All Forum Posts by: Scott Sutherland

we run about 200-250 nights per year. If we focus on 30 day+ rentals we can hit 300 nights per year.

Expenses unique to short term rental:

- Utilities (trash, water, sewer, gas, internet, tv)

- Cleaning and prep

- Consummables (soaps, towels, linens)

- Hotel taxes (this depends on your locality)

Also, to Rob's point, it is more management intensive than long term rental. 

How much would the property cash flow in a long term rental scenario?

Very good points on the expenses of operation and the time involvement. 

We have properties that only return $6K more per year than long term rental would. We also have a property that returns $40K more than long term rental. 

In Austin, it's very difficult to capture any additional income from vacation rentals using a third party property manager. VR property managers typically charge 20-30% of revenues.

But if you like managing vacation rentals and want to make it your job (pay yourself the PM fee) or you live in a desirable area and want to generate revenue from your home while you travel, it could be a good option. 

Texas recently proposed 3 bills which will add many of the same regulations currently reserved for hotels to short term rentals. The rules appear very similar to the ones we operate under in the city of Austin, but this would affect all large cities in the state. 

Additional requirements which are not currently part of the Austin ordinance are:

1. Annual water testing

2. Room rates posted on the door

3. Affidavit from the owner to the marketing websites certifying compliance with local laws

4. The website operators are required to assist the state with any investigation (aka those operators not registered or not paying their taxes)

5. Regulations requiring cleanliness of the units.

The regulations do not apply to:

-primary residences

-individual room rentals (less than the entire dwelling). Some conflicting verbiage on this. 

-half of a duplex if the other side is owner occupied

Links to the proposed bills are below.

http://www.capitol.state.tx.us/tlodocs/84R/billtex...

http://www.capitol.state.tx.us/tlodocs/84R/billtex...

http://www.capitol.state.tx.us/Search/DocViewer.as...

Personally, I'm thankful that the state is creating a framework for the operation and expansion of the vacation rental model. 

For those operators who treat short term rental as a business, this is a great opportunity.

I don't expect that property owners booking the occasional event or those operating under the radar will echo my sentiment.

I'd love to hear from other vacation rental owners in Texas and other areas of the country. Would you welcome this type of regulation in your market?

Currently we have 4 STR units in Austin. During peak times (SXSW, ACL, etc) my wife stays pretty busy managing these units. Probably 20 hours per week.

But in your scenario, your biggest time commitment would be getting the unit ready to rent. Once you get it furnished and equipped, you could do it in 2-3 hours per week which is primarily responding to booking inquiries and coordinating your cleaners.

You can respond to inquiries in the evening. Most bookings are Thursday to Sunday so you'd have Monday to Wednesday to coordinate your cleaning and make any repairs or upgrades.

I just uploaded a file to the fileplace section of the resources tab.

It shows the vacation rental performance of our Austin duplex compared to current long term rental rates. 

This is the way we determine our property strategy. By determining how much additional money we'd receive by renting short term vs long term. ROT (return on time) calculation. It's the cell titled "STR Advantage" in the spreadsheet.

The combined cell is for times that we rent both A and B simultaneously to the same group.

The cleaning value was a SWAG but we've started doing a better job of tracking it.

Maintenance and repairs is higher than average due to deferred maintenance.

Shameless plug: Checkout podcast #114 on vacation rentals.

Link below.

http://www.biggerpockets.com/files/user/RealtyStak...

S

We pay our contractor 10% override on the project plus 20% of the back end profits. This structure is designed to incentivize him to come in under budget and ahead of schedule. The 10% override should be tied to the original budget not actual expenses so there is no front end incentive for cost overruns. 

I know other investors do a flat rate of profit (like $15K) per unit with penalties for delays. While this structure doesn't penalize for cost overruns, it also doesn't reward them for them either. You could penalize for cost overruns that were not authorized by a change order. 

I have another associate that pays his contractor a straight 50% of back end profit.

Please add me to your list. 

I believe you can pull a list of cash sales using the realist tool if you have MLS access.

Otherwise, you could buy a list from listsource or one of the other list providers.

I would form an LLC. I'd contact a commercial lender and only have one person guarantee the loan. That person should be able to qualify for the full amount and should probably receive preferential shares of the profit in return.

The problem with having multiple members guarantee the loan is that all members are liable for the full amount of the loan. And if the goal is to maximize the credit facilities of all the members, the best strategy is to take turns guaranteeing the loan on each project. 

Also, you can ask your lender if the loan will be reported on your credit report. Some commercial lenders do not report it which allows you to retain your lending bandwidth for future deals. 

Regarding structure, I have done it a couple of ways (we are 100% cash/no debt):

1. If I'm the GC, I get a 35% bump above my commitment level with an 8% preferred return. That means that if I put in 5% of the investment, I receive 5% of the profits up to 8% and then 40% of all profits above the 8% level. I also receive 1.5% back end commission as the broker subject to achieving the preferred return. In other words, if the project fails to hit the 8%, then I would list the property for free. 

2. If I'm using a GC, I will split my 35% with them and take a cut as the operator. Usually the split is about 50/50 depending on whether the operator receives any compensation along the way. On my current project, our GC receives 17.5% of the back end profit plus a 10% override along the way (cost plus 10 on the rehab). I receive 17.5% on top of my investment.

The passive investors split the remainder according to their input percentage.