Crushing it with THIS Hybrid Model in Metro Detroit (Pics Inside)

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After such a positive response from my first thread on the BRRRR model in Metro Detroit, I wanted to share a new strategy that I've successfully implemented into my business which will MAXIMIZE CASH FLOW from small Multi Family Properties bought AT MARKET VALUE...

This hybrid model ONLY works on Multi-Family. I've implemented it on a Duplex that I've owned for awhile, but I'm sure it'd also work great with a 3-4 unit. It could work on a larger commercial multi-family property, but it really depends on the area.

I'm going to break down this deal, the numbers, & how I'm maximizing cash flow from a property I purchased AT MARKET VALUE with 95% LTV.

Throughout this thread, I will share pics of the newly rehabbed unit to give some visual context. 

Deal Facts

  • - Built 1928
  • - Duplex
  • - 1429sqft, 954sqft downstairs, 475sqft upstairs
  • - Split garages
  • - Working class neighborhood, C+ or B-
  • - Suburb bordering Detroit, near the GM Tech Center and Chrysler Motor Plants

Purchase Price: $105,000

Down Payment: $5,250

Financing: 5% Conventional Bank Loan

Rehab Costs: $7000 (after I owned it for 1+yrs)

Closing Costs: ~$3000

All In: $115,000

Market Rent when Purchased: $1,370

Cash out of my Pocket: ~$15,250

PITI: $914/m

        The strategy is simple...

        Buy multi family > Rent unit 1 LONG TERM > Rent unit 2 SHORT TERM > PROFIT

        It's not a big secret or difficult process, but it does take some level of risk. 

        Let's break down the numbers so you can see the difference...

        Backstory

        This upstairs unit is only 475sqft. The rent I was receiving from a long term tenant (1yr lease) was $625/m. That included me paying for water/gas/internet. After factoring in those expenses, it was maybe bringing in $550/m. 

        About 9 months into his new lease, the tenant I inherited had to be evicted. I missed out on 2 months rent + had to pay court fees to evict him. He smoked inside the unit and had an unpermitted cat. Judge gave him 3 weeks to move out.

        When I gained access back into the unit, I knew, at the very least, I would have to put in new floors and paint. It would maybe bring rent up to $700/m, but I figured since this was the smallest unit I owned, it might be worth the risk to test out Airbnb. 

        I spent about a week doing research on Airbnb to see if it would even make sense for the area I was in. 

        My property isn't in a travel destination... 

        It's not close to an ocean...

        There's not any attractions nearby that would bring tourists...

        So could this really work?

        I stumbled across a site called AirDNA which gives you data on all the Airbnb listings in your city. 

        I found that listings in my city had an 80% occupancy rate, the highest of ANY surrounding city...INCLUDING Detroit!

        On Airbnb, I also saw there were only 5 other listings in my city. 4 of them were owned by the same guy! 

        So if this guy has 4 properties all around this area and he's boasting an 80% occupancy, I could really crush it on Airbnb...


        This was it...

        I was committing to Airbnb and renovating my unit to be among the BEST in my area. 

        The guy who has 4 units also was renting out an upper unit of a duplex for a whopping $125/night! Granted, it had 2 bedrooms and I had only 1, but still! 

        I started crunching the numbers...

        If I could rent out this property at $60/night and book just 10 nights, I'd be roughly breaking even to what I had before. I also wouldn't have to deal with the constant wear and tear that a long term tenant creates AND I could add more rules. 

        This was my first goal...breaking even. 

        I figured it'd probably start off slow, but as I got reviews it could snowball and then I'd be able to raise prices. 

        I knew this was worth a shot because even if it failed, I could always turn it back into a long term rental. That was the worst that could happen! 

        The Rehab

        Since the unit was only 475sqft, I wasn't expecting the rehab to take long. 

        The hardest part was finding furniture and modernizing the unit, while also giving it nice touches. Facebook marketplace, hole in the wall furniture stores, and Hobby Lobby were mostly responsible for the furnishings. 

        When you have such a small space and mostly 7ft ceilings, you really need to be efficient while also making it feel open. I think we did a good job maximizing the space. 

        The upstairs has some cool built in closets that I put locks on and stuffed with supplies. All the amenities we provide & extra linens are locked away, but available for the cleaner when turning over the unit between guests. 

        We installed a camera at the front door and automated the unit with smart locks to make the property simple and secure for guests. It really makes it easy to manage when I don't even have to meet the guests!

        Overall, I spent around $7000 on this rehab. If I wasn't doing Airbnb, I would have only spent around $2000 to turn this over to long term tenants. This was one of my biggest concerns going into it, because if it fails, I'd be holding onto $5000 in furniture and eating it as a loss.

