The Sweet Spot for Commercial Investing with Vacation Rentals

Recently I was reading a fabulous book titled "Skip the Flip"  by Hayden Crabtree. The gist of the book promotes doing real estate on a commercial level rather than residential. The base of his argument is that when managing residential rentals, you are tied into the Fair Market Value of your property, whereas when doing commercial you can not only increase the NOI, thereby increasing the value of the property, but you can even decrease the cap rate by improving the Class rating. This gives you more control of the hard work you put into improving your property, regardless of how nearby properties are performing. 

The takeaway for me was, how to apply this advice to the work of vacation rentals. The obvious answer was to apply this to motels vs. SFRs. However, when starting to underwrite boutique hotels, I saw a trend where people were not spending as much money on a room as they would on a house. Meaning, that if I had a 10-room motel and charged $100/room a night, I would be better off advertising the space as a mansion and commanding $1200/night for all 10 rooms. That's a potential extra $6,000 a month (not accounting for vacancies). 

To confirm these findings, I actually had a woman who was looking to sell a 7-room motel share her booking history with me. It was clear that when a group rented out the entire space she ended up netting more than renting out single rooms. 

This leads me to the following conclusion, for now at least. If you are looking to do vacation rentals on a commercial level, focus on a 6+ bedroom large home to rent out to groups. Your place should be geared toward large family getaways, mastermind groups and the like. Bear in mind that Airbnb does not allow advertising more than 16 guests at a single location. You can have some cots or similar accommodations for extra guests. 

When it comes to refinancing a residential home where the netted income exceeds the FMV of the property, it may be more challenging getting a bank to lend based on the increased income. Luckily for STR hosts, in 2018, Airbnb partnered with Fannie Mae and several financial institutions, to make it possible for hosts to use their Airbnb Proof of Income on their refinance applications. With participating lenders, it’s now possible for Airbnb hosts to use their earnings to verify their income.