Starting out in real estate (passive long term vs short term)

[Jacob Fafard]

Hi guys first post in the forums, forgive any naivete. I'm twenty eight currently working as chef who "likes" but doesn't love what I do. After listening to almost all of the forums I'm quite convinced this is what I want to do in some capacity. I have 8 years experience working construction for my father's construction company. I understand the building/contractor side but lack some in the business aspects. My question is are there any professionals out there who can give me their perspective on a newbie starting out in short term rentals IE(VRBO and Airbnb). 

I've got a decent understanding on how long term (passive/semi-passive) rentals work, however I want to transition into the real estate industry full time and feel as if short term rentals will create a better platform for a business. 

My idea is to start with one property, maybe even a tiny home. Once I've gained knowledge of overall management, price optimization, systems for high turn over and overall understanding of this "niche" part of real estate; I want to scale the concept to other properties and also manage other short term rentals. That being said I understand that the short term rental market right now has a lot of grey areas. There is always the risk that that area could change regulations and take away the business in a second. Meaning all properties purchased must cash flow as long term rental as a backup. Do you think tiny homes being portable hedge my risk? Should I stick to homes, with the possibility of a rentable ADU or condos?

I understand its a lot bottled up in one question but would greatly appreciate any and all's advice regarding the matter. 

[Eli Lederman]

start small

make a road map for yourself  

[Ethan Cooke]

@Jacob Fafard - You’re right: owning property and managing property (especially for short-term rentals) are two very different things. I own 3 single-family homes in San Francisco and I run a furnished rental business for business travelers by sub-leasing other people’s homes (AKA rental arbitrage). 

Buying properties for long-term rentals requires a lot of capital, fairly little management and is a relatively slow way to build cash flow. But in the right markets, you can also build great wealth in the process. Renting homes, furnishing them and subleasing them requires just a little capital, a fair amount of management and is a relatively quick way to build cash flow. 

If you are interested in learning how to build and scale a short-term rental business, I recommend that you do rental arbitrage: rent other people's homes, drop $3-7K to furnish each one and make it move-in ready, then open up shop using sites like AirBNB and VRBO/ HomeAway. If you are paying low rent for your places and willing to pivot to a long-term furnished rental strategy if STR regulations become too restrictive, then there is fairly little risk in doing this. Check out AirBnB and AirDNA to understand the furnished rental market(s) you are considering.

Good luck!

[Luke Carl]

@Jacob Fafard if you want to start a new job with no money down check out Brian Page Airbnb Formula. If you want to actually invest and buy the properties, give me a call I’ll teach you everything you need to know.

[Paul Sandhu]

If you want to run a STR, you are the concierge, housekeeping, maintenance guy, accountant, marketing guru, etc. If you are not those previous things, you have them on speed dial on your phone. Having 3M talent helps...Mechanic, Magician, Mindreader.

[Jacob Fafard]

@Ethan Cooke- Thank you so much for your insight and advice, I always appreciate hearing how people aproach the business. In regards to your abritrage stradegy, how do you find homes that fit your stradegy. Also how do you aproach the home owner about using his rental as a STR? I assume you operate with full transparency with the owners, so how do you maintian a good relationship with them when they know your cashflowing X amount on thier property?

[Jacob Fafard]

@Luke Carl- Hey Lucas I'll check out the link and strategy however I'm looking to buy properties to build equity along with the cash flow. I would love to talk further about your strategy and knowledge on STR.

[Jacob Fafard]

@Paul Sandhu- Lol so true, I know there is only so much I can prepare for. I'm trying to understand every aspect I can and start to predevelop systems to have in place. Along with that trying to establish a team as well for when I scale. That being said you can only plan for so much, you what they say " You dont know what you dont know". So I very much look forward to all the curves and bumps in the road coming my way!!

[Ethan Cooke]

@Jacob Fafard - I get referrals every month for new arbitrage rentals from the landlords I work with. Before I had a network of landlord-partners, I used Craigslist to find properties. I look for a few basic things which I have found make a unit profitable:

- good neighborhood 

- Close to large employers with well-paying jobs

- easy parking

- below-market rent

- low cost per bedroom

- flexible landlord who will allow 2 people per bedroom plus 1-2 more and will allow small pets (ideally).

