Help! Deciding whether to sell or convert to vacation rental

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Help! Deciding whether to sell or convert to vacation rental

J.Michael Edwards-Toepel
Investor · Scottsdale, AZ · Member since 2016 · 8 posts · 1 vote

Hello All!

I was gearing up to sell a home I own in Minnesota (I live in Arizona now), but after I listened to the most recent BP podcast I am very intrigued by vacation rentals and really thinking that I might be able to do better converting to a vacation rental. My plan was to take my sale proceeds and buy a number of cheaper properties in less competitive markets, but if I could keep the home in MN and make competitive returns it would be a no-brainer to keep it, assuming it doesn't become another full-time job.

My hope is to gain some perspective as to whether this is a good idea or not - and rather than a "yes" or "no", I'd love to hear your perspectives on how to model it out for myself. For example, I've been assuming I could average 20 days occupancy each month, but I really don't know what's "normal" or how to reasonably determine what to expect. I'm definitely taking a risk mitigation lens to this as well, since I have a mortgage to keep up with. In an ideal world I'd beat my revenue expectations for selling and buying in other markets, but I want to use (reasonably) conservative estimates to compare against what I expect to make with the other strategy.

Market analysis:

  • Running some searches, I think a conservative estimate for rent would be $120 / night on average, not counting if I can add revenue for large parties
  • Single rooms or 2-br bungalows nearby are ranging $70 - $100
  • Oddly, I didn't notice a big price dip during the freezing winter months. Either demand stays relatively high, or no one is bothering with their pricing that far out (?)

Property attributes:

  • 1862 sq feet
  • 4 bedrooms
  • 1.75 bathrooms
  • 1 HUGE room on the top floor for dining and relaxing, great for big groups
  • Another big living room in the basement (could easily put sleeper couches in both living spaces to increase max occupancy)
  • Small kitchen - I assume this doesn't matter as much for this type of strategy (which makes it attractive!)
  • Newish washer / dryer, both high end
  • 3-season porch
  • Big deck, nice back yard, fire pit
  • Quiet cul-de-sac with a park at the end (very rare for the city it's in)
  • Public transportation on the corner to just about anywhere in the metro with transfers
  • 2 - 3 minutes from multiple major highways / freeways
  • Walking distance (or close to it)to major mall (Southdale) and premium shopping (Galleria in Edina, MN)

Potential marketing points / targets:

  • The home is < 2 miles from the Best Buy HQ, and public transport goes straight there
  • About 10 minutes from MSP airport
  • About 10 - 20 minutes from downtown Minneapolis, Mall of America, and most major concert or event venues in the city, and just a few minutes more from all of the same in Saint Paul
  • Easy access to the west suburbs, which means access to things like Hazeltine GC (regular host to major golf tournaments, like the Ryder Cup this past year)
  • Minnesota / Twin Cities are home to 17 Fortune 500 companies (http://www.twincities.com/2017/02/06/minnesota-has...)

I totally expect making this a vacation rental to mean it will take more of my time, and not necessarily a trivial amount. I'll definitely take this into account when I'm deciding what to do as well. Also, not being local, I expect to need to work with someone to be a face to my guests. From what I saw it sounds like AirBnB pairs folks like me with a "Co-Host", and I'd love any insight into how this works (or doesn't, or if I'm mistaken in how this might fill this need).


Please let me know if I'm missing any gaping points in my narrative, and I appreciate any and all perspective you can help me with on this! :)

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Peter R.Pro Member
Investor · Orlando, FL · Member since 2016 · 152 posts · 86 votes
9y

In general I'd say 10/month is a good testing amount for when you first start.  With some good 5 star reviews and competitive pricing I think you could get to 15/month but 20+ is really repeat guest territory to get there.

On the cleaning service, the best cleaners I've ever found usually work for themselves or have one or two employees at most, and to be sure this will vary by region, but the big services (Merry Maids, etc) are my backups in an emergency only. 

Because, and this is a big difference, this isn't just a clean, it's a TURN.  Towels, linens, etc need to be washed and restocked/reset, not just cleaned and folded.  Soap needs to be refilled, toilet paper replaced, the refrigerator cleaned out, etc.

I've found word of mouth is the best bet, who do your neighbors use, they can tell you who shows up without fail, does a great job, etc.  

A test clean or two with clear expectations about what you want done, and on what schedule is usually enough to get to know them and try them out for a turn between guests.  I'm totally up front with people who clean, they know it's a short-term and they know ahead of time if there are going to be pets or lots of guests.  I usually send guest count, pet count and turn time at least a week out but usually 2 weeks out to confirm.

They also have their own code on my smart locks and my automation system (SmartThings) can be set to alert me when that code is used to open the lock.  

Worst case if they don't show (and you'll know, you can see lock history in real time) you can call up Merry Maids and give them a single day code to go do an emergency clean.

