Niche short-term rental, will it work?

Question

Hi everyone, I'm looking into entering a very niche market of providing a "Crash pad" to military officers going through long training courses. These individuals are on 3-5 month assignments, and are reimbursed for housing expenses of at least $60/day (or more, depending on the availability of on-base housing), and so I would be able to charge a minimum of $60/day/room. I would buy a nice, newish, large house with 6 bedrooms for about $270,000, and with all 6 bedrooms rented, the income would come out to $10,800/month. Obviously, I don't expect %100 occupancy, but even at %50 the numbers look descent. This is a proven business model, and there are about 15 other houses doing the same thing around the base I am looking at. I don't think the market is totally saturated yet, and even if it is getting close, I think there is a lot of opportunity to market better than most of the competition. Most of the others do not have very good websites, only one them allows online booking, and I would be sure to market at the very specific niche through Facebook and Google.

That said, I realize occupancy rates are going to be the biggest unknown, and this being a niche, I'm not sure how much I can expect any help here. That said, I'd be interested in any input you may have. Do you think I'm asking the right questions?

Here's a basic rundown of what I expect expenses to be:

SETUP:

House: $270,000 ($54,000 down payment)

Furnishings: $40,000

Website: $3,000

Incorporation/Lawyer/CPA fees: $1,500

Advertising: $1,000

Monthly expenses:

PMI: $1,400

Cleaning service (200/week): $800

Premium TV: $125

Utilities: $400

Internet: $80

Maintenance: $200

TOTAL monthly expenses: $3,005

Income at 100% occupancy: $10,800

60%: $6,480

40%: $4,300

Soooooo…the numbers look good to me, but what do you think I might be missing?

I am selling a house (a previous home of mine, and not a good cash-flowing rental) to finance most of this, but I will probably need additional financing. I figure I can cover the down payment, and most of the furnishings if I had to, but I’d like to get a small business loan of some sort to cover as much of the setup as possible. What kind of loan, and what type of lender might be willing to finance a business like this? I’m thinking I wouldn’t ask for more than about 20k, but I’d like to commit as little of my own money as possible.

How do you think this idea compares to more traditional investment strategies, like buying inexpensive multi-family units? I don’t really like the idea of spending so much on furnishings (non-appreciating assets that will only be worth pennies-on-the dollar at some point in the future) but on the other hand, the total return on investment seems very good.

Thanks for reading all of this, and I would appreciate any input!

Elizabeth Colegrove · Answer

@Zachary A. Hey, my husband is active duty Navy and he does alot of TDY's. So I definitely understand this world and what you are trying to do. I have heard of a few places in Florida. Honestly without knowing your exact base, and who you are targeting it would be hard to truly comment on the feasibility of that base/area. Every community has very different rules along with the different schools and TDYS. That being said, there is ALOT more into this world than just filling 6 RANDOM dudes in a house. Here are some things to think of. Do you have military or DOD experience in THIS community you are trying to break in. Do you understand military unwritten rules, your demographic, where the family is located, etc? What do people want to pay? It is great that they get $60 a day but in my experience the lodges and inns are this price. Our area only has one hotel, but in other area there are executive suites that are cheaper than the $420 a week you mentioned. So why would they share a house instead of staying at the lodger or hotel of rate same price. The military world has TONS of unwritten rules. I can tell you that I own 5 houses in central california nearby a large naval air station and this model doesn't work there. My husband does a tdy where he is gone for 3 weeks every 6 weeks to the same place. I have looked at buying down there and so far it doesn't make sense because of THEIR rules for that TDY.I know you say that there is at least 15 houses that does this and there is room for competition. You mention not having the ability to book online as a negative. Honestly I can tell you my husband would never book some place like this online! I only say to make sure that these houses have truly not capitalized on everything possible! As that is not a positive in my husband's book :) . That being said, I agree with @J Martin. I would not buy a house that is soley based on this model. It is way too IFFY. I was working Ft Lee in 2011 with a large apartment company who almost lost their shirt over a army per diem change because more than 50% of their group was based on army off base rules.I do have furnished rentals near a military base. These were rental that I had already owned and I added furniture. I saw a market needed and I capitalized on it. So I get what you are trying to do. I will be honest and say that military is not my target at all for my rentals! If I can help please let me know. I can definitely walk you through furnishing etc. I just did a blog post on how I furnish my 2,000 sqft 4 bedroom 2 bath houses for less than 4k. That is with me being 1,000 miles away so include labor for someone else doing it. So I understand on how to furnish houses for corporate rentals, nice but cheap.Feel free to pm me if you want to talk off line or I can help in any way.Good LUCK!

