vacation rental conversion?

Question

Hi,

I've been working on getting educated on the forums and listening to podcasts.  I recently came across an opportunity buy a property that I could fix up and make a vacation rental.  I wanted to ask if anyone has experience in doing this and if so would be open to connecting?  I'm trying to get a sense of what are the keys to consider/look out for with a situation like this as it is not the normal buy & hold or flip.  The property currently is not a vacation rental.

I am in the Phoenix market and if there are any local investors with this experience and are open to meeting please do let me know.

Sameer Patel · Answer

Michael,

Thanks for all the great detail and points you made.  I'll go back and search for the previous discussion mentioned.  I had tried to search for similar topics but must have not seen that one.  Some background on the property... It is currently an established STR with 8 years of history.  NOI around $2200/month average (before debt service) over 12 months.  The $ #'s on the STR do seem pretty positive especially when considering the upside.  The property I am looking at is pretty much "turn key" including furniture so I'd just take it over and learn from the out of town owner on how to manage.  Location and the reputation of the home as a STR is great.  They even have reservations cemented in for some peak periods over the next 2 years.  It really is me buying a "business" with the property as an asset.

I do have some more specific questions.  Especially around is there a point where a "young" (by experience) investor the money to get into STR vs getting my chops on Buy & Hold SFRs maybe something to consider?  This would be my first property so i don't have the experience of the "Traditional" SFR.  Especially when considering the learning experience required to manage the STR and potential for months where tenants are not in the home?  What about slow periods?  How do you encourage folks to come?  Is it just price?  More?

The other thing that concerns me is that the equity for this one would really be mostly my down payment.  Am I looking at this incorrectly?  The reason is b/c the seller realizes the value of the homes potential as a business and is looking for top $ and therefore little to no discount.  I've asked the seller for for some seller financing and they are open to it.  Still at the end of the day the lack of equity on the way into the property is a concern especially as we enter the "hot" months of phoenix where I'll probably end up having to lose $ up front till around Oct/Nov and carry the property as I establish my presence.

The asking $ for this one is a stretch for me and I can find the funds but it would really shift my initial plan on buying a few properties this year and only now allow me to buy this 1.

Would love to learn more from you if you might be open to talking.

Thanks again for your feedback.

Sameer

Michael Rutkowski · Answer

Someone literally asked this about 3 days ago, and the answer is you should do it. I currently have a 25% CAP on my rental, and with another coming online in May (the property is multi-family) Once I rehab my place as well, (which is part of the multi-family) that's 3 units, with about $150k annual GRI, on a $280k purchase, plus $200k personal loan. You do the math :) If I sell it at $1.2M, it will still get a 12.5% CAP.

Just so you know, it does cost a fortune to get it up and running. I paid about $35k for some basic remodeling, landscaping, and furniture. Property was in bad shape, but remember that LTR tenants are a totally different beast than STR tenants. You can get away with a surprising amount of deferred maintenance... Not saying you should, but for example, I've got some issues with settling at my place, which I am working on while I rent it. STR's don't care about what they can't see, and meanwhile, I can take my time to do it right.

You will be focused on customer service, which is not like a traditional property manager's job, honestly (I've been PM'ing for 20 years so I am aware of what goes on). If you do not make your guest's stay the best it can be, you will get a lower rating, and drop in rankings. This can seriously impact your bottom line. I have had some crazy guests, but I just deal with it. It comes with the territory. Most of them are great people, and I have had chats with many of them.

As for the key situation: I leave my doors unlocked. Maybe you can't do that in your neighborhood, but I can, and it builds a huge sense of trust and sense of safety with the guest. Some of them can't even conceive that I would do something like this, but it works. Try to understand the psychology of your guests as much as possible. You will need to leave them something to eat and drink when they get there. I've had guests who arrived in the middle of the night after driving through a blizzard for EIGHT HOURS... We left them a pot of coffee, and fresh baked cookies which were still warm when they got there. Any guest who stays over 3 days gets a bottle of wine, and we leave snacks and condiments in the fridge. Make sure your beds are as comfy as possible, and purchase two of everything for quick changeouts. I am investing in a commercial washer and dryer at this point.

We have been booked all winter, while my colleagues all told me that it is dead here during the winter season. For this reason, my rental has nothing but 5 star reviews, across all STR sites. Consequently, I am at the top of all the sites for my area, unless I am booked which is every day. That's what you want. I've got repeat customers already booked out until next September. That's what happens when you go above and beyond, and make them feel like it is their home.

Also keep in mind that it may be illegal where you live. I live in a town with restrictions on STR's, but I purchased a multi-family in R4 zoning, because I saw it coming. On top of that we are licensed as a business in this town, so we are basically untouchable. I will sell this property as a business in a few years as well. You are also going to need vacation rental insurance, as your mortgage clause state you must carry their insurance until 1) 1 year of ownership, 2) 25% equity in your loan, and a few other minor things. Until that point you will be paying out the @$$ for insurance, with your standard policy + specialty vacation rental insurance. So maybe wait a year before you start it up? Definitely get 25% equity in your loan (based on initial appraisal, or get a new one from the bank). Trust me when I tell you that you do not want to mess with your insurance. Once you meet all the stipulations of insurance, you can call your escrow division of your servicer and have them cancel the other insurance. It's really about 10 hoops to jump through, and you need to be calling the bank again and again to make sure they follow through with this.

Did you have any more specific questions?