Unbiased Advice from Successful Investors Please

25 Replies

I’m a small time investor, have been a landlord for my 4 units for the last 8 years and I’m also an entrepreneur. I’m reaching out to BP’ers who have a lot more experience than I and can offer some sound unbiased advice for a project I’m looking into.

I’m in the process of transitioning a few of my units into short term rentals to learn the industry. Concurrently, I’m preparing myself to start a small vacation rental business. It’s my idea to purchase a distressed property (cabin) on a larger piece of land in a high tourist mountain area in California. I would like to rehab the existing cabin, in addition add a few tiny homes or yurts and to rent all out on all the short term vacation rental platforms, as well as develop a website to further market the vacation homes.

Please BP’ers…. tear this plan to pieces if you can.

I need advice specifically on two things… First, if an experienced investor was interested in this type of business how might they decide to go about acquiring the property? I’m interested in purchasing something distressed so that I can keep my cost down, rehab it, add value, giving me an exit strategy need be. I’m not sure the best and most time effective way to acquire it. Second… how would one, such as myself, who has never done a deal before, approach funding for a project that I haven’t really seen or heard of before. I’m not rehabbing and selling, this is going to be a business. I am wondering how to approach investors in a way where I can show that we all win. What do investors want to see? Especially when involving a few pieces that don’t appreciate or possibly even hold value. I’m not sure conventional funding will be an option at first (though I would love if it was) so I’m looking into private funds for the first time.

I have faith in the model. I am a buy and hold girl and the short term model, despite the additional expenses, is a way to maximize dollars per day. I have a team of people who are motivating me along the way but I am the one taking the financial risk and pulling the trigger because that’s just my personality. Any input would be greatly appreciated.

Hey @Nicole Jones . I see you're in Fresno, so I'm assuming your high tourist area is Yosemite? As someone who needs Yosemite lodging, I will say your plan sounds great. There is always high demand for close-to-park lodging. It books out months in advance, and the closer you are to the park, the more demand you'll have.

I'm not sure if you have already located the property, or are in the process of locating it. If you have not yet found it, connect with an agent in the mountains - they'll be more in tune with the market and potential properties.

I have no idea of prices there. Can you cash-out anything from your current 4 properties for funding? Do you have a day job that would help you qualify for a mortgage? Is seller funding an option? 

@Mindy Jensen

You are correct on Yosemite.

Yes, I do have a day job but I have minimal amounts to cash out on the current properties as they are multifamily properties. (So I have 2 duplexes, not 4 SFH).

I'm in the process of identifying the right agent for this plan so that'll happen within the next week. And no I don't have a specific property in mind as of yet.  

I really have faith in the model and location I'm just stuck on how to approach this..

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Yes, they recently built a hotel up that way. I know that demand continues to rise and supply is pretty stagnant. @Mindy Jensen if you know of anyone who might be able to help me structure this plan and possibly even consider investing let me know. I'm attacking the management piece of it but as far as acquiring and financing in an unconventional way and rehabbing I admit I'm totally inexperienced.  

Obvious issues are zoning and business licences. We have a similar set up in Colorado, and had to get the site split into 4 parcels to get four units built, after that it was no big deal. We could have applies for a business rental but that would have required  a lot more in the form of permitting and regulations in addition to taxes being significantly higher as a commercial property.

Most mountain areas limit buildings by wells and water tap permits so be careful to make sure you have adequate permits. We had another project in Colorado where zoning allowed us 63 units but we could only get 16 water taps. You needed one per unit so the deal never got done.

You might be better off buying an exisiting motel or large house and doing a B&B, some of the permitting can take years to get in place.

Nicolas Paez

Water is something I know I need to figure out. As far as parcel piecing. Would something that technically doesn't need to be "built" but rather just placed on the land (exactly like an RV) require the same hassle? I think there are benefits but also possibly some hitches to the tiny home plan.

My advice would be to not limit yourself to a knish pool of renters with the yurts and tiny home concept. Build small but reasonably sized cabin structures.

It needs to be rustic but comfortable for vacationers so do not target tiny home enthusiasts. That will limit your market to a miniscule pool of vacationers.

Stay away from the tiny home concept entirely and you will have far better luck attracting investors.

You would be farther ahead buying a existing complex that needs renovation than building new and again may have better luck finding investors in that type of venture.

If you can show a good ROI in a written business plan to your banker that would be a good start. Or you could even make this a long term project , by using equity in your existing properties combined with any savings you have to just buy a good piece of property and once its all paid for, then move to phase 2 where you approach investors or bankers with your business plan of developing this fully owned and appreciated piece of prime real estate.