As to cost @Christopher Meis I'm paying about $25/hour for an average of 2.5 hours a turn on a two bed unit.  A little longer if the guests have pets.  That gets charged up front to the guests as a cleaning fee of about $100.  Between normal wear and tear on furniture, linens and such, I'd say that about evens out over time so that I'm not making anything on the clean, but probably not losing anything either.

Once you've got a cleaner you love things get MUCH easier on your stress level.  I don't even second guess it anymore and that's worth a ton to me.

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  • Peter R.Pro Member
    Investor · Orlando, FL · Member since 2016 · 152 posts · 86 votes
    9y

    20 days a month is too high to expect starting out, don't base your forecasts on that until you can book some repeat guests.  You can totally get there, but don't expect to book 20 days a month, every month, the moment you put up your listing. 

    You don't need to do a co-host if you don't want, nor do you need to give it to a property manager.  But you could.  This will depend on your tolerance for dealing with guests remotely.  Some investment in automated locks, a good communication and guest on-boarding process and a very reliable cleaner will allow you to manage this from afar with little to no issues.  I do it literally every day and I assure you it can be done. :D

    But if you'd rather give it to a property manager that's ok too!  Just make sure to factor that fee into your budgeting.

    If it's already furnished, I'd take some great pictures, create a highly detailed listing and give it a go.  You might be surprised at how easy it can be.

    1Reply
  • Christopher Meis
    Vendor · Norwood, MN · Member since 2016 · 55 posts · 27 votes
    9y

    I live in MN and that is a great area! Guests can use Lyft and Uber to get anywhere if they are unfamiliar with public transport, it's cheap and often faster. @Peter R. Would you be willing to speak to how to vet a cleaning service and the associated costs? I have been pondering AirBNB as a possible strategy after the latest podcast as well, but I am concerned that if the cleaning service no-shows you have a big problem.

    0Reply
  • J.Michael Edwards-Toepel
    OP
    Investor · Scottsdale, AZ · Member since 2016 · 8 posts · 1 vote
    9y

    @Peter R. Thanks for the tips! Very good for sure. Is 15 days / month more realistic to start out with? 10? I just want to make sure I am modeling as realistically as possible.

    It is very helpful to know I can work it out well enough with smart locks and good communication. I was actually hoping this, but as I suggested, am trying to be conservative on my expectations. Mayhaps I start without a co-host but am ready to bring one on board if I find myself in over my head.

    To @Christopher Meis's comment, some help on how to vet a good cleaner would be very helpful. Especially in terms of how having one fail to deliver could be a problem, I see this as being critical. Nothing substitutes for a good battery of questions and following up with references, but do you have any specific advice? Of course luck will play a part as well...

    It is not furnished yet. I currently have a long-term tenant in place. I am running numbers on what it will take to tidy the place up, paint, and furnish it. Once done, though, I'll be working on getting a professional photographer in because I think an investment there is well worth it.

    0Reply
  • Peter R.Pro Member
    Investor · Orlando, FL · Member since 2016 · 152 posts · 86 votes
    9y

    In general I'd say 10/month is a good testing amount for when you first start.  With some good 5 star reviews and competitive pricing I think you could get to 15/month but 20+ is really repeat guest territory to get there.

    On the cleaning service, the best cleaners I've ever found usually work for themselves or have one or two employees at most, and to be sure this will vary by region, but the big services (Merry Maids, etc) are my backups in an emergency only. 

    Because, and this is a big difference, this isn't just a clean, it's a TURN.  Towels, linens, etc need to be washed and restocked/reset, not just cleaned and folded.  Soap needs to be refilled, toilet paper replaced, the refrigerator cleaned out, etc.

    I've found word of mouth is the best bet, who do your neighbors use, they can tell you who shows up without fail, does a great job, etc.  

    A test clean or two with clear expectations about what you want done, and on what schedule is usually enough to get to know them and try them out for a turn between guests.  I'm totally up front with people who clean, they know it's a short-term and they know ahead of time if there are going to be pets or lots of guests.  I usually send guest count, pet count and turn time at least a week out but usually 2 weeks out to confirm.

    They also have their own code on my smart locks and my automation system (SmartThings) can be set to alert me when that code is used to open the lock.  

    Worst case if they don't show (and you'll know, you can see lock history in real time) you can call up Merry Maids and give them a single day code to go do an emergency clean.

    As to cost @Christopher Meis I'm paying about $25/hour for an average of 2.5 hours a turn on a two bed unit.  A little longer if the guests have pets.  That gets charged up front to the guests as a cleaning fee of about $100.  Between normal wear and tear on furniture, linens and such, I'd say that about evens out over time so that I'm not making anything on the clean, but probably not losing anything either.

    Once you've got a cleaner you love things get MUCH easier on your stress level.  I don't even second guess it anymore and that's worth a ton to me.

