All Forum Posts by: Jeremy Horton

Quote from @John Carbone:

Quote from @Jeremy Horton:

Quote from @Nathan Gesner:

Quote from @Jeremy Horton:

For the purpose of analysis, I would remove it from the equation. If you charge $100 for cleaning and spend $100 for cleaning, it's a wash and shouldn't affect the financial performance of the property, therefore it's just noise.

In reality, your cleaning fee should generate income, but it won't be a significant amount. You may charge $8,000 a year and collect $10,000 for a net income of $2,000. That's not enough for me to make a purchase decision.

 Agreed - mostly - the thing is I'll generally screen properties based on their purchase price and gross revenue - basically like the 10% rule where 50k/500k = ~10% return. Super basic but just a screening metric. 

Thing is - ADR is skewed because it has the cleaning fee added in but you still have to pay the cleaner. So if you use the ADR from pricelabs/AirDNA you have to subtract back out the cleaning cost. 

It seems there are 2 ways to do this - use the ADR (from AirDNA/pricelabs) and subtract back out the cleaning cost OR use the nightly rate (without the cleaning charge added in - this would reduce your gross income) and consider the cleaning charge awash since it is a passthrough charge. 

The issue I'm having is projecting revenue. If I use numbers that include the cleaning cost - it has to come back out somewhere, right?!

So your cleaning fee could actually be higher with a duplex. You won’t always have turnovers on the same day. A cleaner to go out each time will be a fixed cost, if they go out to do 2 at same day, it’s likely less of an expense (depending on your cleaner). 

You shouldn’t be running numbers on 40 percent occupancy though, if you can break even on 50 percent occupancy or less then it’s generally a good deal though.  Are you pulling  $205 a night for each unit so $410 a night? If so makes sense, if it’s $205 for both, then it’s not a good deal and I’d pass. 

My number 1 metric is, will it break even renting 12 days a month (just 3 day weekends), and if it does, I’ll pull the trigger. 

 Gotcha on the 12 day thing - very good point\ metric to use. And on the duplex part - cleaning would indeed be more because they would not be rented the same periods, I overlooked that one for sure 

Quote from @Nathan Gesner:

Quote from @Jeremy Horton:

For the purpose of analysis, I would remove it from the equation. If you charge $100 for cleaning and spend $100 for cleaning, it's a wash and shouldn't affect the financial performance of the property, therefore it's just noise.

In reality, your cleaning fee should generate income, but it won't be a significant amount. You may charge $8,000 a year and collect $10,000 for a net income of $2,000. That's not enough for me to make a purchase decision.

 Agreed - mostly - the thing is I'll generally screen properties based on their purchase price and gross revenue - basically like the 10% rule where 50k/500k = ~10% return. Super basic but just a screening metric. 

Thing is - ADR is skewed because it has the cleaning fee added in but you still have to pay the cleaner. So if you use the ADR from pricelabs/AirDNA you have to subtract back out the cleaning cost. 

It seems there are 2 ways to do this - use the ADR (from AirDNA/pricelabs) and subtract back out the cleaning cost OR use the nightly rate (without the cleaning charge added in - this would reduce your gross income) and consider the cleaning charge awash since it is a passthrough charge. 

The issue I'm having is projecting revenue. If I use numbers that include the cleaning cost - it has to come back out somewhere, right?!

Quote from @John Carbone:

How are you getting 4900 monthly income with an ADR of $205 with 12 days a month? Seems like you are projecting on 80 percent occupancy. If this is the case, then it seems to be a break even deal for you factoring in cleaning fee. 

 It's a duplex - so each side 205 @ 12 days a month. Times 2 for 2 units. The total monthly income is the summation of both units (205*12)+(205*12)

@Chase Hoover

Hey Chase, the thing is I'm looking at gross revenue numbers then calculating backwards to find what price I should purchase at to get the return I want. Only way to do that is to calculate monthly expenses. Cleaning would run about 8k year or ~700/mo. This is a pretty big expense.

So to find your net revenue, or what you're actually making, you need to calculate all expenses, especially cleaning. This is the reason why lots of people think they're making a ton of money, then when you look at their balance sheet, they pulled in 4k/annual net on a 80k investment. They say wow I make 40k this year, 3k month expenses, 700 month in cleaning...and they netted a measly 300/mo.

I'm definitely going to pull the trigger when the numbers work out. If they don't, that $ could be better somewhere else.

Thoughts on that?

How do you personally calculate the cleaning fees?

I've been running into this lately in my STR analysis. I have talked to PMs in the area and am told the "cleaning fee is a pass through cost" - I understand that the guest "pays" the cleaning cost but this is still worked into the ADR from Air DNA - AirDNA's gross revenue is calculated as (Nightly Rate + Cleaning Fee)/# of Nights booked. So we can see the cleaning fee is added into the ADR and thus the gross revenue. So when you run analysis, the cleaning fee must come back out to calculate your total monthly expenses - if I'm understanding this right?

The other thing I've heard is that the cleaning fee can be incorporated into CapEx, Repairs/Maintenance, Booking Fees (I typically run these all at 3%). If you do incorporate the cleaning fee this way, it makes sense that you would need to increase those percentages to equate to what an additional cleaning cost would be.

