Statistical Significance of A Location's Well-Being

[Angelo Wong]

Hi,

My business partner @Andrew Wong and I are running into a problem of basically not knowing whether or not a unit we have is "good" or not.

Context: We rent units from landlords, furnish it, and sublease it out (with the landlord's permission) to make a spread.

So we have 8 units, and we're wondering how we can answer the question of "should we keep expanding here?" and "should we renew this unit's lease?"

We have QBO and everything tracking each unit, but the variance of each unit's profit is so high that we could be very up some times, and then very down some times (winter). Because we lease and sublease, each day of vacancy really hurts, about $70/unit/day. So when we are profitable, we are apprehensive in assuming that this is profitable for the long term, and if NOI for the month is negative, we are apprehensive about that as well.

Problem with 1-year analysis:

We started late 2016 and so maybe only half our units are >1 year mark. And there are a few issues looking at just the NOI of each unit:

1. Even neighboring units have drastically different NOI.

2. Is one year enough to tell whether a unit is "performing" or not?

3. How much NOI is considered "good" in the short-term rental space?

1. We have 3 units near one another (literally within 50 meters, on the same street). One did -4k, one did +2k, one did +2k. How do I analyze this? Do I just take the average? Do I not have enough data?

We had a unit in Menlo Park that did +10k. However, this was mainly because we had a nurse stay with us for 9 months. The whole year that unit only needed 9 bookings to fill it. But this isn't proof that that neighborhood is great for short-term rentals because that nurse stay could have been an outlier.

2. If one year isn't good enough to determine whether a booking is good enough or not, how many years is? And because we have 8 units, is there a way to use a shorter time span to at least determine the short-term rental viability of a neighborhood?

3. How much NOI is good? Something like $1k/unit/mo is amazing. And something like $100/unit/mo is terrible since it's a lot of work and more variance than long term rentals. So maybe something in between? This question is mostly to ask "when is it worth it to move out of a unit?"

If I want to determine how "good" a unit is, I might look at the past 30 bookings and see if in that time period, we are profitable or not. Thinking each "booking" as some random time interval payout. If unit X had one 360-day booking, it's unclear if unit X is actually in a great location/great value since that booking could be an outlier. But if say unit Y had 30 12-day bookings across the entire year, we know that that unit will likely keep performing.

But determining how "good" a unit is is fairly difficult if we have multiple units in the same street, because booking one unit is literally taking business away from another unit (since they are priced similar, similar interior, similar everything, and thus elastic). So then I thought maybe a better question to ask is, instead of "how good unit X is doing?" I should be asking "how good is neighborhood Z doing?" But in the example that I have 2 units on Fake St., would I just take the last 15 bookings for each of the 2 units as a time measurement, and then average out how well they did? How do I know if I saturated a particular street or location?

If a unit gets clearly bad reviews compared to the other units that are next to it--it is a clear sign that unit should not have its lease renewed. However, if the reviews are comparable and one unit does financially worse compared to all others due to vacancy? How do I look at that situation?

TL;DR with high income variance, how do I tell whether or not I am profitable (and will be profitable in the long run)?

[Paul Sandhu]

@Angelo Wong  It's like a poker game.  There is going to be one person at the table that's is going to loose money, and everyone at the table knows who it is.  If you're at the table and you don't know who it is, it's you.  

If you have to wonder or question whether or not a unit you have is "good" or not, it's not.

It's also like duck hunting.  If you see a duck far off in the distance and can't tell if it is coming or going away, it's going away.

It's is also like sex (for a guy), if you have to wonder whether or not you had an orgasm, you did not.