Biggest Mistakes/Lessons Learned: Short-Term Rentals

123 Replies

Talk to property managers and other STR owners. I nearly bought several properties that I would have regretted. Stay away from HOA's if you want flexibility. Learn the market demands like a pool, parking for toys....

My wife and I bought a Catskills log home 3 years ago as our first investment, before we even bought our primary residence/house-hack in Northern NJ.  And boy did we learn a lot the first year on multiple fronts!  

Lesson #1: We quickly learned if you underprice your STR listing and allow for 1 or 2 night stays, you'll end up with occasionally really bad renters, who will do damage to your property (we had one group that broke a glass coffee table and left their large dog locked in our bathroom all day while they went skiing). The dog scratched up our door and trim pretty badly.

We now have a 1-week minimum, charge higher prices, and have not had any problems with any of our guests.

Lesson #2: Hire a cleaning person(s) that can handle your rental volume and turnover requirements.  The initial cleaning person we used was not well-suited for our needs.  Pre-COVID, we often had same day turnovers, and she was always stressed out and calling or texting us about every little thing the previous guests did "wrong".  We switched to another cleaning provider, who has a small crew, and that's been relatively seamless for 2 years now.  That's what she does every day, so her team get in and get out quickly, and we only hear from them if there is a real problem (which is very rare).

Lesson #3: Make sure you do thorough inspections BEFORE purchasing your STR investment property. We didn't know any better at the time and did NOT check the septic (and the main waste line going on to the septic field), nor did we check the depth of the well. Both mistakes ended up costing us a lot of money and a ton of stress within the first year of ownership. The well turned out to be a 48 ft gravel well that ran completely dry, while we had guests at the house. And the waste pipe under the driveway leading to the septic field turned out to be made of paper and tar and was partially crushed. We only found out AFTER our basement got flooded with waste back-up when that partly crushed pipe got clogged up. Digging a new well cost us $9500, while the emergency plumbing, hazmat cleanup, and repairs for the septic pipe and basement cost us another $5000.

Lesson #4: Don't panic and don't act based on emotion.  We were so stressed out after that experience, that we seriously considered selling this property and taking a loss, but thankfully, we put emotions aside and made a list of pros and cons, where the pros clearly outweighed the cons.  We changed our mentality from "woe is us" to "how do we improve this property and reduce our stress level?  First thing we did was get rid of the dated hot tub that was a big source of headaches for us -- cleaning, maintenance, guest complaints.  That alone reduced our stress level big time!

Lesson #5: Make sure you have reserves for emergency cap ex.  Luckily, we had some cash saved up when we had to dig a new well or do the emergency plumbing repairs and basement cleanup.  The central air furnace went bust around that same time, during a summer heat wave, which cost us another $7500.  So all in, we had over 20k in unplanned cap ex within 2 months!  If we didn't have the cash, I don't know what we would have done!

We are extremely happy with our decision to keep the property and improve it.  We have made a lot of improvements to it as well, which has allowed us to increase our rental income and enjoyment when we stay there.  COVID has driven prices up in the area significantly, as folks looked to escape NYC or buy second homes, so we are very glad we held onto it instead of selling at a loss.  And the way my wife and I look at it is that the unforeseen expenses and stress was part of our "real estate education", which has made us better, smarter, and more resilient property owners and real estate investors.

I think by far my biggest mistake is not being close enough to drive by and check on property. We have two STR one is managed by a large vacation rental company and the other we just hired a local who handles a handful.
The first has not done a great job with handling emergencies ( got hit by a hurricane and had long wait for restoration co. causing further damage to property), being selective about where your listing pops up in there lists of rentals, not changing air filters, etc. 

STR are an excellent way to stream lots of income but I would prefer to have my hand on the pulse. We are talking thousands of dollars in lost revenue or expenses if you don't have your eyes on the prize.

Hi Everyone - I'm launching an STR business and am in need of financing. Could anyone provide recommendations?

For more context, we're investing in Upstate NY through an LLC with backing from a UHNW individual who would be able to personally guarantee the loans if needed. We are seeking to acquire 10 homes at roughly $1m each over the next 12-24 months.

From initial research/conversations, it's likely that we will need a commercial lender, specialized non-bank lender or private money. Ideally, we'd like some sort of an umbrella portfolio loan but understand the first deal may be transactional in nature to build a longer-term relationship.

Curious to hear what creative solutions BP Members have found (other than conventional owner-occupied mortgages, which we will not qualify for given the nature of the business described above). Any suggestions or recommendations would be greatly appreciated. 

Best,
Tristan

Melanie, 

This is a great post. As I do not own any personal STR properties, I have consulted with a client recently who was looking out using a 1031-exchange to invest partial proceeds into a condo in Colorado. My immediate thought was to steer them away because it is so difficult to generate a decent cap rate, but we were able to build out a strong model for a STR. My issue that I struggled with on the advisory front was how we were sourcing the data, as it is difficult to obtain proprietary data from STR companies. We had all the other data needed (capex, ins, utilities, etc.), but the rental estimates we used were sourced from the property management company which made things exponentially easier. The client is now happy with the purchase and I am looking forward to seeing the returns generated.