Places that meet these criteria generally cash flow very well.

Regarding arrangements with landlords, they love it and bring me their vacant units. When I first speak to them, I tell them:

- I’d like to use their place for furnished corporate rentals of 30+ days

- I will furnish it beautifully and maintain it immaculately  since that’s what corporate tenants expect. 

- the tenants are responsible professionals

- I will be 100% responsible for all the lease terms

- I will handle all property repairs that take less than $200 and 2 hours of my time

It’s free property management for the landlords. They don’t care how much money I am making since we both get what we want: they get to enjoy a completely passive, hassle-free investment and I get to make money by fixing up their place, furnishing it nicely and managing an ongoing stream of traveling tenants. 

[Eric P.]

Originally posted by @Ethan Cooke:

@Jacob Fafard - I get referrals every month for new arbitrage rentals from the landlords I work with. Before I had a network of landlord-partners, I used Craigslist to find properties. I look for a few basic things which I have found make a unit profitable:

- good neighborhood 

- Close to large employers with well-paying jobs

- easy parking

- below-market rent

- low cost per bedroom

- flexible landlord who will allow 2 people per bedroom plus 1-2 more and will allow small pets (ideally).

Places that meet these criteria generally cash flow very well.

Regarding arrangements with landlords, they love it and bring me their vacant units. When I first speak to them, I tell them:

- I’d like to use their place for furnished corporate rentals of 30+ days

- I will furnish it beautifully and maintain it immaculately  since that’s what corporate tenants expect. 

- the tenants are responsible professionals

- I will be 100% responsible for all the lease terms

- I will handle all property repairs that take less than $200 and 2 hours of my time

It’s free property management for the landlords. They don’t care how much money I am making since we both get what we want: they get to enjoy a completely passive, hassle-free investment and I get to make money by fixing up their place, furnishing it nicely and managing an ongoing stream of traveling tenants. 

@Ethan Cooke That’s awesome! A few Qs:

1) How do you find a quality unit in a quality location at below market rent??? Wouldn’t seem very likely!

2) Do you tell them you’re airbnb-ing their units or you just say “furnished corporate rental”? If you don’t mention airbnb, they might certainly discover on their own that you’re running an airbnb, right?

3) What kind of up-front “improvements” do you do to the units and at what cost?

Thanks much - awesome post!!

[Ivan Barratt]

@Jacob Fafard I haven't read others' responses so my apologies if this has been said. I think you are on the right track looking for ways to start a business! Growing a biz from the ground up is a great way to accelerate your wealth building. Don't let anyone talk you out of it and whatever you don't quit!

I started a management co to fund my life and grow my wealth bucket!  I wouldn't be where I'm at today without growing the biz. It generates the income and I in turn; funnel it into more and more income producing assets.

All the best!

[Ethan Cooke]

@Eric P. - Good questions. Nowadays I get below-market-rent listings from the landlords that I am already working with. But previously I used craigslist. If you live in a metropolitan area with a lot of rental units, it's fairly easy to find these places. You need to be willing to scan listings daily, then contact and meet the landlord as soon as you see one. But there are plenty of them out there. 

I tell landlords I am doing "furnished corporate rentals" for a month or more. If they ask where I get my tenants, I tell them "AirBnB, referrals and sometimes Zillow or Trulia". Those are my marketing platforms. Most landlords are fine with AirBnB as a marketing channel when I explain that I market to business travelers who will be staying for 30+ days.

The property improvements I make are cosmetic: interior paint, new light fixtures, new cabinet hardware, new combination door locks, adding nice towel racks, fixing broken closets, shelving if necessary, etc. I have spent up to about $3K on labor and materials to improve a 2-unit place (single family home with in-law). But it was a great investment: the poor condition of the property was one of the reasons my rent was so cheap, and I made back the $3K in profit in the first 2 months.  Just like buying real estate, these cosmetic "value-add" rental properties are the best because they show poorly and most people don't want to rent them from the landlord or put in the effort to fix them up.

I hope that's helpful.

[Michael Glaspie]

A good friend of mine is extremely passionate about Airbnb and may be able to provide you more insight. He is a member here on BP. Reach out to @Daniel Kidd . He may be willing to talk you through a bit more in detail 

[Eric P.]