Zachary A. · Answer

@J. Martin,Hi J., I've already got the REI meeting on my calendar, so I'll definitely try to find you! I'm sorry my posting wasn't very clear about some of the furnishing details, I tried to keep it readable by only posting a summary. The $125 is a monthly expense for premium Direct TV. Part of the reason my budget is so high is because I want to put a huge tv in the living room (70-75in), and big ones each bedroom (60in) with a PS4 connected to each. The PS4s, at least in the bedrooms, would be optional. I'll post some links to some of the other companies doing this below. I really like your idea of putting keypads on all of the doors! @Elizabeth ColegroveI'm actually an active duty Air Force pilot myself. I'm looking at putting this house outside of Randolph AFB specifically, but I would consider other markets as well. One of the reasons this niche is so specific is the culture of the target demographic. There are many flight related training programs at Randolph, but one of the most relevant is PIT (pilot instructor training). These are all young men and women (but mostly men) going through the same training course for several months, many times with very close buddies that they went through pilot training over the last year with. Living together is actually a huge perk. Some of the competition actually advertise themselves as "party houses". The idea of letting your place be a party house may sound dangerous to a landlord, but these are (mostly) responsible adults with a lot to lose. Any alcohol related offense is career killer for an officer. The furnishings budget is very high partly because I try to over estimate, but also because the competition is very high end and loaded with extras, like pool and foosball tables, theater rooms, very nice furniture, kegerators, and the aforementioned TVs,Playstations, etc. The on-base alternative is a basic hotel room, and they don't even have sufficient capacity. I am sure many people would prefer their privacy, though, and they would be very likely to go to an off-base hotel. Here are some links to other houses in the area:One of the nicest, this one sets the bar in my mind: http://www.brollagiopitpad.com Here are some other examples:http://www.pitpadpalace.com http://www.pitpadoasis.comhttp://www.thepitpad.comI have been thinking the best strategy would be to meet the highest standard, since the any higher occupancy rate would quickly overcome the extra expense. Perhaps more importantly, since the price point is consistently set across the board and in most cases insensitive to prices below the compensated amount (they don't get keep any money not spent, although there are new exceptions to this rule), being at the high end is a sort of insurance policy. The least desirable houses will always fill last, and cannot attract more tenants by lowering their pricing. The best houses will always be full, even if demand dips. The truth is though, you have all brought up good reservations, and I'm actually starting to lean a little away from the idea the more I look into it. I would have to put all of my eggs in one basket, and would still come up short unless I made some comprises or brought on partners (something I am still considering). I'm also considering joining up with some guys that have already built a company around the model. I've got an appointment with them to discuss what those details would look like today. It's an overall very complex thing to put together, and I don't even live there (although I have family I could stay with in the area, they couldn't help me out in any other way). The alternative (with my limited capital) is to stick with a more traditional strategy like flipping. Maybe I would learn more general and useful skills going that route as well, and I can do it in my local area. Optional reading: I don't want to bore and overwhelm with details, but here's the detailed list of furnishings. The total is on top, and only the 2nd column is included in the total sum. The 3rd column is used for expenses I might add later, or to add up expenses that will be multiplied (the identical bedrooms). Total $34,725 Living Room Sectional $2,000 Coffee table $500 Bookshelf $200 Decor $500 TV $1,700 PS4 $360 TV Mount $100 Rug $1,000 2 lamps $80 Game room Pool table $650 Chairs $200 Dart board + wall protector $200 Decor $100 4 cues $100 Billiard balls $25 Cue holder $100 Lamp $50 Bedroom Furniture set $800 Desk + chair $300 TV (60in) $500 TV Mount $50 Mattress (Casper) $850 Sheets $60.00 Pillows $50.00 PS4 $360.00 Desk lamp $40.00 Comforter set $100.00 Closet hangers $10.00 Laundry hamper $15.00 5x bedrooms total $15,675 (note: furnish 6th bedroom later) Kitchen Pots/pans $150 Knives $60 Silverware $80 Cups $80 Corelle service for 4 X 4 $120 Cutting board $20 30pc utensil set $20 Hotpads $20 Toaster $20 Keurig $150 Coffee mugs $25 Paper towel holder $15 Grill utensils $20 Wine glasses $20 Dish towels $20 Tash can $50 Mixing bowels $30 Bathrooms (x4) Towel sets x 10 (4 bath, 4 hand, 4 wash / rm) $450 Trash cans $60 Soap dispensers $60 1 toilet plunger $15 Toilet brushes $40 Blow dryers (x3, not in guest bath) $60 Shower curtains/rods (x3) $160 Outdoors Furniture set (later) $1000.00 Table & chairs $1,000 Charcoal grill $120 Chiminea (later) $200.00 Dinning Table & chairs $2,000 Office (convert to gym later) Foosball table $425 Rug $300 Gym (later) Concept2 $950 Bench $200 Rack $600 Bar $100 800lbs plates $400 Mats $300 Bowflex dumbells $260 Family/TV room Theater seating for 3 or 4 $2,000 PS4 $360 70in TV $1,700 TV mount $100 Cleaning closet Cleaners $50 Broom $15 mop $15 Vacuum $200 LAUNDRY Washing machine $600 Dryer $500 Ironing board $25 Iron $30

