All Forum Posts by: Lisa Marie

Thanks to all for the replies.  I will do a little more research on the feasibility of self managing, as well as evaluating other PMs in the area.

I know there are a lot of software options to manage the calendar across platforms and automate guest emails and cleaner reports, but if I have just one property, what's the best option for me?  Theoretically we can do everything manually, but as I have mentioned multiple times, we want less work, not more work.  Is there a software that provides all the functions but with no or little cost?  

My husband and I own a STR in Virginia Beach. It's a SFH and has a pretty good track record in revenue and profit. It was managed by a mom-and-pop PM for a while, until last year when Vacasa acquired the PM company. We are very unhappy with Vacasa for many reasons and are planning to fire them after this summer peak season.

We have 3 options: finding another PM, self-managing, or renting it out to a STR arbitrager.

Before I evaluate the pros and cons of the 3 options, a quick introduction on our background: We have been successful in our W-2 jobs, having achieved FI (financial independent) part of the deal and are now entering the RE (retire early) phase. Many people in real estate investment are trying to make money to replace their W2 incomes, so self-managing makes sense because they are basically working a side hustle as a PM. Some other people are just passionate about real estate or hospitality, so they truly enjoy managing their STRs. We don’t fit in either category. This house is more of an asset diversification – half of our money is in the stock market, so the other half has to go somewhere else: it’s either this or a bond ladder or a bunch of gold bullions buried in the backyard. Therefore, we prefer this real estate investment to be as passive as possible. So far, when we have a PM, we still have to do a lot of work managing the PM -- making sure they are doing their job such as billing us correctly, choosing the right subcontractors, maintaining a good rating on the platforms, etc. The most frustrating part is that after all the work we put in to manage the PM, the result was still poor.

Regarding the 3 options, finding another PM is our backup plan. A new PM cannot get any worse than Vacasa, but probably won’t be much better.

Self Managing is an option and most of the regulars on this forum advocate that approach, but there is a “survivor bias” here, since we only hear from the successful ones. It’s no different than professional actors or athletes giving speeches telling graduates “pursue your dream, one day you too can win Oscar/Superbowl/…”. They can say that because they made it, but it doesn’t mean it will work for others.  Failed actors don't get invited to do commencement, and failed real estate investors don't hang around Bigger Pockets.  Self-managing is not easy. We will have to find a team on the ground, including cleaner, handyman, linen service, lawncare, pool maintenance, emergency contact, … One person may be able to fill multiple roles, but for the very least it will be 2 or 3 different entities and it’s not like I can just order these people from Amazon, with a 30-day free return or refund. What if the initial hire does a bad job? What if the cleaner quits or doesn’t show up and it’s middle of the summer with the new guest arriving in 3 hours, while I am 8 hours away? Even if we manage to get a few decent helpers, we still have to deal with guests and platforms and everything else.

That leads me to the last option – leasing it out to an arbitrager. We will be happy to rent it out for enough money that it will give us about a 4~5% ROI. To use simplistic round numbers, assuming the house is worth $1M, we will be content to rent it out for $5k a month. After paying the property tax, we should net $50k. The house is already fully furnished and ready to go, so the arbitrager doesn't need to do any upfront investment except buying the linens (if they want to do their own laundry) or paying for the first few months' rent before the business picks up. If the arbitrager is any good, they can gross $150k easily. After they pay me $60k and maybe another $30-40k in expenses (utility, maintenance, cleaning, consumables, repairs), they can net $50-60k.

What do you guys think? Convince me I am wrong. Tell me what I missed in my reasoning. 

If anybody has had experiences doing arbitrage, either as the property owner or as the arbitrager, I would love to pick your brain. Please dm me. I have a lot of questions about the practical details such as who pays for the insurance, who pays for the repairs, and etc. If anybody has a template on the arbitrage contract, I would love to get a copy.

@Sean Wilson Thank you for sharing this.  I am going to DM you and get more insight.  My husband and I have a beach house and it's managed by Vacasa, after they bought the previous mom-and-pop PM company exactly a year ago. The mom-and-pop PM wasn't that great either, but Vacasa was even worse. We have been trying to give them the benefit of the doubt, but over the last year, our patience is wearing thin.  We are now trying to decide between going to a different (smaller) PM or self-managing.  I know what most of people on this forum think, but I have always felt that my personal life and leisure is far more important than saving $15k a year in PM commission.  We own the beach house not to make money, but to protect our assets, i.e. diversification, so we are totally fine with a 5% return (similar to a conservative mutual fund) and want the investment to be as much hands-free as possible.  However, if we are going to make a change on PM, I want to do some research and evaluate the 2 options, and trying to be open and willing to change my mind.

@Chris Ritter, do you mind sharing with us how the 6-bedroom house you bought in Massanutten is doing so far? Are you still glad that you made an aggressive offer to buy it? 

Whichever state you registered the LLC, you will have to maintain all the legal paperwork and pay fees to the state. Then whichever state the LLC is operating in, the LLC will have to register with that state as a Foreign entity if the LLC is not originally registered in the state. So if you set up the LLC in State A to own a rental in State B, you have to do everything twice.

