Airbnb Short Term Rentals are the New BRRRR and The NEW FLIP

[Rob Bergeron]

First of all, who cares about interest of x when you are bringing in 2-3-4-5-6-7X in profit? Right now we all need to be SECURING THE ASSET. Someone recently said this and I loved it "Marry the house, date the financing." Interest rates will likely get lower again sometime or another, right now we just need to focus on getting the properties that cashflow. We aren't talking small guys, we are talking big boy airbnbs sleeping at least twelve people. <---this is where the money is made!!!! (Unless you curate a completely amazing experience for everyone). The reason I think Airbnb is the NEW BRRRR and NEW FLIP is because I am a fan of this strategy. First, appraisals are coming in lower and lower each day. I practice real estate in Louisville, Kentucky and in the last two-three years I had only two appraisals come in low that we couldn't argue our way. In the past six weeks I have had FOUR. This tells us two things, that flipping is in a tough spot because appraisals are coming in low. It tells us that traditional BRRRRing is risky because more money could potentially be tied up on a long term rental. Airbnb is fine, money can get left in the deal because you get money back so much faster than traditional real estate. Which is why it is essentially a BRRRR either way, turnkey or needing work. The way Airbnb is the NEW FLIP. Hold for one year, get a T12, sell property as a functioning business and then 1031 into a more desirable asset (large multifamily or an airbnb that you, your friends, and your family can personally enjoy at a much higher rate. I love talking about this stuff, you should hear about some of my tax saving ideas. Do we need to do legal disclaimers on here that this isn't financial advice? If so, that.

[Patricia Berman]

Rob,

I can totally dig it.  I have wanted to do BRRRRs for a while now, and haven't been able to jump in.  But, I did purchase two new short term rentals in January and the beach property is doing beautifully.  The Joshua Tree property is going to be fully launching in August, I was finishing a garage and adding another bathroom to the property, not personally but I hired someone to do it.  

I would also mention on your post that the tax benefits are many when it comes to STRs.  We've been reinvesting the money from the beach property into the other, but once we are up and running in the JT property we are going to be rocking and rolling.  

They do take some ongoing work, and I certainly would not take it on for a small property now that I know. But, definitely worth it.  I sold a property that was cash flowing $300 a month and turned it into cash flow of between $3-5k a month.  That is something!

Anyway, I'm just here to say that I love your post and I am glad I'm not missing anything with BRRR.

[Luke Carl]

You can't use rental history (t12) to boost value of a single family home. Glad you're fired up! Some folks call this a Brrrrbnb

[John Underwood]

I am shying away from high end flips for now unless I can get them really cheap.

I have bought 4 more LTR's for cash so far this year. I'd like to take the rest of the year off but deals keep falling in my lap.

The single family home still has to appraise based on comps of other single family homes. So unless someone is paying cash or adding cash beyond appraisal then there is not a great business model in setting up a STR to sell to someone else. Yes it would likely sell faster and for top dollar, but not much more than the appraised value.

So if I'm going to buy a cashflowing STR property that is already a STR or I turn into one, I am just going to add it to the portfolio, but that's just me.

I can also buy properties that just pay for themselves as I don't need the extra income.

[Connor Cushman]

I agree. Airbnb buying will be mainstream soon. The margins will get squeezed in the next few years as more money pours into the space, but it's still a great time to acquire amazing properties across the country with incredible cashflow. 

First-time investors need to be careful with revenue and expense forecasts right now though. I worry about newbies over-leveraging themselves in this market with pie in the sky revenue projections.

[John D.]

"Interest rates will likely get lower again sometime or another" Yes, but when?  For many, banking on this scenario that could be a number of years out is not palatable.

[Ryan Moyer]

FWIW, "Marry the house, date the financing" to me seems more relevant when home prices are deflated because of high interest rates.  Right now that's not really the case.  Homes are just as expensive as they were when the interest rate was 3%.

If the deal still underwrites at 7% with realistic revenues (using 2021 revenue is not realistic, using 10-20% less than 2021 revenue is not conservative) then yes, it's all good.  Otherwise maybe wait just a little bit because I don't think the market has adjusted to 2021 being an outlier year quite yet.

[Jeremy H.]

Gotta disagree here - Right now the market still has inflated prices (beach markets, smokies etc) and much higher interest rates relative to the prices. Most properties are not going to cashflow "2-3-4-5-6-7X" especially for a newbie - that would be extremely rare and an atypical experience that most could not replicate. You will be lucky to get 10% CoC right now imo - this seems like a lot of risk for little reward.

I personally would caution against the STR market right now - data sucks - people want to sell based off 2021 travel (outlier data point), unusually high occupancy rates (outlier data) etc. Well you could say if you have an awesome property in an awesome location occupancy is something you don't have to worry about - and I'd agree to that. But realistically most people buying STRs are not local to the STR market so you're starting out with the chips stacked slightly against you.

We hear STR supply is increasing and occupancy rates for Q1 2022 are down compared to 2021 (so you'd better not be buying based on 2021 estimates).
3-10 years ago STRs were the secret that made a lot more cashflow (and the caveat being that you self managed) and that is just not the case today like it was...even 2 years ago. Places have doubled in "value" over the past couple years and demand has skyrocketed. The thing is demand can move much faster than supply in the housing market - I don't believe there is a shortage in supply, just a massive increase in demand due to low rates. Rates increased very quick. Let them keep increasing and watch demand evaporate just as fast as it started (we are already seeing this start - give it some time, most real estate data is a month old anyways). Prices in a lot of these markets will follow because sellers will not be able to sell their property in a week so they will be freaking out (everyone thinks multiple offers and selling in a  day is the norm now) and prices will fall ~10% at least imo. 

Another thing - a T12 makes no sense. STRs will sell for the appraisal value because of the loan packages that freddie mac and fannie may offer - so a lot of these lenders will just sell the loan to fm. This is another reason mfh (2-4 units) will not sell as a business either.