I'm selling my long term rentals and buying beach property

[Clint Harris]

Long post, but I really wish someone had told me this when I was struggling to buy single family homes.

Hey y'all, wanted to share what I’ve learned in the past year. I took a promotion with my medical sales job, and move to Wilmington, NC (beach town) in 2017. I started buying rental properties when I was 23 in Columbia SC after the market crash, and ended up with a portfolio of 8 properties, 7 single family, and one duplex. Things were ok, I BRRRR’d 2 of them (I learned from trial and error, didn’t discover Bigger Pockets until 2017) as they appreciated, the rest I bought for 20-30K each, all in I was at or under 35k each, rented from $675-800 depending on bedrooms. I basically looked for brick, decent roof, renovations that put me all in under 35k. Obviously this had me investing in very marginal areas. Great cash flow, but in most cases, I didn’t have an exit strategy for my money. I paid cash, and couldn’t refi unless the 80% LTV was 50k or greater. 2 of these properties eventually appraised for 75k, so I pulled out 55k on each, on another I got an equity line, but again, I was basically on my own trying to figure all this out, and there was a big learning curve.

Ok let’s fast forward. In the past 2 years since leaving Columbia SC, I’ve been through 3 property managers, and basically I’ve learned that the ones that are really good, sooner or later, get really busy, and become really average and then really below average. People make it sound really easy, but it’s just not. Finding a good property manager isn’t that difficult, but finding one that has longevity is different. Basically what I learned is that no one minds my business the way that I would mind my business. Also, because of the type of renters lower income properties house, the cap X expenses really cannibalized a lot of the cash flow. Every time a renter moved out, it was potentially a couple thousand to paint, replaced kicked-in doors, windows, carpet, etc. I never did section 8, but some days it felt like it.

I sounded a lot like some of the newer investors I talk to “I’m making 6k a year off of each of my rentals, once I have 10, that’s 60 grand! Then I can buy 2 a year!” And even though those metrics work for some people, I felt that my time was worth more than what I was making, and that I needed to find a way to put a lot more velocity to my investing to get where I needed to be. I looked at multifamily properties, had a 6 unit under contract, and the deal fell apart. Right about then, I discovered something that changed everything about our trajectory.

Ok, hear me out. I know that Short Term Rentals (STR) has a stigma that people can't shake, but I want to dig into that a little bit. Here's the short version. My wife and I bought a beach house duplex at Carolina Beach just outside of Wilmington. It's a 3/2 in each half. We did some small renovations, flooring, paint, scraped ceilings, etc, moved into one unit, and put the other up on AirBnB. Our occupancy on our island goes from 19% in the winter to 95% in the summer, and we listed on November the 10th, 2018, so we really weren’t expecting much. Our first booking was for November 16th, and amazingly, we did $1250 in gross rents between then and 30th. In December, we did $2400, which is our mortgage. (those are gross rents, doesn’t discount the cleaning fees, but we cleaned it ourselves for the first 3 months) We’ve increased that every month, more and more 5 star reviews push you higher up the list, and the bookings start rolling in faster and faster. Currently, we’re fully booked for the next 3 months, and June-Sep, we’ll do $8,000-$8,500 in gross rents PER MONTH. I haven’t had a house payment since December 2018. On a yearly average, we pay all our bills, and get paid about $1400 a month to live 2 blocks from the ocean. See why my long term rentals stopped looking so attractive?

People have trepidation about STR, "What happens when the market tanks? Aren't all your bookings going to dry up?" Well, no actually. From all the research I've done, in 2008, when the market tanked, domestic travel didn't take a hit. People still take their time for vacations. When they want to save money, they don't cancel their 7 day vacation, they change the destination. Instead of flying a family of 4 to Disney, or the Bahamas, they save $500 per ticket and instead drive to the beach. Also, with AirBnB being a global company, it's easy to find a market with a lot of volatility and see how it reacted. Greece is a good place to start, but again, I found that it didn't really dent the occupancy, average daily rate, or cash flow.