I like it @Nicole Jones and I am a 2-year STR (short term rental) owner in Scottsdale, AZ - another touristy location. There's a LOT to be considered, like drinking from a fire hose, as it differs a ton from long term rentals, but where's there's pain, there is indeed money. One question to answer is: Do you need the rental income to live on or is it mattress money (savings)? If you need it to live on, then I think a longer term, lower payments is the way to go. If it's mattress money, put as much down as you can, a shorter note, and pay it off using your rental proceeds - then you can rinse & repeat (or keep and repeat). Before you know it you'll have a portfolio of properties that are rocking and rolling. If your haven't done so already, visit a website called Airdna.com - download the free guide and read it, but more importantly use their site to research your area for rental rates and booked nights - critical information to your financial success. Also, if you're not on Twitter - do it and find Matt Landau @bookmorenights (tell him I said to connect). He has been incredibly helpful with my business. (Feel free to look me up too @thejetsethost. Now, here comes the tough stuff.... managing this process is like herding cats and as you build your portfolio it's like wrangling lions to do it yourself. I have two STR's now and it has it's challenges already. I think once I get to four, I'm going to have to hire a management company to at least take care of bookings, reservations and cleanings (can be a big chunk of your profits, but less than mucking it up). And speaking of cleanings, if you're going to do anything right - do this as it will be key to your success. You've got to have a crew that can turn your place(s) quickly and do a great job so you can maximize your return. One other mention before you sink in the cash, check with your local municipalities - there are all flavors of legislation, some good, some not good and you don't want to mess with Uncle Sam. Happy to continue this exchange and best of luck.

@Michael Greenberg

To answer your questions...

I don't need the income to live on which is great. Maybe later I can consider quitting my job.

I have used the airdna analysis tool for this exact project. I love the info it provides.

Matt Landau... did he do a podcast with "Get Paid for Your Pad?" His name sounds familiar. I'll look him up, thank you!

Agreed on the cleaning... Starting myself but will quickly transition to a crew... part time to test out a few cleaners.

PM me if you can, I would love to pick your brain

Great - then you're on your way - Airdna rocks and you can buy their data as well (worthwhile investment).  Send them a note, they'll negotiate.

No, Get Paid for your Pad is Ribbers and Kapadia - good resource too. I like Matt because he provides some amazing marketing templates and recommendations. He also responds quickly to questions and has a users group of over 700 STR owners.

I can't seem to find where to PM you - rookie to this site, which I love but find it challenging to navigate at times.  I found my inbox but it would let me PM you after requesting to connect.  Can you PM me?

Thanks

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Looks like your vacation rental may be ~3 hours from where you are. Do you have a plan to manage the property? I think vacation rentals are fairly management intensive. Part of that is taking reservations, scheduling, billing, etc. which can be done by you over the phone and internet from anywhere. The other part is maintenance, cleaning, and make ready. I guess you could find and hire a regular cleaning crew if you could find one you trust and verify from time to time that they are doing a good job. The other option is hire a PM, which is VERY expensive as I understand it for vacation rentals.

Things I think you have going for you are that the location I'd bet is an attraction year round, not just during an "on season". I'd also bet that vacation rentals are common place so though there is competition but also I'd bet regulatory risk would be less. Personally, I've kicked around the idea myself, but for me personally I'd want a deal sufficiently good that I have instant equity (which sounds like you are doing) to sell at profit if I chose to and a place that would still cash flow as a long term rental to create multiple exit strategies.

A few other options to throw out there ... I've heard some do well with master leases on vacation rentals ... that is, you create a long term lease on a property where you guarantee the rent, handle the management, are transparent about subleasing it, run it as a vacation rental, and pocket the (hopefully positive) difference between short term rental income and long term rental expense. This allows you to get into vacation rentals without buying the property, which has pluses and minuses.

Also, if you find you enjoy the business and are good at it, then you can become a turnkey vacation rental provider, to find, fix, sell, and manage vacation rentals for others for profit. The beauty of this is most people that buy vacation rentals do so for personal use and enjoyment, not as an investment. Therefore, they don't want to hassle with managing it as a rental and would be thrilled if they could just break even and get to use it for free every now and again. This creates demand and a lot of room financially for this type of gig.

@David Faulkner

I do plan on building a team for the management piece and the exact thought to bring in an extra leg of income is building a STR management company for locals. I considered the master lease option but for personal and future reasons I would just rather make an attempt to own the property and land. Thanks for your input! I like how most minds on here think very similar.

If you're doing short-term rental, don't do it in an area that has the SLIGHTEST safety concern. Any street people hanging around the area at any time can lead to tons of cancellations with no money back from places like Airbnb. Thoroughly vet the area at all times, day and night, if you're purchasing for short-term rentals.