Originally posted by @Ethan Cooke:

@Eric P. - Good questions. Nowadays I get below-market-rent listings from the landlords that I am already working with. But previously I used craigslist. If you live in a metropolitan area with a lot of rental units, it's fairly easy to find these places. You need to be willing to scan listings daily, then contact and meet the landlord as soon as you see one. But there are plenty of them out there. 

I tell landlords I am doing "furnished corporate rentals" for a month or more. If they ask where I get my tenants, I tell them "AirBnB, referrals and sometimes Zillow or Trulia". Those are my marketing platforms. Most landlords are fine with AirBnB as a marketing channel when I explain that I market to business travelers who will be staying for 30+ days.

The property improvements I make are cosmetic: interior paint, new light fixtures, new cabinet hardware, new combination door locks, adding nice towel racks, fixing broken closets, shelving if necessary, etc. I have spent up to about $3K on labor and materials to improve a 2-unit place (single family home with in-law). But it was a great investment: the poor condition of the property was one of the reasons my rent was so cheap, and I made back the $3K in profit in the first 2 months.  Just like buying real estate, these cosmetic "value-add" rental properties are the best because they show poorly and most people don't want to rent them from the landlord or put in the effort to fix them up.

I hope that's helpful.

Thanks @Ethan Cooke - that’s tremendously helpful and quite fascinating! My only concern is: you haven’t had any landlords jack up the renewal rental rate on you after you improved their properties?! Seems like that’s a huge risk when improving someone else’s property!

[Deep Johal]

I would actually counter some of the advice given here and advise you to work for somebody already in this space - if you're going to rent out somebody's home and re-rent it with no experience in real estate you're running a risk. There are too many unknowns and things that can go wrong and it's somebody else's property at risk if you don't know what you're doing. 

I'm not advising against getting experience since we learn from mistakes but in the words of Warren Buffett, they don't have to be YOUR mistakes. Learn from somebody who already made the mistakes

A lot of people in this space I'm sure would be happy to take you on and have you assist them while showing you the ropes

[Ethan Cooke]

@Eric P. - I have not had any landlords requesting unusual rent increases after I improve their properties. It’s a win-win partnership. We have very good relationships and they love the arrangement: free maintenance, early rent payment and no tenant complaints to them. I am very transparent with them and I like to give them a cut of the action: if the unit makes good money during year 1, I tell them that and offer them a 5-10% rent increase (fairly standard for the Bay Area). It’s a small price to pay to maintain a great relationship and keep a great unit. If the unit doesn’t make much, I tell them that and let them know that I can’t justify paying higher rent but I am happy to stay if they keep the rent flat. I have renewed these leases also. So far I have renewed all 4 leases that have come up for renewal—at very reasonable rates.

[Eric P.]

Originally posted by @Ethan Cooke:

@Eric P. - I have not had any landlords requesting unusual rent increases after I improve their properties. It’s a win-win partnership. We have very good relationships and they love the arrangement: free maintenance, early rent payment and no tenant complaints to them. I am very transparent with them and I like to give them a cut of the action: if the unit makes good money during year 1, I tell them that and offer them a 5-10% rent increase (fairly standard for the Bay Area). It’s a small price to pay to maintain a great relationship and keep a great unit. If the unit doesn’t make much, I tell them that and let them know that I can’t justify paying higher rent but I am happy to stay if they keep the rent flat. I have renewed these leases also. So far I have renewed all 4 leases that have come up for renewal—at very reasonable rates.

Once again, thank you - this is great stuff! Do you mostly rent houses or apartments?

[Ethan Cooke]

@Eric P. - I rent mostly houses since most apartments are managed by property managers. Apartments can also be really good since there’s less maintenance and the landlords own several units. I rented an apartment from a building owner a few months ago and now he is offering me his vacant apartments whenever they come up for rent.  So if you can find the right apartment landlord, That can also be a good strategy.

[Laura R.]

@Ethan Cooke What happens in the event of significant damage to the property or if a renter refuses to leave?

[Laura R.]

Also do you do your own due diligence to make sure the HOA/deed restrictions don't prevent short term rentals?