5 Steps of Short Term Vacation Rental Investing

5stepsshorttermYou’re about to discover a new twist, thanks to technology, on the age-old concept of short term vacation renting of a house or of a condo. Not just so that you can have a vacation home, like I described in a previous training, “How to Make Your Vacation Home Dreams a Reality”. Instead, in this training, I’m going to take this concept to a whole new level and focus on short term vacation rental from an investing standpoint.

 

Five Steps to Short-Term Vacation Rental Investing

Things like Airbnb, VRBO, HomeAway, and now to a lesser extent, TripAdvisor, this is an amazing way to make more money with a rental than the traditional way. I have a video called, “Three Ways to Turn a House into a Cash Flowing Machine”, where I introduced this concept of being able to produce more profits with the same house by converting it into a short-term rental in a vacation rental.

To be clear, you don’t necessarily have to be in some far off Caribbean island or some ski resort to make this concept work, it can work in a lot of places because in a way it’s competing against hotels and motels. More and more travelers are travelling as a family and they want to have more space and more room when they go on vacation, and thanks to technology we can now put this altogether and put it into your hands as opposed to just some select local property managers.

Vacation rental investing is for real. I personally do it so I have a tremendous amount of experience, and so in sharing this with you I know what I’m talking about and it can make you a lot more money than the traditional rental. Here are the five steps.

1. Do Your Research

There’s a couple of things in particular I want you to research. The first is the legality. This is somewhat new in a way, the idea that someone can put their house up for short-term rent. A lot of these houses are in little residential neighborhoods and they’re zoned as a single family home. What happens is some of these communities don’t even have laws in place for this kind of stuff. What they do is change the law if there is none, or they put one in place that says you can’t rent it for less than 30 days.

I need you to do your research on the legality because that could be a big deal killer. You get this going, you have all these bookings set up, some as far as a year in advance and then boom, the government says you can’t do it. Make sure you do your research on that.

The next thing is you need to see if it’s going to make any money, so you need to look into what other vacation rentals in the area are going for. They’re already on HomeAway.com and AirBnb, so go look at some competitors, see what their nightly rates are and then look at the calendar and see how booked up they are. You might even want to call a local property manager.

Gross Revenue

Another thing I’m going to talk about here in a minute is a booking agent, and their organization can look into some of their statistics as well. Look at what it’s bringing in, and the main number you want to get to more than anything else is the gross. What is the gross revenue? I’m not taking about when they collect an extra 12.5% for taxes or a cleaning fee, I’m talking about the actual rental money that could go to you as the owner, what is the gross amount?

If the gross amount is  about 45,000, well then how much are my utilities going to be because that’s extra, and your normal rental would not have to pay for utilities. You’ve got your gas maybe, your electrical, and  your water, you might have your sewer and your trash, then you’re also potentially going to have cable, and internet. Some people try to cut corners and not offer cable TV. Just real quick on that. The cable organizations around the world have figured this out, and so what they do is make the idea of just buying the internet, maybe like $75 a month, but if you go ahead and get the cable and what not, it’s $85. Often times, cable TV is not that much more expensive than internet, but travelers want internet as well.

Other expenses include things like lawn care or if you have a pool you of course have pool care. You’re going to need to look at what the revenue you’re going to generate.  I’m not including taxes or insurance because you’d have that no matter what, but what kind of revenue are you going to generate. Is it significantly more than if you did a normal rental?

2. Sweet Spot Property

That’s the property that’s going to give you the most beds at the least amount of cost but also has the amenities. If you’re in the Smokey Mountains it’s going to need a view. Ideally it’s not incredibly difficult to get your car up the mountain, and maybe it has a flat and is a log cabin not just some stick built home. If you’re near the water you want to be close to the beach, but you don’t necessarily have to be waterfront. Waterfront properties typically cost more but they don’t generate nearly as much revenue to compensate for the cost of purchase. You want to be close enough to where it’s not a long bike ride or a really long car ride to get to the ocean.

