All Forum Posts by: Chris Luth

I know this is an older thread, but I wanted to chime in.

Assuming we're all talking about contracted cleaning companies (no employer-employee relationship, in which chase employment law may come into play), I think a distinction needs to be made between terminating a contractual relationship as a course of business and firing a contractor for cause.

Terminating a contractual relationship when there's no malice--just a desire to change contractors to someone who will fit your needs better--is rarely an emotionally charged event. Business is business, and both parties usually do understand the process. When I went through this process last year, I contacted the owner of the cleaning company at the beginning of the month and said we would be terminating the agreement with them at the end of the month. No hard feelings were exchanged. It was a professional relationship and I had no sense that there would be any sort of retaliation in the form of poor workmanship, stolen goods, etc. It was simply a business decision, and indeed, we may use them again in the future.

Firing a contractor (due to poor performance, unreliability, etc.) can be handled similarly if it's a professional relationship, but it can also be a bit more of an emotional situation--and that's a case where the situation may call for an immediate termination of the contract and revoking access to the property, especially where there's a risk of intentional bad work or theft or anything.

It depends on the situation you're in and your relationship with your contractors (and also what the terms of your contract, if you've signed one, stipulate), but unlike most other posters in this thread, I don't think there's necessarily any problem with giving a few weeks or a month's notice to end a contract if the relationship is professional and businesslike.

Branson STR investor here. (It's still a fantastic market, and I'm still buying, although the cost of property has gone up somewhat dramatically in the last couple of years and the market has started to get slightly oversupplied on the larger-house side as more and more are being constructed.)

I did want to address this question, though. The Springfield Real Estate Investor's Association (I'm a member) is a great group of people (a mix of highly experienced and newly interested, but all above-board and ethical--the leadership doesn't tolerate shenanigans) and many in there are invested in Branson STRs (many also have STRs in Springfield, which of course caters to an entirely different market, but their perspective has been interesting). Meetings are in Springfield on the third Thursday of every month, plus there's a handful of smaller sub-groups that meet throughout the month.

One of the REIA co-founders, Brad Moncado, is an experienced STR investor and holds a yearly boot camp if you're the type of person who needs a data-dump/kick-in-the-pants. Otherwise, I'll echo the mentions to Tracey and team at Worley--they know STR inside and out, so they can help with all the questions about zoning/permitting and such before you buy. Once you've bought, if you feel the permitting/licensing/tax issues are confusing/challenging, Avalara MyLodgeTax will set all that up for you for $50 and then handle reporting/remitting tax for an ongoing $20 per month. Then it's a matter of setting up the property and then finding a good cleaner. Once that's set, it's really not a super difficult thing to run--the biggest deal for most people is needing to be married to your phone in a way that other RE investments don't require, because you always have to be able to answer inquiries and accept bookings, and if you're not fast enough, people will often move on to other listings.

You can definitely self-manage properties remotely, but it is necessary to have some kind of boots-on-the-ground help, whether for maintenance or even just helping guests with occasional issues that pop up (confusion about TV cable box remotes, etc.). Someone upthread mentioned that Branson has had STRs longer than the booking channels have been around, and that illustrates a point related to this: in the olden days, when you'd look up a vacation rental in the classifieds, people were more tolerant of the idea that they were sort of borrowing someone else's house and things might not be completely perfect and they'd have to procure their own supplies, but these days, the booking channels have created almost hotel-like expectations. You risk a bad review if you're not there in 15 minutes to fix the leaky toilet flapper or burned-out light bulb or resupply coffee and laundry soap. :)

The TL;DR version of the question: How should I structure a JV agreement between me (acquisition/management) and a silent partner (capital) specifically for a long-term investment in a vacation rental property? Any particularly creative (and mutually-beneficial) arrangements I should think of?

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I manage several vacation rental properties and have an ownership interest in most of them. I'd like to continue expanding my portfolio with some great off-market deals that are available now, but I'm out of my capital.

Background:

Vacation rentals here in the Branson market are quite a lucrative investment because the cost to acquire property is relatively low, but nightly rent rates are strong and the tourist season is long. The properties I've acquired myself have performed extremely well (extremely high cap rates and cash-on-cash returns).