I am not sure this is a mistake, but we have a beach duplex in an area with a lot of STRs (Mission Beach, San Diego).

We once had a guest turn one half of the small yard into a mud wrestling pit for girls to mud wrestle in.  Our PM collected for damages including lost rent.  We did one side of the yard deck and the other side artificial turf to prevent a repeat from any other guests.

Not sure if we really made any mistake, but it is out most interesting event.

Our second most interesting event is that some neighbors were being obnoxious to a female guest.  The male guest tried to be chivalrous and got knocked out.  Even though the neighbors were being jerks, our guest apparently threw the first punch.

Again I do not think we made any large mistake, but it is an interesting event.

We have had the STR in operation since 1999. These are our two most interesting events (at least that we heard about, the PM is paid so we do not have to hear about minor items). In my view that is not bad for over 20 years in a party, beach area. In addition, both of those events happened over 10 years ago. So recent times my STRs have been boring (or the PM has been handling the items without getting me involved).

This one might be a mistake.  We had a duplex on the beach in Gulf Shores Alabama.  It got hit by hurricanes in back to back seasons.  Being OOS we were getting the run around by contractors and had to go to Gulf Shores to get work performed on our units versus just promises.  We sold after the repairs from the second hurricane.  This was a mistake because 1) prices were down in the area due to many being fed up as a result of 2 hurricanes 2) It was many years before Gulf Shores got another storm that could do any damage (I am not sure if they have had a hurricane since the 2 that were back to back).  The time to sell is not when everyone else is selling.  I wish we had kept the property even though it performed worse than our So Cal properties.  In So Cal a property that is on the beach likely starts at close to $10M and there are very few of them.

I had an Airbnb in New Orleans on the other half of my duplex. It was a cash cow until COVID. There are three helpful nuggets of information I would advise for any STR host:

1) Be sure to closely inspect the area for damage BEFORE the next tenants arrive. If you're having someone else clean, be sure to coach them to do the same. Any damage needs to be documented and reported PRIOR to your next guests arriving. 

2) In line with comments above, vet your cleaners. Make sure they're responsive, agile, appropriately staffed, etc. A good backup plan is to talk to friends of yours who may be looking for extra income, or who have WFH flexibility. 

3) If you live in a party city or think that your guests might be on the wilder side, send a message with your expectations of respecting the home, keeping noise levels down, and sending a gentle reminder that this is your property and/or you otherwise live there. 

I had guests for Mardi Gras '20 who managed to cause over $2,000 in damage to my home. They vomited on the futon and ruined it and the pillows (even after I paid almost $200 to have it professionally cleaned). They left gummy worm candy scattered all about the floor in several rooms, made a golf-ball sized indent in one of the walls, made almost a 2' scratch on another wall, and the icing on the cake was that one of them defecated right next to the back door. I was home at the time and heard them laughing about it shortly after (and no, they didn't clean it up). I took plenty of pictures and sent Airbnb 'evidence' of things they'd rather not seen. I was able to recover over $2,000 for the damage done. Thankfully, I did all of this prior to my next guests coming a couple of hours later...

My very next guests also caused a headache. While there, one of the bed comforters mysteriously went missing, and none of them claimed to know anything about it... While turning it over (also a same-day turnover) I went to Marshalls in a hurry for a new comforter. I was unable to submit my complain prior to 3pm (when the new guests checked in). Despite fighting this, Airbnb refused to pay out, and the tenants maintained their ignorance. I ate this cost. Luckily, it was only $70.

Our biggest lessons are:

1) decorate for the type of guest you want to stay in your place. We have found that it is better to focus after a certain group of guest than any guest.

2) cheap rates attract cheap guest and bad reviews. Know what your property is worth and stick to it.

In just over 7 years in STR business made my share of mistakes, especially on the first one.

Easier to suggest what to do (lessons learned from mistakes & successes).

1. Buy in right location which is high demand resort or destination location.

2. Make sure it pencils as either STR or LTR. Or you wouldn't mind living there yourself if needed or wanted.

3. Be sure STR's are allowed by City / County and HOA if a condo - get your permit, if ones required. Going without will get caught and cost you.

4. Reliable Cleaners, maintenance and boots on ground are mission critical.

5. Add amenities and creature comforts such as coffee maker, Amazon Firestick, hangers in closet, waste baskets, blow dryer, ironing board & iron etc.

6. Communicate timely and in a friendly manner with guests and prospective guests.

7. Monitor local politics and the news for any changes in law.

8. Don’t be emotionally attached and be prepared to 1031 to friendlier climes or states if rules of the game change.

I personally prefer to do higher quality furniture decor and often make hard improvements such as quartz countertops, all new lighting, paint, appliances, etc.

