!. Not as many words but I agree and need to make the decision to sell!
I’ve been considering the same. Did you use 1031 to make the jump?
Great post. I'm about to pull the trigger on my first STR and this had a lot of good info.
I don't think anyone can deny the money to be made in the STR game. It's just more of a job than a LTR is. Keep doing your thing and enjoying the fruits of your labor.
I'm still not exactly sure how to tag someone in a post, but I think it's important to point out that Jason Turgeon made some really good points here. You're exactly right Jason, the short term rental avenue is, in my mind, a result of the hotel lobby doing things the wrong way, and people on a small scale being able to be more in touch with society and what people need. I also think it's early adopters of the new technology that are able to leverage people having a smart phone and eliminate the need for STR property managers that used to scrape 20% off the top, which thereby puts owning small properties being used as short term rentals back in the profitable space again. That having been said, you are exactly right about the detriment that it can cause on towns, and especially historic districts. I think there's a time and place for this type of investment strategy, and anyone that does it, has a responsibility to their property, their neighbors, their neighborhood, and the town that they live in to do it the right way. Personally I believe that we operate our properties in a way that creates appreciation for our property itself, tremendous cash flow, which also results in tremendous taxes that are realized by our town, and I get to watch those funds go straight in to action to improve our town, streets, burying the electric lines, and creating a better experience for everyone around. In turn, our town quickly has become addicted to the tremendous amounts of revenue created by this strategy, which also ensures that our portfolio can continue to grow without threat of regulation beyond what is currently in place. I also agree with you that the strategy is probably not a great long-term solution, however, I had nine single-family properties in Columbia South Carolina, and it was really hard for me to make enough money after cap X expenses and unoccupancy to ever really get anywhere with that portfolio. With this strategy, we should be bringing in a net profit of 200K a year by Mid 2020, and at that point, our plan is to transition into apartment complexes. But in mind, of done correctly, this can be a Win for everyone, and can put tremendous velocity to anyone's portfolio, as long as they have the ability to execute on the overall principle, while still paying attention to the fine details. Great comments man, and appreciated.
@Jason Turgeon , there we go, sorry man, read above, I didn’t know how to tag you
Originally posted by @Dennis Cosgrave :
Thanks for posting that. I have one question. Did you need to get any kind of hotel permit or license to be able to do STR's? Also, do you have to collect and pay sales taxes?
No, nothing special required. AirBNB collects our taxes and pays them, others like VRBO and Booking require us to send them I separately. All can be easily managed through a software app like YourPorter
Thanks for the post.
Beach property sounds like way more fun. I have a bunch of long term rentals that are paid off and don't cause much trouble.
I do enjoy having our VRBO Lake house, but it more work compared to a LTR. I wouldn't mind having a Vrbo on the beach or Intercoastal waterway in Florida.
Great post! Beach property does sound amazing. I was looking at long-term strategy, as I'm still learning, but am interested in STR after this.
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