        RESULTS

        The rehab took 1 month and I finally got the unit launched on Airbnb. 

        I put the base price at $50/night and added a $50 cleaning fee. 

        After 48hrs, I had 11 bookings! They just kept coming! 

        I was booked almost the entire month of September and most of October! It's crazy how big of a hit it's been so far! I can only hope this continues as we head into the winter months!

        So now this little Duplex, my first investment property, that I started with a house hack, is now clearing $2200/m in income! My 475sqft unit is bringing in more than my long term rental downstairs (which is nearly double in size). 

        Bottom unit rent: $925/m

        So far this has been a massive success. I'm close to Superhost status and so far have all had amazing guests who take great care of the property (way better than my long term tenants). 

        CONCLUSION

        I made this thread to share and document my experience. 

        I like this hybrid model of doing both long term and short term rentals under the same roof to mitigate risk. I would ONLY consider buying based on rents that it could produce as a long term rental and would not always count on short term rental profits. Right now it's the icing on the cake and I'm going to milk it for as long as I can!

        I know the Detroit markets get a LOT of hate on the podcasts and forums, so I'm highlighting my investments to shed some positive light on the area.

        So far, I've had great success with BRRRR deals, wholesaling, flips, turnkey properties, and now Airbnb.

        I do not own anything in the city of Detroit, I've only been focusing on the surrounding suburbs.  If you're creative, it is definitely possible to break 2% of the purchase price in rent while also sticking to B class and C class areas. 

        Thanks for reading and I hope more people are able to successfully implement this strategy! 

        @Matthew John   Congrats on your success and finding a great strategy that works for you!  

        Quick question, I was actually just discussing with a friend today about potentially converting his upstairs unit of his duplex to an STR while keeping the downstairs LTR in place. My big concern was the LTR resident having to deal with STR guests coming in and out from the upstairs unit and/or noise issues. The numbers make sense but don't want to throw the baby out with the bathwater by alienated the downstairs renter with potential STR issues. What's your experience with that piece if you don't mind me asking?

        Thanks for sharing! 

        @Jon Crosby I’ve just been open and honest with my both my tenants and guests up front.

        I check in with my tenants and told me I’m here to resolve any issues that arise as soon as possible.

        My guests on Airbnb know there’s tenants living downstairs and have strict instructions on parking and quiet hours.

        I limit the guest count to try and minimize disturbances.

        Whether there's a full time tenant or STR guests, there will always be some level of noise and someone they can run into.

        I guess we’ll see next year come time for renewal of my LTR.

        That is great that this is working out and that you were proactive about letting your ling term tenants know what you were doing.

        You would need some easy going tenants for this to work and not be complaining to you constantly.

        Congratulations on your success. This post is very well written but I think you've missed a few critical expenses that give a false picture of success, which is common among the AirBnB investors.

        First off, how did you purchase an investment property with just 5% down? Banks require 20% or more unless the home is owner-occupied but you claim it was a rental from the beginning. Isn't that mortgage fraud?

        Second, you're missing some expenses in your break-down. Maybe you were in a hurry. Maybe you forgot to account for them. Maybe you're running a bad business and not paying some of them? Some expenses I don't see accounted for: AirBnB fees, lodging tax, sales tax, utilities, TV, internet.

        Here are some estimations:

        • Utilities: $100
        • TV/Internet: $100
        • AirBnB fee: 3% of bookings or ~$36
        • Taxes: 10% or more is my guess, $120
        • Original cost to convert: $5,000 which over a 5-year period breaks down to $84 a month

        That's $440 in expenses you haven't accounted for. If your total income is $2,200 and the long-term tenant pays $900, that leaves $1,300 for the AirBnB unit. Subtract the $440 in expenses and your AirBnB is earning you $860 a month. You said it would earn $700 as a long-term rental so you've essentially increased income $160 a month, which is respectable.

        But wait! There's more!

        You haven't accounted for your time. Operating a vacation rental takes time and time is not free. Vacation renters call to ask questions, figure out how to operate the remote control, report maintenance issues, or ask your advice for a good place to eat. I suspect you spend at least five hours a month handling calls, emails, and site visits. If your time is worth $20 an hour, that's another $100 to account for.

        Crushing it? I'm pessimistic. Like most vacation rental investors, I think you're failing to account for the true costs and exaggerating the actual return. 

        But please don't let me crush your dreams! AirBnB is fun and there are ways you can increase revenue over time. It's worth pursuing and you may eventually get returns of 25% or more over a long-term rental.