What about seasonality of being a beach destination, aren’t you busy 4 months and year and then just sitting empty? Nope. From November 10th through April, our occupancy is 81%. What we found is that there are still a lot of people travelling to the beach, they can just be really picky about where they stay. So, how did we jump to over 80% occupancy and stay there? One word. Data.

I am in no way affiliated, but I attribute most of our success to AirDNA.co (not .com, it’s .co) This is a data scraping company that gives back-end data on AirBnB, Booking, and Home Away. I can see what people are booking, what they pay, average daily rate, length of stay, where the people are from, what they like, and what they didn’t. When we staged our house, we didn’t guess on what people would like, we used the data. We used over 10,000 AirBnB reviews to pick out the top rated mattress (zinus memory foam $399 for a king), the best platform beds (Wayfair, $299 a king), the best lighting (daylight LED), basically everything. I’m a big believer in using data. Past reviews and metrics dictate our future performance. Because of this, we operate as a 90% performer in our market (that’s overall performance, not occupancy), and our downstairs is on pace to do 57k in gross rents this year. YEAH, THAT’S RIGHT, I SAID $57,000. Which is awesome, but all of a sudden, I’m an idiot for living in the other unit. Our opportunity cost of another 50 grand has us looking for another house now. Also, we signed on a tri-plex last month, the first unit just hit AirBnb, and that property will do 105k in gross rents per year as a median performer in our market, 130k if we knock it out of the park (We will).

"But what happens when a renter trashes your place, or kids throw a party? I bet you guys are only having success because you live there…" Well, about that. AirBnb (I use that to mean all STR, for bandwidth, we are across all platforms, VRBO, AirBnB, HomeAway, Booking, Travelocity, etc, our pricing just varies based upon what commission they charge) is a review based system. It's a feedback loop, all tenants review your property, and you review them. So everyone has an incentive to be fair and honest and to try and do right. When a person requests to book, we see who they are, where they are coming from, and every place they have booked before, and we see what that host had to say about them. News flash, if a profile for a 20 year old kid was created yesterday, has no reviews, and they live locally, I would decline that request, they're trying to throw a party. The point is, the data is there, you can pick your guests.

“What about how your property is treated? People constantly in and out sounds like a bad idea.” Nope, so far, on average people are actually in the property 3-4 hours a day, usually they are out enjoying their vacation, checking out local restaurants, hanging on the beach, fishing, kayaking, who knows. We’ve actually found that any time there’s an issue, we find out about it right away. For instance, 2 weeks ago, a shower head broke and was leaking. The guests let us know about it as soon as they checked in. They wanted us to know, so that we didn’t assume they did it. (if anyone ever does break anything, you can charge them through the AirBnB app, another reason people take great care of the property) I sent the info to our handyman, and he coordinated with our cleaner, and went in and fixed it the next time she was in there, boom, back in business.

So here’s the long and short of it. I’m selling off my long term rental properties. Most of them are now worth 50-70k, I’m taking that money, and putting it to work here at the coast. Here’s my barrier to entry, in order to pick up a property, I need to cover the mortgage, taxes, insurance, and profit $1000 per door, per month. Sounds unrealistic, but so far we’ve averaging 15k per door per year. So basically, I get an equity pay down, I get really really strong cash flow, and unlike in Columbia, I’m in a market that should appreciate over time. Equity, Cash flow, and Appreciation? Find me a better investment and I’m all ears. As for now, my wife quit her job in medical sales and became a real estate agent here at the beach (Shameless plug, anyone need help investing at the coast?), we’ve started a boutique property management company, and we’ll be scaled to 10 doors by the end of 2019. Just so we’re clear, that’s 120k in cash flow, not counting the equity pay down. Also, before it comes up, I manage our listings from my phone, and it takes me about 5-10 minutes per day. I sell and implant pacemakers and defibrillators for a living, so we use automated technology for 90% of our communications with guests and the cleaners.

Ok, rant over. Anyone struggling to scale a long term rental portfolio and thinking that you need to invest in marginal areas to try and achieve that elusive 2% rule, there is a better way.