I started out self-managing my own properties, but I took on a few clients who were attracted by seeing how well my properties were performing. (My units tend to average 25-50% higher occupancy than most others in the market.) Word has sort of gotten around that I know what I'm doing, which is kind of nice...and I'd like to try to leverage that positive reputation to open up some deals I wouldn't otherwise be able to access right now.

Goals:

Since I'm out of capital myself for now, I see three possible ways I can leverage this expertise:

• Manage others' properties for a commission
• Source private money for down payments and purchase them myself
• Form a joint-venture partnership with someone who has capital

I've already done the first two ideas, but I'm really intrigued by the last one. I actually have been approached by several investors who have expressed interest in doing something together, but I'm struggling to think of how to structure the arrangement.

I'm not really interested in the traditional 50/50 split where we each put up half of the capital, since I'm out. Plus, I'd be managing the property and they'd be pretty much a silent partner, so there would be an imbalance in the amount of work there.

What attracts me to the idea of a JV is that it's a way for me to basically trade my expertise and my work for equity. I could simply offer to manage the property for them, but I'm willing to forgo short-term revenue and cashflow for long-term equity and wealth building.

Value-adds:

Here are the three major things I think I bring to the table that other investors (especially those not focused on this niche of the market) don't have:

• Acquisition: Access to off-market vacation-rental-approved properties at below-market rates
• Set-up: Expertise with navigating the necessary licensing, connections to furnish properties quickly and extremely affordably
• Operation: Successful (and proven) management (above-market revenue and occupancy--high reviews, fast response time, competitive rates, etc.)

I would thus definitely say I bring value to the table. I know a number of investors who are interested in jumping into the world of vacation rental but don't really know how to navigate it and/or don't have the time to dedicate to it, because it is a more active form of investing than a traditional passive rental.

Analysis:

So what I'm trying to do is figure out a way to leverage the high returns in this market and create value for both myself and other investors in a fair way.

I see a lot of discussions in other threads about 50/50 JV partners--one person puts up all the capital and the other (usually the enterprising flipper) does all the work. Would such a model work here, where the goal isn't a quick turnaround and a big payoff but rather a long-term investment with positive cashflow?

Let me set up two hypothetical examples here.

1. A four-bedroom turnkey vacation rental property for $230,000, financed at 85% LTV and 5.5% interest on a 25-year amortization, with $37,000 cash required for down payment/closing/set-up costs, with expected revenues of $65,000 and expenses of $22,000 for a net income of $43,000 per year. After debt service, the expected positive cashflow is $28,500. That equates to a cap rate of 18.7% and a cash-on-cash return of 83%.
2. A three-bedroom unfurnished vacation rental condo for $90,000, financed at 80% LTV and 5.5% interest on a 20-year amortization, with $33,000 cash required for down payment/closing/furnishings, with expected revenues of $24,000 and expenses of $11,500 for a net income of $12,500 per year. After debt service, the expected positive cashflow is $7,000 per year. That equates to a cap rate of 13.9% and a cash-on-cash return of 20%.

Most vacation rental managers in this market collect a commission on gross revenue of between 25-40%, which eats away at a good chunk of (or, in some cases, all of) the owner's cashflow. Plugging an average 30% management fee into the two examples above, the first owner would see his or her cashflow drop to about $8,000 per year (10% cap and 24% cash-on-cash return), while the second owner would see his or her cashflow go slightly (~$300) negative (6% cap and -1% cash-on-cash return).

In contrast, if I were to approach an investor with an idea of a 50/50 JV agreement, where they put up the capital, I take no management fee, and we share equity and cashflow 50%, the first owner would see cashflow of $14,250 per year (38% cash-on-cash return), and the second owner would see cashflow of $3,500 per year (10% cash-on-cash return)--both significantly better than hiring a professional manager.

Of course, in the second scenario, I would end up with less cashflow than I would managing the same property at 30% ($14,250 vs. $19,500 for the first and $3,500 vs. $7,200 for the second), but that's OK with me because now I have equity in the property (with a potential infinite rate of return if and when the property is sold).

The question:

So, would something like this be an equitable arrangement? And, perhaps more importantly, what would a "typical" investor looking to partner up with me expect as far as a return on investment?

Obviously the first example is quite generous no matter how you slice it, but that second example is pretty lean (or at least I guess it's comparable with a moderately performing long-term rental), so I'm guessing that there's a line somewhere in there that maybe I should target to keep above as I do my math--12%? 15%? 20%?

