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.

[David Morrison]

@Clint Harris

great post.

I live in San Diego and own several properties here. Most of my rentals are duplexes. I bought a house last year in Claremont San Diego and I have doing short term rental. It has been doing really well. (Way better than I expected). I would buy another here but I am afraid that the city will start to band it. It has been really controversial here.

Has there been any issues with the city or state with str?

In your area?

[Trevor J.]

First off, props @Clint Harris for the amazing thread and wealth of knowledge you've shared. I've learned more in these past 10 minutes than I would have in an entire BP podcast (and trust me I learn a lot there). Keep posting!

@David Morrison - do you have some good articles for why you're scared about STR's in SD? I live here currently and although I'm just getting started learning about REI, I really did have an interest in STR's for after I house-hack. I'm also intrigued by the idea of buying a boat, docking it, and renting that out (plenty of non-operating boats get rented out at what appears to be full-booking rates around here).

[Heather Hall]

@Clint Harris - very thorough info. Thank you! Have you ever had issues living right next door to your vacation rental guests? I have thought about "house hacking" in a vacation town - living in one unit in a duplex or triplex and renting out the others as STRs. I would not like to manage it myself, however, and would like to hire a company to run the STR units and not have the vacationers know that I am the owner (I would rather them think I'm an LTR tenant so they don not get confused and come to me for any rental issues). Do you think this would be possible?

[Justin Craver]

@Clint Harris incredible post and very well timed. I have thought about getting a STR for a while and am actually on vaca to Myrtle beach area right now. Looked at a condo with an agent first day in town.

I'd be interested in a STR mastermind as well and would love to connect when you return from Bahamas. Congrats on the little one by the way.

Also, I know a lady that owns a cleaning company and pretty sure they service Carolina beach. Be happy to share her info if you ever need additional vendors.

[Account Closed]

@Clint Harris

Why buy them at all...?

[Trudy Pachon]

@David Morrison We live in San Diego too and have been concerned about the threats to regulate STR and some communities are calling for an outright ban. A couple of years ago, our city council banned it in the city, and then quickly reversed itself! It's an interesting problem here, we definitely have a shortage of housing. But not sure if banning STR is the solution!

I wonder if there has been any movement on STR regulation/banning on the east coast @Clint Harris?

[Andy Bauman]

@Clint Harris - Thanks for sharing!  I love your approach with systems and data.  I'm in the data and analytics field and that is my full-time gig!  You are reallying helping open my eyes to other opportunities.  I'll be doing some more market research in my area.  Now I wish I lived in a lower-priced, high-demand beach area.  

Great conversation in this thread.

Enjoy your vacation!

[Clint Harris]

Originally posted by @Heather Hall:

@Clint Harris - very thorough info. Thank you! Have you ever had issues living right next door to your vacation rental guests? I have thought about "house hacking" in a vacation town - living in one unit in a duplex or triplex and renting out the others as STRs. I would not like to manage it myself, however, and would like to hire a company to run the STR units and not have the vacationers know that I am the owner (I would rather them think I'm an LTR tenant so they don not get confused and come to me for any rental issues). Do you think this would be possible?

Yes it would, we don’t even see most of our guests, so they either don’t know we are there, or assume we are renters.  We have sparked up conversation with a handful of people and they all usually seem to think it’s really cool what we’re doing and have always left glowing reviews, so I don’t think it’s an issue.  And yeah, you can absolutely use that househack strategy.  Just keep in mind that most property management companies suck, and they are going to lump your property in with another 300 that they manage.  You can manage it all yourself from your phone in about 5-10 minutes a day 

[Clint Harris]

Originally posted by @Justin Craver:

@Clint Harris incredible post and very well timed. I have thought about getting a STR for a while and am actually on vaca to Myrtle beach area right now. Looked at a condo with an agent first day in town.

I'd be interested in a STR mastermind as well and would love to connect when you return from Bahamas. Congrats on the little one by the way.

Also, I know a lady that owns a cleaning company and pretty sure they service Carolina beach. Be happy to share her info if you ever need additional vendors.

 You can do a condo, but a multifamily is a better option.  The first door will pay your note and then some, the second and or third unit are all profit.  On a condo, you can pay your bills and maybe make 5k, with a duplex or triplex, you can pay the note, and cash flow 40-60k depending on the analysis 

[Clint Harris]

Originally posted by @Account Closed:

@Clint Harris

Why buy them at all...?