The thing I'm running into is cleaning is a significant expense - I'd estimate at ~700 month for a reasonably sized place, on average, annually. This is 7-8k/year in cleaning. I can have pretty good numbers then add that in and boom - out the window that one goes. 

I've attached a picture of a basic STR spreadsheet, that may describe what I'm talking about better than I can describe it in words lol.

Please let me know your thoughts and how you personally like to do it! I am always open to learning and listening

How do you all organize your rental property bank accounts?

Bank Account per property? Pros: Would be very easy to see expenses/costs etc. Cons: Would end up with lots of Bank Accounts but still organize them all under "Business"

Single Bank Account? All deposits and costs would go into a singular account. Could still see totals for the whole business but would need something separate (maybe excel sheet) to see how each property was doing. 

Quickbooks?

Trying to come up with an efficient way to organize my properties. It's been turning into quite the cluster the past couple years. Trying to make this easier for my CPA down the road. 

So there's a lot to be learned here:

1) Putting down 20% is nice IF you want to buy a property or two a year. If it's an expensive property, maybe 1 every 2+ years. The capital runs out quick - doesn't matter who you are or how much you make. 

2) Appreciation play is somewhat of a gamble. In the short term it's extremely risky - long term it should work out just due to inflation. That being said I always want cashflow to cover maintenance/repairs/Cap Ex. You live in California (very liberal place and not landlord friendly) so you may be capped on your rent increases (this would impede your potential cashflow even more) - something to look out for. Assuming you meant you'll make a couple hundred thousand in a couple of years...this is an extremely bold prediction. I can almost guarantee if that was the case those properties would be long gone by companies that have access to more data than you or me. 

3) An STR can be nearly anywhere - popular vacation destinations or your neighborhood. Regulations are a thing to pay attention to. This again should cashflow. If you buy a STR that doesn't cashflow...you'll have two places that don't cashflow. This is a recipe for disaster.

4) Why do you want the home paid off in 15 years? What's the benefit of a paid off home? Your ROI will likely be lower since your monthly payments are higher and you'll have to leave more in the property if you want it to cashflow. I don't care if my loan was for 50 years if the place cashflows...see where I'm going here? Let the debt work in your favor. Lower monthly payments = more potential cashflow.

5) There are always deals. Some may be harder to find, but they are always out there. And there will always be another one.  

The last few places I bought - PITI is $616 - rent is 1350 (duplex, $675 per unit), PITI is $909 - rent is 2600 (fourplex, 650/unit), PITI is 662 - rent is 1250 (SFH). You really want your PITI to be half of your monthly rent for a place to cashflow well.

Absolutely - first time in a while I can ask for some seller concessions because they don't have 50 over ask offers in less than 24 hours 

I'd prefer to buy at a lower price and higher rate - I can always refi that rate. Nothing you can do about a high purchase price - and if you ever do refi - guess what? That rate is more than likely going up

Quote from @Christine Watson:

Quote from @Jeremy Horton:

Quote from @Christine Watson:

Hello David,

Thank you for this.  This helped me see points that I was not aware of before.  

I want to purchase personally because my LLC does not have any income. I am purchasing a four plex. Once the 4 plex is rehabbed, the income from the four plex will go to the LLC.

Messing up the veil - I am assuming that I need an attorney to do the quit claim deed in order for the veil not to be broken.  Is this correct?  

Loan - I would not be able to refi a property that is in an LLC with a conventional loan. Is this correct?

Firstly - why do you want to put the property in an LLC? 

You can just purchase under your name - this gets you the best terms for your loan. Then talk to the title company and tell them you want to put it in an LLC. They'll record it and the deed will have the LLC. As far as the "veil" just keep your personal vs business bank accounts separate. This will limit your liability.

You likely won't be able to close under an LLC unless you go with a commercial type loan. AKA lenders will not let you close with a conventional loan under your LLC - needs to be your personal name. Just swap it over after 

Thank you, Jeremy!

I thought this way was a go, until David brought up some concerns that I had not considered.  
This seems to be the easiest way, however my main concern is the piercing of the veil.  If I do not have that protection, I have no use for the LLC.  

No - there's no concerns involving having your title company swap it over to an LLC after you close (regarding the veil)

Concern is - and all mortgage lender contracts will have is - is the "due on sale clause" - technically the lender can call your note due upon transfer of the property (since the property has been transferred to an LLC). I personally, nor has anyone I have ever spoken to had their note called due. That is the only concern. If you pay your note, I don't believe you'll ever have an issue

Quote from @Christine Watson:

Hello David,

Thank you for this.  This helped me see points that I was not aware of before.  

I want to purchase personally because my LLC does not have any income. I am purchasing a four plex. Once the 4 plex is rehabbed, the income from the four plex will go to the LLC.

Messing up the veil - I am assuming that I need an attorney to do the quit claim deed in order for the veil not to be broken.  Is this correct?  

Loan - I would not be able to refi a property that is in an LLC with a conventional loan. Is this correct?

Firstly - why do you want to put the property in an LLC? 

You can just purchase under your name - this gets you the best terms for your loan. Then talk to the title company and tell them you want to put it in an LLC. They'll record it and the deed will have the LLC. As far as the "veil" just keep your personal vs business bank accounts separate. This will limit your liability.

You likely won't be able to close under an LLC unless you go with a commercial type loan. AKA lenders will not let you close with a conventional loan under your LLC - needs to be your personal name. Just swap it over after