If I can't meet that minimum standard of being an attractive investment with a 50/50 JV arrangement, are there any creative ideas for what a JV agreement might look like? I thought of a few options but wasn't sure how they'd work out in practice:

• Reduce my equity stake (say, 30% instead of 50%--in that second example, that would effectively give my partner a 14.8% cash-on-cash return)
• Stick with a 50% equity stake but agree that my partner is entitled to a greater share of any monthly cashflow to meet their rate of return goals
• Designate that a higher portion (e.g. 75% or 100%) of any cashflow goes to my partner until it's equal to their initial cash investment, after which it reverts to an even split (so assuming 100% of positive cashflow goes to my partner, in the second example, he or she would be "repaid" in 2 years 8 months)
• Tie my equity to my work (as a manager) on a sliding scale--at closing, my partner would have 100% equity, but I would effectively "buy into" the property over time based on what I would have otherwise taken as a management fee (in the second example, since a 30% management fee would normally grant me $7,200 per year, I'd effectively "repay" $7,200 per year towards my half ($16,500) of the $33,000 cash invested in the property, and so after the first year, I'd own a 21.8% equity stake, after the second I'd own a 43.6% equity stake, and then after 2 years 4 months, I'd hit my 50% equity stake)

These are just a few "creative" things I came up with after mulling this over a bit, but maybe there are downsides to some of them or maybe there are other options. I guess that's why they call all this stuff "creative financing." :)

Anyway, I thought I'd run this by the BiggerPockets community so y'all could poke holes in my logic or shoot me down entirely. :) Thanks!

Cool. They sound motivated and connected, which is valuable. Will check them out!

Edit: looks like they have 90 closed listings on the MLS in the last year. They have 35ish agents listed on their website (including the brother of a friend, ha).

Not for investment, just a family member selling her modest 3br, 2ba home to move out of state.

I know good listing agents are fantastic resources because they work their tushes off to market properties and not list at wildly off-base prices, and not being in that market myself, I want to make sure my family member is getting good help there.

Seems that Keller Williams Alaska and Dynamic Properties (RE/MAX) are the two top listing offices (about 500 each for a total of 1,000 out of the 2,000 SFR homes sold/closed on the MLS in the last year).

Both are huge operations with lots of sub-licensees and agents. Anyone know any specific top listing agents at these brokerages (or any others, I guess)?

Dar Walden keeps coming up in Google searches, but I'm hesitant to pick someone just because they may have hired a good SEO consultant. ;)

This is probably getting into "consult a lawyer" territory, but I've done some digging in MO's regs off and on for the last year for other VR-related matters and can't find any mentions at all in state statutes identifying what exactly is considered "renting" or "leasing." As far as my attorney has advised me, I'm not "renting" my VRs--I'm offering a "license to occupy the premises," similar to what a hotel does. While a specific time limit is not coded in Missouri law (unlike other states, where tenancy is specifically noted as being a resident for more than 30 days), as long as the guest is on a short stay (less than 30 days), I suspect it could reasonably be argued that a VR guest is not "renting" or "leasing" the property, but unless there's case law somewhere to that effect, it'd just be an argument in front of a judge. :/ But I think it is pretty clear that hotels and motels aren't subject to normal tenancy regulations and eviction law and the like, and so it seems logical that short-term rentals are more similar to a hotel/motel than a long-term rental.

This article here on BP seems to contradict Ashish's post:

https://www.biggerpockets.com/renewsblog/2015/07/0...

On the other hand, one of the two CPAs I've asked agrees with Ashish and that reporting VR income on a Schedule E is fine, even if the length of stay is less than 7 days. The other CPA I talked to just assumed the VR income would be reported on Schedule C, and I didn't know enough at the time to probe into that more.

I own a couple of VR condos and do not provide services (no breakfast, maid service, laundry, etc.), but my average length of stay is around 4 days. I'm currently struggling with how to classify the income, especially since there's info from multiple CPAs with contradictory information.

I came here to BP hoping I could clear this up. :) How can I know I'm doing the right thing (both from a tax compliance as well as for my personal financial situation)? If CPAs disagree with each other, how do I know who's right? How do I decide who is a good CPA who is giving me good advice? Should I find and talk with a tax attorney on this topic?