A new business model with Short term rentals

[Account Closed]

Greetings BP, I've been on the platform for a few months and greatly value the connections, feedback, and partnerships I've gained from joining. So, before I go any further I wanted to say thank you to the group. Now, on to business! My company has recently (last 6 months) came to a fork in the road with STR management. We were doing the traditional model which would be a commission split with property owners where we would do the work and split the profits (between 30-50% in most cases) of gross revenues and net a decent return at the end of the day. The key to a successful property management company is volume, the more accounts and listings the more revenue you generate. As of lately there's been a concept bouncing around which allows us to stabilize income and remove all the guess work by renting and subsequently subletting units for the purpose of short term rentals. This has been a growing trend that nets healthier returns for PM's like myself and a higher quality "tenant" for landlords. We've completed a test market in a second tier city with 5 units and on average generated 2.5-3 times what we paid in rent without having to split the commission generated. The challenge of using this model is that of any new location, start up costs! First and security for rent and staging can easily go from 25-75 a sqft depending on your target demographic. These upfront costs are recouped within the first 60-75 days but to scale at a higher rate we are looking for alternative funding sources as traditional loans are still uncertain on how to underwrite short term rental financing without a "traditional" revenue stream. I'm hoping for a number of responses here. Are you currently doing a similar model? How is your progress? Are you a landlord and interested in doing a model like this? Are you a STR Property Manager and want to partner up to combine resources? Are you a non conventional lender that sees how you can get a healthy return on loans in a rather short period of time? I'm open to any and all suggestions, comments, and feedback.

[Paul Sandhu]

I've been paying $6 to $8.50 per square foot for the last 5 houses I've bought, they were bank repos.  I don't stage them.  I furnish them with the appliances and furniture that people will have when they rent it.  3 or 4 weeks of rent pays for all the appliances and furniture.  6 months of rent pays for the house.  It may take 7-12 months to get 6 months of rent.

Or you may get lucking and find a goose that lays a golden egg.  In my case, it was a superintendent, his foreman, and his main hand that rented a house from me.  The super transferred rent into our bank account like clockwork every Thursday, while he paid his work crew.  We didn't have to do anything.  Everything was fine for 6 months, until he took an unauthorized trip home in his company vehicle.  That was a no no.  The only reason he got caught was because he parked his company vehicle in some tall grass by a farm pond to go fishing.  The cat converter set the grass on fire.  The ensuing fire destroyed the F250.  He was fired.

2 days later a major component of the facility he worked for broke.  The component generates about $600/minute.  The facility owner insisted on having the superintendent back to fix it. So he was rehired immediately, but had no banking or transportation priviledges.

[Ethan Cooke]

@Account Closed - I like where your company is going with this! I am also looking to expand my STR business. I think that like any kind of REI loan, a critical factor to qualify for financing is demonstrated success. Have you kept detailed records on the financial returns of the 5 units in your test city? I imagine this documentation combined with your STR management experience would allow you to qualify for various loans--at least from hard money lenders if not from traditional banks. I think 5 years from now this will be a non-issue because banks will see the healthy returns that STR's can produce. Good luck securing your next $10M!

[Andrew Wong]

So are you talking about https://www.biggerpockets.com/forums/530/topics/32...?

[John D.]

@Account Closed Nothing new about a master lease, but good to hear that model is working for you!  If your true break-even is 60-75 days, that means you can double your business every 120-150 days.  If you're trying to compound growth faster then that.....wow!

[Ethan Cooke]

@Andrew Wong - That's a great thread about subletting STR's in partnership with the landlord. Thanks for posting the link.

[Account Closed]

Andrew Wong

Reading that post definitely puts more confidence in our direction. I think with how large Airbnb has gotten there's a better understanding of the eco system that it's created and more landlords are willing to allow subleasing for this purpose.

[Carlos Carbajal]

Hi Michael-

I manage almost 30 furnished units here in San Francisco Bay Area.  20 of those units we are doing on the "Master Lease" model where we lease, furnish and sublet.  The remainder are on what you are calling the "commission split" model where we manage a unit on behalf of an owner and they already have it furnished.

When I started doing this about 4 years ago 100% of my units were "Master Lease" and you are right the start up expenses are not exactly trivial.   

For a studio apartment we spend about $4000 - $7000 to furnish all in (Ikea, Target, Overstock.com, Amazon). 

1BR $5000 - $8000. 

2BR $7000 - $12000.  

We haven't furnished anything larger than a 2BR.

As far as financing the start up costs we often just use the profits but in the beginning we used 2 forms of debt and I will mention a 3rd.

1. Credit Cards. We used a combo of low-interest credit cards from a local credit union (8.5%) or sometimes just an AMEX if I wanted the points.  The high interest rate didn't bother me as the card would be paid off within 90 days.
2. Unsecured Credit Line.  Again credit unions are a good source here. I think our interest rate was like 11%. These are basically "signature loans" meaning the bank/credit union gives you a line of credit you can use for anything you like.
3. HELOC. This is the cheapest source of money I know of.  It's a line of credit against a property.  Interest rates are variable but typically 3%-5% amortized over 30 years. I never used this to buy furniture but you could easily enough.

So one thing about your "commission split" model that I think is uncommon is that you are "splitting the profits".  This is not a common arrangement in my experience.  For all of my units that I am not the leaseholder on I charge a percentage of the monthly gross revenue. It ranges from 15% to 20%. So if the unit in question grosses $10,000 (not including cleaning fees charged to guest) I keep $1500 - $2000. Cleaning fees are still charged to the guest/tenant on top of the gross so you can think of this percentage as the "operating margin".

Goes without saying that charging a percentage of the gross is a more robust business model for the manager compared to "splitting profits".  The manager makes money every month regardless of the operating expenses and overhead.  Do you have competitors in your locale offering a similar business model as yours?

Before AirBnB broke the Short Term Rental market wide open there was already an established industry of property managers operating vacation rentals and furnished corporate apartments. These companies always charged a percentage of the gross and almost all of them still do as far as I know.

My profit margins are higher on the properties I hold the lease on.  But it is more stress since I am on the hook for the rent, utils, operating costs each month and I don't always breathe easy until I see enough bookings for that month to put me in the black. Especially true in the slower seasons which for us is Nov - Feb.

Good luck on your road to signing new leases!  I do however recommend you get some new clients where you are charging a percentage of the gross. You might find that model less risky and more scalable.

Carlos