Testing the Waters on an Idea MN Air BNB

14 Replies

Hi everyone, a few of you may have seen my enthusiasm in the past about utilizing Air BNB's platform to bring entrepreneurs together with investors to expand both of their businesses and while I have done some limited testing in my own market with favorable results, wanted to get other's opinions and share this idea.

In the Twin Cities market in Minnesota we are fighting hard to find 6% cap rates in multi family homes (oftentimes even harder in single families) which has turned off many investors who have been sitting on their cash for the last year.  At the same time, the Air BNB market is gaining some momentum, but the biggest limiting factor for expansion for most Air BNB operators is the initial capital investment to acquire a new property.

My solution is to pair the two by vetting and working with experienced Air BNB operators who want to expand, but don't want to be relegated to negotiating over and over again with landlords who can't rent their house to an ordinary tenant or don't have the cash/inclination to stick 20% down payments into these properties.  This is an inefficient use of time and does not allow the operator to expand their business into the desirable areas they should be targeting (which consequently is where most investors want to own RE).

If an investor can acquire any property an operator would like to use and get some standard return on a long term lease (8 cap is the target for 5 years), the investor is able to benefit by getting a slightly above market rent amount without having to pay for management.  The operator is also happy because they get a new property that they choose with the ability to profit anything above the rent amount they are paying per month, which will allow them to scale much much faster.

As I said, I have interested and willing parties on both end already, but wanted to open the idea up to scrutiny and feedback and hopefully allow people in other markets to take advantage of this model to scale their business.

Isn't that essentially just a master lease?

Investor buys property

Investor has master lease with operator

Operator operates property as a BnB

Originally posted by @Kevin Terpening :

Isn't that essentially just a master lease?

Investor buys property

Investor has master lease with operator

Operator operates property as a BnB

Yes it can certainly be structured that way, as well as an RTO or CFD. I would say on average it performs more like a single net lease with the host handling maintenance and management as many owners are more comfortable taking the responsibility for taxes and insurance out of the hands of the host/operator.

I had originally intended to use master leases, but there was generally less enthusiasm from both parties.

Your idea sucks!

JK, but in seriousness, I think the biggest challenge is to convince someone that owns a property to master lease it to you, unless you are giving them substantially more in rent. The rental market in the twin cities is at 3% vacancy and in most areas less than that, so renting a house is easy. Why give you the keys, unless you will pay me $1800/mo vs $1400? 

As always though, thinking outside the box comes with challenges. Try your concept. If it works, there could be a lot of good money made. I would try to work deals as contract for deeds if you can, that way you are building equity as well. 

Originally posted by @Todd Dexheimer :

Your idea sucks!

JK, but in seriousness, I think the biggest challenge is to convince someone that owns a property to master lease it to you, unless you are giving them substantially more in rent. The rental market in the twin cities is at 3% vacancy and in most areas less than that, so renting a house is easy. Why give you the keys, unless you will pay me $1800/mo vs $1400? 

As always though, thinking outside the box comes with challenges. Try your concept. If it works, there could be a lot of good money made. I would try to work deals as contract for deeds if you can, that way you are building equity as well. 

Hey dude! Surprisingly the investor component has been the easiest part and I have $5mm ready to deploy for this if needed between a few different investors who are super stoked to get into the better neighborhoods in the area at an 8% cap rate. Not needing third party property management is a great efficiency that has a significant effect on NOI for most of the investors in my network.

The challenge I am finding is to locate skilled Air BNB hosts.  It is not a circle I run in right now and there is a tendency to attract people who would be pretty difficult for me to underwrite for one of my clients based on their financial background/ability to follow instructions in terms of putting together a financial statement or showing up on time.  lol

Much it would seem is predicated on the strength of the host and while I would prefer to set all of these up as CFDs (I do a lot of CFD deals for my own investing), the down payment makes it unpalatable for some of the hosts. Perhaps with a smaller down payment of like 5% or something it could work for the right people.

@Daniel Kurkowski I actually know a few guys who are skilled Airbnb operators, myself included.

Currently they are renting places and with the landlords permission, putting them on Airbnb.

I think your biggest risk and challenge will be the city, who is currently trying to regulate Airbnb.

I though I had read on BP recently that Airbnb was moving to only allow Airbnb ing properties that a person physically owned. Did anyone else see something along these lines or did I imagine this?

@Daniel Kurkowski I think this is an interesting concept - thanks for starting this thread! My partner and I are Airbnb operators in the Twin Cities - of both our own properties and on behalf of investors who are our clients. We've looked into the master lease idea but found similar results as you mentioned above. We've come across CFD opportunities but the properties haven't been ideal for Airbnb or would have needed additional investment to get them in the condition we would need them for Airbnb. If you know of investors willing to do CFD for properties suited for short-term rental, we would definitely be interested!

