Expanding STR business

13 Replies

I've been a host for a year now and have really enjoyed it. I've recently bought a property specifically to rent out full time and it got me thinking about how a STR business can expand.

It seems like the main avenues are:

1. work with landlords to rent out properties and simply pay them rent

2. co host and manage other people's listings

3. buy properties and run yourself

each has their pros and cons, though #1 seems the most approachable, though would take a good amount of work to find landlords open to allowing it.

What have been ways that you've scaled your business beyond just 1 property?

I know people who have 10+ houses that they bought and now manage - usually together with a private lender. I would be very interested to hear if anyone has success with option #1 as well.

It is difficult to acquire more than (3) homes using conventional lending.  There are a number of successful people like Eric Moeller as @Valerie Rogers mentioned who have not only "released" properties, but are creating master lease agreements on a larger scale.  My word of caution would be to approach carefully and make sure you can hit your financial targets prior to approaching the business this way.  

it seems as if option #1 allows you to quickly scale with less money (basically furniture and a security deposit) but has the downside of lower margins since you're not building equity.

I've also thought of other ideas such as buying a few properties under a llc with several other investors, where the total cash per person would be the same as if you bought 1 property by yourself but it's diversified across different markets and reduced risk. Also a single software license and team for management could be used. 

This would also have a benefit of having 3+ properties that you could use for vacation during off seasons/empty days while still making you money overall.

Hi @Chris Cantrell ! They used a private lender (a high net worth individual, a.k.a. rich dude) who didn’t care much about income requirements. He’s getting 10% interest and gross income/mortgage payment ratio is very high + he’s getting cash flow sweeps every year so that the total loan amount is repaid in 3-4 years. So the deal is higher interest rate in exchange for flexible terms. I will be looking for private lenders myself this year; I like the trade-off. 

     @Ben Hooper How about a partner?  I am not in this space but could see how someone who wants to be involved but doesn't have the time to manage would be interested in partnering where they provide the money and you provide the management.  

     The more of a track record you create, the easier I think it would be to bring in a partner.  Much like what @Julia Bykhovskaia mentioned except you would share in the equity instead of them just providing the debt. The structures are endless. Maybe you put in 10 percent as a down payment and pay for furnishings and the partner finances 90 percent. Then you have "skin in the game" and maybe you split profits 50/50 but also have split ownership of the property in an LLC? Never done anything like this, just trying to help you think creatively.

     As a long-term rental owner, I'd consider renting to you for this purpose but would definitely want a premium rent to compensate me for the risk.  But if you offered me maybe 1500 on a house that normally rents for 1200, it would be VERY hard for me to pass up.  Is that too much of a margin to still make the business model work?  

     Interesting topic.  Let us know how you proceed.

Good Luck!

-Will

@Will Pritchett great thoughts Will, thats generally what i was thinking. I'm finding the hard part is more finding properties that are in a good location and also don't have restrictions on short term renters (either hoa or local regulations).

I've reached out to owners with the same basic offer (increase rent, cover repairs up to a certain amount) and most people are hesitant to even discuss it, so i think it's a sheer numbers game and being ready to buy a property when one shows up that matches my criteria

@Michael Greenberg this is off topic but regulations say 10 conventional properties. Per person. If you’re married and don’t put them in BOTH names, rather the individuals names, you can have 10 each. So 20.
Not sure who told you 3 but Id call another lender. Some banks may say you’re done at 4. I’ve never heard 3. Could be DTI issue??

Check out this article and call another bank and get you some more houses!

https://www.google.com/amp/s/themortgagereports.com/7395/the-5-10-properties-program-is-for-investors-with-more-than-4-properties-financed/amp

Every market is different, but I buy bank foreclosure houses.  Usually at 25% of the appraised value set by the county.  6 months of rent pays for the house.  It may take 7-12 months to collect 6 months of rent.  After you have 8 or 10 houses and they are completely occupied, you can afford to buy another house every 2-3 weeks.  But around here, good deals on bank foreclosures happen 1-2 times a year.

Originally posted by @Ben Hooper :

it seems as if option #1 allows you to quickly scale with less money (basically furniture and a security deposit) but has the downside of lower margins since you're not building equity.

 I tend to rely heavily on option 1 since I don't have much capital. Margins are indeed smaller for option 1 but your velocity of money is much higher, meaning in the long-term you can buy more of your own Airbnb units/have more of your own equity, thus creating more cashflow. So if the objective is long-term cashflow I wouldn't write off option 1. If the objective is maximizing cash-flow in the short-term and you have the capital to deploy, I think the other options are better.

But the main downside for me isn't the lower margins for option 1. The main downside is control. Working with property managers, you can have access to a lot more than just 1 unit; however, they have their own system in place and as a tenant you ultimately need to respect their system.

For example, you can't just throw in your own smart locks, hire a vendor to clean the carpet, or your own enhancements, etc.

@Angelo Wong how have you gone about expanding with option #1? have you found any techniques or ways to partner with landlords to help ease their concerns? 

My assumption is that individual landlords rather than management companies are more open to allowing STR. Has that been your experience?

@Benhooper I do rental arbitrage on 6 homes, own 2, partner on one. And they are all 10 minutes, or less, from my home.

I don't have many problems getting landlords on board. And I don't pay anything extra. Reach out anytime to chat.