Short Term Rental- Getting started & my first No Money Down Deal!
Sorry guys, another long post, but this is just too good not to share. We've put crazy velocity to our investing money.
Short Term Rentals: The numbers, how I got started, and my first No Money Down deal
Hey y'all, I've been posting a little recently sharing some of our success in short term rentals (STR) on AirBnb, VRBO, Homeaway, Booking, Travelocity, etc. I posted on April 25th in a post titled “I’m selling my long term rentals and buying beach property” and that’s generated some questions on finding and funding listings. I thought I would share a little bit on our first deal, and then on a tri-plex that we manage that we were able to get into without spending any of our own cash. I went a lot deeper into the metrics in my last post, so may be helpful to go back and read that, but I wanted to dive a little deeper in this post to answer some of the specific questions that have been raised.
Quick recap, my wife and I moved to Wilmington, NC in 2017. We came from Columbia, SC, where we have a small portfolio of single family rental properties. We started having issues with our property management, and went through a few different companies. It was just exhausting, the ones that are really good end up getting busy, and with the more properties they manage, quality starts to deteriorate. There also seems to be a fairly high burnout rate in that industry. Anyway, we started looking at properties in our new home to move the money into, multi-family, flips, etc, and in the process, started running the numbers on short term rentals. Wilmington is a beach town, with 4 beaches in close proximity to downtown. We did some research, discovered AirDNA.co through Bigger Pockets, (a data scraping company that provides data on short term rental metrics) and started running 10-15 analysis a day on properties until we had a good idea on our market. We ended up buying a duplex at Carolina Beach, 25 minutes outside of Wilmington. This was a house-hack for us so that I could build my new territory (medical sales) and take some of the pressure off by hopefully not having a mortgage to worry about. We did some small renovations like flooring, paint, etc, moved into the upstairs 3/2, and put the downstairs 3/2 on AirBNB last November. Fast forward, we did $1250 in the second half of Nov, $2400 in Dec (which is our mortgage), and have continued to grow every month. We haven’t had a mortgage payment since December, and actually make about $1400 a month after all expenses, including taxes, insurance, cleaning fees, etc. Obviously the beach is a seasonal market, but we managed 81% occupancy straight through the winter.
That’s actually a really cool discussion in and of itself, that we can get into more later, but here’s the quick version. People still travel to the beach in the winter, they can just be really really picky about where they stay because there are so many listings available. By using the data of what are the top staging and fixtures as reviewed by short term rental guests, we didn’t gamble, we chose the top rated mattresses (zinus, $399 a king), the top rated platform beds (Wayfair, $299 a king), the top LED daylight bulbs, TV, internet speed, everything. We used past performance of top rated listings to determine our renovation and staging. By doing things the right way, great staging, great marketing, and really good photos, we have been able to maintain all 5 star reviews, which put us at the top of the list of available properties, and we stayed booked pretty much all winter.
Here’s the important part, our metrics showed that our downstairs should do 42k in gross rents per year. That prediction is as a median performer in our market according to AirDNA. Well, because of our data-driven approach, we operate as a 90%+ performer in our market, and we’re on track to do 57k in our downstairs unit. June-Sept we’re booked at $8,000-$8,500 gross rents PER MONTH. So all of a sudden, we have another problem. Yeah, we’re getting paid to live at the beach, which is amazing, but our opportunity cost that we’re losing is another $50k by not renting out our upstairs. Again, that’s a discussion for another day, we’ve got a baby on the way, and my wife is very happy with our evening walks taking the dogs on the beach. Bigger Pockets won’t let me add the link, but if anyone wants to see this particular listing, it’s the Sundown Cottage at CB on AirBNB.
Ok, so that first listing just exploded and has been doing great. We bought that duplex for 370k, put 20k into it, so we’re 390k in, but it has strong cash flow and we’re getting paid to live 2 blocks from the ocean. You can’t see the water from our house, but you can hear the waves on the front porch, which is nice.
At this point, we had proven the concept, so we wanted to scale. The problem is that beach property has a fairly large barrier to entry, which is price. These are expensive properties to purchase. We didn’t have the cash to put down 20% on another really expensive beach multi-family, so we needed a creative solution. This is the part that I think is really powerful, and could really be helpful for anyone trying to get started that doesn’t have funding in place. We discovered arbitrage. We landed a tri-plex that’s a block off of the beach, and operate the three units as short term rentals that generate unreal cash flow, and we didn’t put any money down or into the property at all. Here are the details.