I posted about some of my nightmares with Airbnb, you can read there if you want to know how Airbnb can go wrong. If you're doing an Airbnb in vacation spots with a wealthier clientele, you'll probably have a better experience

Hi @Nicole Jones , welcome aboard the tiny home train. There are a bunch of us trying to build something, in my case a village, for tiny homes. Besides becoming an expert in this area, I'm a real estate lawyer, which makes it easier for me to understand the laws & zoning codes I'm reading.

As far as I know, there is only one County in California where tiny homes are legal as Accessory Dwelling Units (ADU), a unit placed on the property that already has a home on it. The only county that has allowed this is Fresno. Maybe that's where you got the idea this is legal. In every other county it is not legal. The State of California, HCD, has published a bulletin in February that they will prosecute people who occupy, sell or rent illegal tiny homes. So, your big challenge is working with the County where you want to develop this mini resort, to find a way they will allow you to develop. After researching this for the past 6 months in Santa Cruz County, I have found some ways that might work. The County has told me how they intend to push back against my developments. In my case I have some weapons to use because the County is under the gun for providing affordable housing and they are not doing it, in violation of State law.

Depending on where you want to develop Tuolumne, Mariposa and Madera counties will have different General Plans that create the rules that govern how land is used. There is a certain amount of creativity that can be used in following the General Plan in crating "visitor accommodations." But it must comply with the zoning rules. Generally, a piece of property that is zoned for a single family residence cannot be made into visitor accommodations.

This gets back to getting investors. You'll have to find a piece of property that allows visitor accommodations, apply for the permits and entitlements (very expensive) or disclose to investors that what you are doing is a violation of zoning rules.

I would love to follow your progress. I am not an experienced investor in the area of short-term rentals, but I am a very experienced accountant in that area. However, my work is done in Hawaii, very different state taxation and zoning laws here. 

@Jenifer Levini

Thank you so much for that input. I am aware that this will be my biggest challenge. I was also aware that Fresno is the only county allowing this type of addition. My plan is to organically modify my plan based on what exactly is allowed. I wouldn't myself not involve anyone else in anything that will bring scrutiny and a headache to myself. I would love to connect with you as it sounds like you have done a lot of research in this area. I'll pm you later today.

There is actually an institution that claimed/bought undeveloped area 1 1/2 hours south of Yosemite along the only main road to the park itself. City of San Jose actually get to own this undeveloped land that is now home to several dotted 1-week type rental yurts (no electricity, now water - only two bunkbeds and a trash can with one nearby main restroom/shower room for everyone to share. It's along a streaming creek. There is also a large building for kitchen and diner where everyone get to walk for cooking and dining. The restroom/shower room and the dining hall building have access to piped municipal water and connected electricity from the main grid as well as the sewage system. The city of San Jose rented these little yurts to organizing institutions such as YMCA and others for off and on seasons. They booked up so quickly. They do have maintenance guys that maintains the property and now had expanded and built more yurts. Demand must be great because every year there seemed to be more of yurts that get constructed and more little graded roads were built. So, having said these, there were already precedents with your wonderful plan, only outside local municipalities have taken these opportunities. You may dig in a bit more in how City of San Jose get to acquire this investment or property and get it to work.

I do have a question for Jennifer Livini about zoning and development. A streak piece of land under an agricultural zoning, along a creek can be converted to a commercial zoning? This piece of land is surrounded by rental properties and private residential development and agriculture. The land has access to both the electric grid, water, and sewage. Can this land be converted to a commercial property? If not, one idea is to erect an advertising sign board just to make the land productive. Can this be possible also? Talking to landowner about leasing this property and possibly split the advertising profits?

Hi 

@Abe Gonzales  

The way to find out what you can do on a piece of property is to:

1. Get the Assessors parcel number (APN)

2. Using APN go to your county zoning maps and look up the zoning on that parcel.

3. When you get the zoning, like C-1, C-2, RM, R-1-6 or some other code, go to your County General Plan and Zoning Guide and look up what that code means. This can be tricky. For example there can be many different meanings of agriculture. Some agriculture allows one home to be built on the parcel. some agriculture allows other commercial uses like visitor accommodations, some is very strict that it can only be used to plant commercial crops. When you look up the meaning you'll also need to read the follow-up codes and regulations because those have the exceptions to the original rules.

This is why people hire lawyers to understand this stuff. 

Generally, you cannot change the zoning without a big public process involving approval by county supervisors and public hearings. (think $$$$$) But sometimes you dont have to change zoning because the exceptions might allow the use youre seeking. You may be able to get an appointment in your planning department and ask about this use, if you cant figure it out, and you dont want to hire a lawyer. good luck!