The problem is not the demand but the supply. AirDNA had some data showing a nationwide short term rental supply went up by about 20 to 25% from 2020 to 2022. However in some pockets such as the Smokies, supply went up by more than 30 to 35%. It’s no surprise that ADR is down and occupancy is down.

If your rental is below average, your occupancy will be down by more than 35%. The natural reaction is to significantly cut your rate to attract business. If you cut enough, you will take some business away from the above average rentals, because some guests would rather give up nicer views or better decor in exchange for several hundred dollars less in cost. Therefore, even if your rental is above average, you will still suffer lower occupancy rates. That’s the beauty, or curse of capitalism/free market. When there is an opportunity to make better returns in one niche, money will flow to that niche until supply overwhelms the demand, and the return in that niche comes down to the average of the rest of the market. We are witnessing it happening in real time. That means people will still make money in shorter rental, it’s just no longer as lucrative. The return on investment will eventually be the same as investments in other forms (stocks, bonds, or long term rentals), adjusted for respective risks. 

@Julia Ferris, I don't mean to be nitpicking, but your math is wrong. A $250k house produces net income $25k is possible, but that doesn't include any mortgage payments. That's what I was trying to explain in my earlier post. If you buy the house with cash, your return (aka Cap Rate) and COC are the same- 10% in this case. If you put $50k down and borrow $200k, your CapRate doesn't change, but to calculate your COC, now you have to subtract your mortgage expenses. $200k mortgage nowadays will probably result in a monthly payment of $1300 or $1400. So your cash flow is only 25000- 1300x12= 9400. Therefore, your COC is only 18%. Not bad, but it's also not completely true. If you paid $5k on loan closing cost and $30k to get the house ready, your initial cash outlay is not the 20% of the purchase price, but a much higher $85k instead of $50k. Your real COC is 11%. My point is that people tend to exaggerate the COC either because they are not understanding the math, or they conveniently forget some of the costs and it makes the COC looks much better than reality. On the other hand, real CapRate(including the same startup cost) is 25/ 285 = 8.7%. Cap Rate is much less likely to be manipulated.

It seems that people are confusing the terms COC and CapRate(or simply called Return). In my understanding, Return (or Cap Rate) is net income divided by purchase price. It doesn't matter if you bought it with cash or loan. If you bought a house for $1M, and your net income (after all expenses) is 100k, the Return or Cap Rate is 10%. If your net income is 50k, the Cap Rate is 5%. 2 years ago, 10% is feasible, nowadays, 5% is more likely.
COC is Cash on Cash, so if you put down $200k as down payment on a mortgage, your net income is still 100k, but your cash income may only be 40k because you are paying 60k in mortgage payments. Your COC is 40/200 = 20%. COC is usually higher than CapRate. When people talks about 20 or 25% return, they are referring to COC. When people talk about 3 or 5% return, it's usually not COC. A 3% COC would mean a $1M house, $200k down payment, and $6k net cash income. I guess it's possible, but it would be way too low to be worthwhile, because a 6k net cash income can quickly turn into a negative 20 or 30k cash outflow if you need to replace a furnace or if the STR demand softens.

I’m surprised that nobody mentioned the issue of deduction and taxes. If you use the rental for more than two weeks a year, Including any use by your friends and family, you will not be able to deduct the full expenses such as mortgage, property tax, insurance, maintenance, repair etc. For instance, if you use two weeks yourself, but your friends and family uses 11 weeks even if in off-season when the unit would have been empty, you can only deduct 80% of all your expenses as well as only 80% of depreciation, because your personal use is 13 out of 52 weeks. 

it could be worse, as I have heard some accountants saying that it’s not a percentage of the whole year but a percentage of the weeks the house was rented out. If that’s true, assuming you rented it out 39 weeks in a year, then you can only deduct 2/3 of the expenses and depreciation. I’m not super knowledgeable about this, and simply aim to stay under two weeks a year to avoid this issue altogether. You may want to consult your own accountant. 

Everybody else is focusing on the issue of not having adequate reserve and etc., which is a very real concern.  But in addition to that, does it sound realistic in today's market that you can buy a house for under $500k and generate $135k income?  In most of the vacation markets (whether it's beach house or mountain chalet or ski resort), if a house can generate $135k income, even if it includes cleaning fees, that house will be selling $1M+.  If this house is available for under $500k, then either you have found the bargain of the decade, or it's too good to be true.  

Another way to verify the income estimate is to go ground up: assuming 250 nights rented, in order to generate $135k, the daily rate will need to be $540. Have you checked Airbnb and VRBO to see how much a comparable house is charging? 

Sorry to rain on your parade, but nowadays there just isn't any property in the market that can produce 25% cap rate. Don't get blinded by the glitz of other people's STR success story on Youtube or Tiktok. It's no different if somebody is trying to sell you a stock that is supposedly to yield 15% dividend rate. You really have to ask yourself "what's the catch?"