Try to figure out what those amenities are by going back to study what your competition is and what they putting in their ads. Really study what they’re offering to figure out and pick up on ideas on what those amenities need to be.

Sleep number is another one. Maybe you’ve only got three bedrooms but it’s got an extra bonus room that you can put some bunk beds in. The number of people that a rental sleeps is a huge determining factor on how much more money you can get. The sweet spot property has the amenities, the beds, and then it has to have the ability to just to have a ” Wow Factor”.

Wow Factor

You can fabricate some of this by the way in which you furnish the property and renovate it, but the “Wow Factor” is the reason people go there they just love it. Again, I’m going to go back to the Smokey Mountains, it’s got a great view. Let’s say you’re just in a major city you’re not in some super destination, it may be accessible to the subway, or have something  there that people are really, really going to like. If it’s a complete dump you’re going to absolutely have to renovate it.

3. Renovate and Furnish

Now, you may not have to renovate very much, but usually there are certain things you may need to accomplish to make it far more traveler friendly. You can win big by how you furnish your vacation home. You’ve got leather couches and great things on the wall, you make it feel homey, you do all the little things. You have all the pots and the pans, and everything you need so that as a traveler you feel like you’re at home. You can make up for some lack of amenities that a property doesn’t have, maybe it isn’t all that close to the water as much as it should be, but if you can make it wonderful.

If when people walk in they’re just like, “Wow, this place is great.” . All those little things, they’re not that expensive but they make a huge difference. This is by far the biggest separator from going to a normal, traditional investing arrangement versus short-term rentals or vacation rentals. You’re going to have to pay to get it furnished, and this can be $10,000, $15,000, $20,000. This is definitely more difficult for those that are cash challenged because you can’t usually borrow money on furnishing unless you get a credit card and those interest rates are too high, you have to have the cash to do it.

You have to look at the math that we started with on step one. If it’s going to make enough money then the furnishings are negligible. In fact, many of the deals that I do I can make up for the furnishings, in half a year I get them all paid off. Make it wonderful, make it a home and it will have a huge impact on your star ratings which makes a big deal over time, but also it makes a huge impact on the ability to get these people to come back. Ideally, you start building a brand where people want to stay in your properties because they’re just wonderful and have all of the little things that most people don’t have.

This is where so many of the people that have been in the short-term rental business for a little bit of time, get cheap on the furnishings. Don’t do that, this is where you can win or win big.  I have amazing furniture and people love it even if the property doesn’t have all the other details it should have. I can make up for it and then some in furnishings, because they’re going to stay in the property anyways.

4. Booking Agents

With a short-term rental especially on platforms like HomeAway, Airbnb, VRBO, TripAdvisor, they require you to respond in 24 hours or less. That’s not freedom. I mean at least with the traditional rental you just have to pick up your rent each month and maybe pick up a phone or call or two, or you hire a property manager to do it. A booking agent is kind of like a property manager only they’re more suited for this particular industry. They’re the ones that are handling those inquiries that are coming in usually on a daily basis.

Perhaps the biggest one out there is evolvevacationrental.com. What’s so wonderful about a group like this is not just that they’re going to pick up the phones, they’re also going to manage your listings. If you don’t know how to set up an Airbnb or a VRBO or a HomeAway listing account very well then you’re going to be in trouble because that’s where all the bookings come from so you got to make that look good. These people have already figured that out and they’ll manage it for you.

Dynamic Pricing

This is the other big thing that they’re going to do, this one is huge, dynamic pricing. There are tools out there now that the hotel industry has been using for eons where they will dynamically price the unit based on time of year, based on if it’s a peak week or not because there’s some event coming to town, also based on what the hotels are changing, what the other competition is like out there. It’s amazing. They have it already built in to what they’re doing.