We identified a property that would be great as a short term rental multi family. It was on the MLS, it was a rundown tri-plex with crappy long term tenants in 2 of the units, and the 3rd unit sitting empty with really crooked floors. The owner had been trying to sell it for $470k for over a year. The problem was that the property only showed 24k a year in gross rents due to bad management, and bad tenants. The owner was upside down in the property, we looked up the records, and he bought it for 550k in 2005. At this point, he was willing to take a loss to get out of it, the flood insurance was eating him up, and the rents weren't covering the debt service. Unfortunately for him, he couldn't sell it. It sat and sat, and my wife and I kept a close eye on it. Here's the key. Everyone else looked at that property, and looked at the rents, and saw it as grossly over-priced. Because of all of our research and knowledge of STR, we knew it wasn't over-priced just under-performing. The day the listing expired for the second time, I pulled the deed, looked up the owner's phone number in Raleigh NC, and cold called him. His name is Brian, and after reaching Brian, I introduced myself, explained what my wife and I have done at Carolina Beach with our property, and explained to him that we felt that his property could do well with the right improvements. Brian was intrigued, and I asked if we could put together a property analysis on what we think would improve the property and what kind of performance we could expect based upon the data and send it to him. He said sure, so we put together a 4 page analysis on the Carolina Beach STR market, the comps and metrics for his property in terms of occupancy, average daily rate, seasonality, etc, and we shared what kind of value we could add to his property in terms of equity with a strong rental history. We sent it off, included things like paint swatches, samples of LVP flooring, and pics of our listing as well so he had an idea of what we are capable of. I followed up with Brian a few days later, and he and his wife were impressed, but still skeptical. The following week, my wife and I drove the 2 hours to Raleigh, NC, and we took Brian and his wife Wendy to dinner. We had a great evening together, Brian was retired from the insurance industry, has done his fair share of real estate investing, and was excited to see a young(ish) couple trying to do big things. We came to an agreement. Brian would fund some renovations on the property, new subfloor and LVP, paint, adding some windows, updating the AC, and one by one we would renovate and lease each unit from him. We put together a Master lease (sometimes called a sandwich lease) where we leased all three units from Brian one at a time as the renovations were complete, and we would stage them, pay for utilities and internet, and put them up on the STR market. We settled on $1200, $1000, and $800 for the three units respectively, meaning that we would pay $36k a year for all three units, and Brian was willing to defer the rent for 3 months so we could build our cash flow. We were in business. I spent a lot of hours finding the right contractor, turning in bids at the Home Depot ProDesk, and running to lumber liquidators to get Brian the best deal on materials and renovation costs. It took time, but so far, the only money I had in the deal was the $4.99 I spent at WhitePages to pay for Brian's contact info.
Next came the staging. Our aim was to use a 0% interest for 12 months credit card to fund the staging, but we actually went a different route. A local friend that had been following our journey actually offered to pay for the staging as a hard money lender at a reasonable rate so that he could be a part of the journey and learn along the way. (Thanks TJ!) We spent $5800 on staging the first 2/2 unit, and it went live last week. We currently have 17 bookings for May and June, for a total of just over $7000 on the books, and we that’s only at 50% occupancy. The bookings are coming in daily (check out The Beach Hive in Carolina Beach on Airbnb) and we’ll be caught up with the rent in a month, and will have the hard money for staging paid off in July. The 3rd unit is under renovation now, and will be completed and staged over the next 3-4 weeks.
The reason this works is because it’s a true win-win. According to AirDNA, this tri-plex will do 105k in gross rents per year as a median performer in our market. With our staging and winning formula we should be able to do 125-130k in gross rents. We pay 36k a year for the units, plus the commissions, and some small overhead, and our net should be 55k if we do 105k in gross rents, or 80k if we do 130k., which we should. We have a 2 year lease agreement with Brian, it’s 36k for year one, and then in year two, we will cover his mortgage, taxes, insurance, and provide an 8% profit share. That turns a liability in his portfolio into an asset, and we still generate unreal cash flow. We also have first right of refusal if he decides to sell the property, but for me, it was more important to prove this concept, and develop a relationship that has the potential to fuel a lot more deals down the road than to just secure this one property. Besides the cash flow, do you see what else Brian gets? He gets tremendous equity. He struggled for over a year to sell that property at 470K. With a rental history that shows $105k in gross rents, all of a sudden, that property isn’t over-priced at 470k, it’s underpriced!
Arbitrage, the act of taking someone else’s property and leveraging it to generate awesome cash flow isn’t our end goal. One of the most powerful parts of this strategy is to own the property you’re managing, because then you get the cash flow, the equity pay down, the appreciation, and the tax benefit. However, if you don’t have the cash to buy a property, or you can’t find funding to get started, keep in mind, there are a lot of ways to provide value. If we can take a property that was a thorn in someone’s side, convert it into a top performing rental, and make it a true asset, then anyone can do it. It’s all about the messaging, finding a problem that someone may not even know they have, and providing a solution.
Sure, this may be an unlikely scenario, but honestly, it was the very first cold call that I made trying to work out an arbitrage deal. What are the chances of that? I have no idea. So far I’m 1 for 1, but what if you have to make 20 phone calls? Or 50? Or 200? Who cares, if it’s the only way you have to get started, then why not give it a shot? In this case, one deal has literally created over 50k in cash flow that is going right back into our investing portfolio. So far, I’ve spent $4.99.
Thanks for reading!
Clint and Abby Harris