J. Martin · Answer

@Zachary A.,I'm driving up to Rocklin tomorrow to speak at @David Oldenburg's meetup on this exact topic tomorrow night! Come out and join us!I have 15 furnished rentals here in the SF Bay Area and have some tips. Like @Jake Knight said, you could most likely spend less on furniture (I spend ~3-5K on small apartments.) Although I would bump up your TV spending a lot. You put $125 for a premium TV. You should put a minimum 55" TV in the living room, and should be a SMART TV so you can include Netflix or they can watch their own stuff. They cost around $400-600, including a nice mount. I also found that TV-loving Americans prefer a TV in their bedroom also. They like lounging around or watching before bed. Also make them feel more like they have their own self-contained private space in their room. I almost always put small TV' in the bedroom also (32"). You can save some money off the $40k furnishing bill and spend a little more on the TV's. (I personally do not have a TV in my residence, but own about 30 TV's lol)I also recommend putting an electronic code entry pad on each bedroom, so they feel like they have a private, locked space - but cannot lock themselves out of the room. Also hotel latch for extra feel of security, even if not necessary (that's a tip from Al ;)@Elizabeth Colegrove is more familiar with the military market. And @Al Williamson knows about government per diems. (Al also has a course to help get you launched).I personally wouldn't buy a property based on the furnished rental income unless I was already operating the property or really knew what the performance was going to be. As Jake said, making sure there is an exit is one way to mitigate that risk. Best of luck on the project Zachary, and hope to meet you tomorrow night! :)

Jake Knight · Answer

I am also buying an out-of-area property that I will furnish, but for a different clientele (business travelers and people who are relocating). Figuring out the demand is tough but you can do a few things to lessen the unknown. You can inquire with the other houses to see if they have room for you (posing as a potential guest), post a ghost ad (something I just learned yesterday), and call major employers and or property managers, though in your case it is the military so they may not use property managers and you'd have to call the base. This is worth it if you're putting all your eggs in their basket. I think you could probably reduce the amount you're spending on furnishings. Shouldn't be more than $15k, even with that many BDs.You have found a niche in the market that has potential to be very profitable. But make sure you have a plan B; an exit plan just in case your single source of renters changes for any reason (a la military budget). Having a high concentration of clients from one source is always risky. Be ready and able to convert/exit if needed.

