Advice for negative cashflow Airbnb

[Allen Vance]

Ok, so I'm new to BP and I'm probably posting in the wrong place. I appreciate your patience. 

I live in Los Angeles and a couple of years ago I bought a tiny homestead cabin on 5 acres about 2 hours away in the hi-desert of California near Joshua Tree National Park. I did it for several reasons: 1) My fiance and I really enjoy the desert and the cost was low (or so it seemed at the time) 2) I expected I could Airbnb the place when not using it and, if not profit, at least break even 3) It was all I could afford (or at least I thought I could afford it at the time). The cabin itself turned out really cool and it rents for around $250 a night on weekends. I use a local management company that takes 30% off the top of the Airbnb income, because I can't really do it remotely. 

Anyway, the purchase price was about $40k and I ended up spending about $100k on top of that because it needed everything. I really went overboard (being new at this sorta thing) and probably overpaid for goods and services.  After everything was said and done, I was able to do a cash-out refi last year for about $95k with a conventional mortgage, and I consolidated the rest of my debt with a short-term personal loan. I now owe about what it appraised for ($145k) and my carrying costs are way higher than what it's bringing in after expenses. 

So...selling looks like my only option at this point, but I'm worried about capital gains. I'd rather keep it, but don't know how to structure the debt in such a way that it's even possible. Also, as if the above wasn't enough, there's an encroachment issue that makes it not as straightforward a sale as I would like (which is probably how I was able to get it in the first place, because the market is/was hot). The neighbor is aware of the issue but not too motivated to grant me an easement, which means I'll probably have to pay her through escrow if I can find a buyer willing to stomach the defect. 

So that's it in a nutshell. What would you do? I welcome any input/advice/abuse/consoling!

[John Lee]

@Allen Vance, I have 2 properties in Joshua Tree and one in the Disney area that have all performed well (one of our properties has consistently been one of the top 5 in Joshua Tree on Airbnb). Full disclosure: I am starting my own Airbnb property management company out in Joshua Tree. Most property managers don’t really care to get you more business or keep up with maintenance and other essentials that are essential for long-term success in an area like Joshua Tree — I know because we tried a few property managers.

We think it’s not that difficult — although there is a lot of competition out in Joshua Tree, you can be and stay successful. You have to focus on 2 things at all times: ADR (Average Daily Rate) and Occupancy percentage (how often your property is booked). If you can increase those two things at the same time, you can dramatically increase your revenue.

E.g. Your property rents at $149/night on average at about 10 days/month occupancy (just 33%). Your gross will be about $1,490. If you can increase your average rate to $199/night and occupancy to 50% (15 days), then now your gross is $2985. You just more than doubled your gross income (over 100% increase) by just making two small performance improvements in your property.

The key is to research what is required for you to increase from say a $149/night property to a $199/night property. You can’t just increase your price for no reason, you have to justify it through the quality of the listing matching the price point.

In order to increase the ADR, you have to do two things:

(1) ensure your listing (description and photos) matches up to the price point that you want. You need your listing to stand out among the 100s of properties likely in your price point. To do that, it’s marketing 101: focus on what makes your property unique (your Unique Selling Proposition or USP). It may not even be exclusive to you, but your listing has to focus on that USP and sell the person browsing your listing on that USP through every description entry and your photos.

(2) ensure the experience of the person booking your place matches up to what they were told in the listing and matches the price point. You can’t have cheap Walmart towels and large bar soap in a property you rent for $299/night (although at $99/night it’s probably fine). You want the guest to be wowed by your property — it can be as simple as a couple of unique, stunning art pieces.

Just keep in mind people are not going to actually look at your property before booking (this is not a real estate listing where they will come and look at it in person before making a decision). So don’t take pictures like it was a real estate listing. They are booking your property based on two things: (1) the quality of the listing (description and especially, photos) and (2) your reviews (if you keep the guest experience matching the listing and price point, you will have good reviews).

To increase occupancy, there are many well known techniques: using hotel style price algorithms, offering point of sale extensions of stay, lowering the minimum daily stay during periods unlikely to otherwise book. Just remember that if your property is vacant- you make $0. Even if you lower your price to a predetermined minimum (don’t want to go too low or you increase the risk of attracting the wrong kind of guests) — if your property gets booked at the lowered price that is still that much more money you make vs the $0 you would’ve made if vacant.