 I’m assuming you’re talking about Arbitrage??? Which is a fine strategy, especially when you dont start out with much capital.   After our first duplex purchase our very next deal was an arbitrage triplex. We still run that operation, we pay 36K a year to master lease the entire property, (sandwich lease) and we do 125K a year in gross rents, our net is about 80k.   So that’s great, and certainly helpful to get it started, but I don’t think that’s a way to build a portfolio. There are a lot of different revenue streams with the strategy, sure the cash flow is awesome, but you’re also getting a really strong equity pay down, you also have forced appreciation in the property because of the increase rental income, and then natural appreciation if you’re buying in nice areas where people want to visit. On top of that, with ownership you also have tax benefits, and we started our own property management because we can put all of our listings into one place, and then sell that management company later. You can’t do any of that with arbitrage, you’re leaving a lot of money on the table. 

[Jay M.]

@Clint Harris  I grew up on Cape Cod and have lived on or within 20 minutes most of my life.  Your statement about when the economy is in a downturn people don't travel as far is spot on.  The NY'ers, CT, PA, NJ and Canadians don't go to Italy or France when they're short on cash or anxious they go to the Cape.  The chink in your armor is the same that you mention about property managers.  It's a bear to get someone to turn over (clean etc.) the unit each and every Saturday morning. 

[Account Closed]

@Clint Harris

The arbitrage model is good for people to get started if they don’t have a lot of capital. However getting into this business “with” capital is like shooting fish in a barrel. But if the equity play is that important to you then I My suggestion is that you do arbitrage and then put the money you would have had in equity into a better asset class such as multi family to hold your wealth. That way at least you control the value of your property with net operating income. Good luck!

[Heather Hall]

@Clint Harris Thanks! I appreciate the info!

[Justin Craver]

@Clint Harris thanks for the feedback.

[Keith Ghion]

@Clint Harris Thanks for sharing all of this, very interesting.  Not sure if you'd mind sharing but when you started this, when you were evaluating potential purchases how were you running your numbers to determine offers? Was there a certain % of occupancy and average rental income projections or something else? I know you mentioned there's less wear and tear but I'm assuming you still budget for repairs, cap ex etc. 

[Clint Harris]

Originally posted by @Account Closed:

@Clint Harris

The arbitrage model is good for people to get started if they don’t have a lot of capital. However getting into this business “with” capital is like shooting fish in a barrel. But if the equity play is that important to you then I My suggestion is that you do arbitrage and then put the money you would have had in equity into a better asset class such as multi family to hold your wealth. That way at least you control the value of your property with net operating income. Good luck!

 Couldn’t agree more. With the leverage of arbitrage, it’s really easy to make 100kna year within 12 to 18 months of leveraging short-term rentals, and completely agree with your strategy, the play from there is to take that money and put it into apartment complexes or high-level multi family units. That’s exactly what we are doing.

[Scott Donahue]

@Clint Harris Not too long. Read every word.

Thank you for sharing your experience, you lessons learned and your current mindset. It’s that open sharing of current headspace, without regard to ego, is refreshing and what, in my opinion, is the essence of these forums.

Kudos to you and your wife. When everyone else zigs, you zag. It will make all the difference in the long run.

[Clint Harris]

Originally posted by @Trudy Pachon:

@David Morrison We live in San Diego too and have been concerned about the threats to regulate STR and some communities are calling for an outright ban. A couple of years ago, our city council banned it in the city, and then quickly reversed itself! It's an interesting problem here, we definitely have a shortage of housing. But not sure if banning STR is the solution!

I wonder if there has been any movement on STR regulation/banning on the east coast @Clint Harris?

Nothing crazy, definitely different levels of regulation, usually in areas with high levels of hotel lobby influence. Some variation between city, town, and also broken down by historians district. I've written 2 posts about it before. Short version, look for areas that tax STR, then you're protected.

[Clint Harris]

Originally posted by @Keith Ghion:

@Clint Harris Thanks for sharing all of this, very interesting.  Not sure if you'd mind sharing but when you started this, when you were evaluating potential purchases how were you running your numbers to determine offers? Was there a certain % of occupancy and average rental income projections or something else? I know you mentioned there's less wear and tear but I'm assuming you still budget for repairs, cap ex etc. 

 It’s tricky because we buy properties that are being run poorly, and then convert them to with our strategy.  The best metrics for analysis are the Rentalizer analysis through AirDNA.co.  We plug in the address, and it gives us gross rental metrics, including occupancy, seasonality, average daily rate, etc.  and yes, we obviously budget for Cap X, but so far it’s been minimal.  These aren’t long term rental, people almost never use any appliances, and when they visit, they are in the house for 2-4 hours a day, the rest of the time they are out vacationing.  All of those data metrics from AirDNA are scraped from AirBNB, homeaway and booking from actual listings in the previous 365 days as a median performer.  With basing all of our projections on that analysis, that’s how we pick out projects, and so far have easily been able to beat those metrics by 15+%

[Nicole Heasley Beitenman]

@Clint Harris Curious to know your thoughts on investing in coastal areas in the midst of the climate crises. How are you preparing for increased storms, storm strength, and beach erosion. With rising sea levels, do you still feel beachfront properties are worth the costs you're likely to incur? My business partner is VERY into beachfront property (specifically FL), but it seems foolish to invest in an area that a) gets blown away by hurricanes every single year and b) is likely to be underwater in 50 years. I'd love to hear from more investors who maintain properties along coasts. 