        There are a number of weaknesses and it's chilling question the original post. I would not use this as any kind of a model and I'll be really careful about a 5% down loan in which you don't live. mortgage Banks do not give 5% down loans unless I think you're living there

        crushing it might get your loan called.

        a lot of other stuff is what almost every short term renter already is well aware of.

        @Jon Crosby Thank you! I manage all my rentals myself and advertise myself as the manager, not the owner. When I signed the lease with the downstairs tenants, I straight up told them that the upstairs will eventually be used as a short term rental. Now that we have bookings from Airbnb coming in, I've continued to reach out to them and ask that they tell me immediately if anyone is disturbing them in anyway. I told them they are my #1 priority since that is their home. I have cameras to monitor the units and only allow 2 guests max upstairs. I make sure the upstairs guests know that quiet hours are between 10pm - 7am and to please respect the tenants that occupy the downstairs. So far everyone seems to be doing fine!

        Hey thanks for your reply!
        I first want to clarify hat I lived in this unit for over 1yr BEFORE renting out both units and turning this into an Airbnb. When I purchased the property, the previous owner lived in 1 unit and estimated market rent to be $795/m. The upstairs unit was at $575/m, but the tenant paid an additional $50/m for water/internet. 

        As for the expenses, they are accounted for. When I had a long term tenant, the only expenses they paid for were the gas/electric. On a 475sqft unit, they are minimal. Both combined are under $50/m. When rehabbing, I did my best to make it energy efficient by installing smart outlets so I'm able to control the AC/heat units remotely from my phone. When I know a guest leaves, I simply switch everything off. Since someone is not occupying the property 24/7 the bills are generally lower. 

        With the unit being a duplex, I also put the internet in my name. At $50/m, I charge the downstairs tenants $30/m and they get full access to the modem. I got a WIFI signal booster upstairs for the BNB and I cover the additional $20/m for the internet. 

        Water in Michigan is almost always covered by the landlord. It's always been under $100/m. With someone not occupying the property long term on the upstairs unit, it's pretty easy to keep this cost low. I also have it in my lease for the downstairs unit that if they use over $100/m in water, they will be billed the extra amount. 

        So all in all my expenses for utilities are around $170/m. 

        Airbnb fees are minimal and they are covered directly by the guest, not me. 

        Sure, there will be taxes on profit, but with all the write offs I get for furnishing and expenses, I'm going to recoup my initial investment before giving up a large chunk to the gov. 

        So far it's been great, although I'm sure there will be bumps along the road. It's pretty automated and fun, I have met people coming to town interest in real estate and looking to network. I'm on my phone working/networking a lot during the day, so the 5 seconds it takes to respond to a message isn't a big deal to me.

        This is my first STR and so far it's bringing in a LOT more (including expenses) than it would with a long term tenant in there. I like that I'm able to go and inspect my unit (and keep it clean) all the time. When I'm renting to someone on year leases, I don't get to go inside every few days and clean it, so the wear and tear is much less with Airbnb!

        @Nathan G.   since I travel on business extensively I could not in a lifetime imagine renting that place by the night LOL.

        I don't know who would..  just my personal bias 

        @Ken Latchers With a 5% conventional loan, you're only required to live in the property for 1 year. After that, you can move out and rent out the entire property. This was originally a house hack, but I'm going on 2yrs now that I've owned this property and it's perfectly legal to rent out both units. 

        This post was to simply document my experience and highlight the benefits of this hybrid model which I haven't seen talked about yet on BP. 

        @Jay Hinrichs Airbnb is popular with millennials. I've stayed in a few dozen Airbnbs all around the world for business trips. Since I've discovered Airbnb, I've stayed in maybe 3 hotels in the past 4 yrs. So far I've had guests that were Real Estate Investors coming to check out Detroit and the surrounding markets, concert goers, people between apartments, and travelers attending events in the city. 

        You can book my place for $50-60/night or you can book a hotel for $125/night or more and have similar amenities. 

        Great job. 

        It's entertaining to see so many people come in and assume so many variables about Airbnb.

        Noiseaware is a decibel meter you can use to detect and squash noise if it exceeds your pre set boundaries. Great way to put your LTR tenants at ease. 

        There's another service that isn't coming to memory that detects cigarette and marijuana smoke. Another great selling point for your LTR.

        STR guests don't have tenant rights. You can get rid of them the night of IF they cause any trouble.

        Several nights a month the unit will be vacant. Good for the LTR guest as well 

        Smartbnb uses AI to auto respond to messages guests may have. Not as time consuming as a newbie to Star's would imagine. 