What is working for us, so far, is partnering with investors who have existing properties (or units) in desirable Airbnb areas. We provide them with turn-key management and charge a 20% fee. So far, we are consistently earning the the investor 1.5 times market rent (after Airbnb fees and our management fees). Our biggest hurdle with this is the initial start-up costs for the investor, mostly related to furnishing the unit.

It seems like investors would soon get wise to the fact that they may only be getting “slightly above market rent” when they could potentially have a larger upside by bringing on a short-term rental management company and paying a percentage of revenue generated. Have you also considered working with investors to find and purchase properties specifically suited for Airbnb - locations or types of properties with a proven track record based on data available?

@Jordan Moorhead Mpls and St. Paul recently approved Airbnb with appropriate rental licenses. I know Mpls starts taking applications Dec. 1.  

I am a host for short term rentals of my own property in Rochester, MN.  If I was going to do any hosting, I would want it to be for my own property so Contract For Deed would work great for me.  With as much work there is involved in being a host I would want more than just the paycheck of running the business.  I don't just want a job/paycheck I want an asset for my future.

Daniel Kurkowski

You stated "the biggest limiting factor for expansion for most Air BNB operators is the initial capital investment to acquire a new property. "  I don't think that is the main problem.  I think it is finding reasonable priced property to purchase.  As you stated the market is tight.  We are investors too and you make your money when you purchase a property I have always heard.  

So I guess it really depends on the two parties and what they would like done.  If you were thinking of being the middle man so the two can find each other this might work out for you.  

If you know of investors willing to do contract for deed for properties suited for short-term rental in Rochester, MN, I would definitely be interested!

Covered By Faith LLC

I think it is interesting, but would the home owners be guaranteed a set payment similar to rent or would they just be collecting a portion of what the host would be collecting?

As previously discussed, I see it as somewhat difficult to sell a home owner on unless there was a set minimum to them that would be above what they woud get in rent.

Would the cost of furnishing be on the host with a longer term contract or would that be on the home owner as well?

@Daniel Kurkowski This is a great idea and people are hopping on it fast. My wife is an Airbnb consultant and most of the people she works with have found property owners and are subletting their places. A lot of investors with a lot of doors see the potential with Airbnb and are more than willing to have Airbnb operators operate them and of course cut them a piece of the pie to increase their cash flow. I've met a few property owners that are comfortable with their cash flow and are willing to let Airbnb operators operate their business with their property without taking anything out of the operators proceeds. 

Thanks for all of the responses everyone!  I will reach out to a few of your privately to see if we can't have a more specific conversation about the model.

At the end of the day everything is negotiable but the simplest breakdown I can find is having the investor purchase the property and the operator purchase all furniture.  It is an asset that only has value to the operator and if they were to part ways, it would likely just be trash hauled by investor if left behind.  That said some improvements like appliances, electronic locks, etc, could definitely be factored into the investor's purchase price if it is also reflected in their return.

The idea is that the investor gets a set return and the operator makes anything above that rent amount.  The investor gets a good return on the property and doesn't get to share in increased profits because their risk is static, just like the return.  

Most investors I work with don't care if their return could be higher dealing with Air BNB themselves.  There is the potential for more risk (especially upfront) and more hassle to deal with.  If you have $500k to spend you don't often have time to meet guests during the day etc. and don't want to deal with $15/hr problems.

The initial idea is to middle these transactions because I don't feel I have the requisite experience to put the management infrastructure in place for this medium, but have offers in on properties right now to learn more about what we would need to do as a company to set this up.  If we are able to do this, we would look to employ the same model of a set rent amount secured by our real estate assets and businesses.

I am working with an attorney to draft a standard lease document that is fair to both sides that we can use as a template so there shouldn't be any need for attorney's fees.  We are doing the leasing like a commercial lease and charging a total of 4% (2% operator/2% investor) of the gross lease amount (super low IMO and likely to change in the future) for putting all of this together and can also collect a brokerage commission when applicable.

The CD angle would be so dependent on the individuals profile but I have access to 10-15 deals a year as it is with minimum terms of 10% down, 5% increase in resale price per year of term, 7.5% interest with all of my closing fees covered by the CD buyer with a 2 year max.  It is hard to do worse than that unless there is a compelling reason to deviate based on the strength of the borrower due to some cross-collateralization, or if the underlying property has a lot of inherent value to the investor.

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