[Kelly Jennings]

@Jason Goretzki you're not going to be able to do that in what's called Old Wilmington. But you can definitely do that 1 block away on the riverfront, the historic houses have strict regulations, plus most of them are primary residences, but they are building several riverfront condos, all walkable to all the attractions, I've been running those numbers on them

[Clint Harris]

Originally posted by @Nicole Heasley Beitenman:

@Clint Harris Curious to know your thoughts on investing in coastal areas in the midst of the climate crises. How are you preparing for increased storms, storm strength, and beach erosion. With rising sea levels, do you still feel beachfront properties are worth the costs you're likely to incur? My business partner is VERY into beachfront property (specifically FL), but it seems foolish to invest in an area that a) gets blown away by hurricanes every single year and b) is likely to be underwater in 50 years. I'd love to hear from more investors who maintain properties along coasts. 

Nocole,  I think this is a great question. I do have a response, but unfortunately it’s gonna have to wait a couple days because I’m in the Bahamas right now and don’t have a some of my notes, but frankly I’ve worked through a lot of those metrics. Can’t wait to reach out about this, but at least wanted to let you know that I appreciate this question, and I think it’s intelligent, and I’ll write you back shortly once I have some of the data that I’ve worked through on this. 

[Nicole Heasley Beitenman]

@Clint Harris I look forward to hearing from you! Have a great vacation!

[Clint Harris]

Originally posted by @Nicole Heasley Beitenman:

@Clint Harris Curious to know your thoughts on investing in coastal areas in the midst of the climate crises. How are you preparing for increased storms, storm strength, and beach erosion. With rising sea levels, do you still feel beachfront properties are worth the costs you're likely to incur? My business partner is VERY into beachfront property (specifically FL), but it seems foolish to invest in an area that a) gets blown away by hurricanes every single year and b) is likely to be underwater in 50 years. I'd love to hear from more investors who maintain properties along coasts. 

Hey Nicole, sorry for the delay, been doing a lot of traveling. OK, I'm actually still on the road, but I'm gonna shoot you the short version. I don't have a problem investing in coastal properties at all. It's really a matter of risk and reward, sure, there is risk, you have hurricanes, in fact, Wilmington North Carolina got hit with one last September and we lost two months of the tourist season. So I just look at that as lumping that in as a capital expense. People are very gentle on the properties, they typically arent doing any cooking or using appliances it or anything like that, but we definitely still have Cap ex, and that's one of them. Yep, beach erosion is a real thing, but tax dollars are usually used to fix that, I invest in areas that take a tax on short term rental income, when the town gets addicted to that revenue, it's very important for them to keep the town nice so the tourist want to continue to visit. Sure, everything could be underwater in 50 years, but I'll be 86 then. That's not really the trajectory that I'm playing. Here's the real difference, I had nine single-family properties in Columbia South Carolina making 5k each annually when paid off, or I could refinance, cannibalize that cash flow, but be able to take that equity and buy another. So the choice was I could have strongish cashflow but have my money stuck in the properties, OR I could refinance, pull my equity out and add more properties to my portfolio. It was one or the other. With STR, someone else pays the mortgage and I build equity every month. On top of that, I make AT LEAST $1000 profit per month per unit. Summertime, we're doing $7000-$8500 gross rents per unit per month. My timelines isn't 50 years, it's more like 3-5. By 2020, we should Be netting 150-200k a year. So for 3 years in a row I take that and I'm invest in LTR multifamily, or self storage, or whatever it may be, in 3-5 we can be done if we want. You're a an accountant, and you are probably very good at risk assessment. Bad things happen, but that's what I insurance is for. If you want to mitigate risk, invest in Gatlinburg or somewhere inland. For me it's all about cash flow, Equity, and appreciation all being in one place. Combination of forced appreciation, and natural appreciation over time from being in a nice area. We can get hit with another hurricane, and that's OK, I have funds set aside for that. Any investment has risk, but there's a big difference in risk, and calculated risk. Even with an increase risk in coastal areas, the 3-5x multiplier in performance with maybe a 10-15% risk increase Ian completely justified. I guess my question if you're investing for 50 years from now would be, how much money do you really want to leave your great grandkids?

[Erik Hatch]

Gatlinburg?