        Not all cities tax Airbnb yet. Detroit may, I'm not sure. That costs is paid by the guest anyway. 

        If STR is plan A and you can still cash flow with am LTR as plan B, it's a fantastic strategy.

        Originally posted by @Matthew John :

        @Jay Hinrichs Airbnb is popular with millennials. I've stayed in a few dozen Airbnbs all around the world for business trips. Since I've discovered Airbnb, I've stayed in maybe 3 hotels in the past 4 yrs. So far I've had guests that were Real Estate Investors coming to check out Detroit and the surrounding markets, concert goers, people between apartments, and travelers attending events in the city. 

        You can book my place for $50-60/night or you can book a hotel for $125/night or more and have similar amenities. 

        Gothca like the car dealers say there is a butt for every seat  :)   good luck with it..  the burbs of Detroit is just not a place I would personally stay.. 

         

        precisely. the original posts put this forward like it is some kind of game-changing idea.  It comes across as flaky and questionable. 


        Originally posted by @Allan Smith :

        Why not just rent both of them STR?

         

        @Jay Hinrichs I get it. I just know people prefer to stay in the suburbs vs the city given the reputation. It gets nicer the further north you get off 8 mile.

        @Allan Smith It reduces risk. I would also like to see how it performs in the winter months to see how that impacts occupancy. My LTR cover the mortgage payments so it’s nice knowing that’s covered without relying on 3rd party platform.

        Originally posted by @Matthew John :

        @Jay Hinrichs I get it. I just know people prefer to stay in the suburbs vs the city given the reputation. It gets nicer the further north you get off 8 mile. 

        Fully understand I started my OOS HML career in Detroit of all places.. in 2002 I was doing 80 to 100k HMLs on those brick houses south of 8 mile that investors were paying 120 to 140k for.. then fast forward to 2010 those same houses went down to 10 to 20k or less. so fully understand .. Nice to see that market bouncing back though.. for me personally I stick to my hotels were I get points.. know what to expect and usually close to downtown since I am treating venders to top line meals etc.. they don't want to go to applebees in the burbs LOL

         

        @Ernesto Hernandez Great tips! I might need to get one of those weed/cigarette smoke detectors. Thanks for sharing. This Airbnb game is definitely a game changer when it comes to cash flow and keeping your property in excellent condition!

        @Jay Hinrichs That's insane! I don't even own anything south of 10 mile! I can't believe what people spent down there before. I'm not a fan of the ultra cheap houses, I usually go for the $100k ARV types that are in areas with higher quality tenants.

        The Hotel vs BNB is all about preference. So far all my guests have been under 35, so it’s definitely a different crowd that prefer Airbnb.

        Originally posted by @Matthew John :

        @Jay Hinrichs That's insane! I don't even own anything south of 10 mile! I can't believe what people spent down there before. I'm not a fan of the ultra cheap houses, I usually go for the $100k ARV types that are in areas with higher quality tenants.

        The Hotel vs BNB is all about preference. So far all my guests have been under 35, so it’s definitely a different crowd that prefer Airbnb. 

        YUP I know we have short memories and the ONLY reason I think those houses have come back to life is the way that rental property ownership has invaded the everyday investor.. without out of area investors. those houses in those areas would just still be abandoned and left to rot. since there is not enough organic demand . Economic and Social obsolescence as work.

         

        @Jay Hinrichs Granted, I was in middle school back then, but still..I can’t believe those valuations. We currently have a big problem with Japanese investors, buying houses cash and renting them out. They don’t pay taxes, don’t do repairs, they just buy and collect cash. The city has no way to contact them. The house eventually falls apart and the city goes to hell. I consistently tell people that contact me to be VERY careful if they’re looking to buy inside Detroit city limits.

        I suspect your rental is in Warren Michigan.  You don't say, but that is the suburb that borders Detroit and is home to the Tech Center.  Warren is far more stable than the City of Detroit.  Yet the Southern half, bordering Detroit, is filled with lots of homes under 100K, which does suggest decline or low demand for homeowners.   I wouldn't call this good real estate, but it is a market that could be targeted for rental homes.  

        For me Airbnb isn't profitable because it takes too much time.  For the small investors, especially in expensive markets, this is a way to bring in cash flow to support the deal.  

        Two more things:   the 5% down isn't a product that is available for investors.  Those who want to put that amount down would have to be a homeowner (or fibbed about that).  I generally think that it is a mistake to put down such a small amount on an investment;  It is overleveraged.  Any downturn would quickly wipe out your equity and leave you with an under-water deal.