Tends to draw higher quality guests, higher rates. You enjoy it when visit. Plus adds value on re-sale. I also double-pay the mortgage to save interest, beat down principal and build equity. A successful STR makes plenty of cash flow for this. Often will cash-out Refi to build reserves and generate funds for other r/e investments. Keep LTV at 50% or less.

Agree that staying at your STR from time to time helps with spotting / addressing ongoing maintenance needs. Have cleaners report items that need replenished such as TP, paper towels, coffee, soaps etc. Have high volume washer and dryer so cleaners can turn bedding towels and linens promptly.

Hope this helps. Many successes to everyone!

David


Originally posted by @Tristan Sperry :

Hi Everyone - I'm launching an STR business and am in need of financing. Could anyone provide recommendations?

For more context, we're investing in Upstate NY through an LLC with backing from a UHNW individual who would be able to personally guarantee the loans if needed. We are seeking to acquire 10 homes at roughly $1m each over the next 12-24 months.

From initial research/conversations, it's likely that we will need a commercial lender, specialized non-bank lender or private money. Ideally, we'd like some sort of an umbrella portfolio loan but understand the first deal may be transactional in nature to build a longer-term relationship.

Curious to hear what creative solutions BP Members have found (other than conventional owner-occupied mortgages, which we will not qualify for given the nature of the business described above). Any suggestions or recommendations would be greatly appreciated. 

Best,
Tristan

 
@Tristan Sperry

Where in upstate NY are you looking ? I can give you more info about the Catskills and I can tell you you dont need $1m per home to earn sizeable returns. Lets connect if you'd like to chat.

One thing that working at GM as a business plan deployer for 26 years taught me is systems, processes and to TRUST the process.

I was just about to start purchasing properties, had bank and hard money leader approvals when COVID shut in changed everything.  I told my son that property should make money, but how will that happen now?  My son started researching Airbnb and after sometime my son talked me into doing my Airbnb.   He said use what you have to make you money. I wasn’t sure it would work so I just started.  Right out the gate all my rooms were booked and have remained booked every day. 
—Lesson learned: Adults can behave like children, they need direction & structure.  My Airbnb mostly has 30+ night stays of traveling nurses and resident doctors 95% of the time and traveling skilled trades worker 5%.  Overtime I’ve realized that some friction was occurring because of misunderstandings (different mindset) and the unknown.  Also for me I felt that something was out of sorts even though I was successful with Airbnb and it wasn’t hard as I thought it would be with working long hours at GM and managing the Airbnb.  Then I got two guest (doctor and pipe fitter) that seemed to complain about each other constantly even though both of them worked about 16 hours a day.  At this point I put my GM hat on and spent time creating systems and processes.  I didn’t recreate the wheel I just took the systems and process that we use at GM and reduced the scale of people and implemented them for my Airbnb, including GM’s famous words “subject to change”.   Using my psychology degree for how expectations are communicated and like magic things are amazingly good!  

Now as I continue to grow I just copy the same system and processes.  Standardized work will have every home operating the same…my signature.

My son said, mom I bet your glad I was born with great idea’s.  Yes I am!

I was planning on using a second home loan to purchase my first STR. I didn't realize that placing it under property management was in direct violation of the second home loan, so in the middle of escrow, needed to find alternate financing. Was not a huge deal but would have been nice to know and absolutely essential moving forward!

Always follow your systems. So I buy foreclosed properties at the foreclosure sales (well I did until March of 2020). I found a property I wanted to bib on a couple of years ago and went to check it out. Up to this point my system had always been, drive by the property, if someone is living there knock on the door and let them know what is going on and see if I can help them out if I end up getting the home. I then call the local police department and see if there have been any issues with the property address and neighborhood. Well, in this case I had lived in the neighborhood years before and the home looked to be in good shape for a foreclosure. To make a verrrrry long story short I didn't follow my systems. I never went to the door and never called the police. The property got bib up a little higher than I wanted to go but I bought it anyway, another breach of systems protocol. Once I got the current occupant/old owner to answer the door I was greeted by a 60 year old drug addict and her 30 year old meth addict daughter. After I finally got them out, 4 months later, the house tested extremely high for meth contamination. This story goes on and on and on, from the evection attorney to the flooded house after it was rehabbed, but after gutting the place and putting it back together I was able to sell it to a very nice young couple and I only lost about $15,000. Remember, always follow your systems!

Hi @Melanie Stephens ,

Data is one of the most important aspects of your short-term rental strategy. There are certain market tools to estimate how well your investment will do. A tool that works for me is Airdna. It provides analytics that measures seasonality, profitability, and more! What is your strategy to estimate the performance of your Airbnb?

Find a reliable cleaner, treat them well and pay them well. My cleaning lady also doubles as a lookout for anything suspicious going on in my rentals.