If you want to build your own Airbnb accounts and whatnot, which is what I do, I have complete control but I’ve also hired people. This was even before I new these organizations existed. I use a thing called usewheelhouse.com. Pricing is going to make or break you in this game. So often you’re going to price it too low, and once that little slot of time is booked you don’t get it back. If you have short changed yourself, you’re losing money, you’re leaving money on the table. Killed me for years on this. Usewheelhouse has been a game-changer for me because it dynamically prices.

I knew that pricing as well as my team, we knew the pricing pretty well, but when I saw what their algorithms were doing I was kind of blown away because they were pricing some of the peak weeks a lot higher than I was. Anyways, I made the adjustments, I still got the bookings, just more money. Dynamic pricing, but on a group like evolvevacationrental will do that.

Other Groups

There’s another group that’s like them called vacasa.com and I think there’s another one called redawning. The thing is I haven’t used theses services so I can’t tell you all of the potential negatives that could come with them. In general, the biggest problem you’re going to have is not responding quickly enough, not setting up your listing right and definitely not pricing it right.

They’re going to make sure that you get a price right, they’re going to make sure everything is responded to correctly, the ad is saying the right things, and so you should be able to more than make up for the 10% you have to pay them, and it create some automation in your life as well.

Again, to disclaim, I manage all of my own stuff with my staff but that’s because we’ve been doing it for awhile and all of my listings have been built up and have tons of reviews. If I switched over to them now then I would lose all of my reviews, so I have to keep what I’m doing. I could recommend to you if you’re first getting started, this might be a lot easier way to do than the hard road I went through because I didn’t have all of the information you’re getting from me right now, I didn’t have this, nobody was teaching this staff.

5. Bookkeeping

This is above and beyond the normal bookkeeping of a property management system. You now have to deal with what’s called “occupancy taxes”. This is what hotels and motels have been dealing with as long as it’s been in place. 12.5% to 13% is normal. This gets paid above and beyond what you get paid. You can charge this to the guest so it’s not going to be an expense to you, but you do have to pay the government what you collect.

There’s a service called my lodge tax that I just heard about that will do this bookkeeping for you. I already have a bookkeeper in place doing all this. One of the most frustrating things about setting up occupancy tax is setting up the licenses, and getting all these things in place, these different government organizations tax to get this done, this could take awhile. One of my property took over a day to get all of this done, we’re talking like 10 hours to get it setup just so I could pay the government. Mylodgetax.com supposedly will do this for you. I haven’t used them but they’re recommended by HomeAway so they might be pretty good.

Summary

Those are your five steps. Research, make sure you’re picking up properties that actually can make the money we’re looking at as well as being legal. Number two, the sweet spot property as being with the most beds you can get and also have those amenities that those travelers are looking for. Number three, renovate and also furnish. The better you furnish the better off you’re going to be. Number four, hire a booking agent. I also failed to mention, not only do they help with the listings and they can do the dynamic price, but they also can help coordinate with the cleaning and the maintenance. Number five, bookkeeping. It’s important to pay your taxes as well.

Other Benefits of Vacation Rentals

This obviously is a little bit more complicated than the normal, traditional rental, but it can make more money and there are a couple of other benefits I want to share with you real quick before we wrap up. Number one is that you don’t have to evict anyone because they are travelers, they’re coming in, they’re coming out. It’s fantastic. Evictions are non-existent. In the world of normal, traditional rentals, evictions are very common and it’s frustrating because the laws are setup mostly to protect tenants, so landlords typically get screwed.

The next thing is you get your money upfront, you’re not chasing tenants for rents. They’re paying you sometimes upwards of a year in advance, you’re always getting your rental money. I love this form of investing, but you do have to pick through right properties that are in the sweet spot and you have to have done your research right. All these things have to be in place. When you do that, this can be a magical formula. You can make a lot more money for the same property you currently have that you might be doing a traditional rental on.

 

Original Article by Phil Pustejovsky