All Forum Posts by: Scott Sutherland

Funds are typically deposited after due diligence (option period) but prior to closing.

Our LLC agreement provides the commitment levels for each member and if they fail to contribute, their interest would be available to other members. We typically have 5-10 investors so one backing out could easily be absorbed by the other members.

But our investors have worked together for a number of years, so I couldn't see someone failing to contribute unless they had a life event in which case we'd work it out.

Cody,

I would meet with some commercial lenders in your area. My lender doesn't care where I get the down payment as long as I have the credit worthiness to approve the loan. Most investors won't sign a personal guarantee. If they did, they would effective be providing the financing along with you so their share of the company would be arguably greater.

But you could partner with someone with solid credit as a co-GP and split the GP profits with them in exchange for providing operational sweat equity.

The great thing about qualifying by yourself is that you've covered your contribution with the bank's money and none of your money. Great OPM strategy

Mike and Cody, keep me posted on your progress!

We have 4 units currently in Austin, Texas. We got our start in 2012 much like Catherine did. We were in Colorado for my birthday (Breckenridge as a matter of fact) and on the drive back to Texas my wife said "we can do that"!

So we put together a plan and 10 days later we were renting our primary residence for the SXSW music festival.

We ended up purchasing an RV and initially focused on weekend rentals. So we'd get a paid vacation and used the revenue to fix up the properties and purchase more. This also gave us a place to put our food and belongings when the house was rented. 

The demand was very surprising. We consistently book 200-250 nights per year and cash flow twice as much as we would in a long term rental scenario even after factoring in utilities, cleaning, hotel taxes, and consumables. We have the cost savings of managing them ourselves but we think we get better rates and more occupancy than we would by turning it over to a 3rd party.

Summers are slower in Austin due to the heat, but we stay pretty booked by lowering our prices during those periods.

Austin has expanded the regulations over the past couple of years so we are required to pay a 15% hotel tax on stays less than 30 days and also pay an annual fee for our license which is about $300.

When shopping for a new vacation rental, we use the homeaway and vrbo sites to see what other owners are charging in the neighborhood and how full their calendars are.

We love the business. We've had hundreds of bookings with very little damage to the properties. It's even allowed my wife to retire from her corporate job to handle the rentals and build her real estate business.

I think 50% is great if you are doing it with investor cash and your credit.  Would you have the investors covering the debt cost as well? If so, all the better for you. 

Plus you are shielded from the majority of the downside risk since the investors would have to lose their money before the bank got involved.

Yes. We try to have the LLC and operating agreement in place prior to purchase. I've actually put a couple of these together on the fly, but to make it happen in the typical 30 day closing period requires having some ducks in a row. Most importantly investors ready to commit and a boilerplate agreement. I think this would be difficult in most instances. The only way we managed was that the investors in the pool had already created a similar vehicle in another state so they were comfortable with the structure from day 1.

We have two entities created. One vehicle for buy/hold and one for flip. 

Both of our vehicles are cash. We don't use any debt. You could probably use something similar if you were covering the debt expenses for your contribution and none of the investor partners were signing personal guarantees for the loan.

The structure for the buy/hold investment is as follows:

GP receives a 20% incentive and 6% property management payment. The incentive is calculated after paying a preferred return of 6% per year.

So for example: $1M investment pool and assuming the GP put up 20% of the capital, the GP would receive 40% of all profits after the 6% was paid. This creates an accelerated return structure for the GP. 

Each quarter the GP receives 6% PM (calculated on rent collected) and 1.5% preferred return (6% annually) on the 20% contribution. All the investors receive their quarterly 1.5% based on their investment. Excess funds are paid out as return of capital to the partners. Once all capital ($1m) is returned, the GP would own 40% of the remaining pool and receive 40% of all profits. 

The flip pool has a higher (8%) preferred return due to risk and a higher GP incentive (40%) due to the work required to manage flip properties vs buy/hold.

I've done it both ways and personally I prefer to formalize the capital partner structure and partner commitments prior to locating the property. I explain to my partners that the market will determine the deals and that we could find a suitable investment quickly, slowly, or not at all but that my goal is to find them properties that fit the investment criteria. They have no obligation to fund until we locate the investment. 

Also, we form LLCs for our purchases, so by having the partnership structured up front we avoid having to assign the contracts to the entity prior to close which can often be a red flag to sellers.

We are having a similar problem in Austin. We're still looking, but in the meantime, we're using funds to optimize the units we currently own. That means updating our short term rentals to increase the rental rate and also considering adding garage apartments to large lot properties to generate additional cash flow. 

Also, with rates as low as they are, now is a good time to do cash out refinance on units we've previously rehabbed to park the cash for the next buying cycle. 

I prefer Homeaway/VRBO over Airbnb as long as your properties are rented regularly. Airbnb is a good option for owners who rent occasionally (when they leave for vacation, special events, etc). But over time, the Airbnb fees add up to more than the subscription cost of Homeaway. 

Also, with Homeaway, you can have unrestricted communication with the guests prior to booking. Airbnb restricts the email and phone communication to ensure you don't shift them over to another service. There is also less flexibility with Airbnb on the timing of the rent collection and the penalties for cancellation.

If you're in a highly competitive market and find yourself outside of the first page of searches, I'd recommend upgrading your account to platinum with Homeaway. The $1000 per year could be recouped with a single booking. 

I also like the Homeaway iphone app for tracking the calendars and bookings and their payment processing/tracking system is very helpful at tax time.

We own and manage 4 Vacation Rentals in Austin, Texas. We began operating them in 2011. 

We use Homeaway/VRBO and airbnb to market them. I believe Airbnb is a bit more popular in California and most of our Airbnb bookings are west coast guests.

We typically look at the calendars of our competitors on the site to get a feel for what their rates and occupancy are when determining whether to invest in a new property. 

We stay pretty booked. 150-200 nights per year. Some months are stronger than others. In Texas, the summer is slow, but we can usually stay booked by lowering our rates.

The best locations have good walkability. Near restaurants, parks, concerts, events, downtown, etc. But they also tend to be the priciest neighborhoods, so it's a balancing act to get the best ROI.

Our net income after all expenses is about 2X what we would generate in a long term rental scenario. 

Brian,

Do you use GCs on your projects or are you GCing the projects yourself?

If using a GC, are they participating in the back end profit or just bidding at cost plus?