    3Reply
  • Michael Greenberg
    Investor · Denver, CO · Member since 2016 · 533 posts · 433 votes
    9y

    These are ALL great comments.  How did you do your "market research" and what listing sites are you planning to use to market your own property?  You can gauge occupancy and measure pricing using a tool from airdna (d0t) co (not c0m).  I use this tool every so often for market data and you can obtain a free account just by signing up, giving you access by location / zipcode of potential rent, occupancy, etc....  As for cleaning services, I have used a website called Nextdoor (dot) com and asked my neighbors for referrals.  It has turned out to be a great tool for finding reliable, independent services.  Another consideration is how to manage linens/towels and items that require lengthy cleaning tasks.  I have found that buying these items in multiple and rotating them to a laundry service that charges by the pound has been the best solution.  It adds about $20 per stay on average.

    Best of luck!

    Mike

    0Reply
  • Ryan Luthi
    Real Estate Broker · Edina, MN · Member since 2015 · 56 posts · 37 votes
    9y

    Hi There, 

    I think overall this is some great feedback!  My family has 3 vacation rentals currently and they do very well compared to what a long term "normal" tenant would bring in.  However, 2 are in Nashville which is a warmer climate year round (which I think makes a big difference on seasonality).  

    I would say that you will likely get to 20+ days from May through End of August but see lower occupancy during the colder months.  I think the average would likely be in the 10-15 day range, but from a cash flow perspective it might just take some planning to keep from needing your own funds to float you through lower months like Jan/Feb, etc.  

    I am a local investor, broker and owner of Fulton Realty. Private message me if you would like a CMA of your property to compare renting it against the gains of selling it and re-leveraging that equity another way.

    Good luck!

    -Ryan

    0Reply
  • John Nachtigall
    Santa Rosa, CA · Member since 2017 · 325 posts · 701 votes
    9y

    An interesting thing I heard on a podcast is corporate short term housing.   It combines the airbnb model with longer (and therefore more lucrative) stays.    I have no personal experience with it at all, but here is the podcast

    http://morrisinvest.com/podcast/2017/3/30/ep140-ho...

    The person was Kimberly Smith, the CEO of AvenueWest and Corporate Housing by Owner. To me it seemed like a way to address the biggest drawback of airbnb which is turnover.   You might want to consider it.

    Good Luck.

    0Reply
  • David S.
    Investor · Fridley, MN · Member since 2015 · 108 posts · 25 votes
    9y

    @Selena Walsh would also be a good resource for questions on this. 

    0Reply
  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y
    J.Michael Edwards-Toepel What you're really lacking (at this point) is a spreadsheet where you model this out. What are your costs to furnish? What are your costs for new locks? What are your costs (if any) to market? What are you cleaning costs? Is there an easy access to a short-notice cleaning service in your area? What are the costs for gardening (you'll be paying for that yourself now)? How much more will commercial property instance cost? Personally, I think it's easier to figure out a cost-per-night than occupancy rate. So you'll be able to figure out how many nights-per-month that you will need to break even. How many months (years) it will take to payback the fixed costs of new locks and furnishing? For some period of time (thanks to the fixed cost investment) you're probably cash-flow negative based on having a mortgage. If that's okay with you then you go in with your eyes wide open. By the way, if you end up hating the property management side: 1.) You won't get your dollar-for-dollar money back on the furnishings. 2.) Budget 25% of gross rents for a property management service. Yup might love it, but it's only prudent to look at the first 12 months so you know your risk exposure.
    0Reply
  • Selena Walsh
    Rental Property Investor · Minneapolis, MN · Member since 2017 · 59 posts · 51 votes
    9y

    I have three short term rentals very near your place in MN (1 duplex, 1 single family in SW Minneapolis). In my experience, the demand has been very strong and I'm very happy with how it is going. I'm seeing strong demand throughout the year. I think assuming 10 nights per month is not realistic (too low). A general guideline I would use based on your description is 15 to 18 nights in winter and spring, 18 to 20 in summer and fall. When looking at comps for pricing, make sure to look at the calendar or price with specific dates entered. The generic price that shows up on the listing page is typically the minimum price. When doing your analysis, don't forget about additional costs that may not apply to long term rentals (utilities, consumables, addressing maintenance items quickly). I use a cleaning service for turns and do "back-up" myself. I'm looking to move to a few housekeepers that I can pay directly to reduce the overhead associated with the cleaning service.

    I've been pretty hands on and focused on keeping my places in tip-top condition with amenities with the goal of five star reviews, higher price point and higher quality guests. Now that I've learned what works and what challenges may come up, my focus is more on developing systems to automate and make management less time intensive. :)

    PM me if you want to connect further. We are starting to do co-hosting now as well and would love to chat.

    1Reply
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