Paul Sandhu · Answer

There is a refinery in the town I live in. The towns pop is around 9000. At any one time there can be 50-150 contractors working short term jobs at the refinery. By short term, I mean anywhere from 3 weeks to 3 months. I have 22 furnished apartments and houses that I rent to contractors on a weekly basis. There's a total of 78 beds, and probably around 60 televisions total. Most guys work 10-12 hour days, so when they get home they just want to eat, shower, and go to bed. The houses I buy are bank foreclosures. They run $6-$8 per square foot. There is usually another expense involved (roof, plumbing, electric, etc) and that's usually another $1000.We furnish them for around $1500 to $2000 for a whole 2 or 3 bedroom house. We buy furniture and appliances from estate sales and auctions. They are used, but they are functional. Washer/Dryer usually sells for $75 each. Fridge, about $150. Bedroom set, $50-$200. Old style tv's go for $3-$5, I put one in every bedroom.The cheapest motel in town is $350/week. That gets you a shabby room in the ghetto with 2 beds.I charge $350-$400 a week for a 2 bedroom house in a nice neighbourhood. There is usually a sofa bed in the living room. $600 to $800 for a 3 or 4 bedroom house.Their per diem is usually $75-$100 a day. But that doesn't mean they are going to spend it all. With me, they are spending $25-$30 a day to stay. It's less than that when someone sleeps in the living room. For some people, saving money is a big priority.They have cable and wifi. Bigger houses will have 2 washers dryers and fridges. Bigger houses will also have fun amenities like HDTV with a streaming blu-ray player, jacuzzi, kegorator, poker table, darts, and a fire ring with wood in the back yard.They pay for themself in 6 months or less of being rented. It may take up to 9-10 months to get 6 months of rent.Alot of my repeat renters come from the gulf coast. I'm in Kansas. We trade shrimp or gator for rent. They also have a place to harvest venison during the appropriate season with the appropriate equipment and license. I also keep them out of trouble with the law, or at least warn them of what behaviours not to do. This is especially true with people from Louisiana.

Libbie Grant · Answer

It seems to be on the low end of the risk spectrum to me, but I'm new at investing, so take that with a grain of salt!What I like about it is that even if your "crash pad" idea doesn't work out, most military bases are great markets for family housing. So you could rent it out to one family or convert it to a multi-family unit if your initial idea doesn't work out as planned.You can find used furniture that's newer and in really great condition on Craigslist if you're patient and check it every day. If you aren't in a huge rush to get the whole place furnished within days, I think you could trim something off your budget there.

Zachary A. · Answer

@Andrew McConnell Thanks! I would be interested in property management, especially if I could find someone specialized in this kind of thing. I just left about a week ago on an unexpected trip overseas, and so this is all on the back burner for at least the next month.

Andrew McConnell · Answer

@Zachary A. Great idea! I had a buddy who was just looking for a place like this for the summer in San Antonio while he was doing some itensive training courses. A set up like the one you just described would have been ideal. I also have another friend who owns a property like that in San Diego. He takes it one step further and has a local PM who has a hook up with the military who has a pipeline of new miltiary personnel so he has virtually 100% occupancy.If you end up in an Airbnb or vacation rental market, let me know if you're interested in exploring options on the property manager side. Just shoot me a direct message or give me a ring.

Jake Knight · Answer

Got a nice little slice of the pie carved our for yourself! @Paul Sandhu

Elizabeth Colegrove · Answer

Zachary,My husband is a navy pilot so I get it. I pm you.Elizabeth