All Forum Posts by: Peter Stewart

You are selling a house, not a business. It is a residential property and it will be valued as such. The income potential is irrelevant. 

Now, I understand where you are coming from. But, that is just not how residential real estate works - that is how commercial real estate works. Anyone getting traditional financing on the home will have to have to have an appraisal, and the appraisal will be based on the comps.

The only exception is if you find an all-cash buyer. However, they should be saavy enough to understand that the valuation of the house is based on what similar properties in the area over the past 6-12mo have sold for. 

I would not supply any streaming channels. Give your guests high speed internet and smart TV's - they can use their own log ins for the streaming sites. Pretty much everyone has Hulu, Netflix, Disney, etc these days. 

I've never had a single complaint from any of my STR guests regarding not providing streaming services.

Also, be sure to set that expectation up front in your listing - let guests know you provide high speed internet and have smart TV's so they need to bring their own log-ins if they want to use any streaming services. If it's right there in the initial listing they can't come back and complain about it later.

As someone who lived in Los Angeles for 12 years, was a RE broker for 6 there, works with TONS of CA clients, has plenty of friends and family up and down the coast, and owns and has owned rental properties there, I can answer this for you.

#1 - You are parroting MSM talking points about how "bad" it is there without actually having any real knowledge of the situation (at least that's what I gather from the post). In reality, you're only seeing a small sliver of what life is actually like there. You are reading the 1 horror story about a crazy tenant that the owner could not evict for a year, and missing the 10,000 other positive stories. 

Now, don't get me wrong - CA definitely has its issues, but it's not like every block in CA is full of drug addicted sidewalk pooping landlord scamming thieves. Most of CA is very nice and life is very "normal". 

People invest in CA for many reasons. It is a gorgeous state. The weather is awesome. The food is amazing. The culture is amazing. It's an economic powerhouse. It's a global destination and a world famous city. And boy can appreciation be amazing.

However, investing there today looks a lot different than it did years ago. Cash flow through long term rentals is pretty much gone. Your main two plays are appreciation or development (build new construction, condo conversion, etc). The price to play is very steep, so it's not for beginners or those with limited capital. The market is also pretty volatile, so if you play the short game, you can get burned badly. 

I'm in the same boat. After 16 years in my career (RE broker) and 13 years as an investor, I'm at the equity growth stage as well. 

I shifted from investing with a cash flow focus to the appreciation and tax benefits side of things. C class areas/properties to A class areas/properties. I always make sure that the properties are cash flow positive, but the large bulk of the money I make from them is from the other items (appreciation, debt paydown, tax benefits, etc). 

It seems to be a pretty natural evolution for many investors. When you don't have any money/equity (early in career and/or early in your investing journey) the tax benefits are pretty minor. But, once you do build some wealth and have a high income, you realize how much you can save/make by owning the right real estate - numbers that far exceed any cash flow you might make on a property. 

A lot of the answer depends on your income, how long it took you to save up that money, and what your risk tolerance is. 

For my answer, I'll assume it took years to save up the $80k, income is "normal" (meaning you are not making $500k+/yr), and you are moderately risk adverse.

If those are correct, then first off I would not spend all the money. Keep some as reserves. I'd spend maybe ~$60k of that money. I would buy a turnkey 2-4 unit property in a well known mid to large city. The property would be in a C+ to B- type location, with cash flow as the main objective and appreciation second (75/25 split). Purchase price up to $300k.

That way you will have a property that produces passive cash flow every month and appreciates slowly and steadily over time. Risk is minimized due to the amount of rents, property condition, property price, and location. Also you spread out your risk over multiple units, so if you get a vacancy, you still have money coming in (vs a SFR - no tenant = no money).

Let that cash flow build up (don't spend it - put it all into a separate savings acct), keep saving (do whatever you did to get the $80k) and when you have enough money saved up again, buy another one. This time, I would consider increasing your risk a bit now that you have the first one out of the way. I would buy a similar property, but buy one that needs a bit of work. That way you can renovate it after closing and gain some additional equity. Stabilize the property, wait a year or two for some appreciation, and then refinance - pull that equity out, and then do it again. And again, and again. Fast forward 20 years when you are 60 and you have a multi-million dollar real estate portfolio that should be generating a solid amount of passive income.

You can certainly ask the agent who helped you purchase the property for advice too ;)

Since you are using a PM to run things, I don't see any need to meet anyone except your PM and the contractor/handyman you plan on using for repairs/updates. I would remain as anonymous as possible to the neighbors. Your PM is there to act as a buffer between you and the property. Let them handle the neighbors, cleaners, etc. That's what they are getting paid for. 

If your PM is handling the furnishings/decor, then I would not worry too much about the placement. If you are handling that side of things, then of course it makes sense to map it all out and start planning your purchases. 

Ultimately I think the main focus of the visit is to familiarize yourself with the property (since you have not seen it in person yet) and check on the rehab work and meet your contractor and PM. I would also drive around the immediate area a bit too, so you can get a feel for the area (check out Butler campus, Broad Ripple, etc). 

I researched all of them before getting into the STR game, and settled on Hospitable. It's fantastic. I've been using it for close to 3 years now managing several properties, and I have not had any issues.

Initial set up was pretty easy. I spent the most time customizing the messages (I use 95% of what they write, just add/tweak a bit to make them my own). 

The automated messaging is the best. I get compliments all the time about how responsive I was. 

Calendar syncing between Airbnb and VRBO has been seamless and flawless - never once had a double booking. 

I use Resort Cleaning and it links perfectly to Hospitable to automate my cleaners.

Ultimately though, all 3 platforms are excellent and will do what you need them to do.

Quote from @Wes D.:

Hi @Krysten Zarembski!

This is a really good question and one I was asking a year ago when I decided to jump into the MTR business. My conclusion then was this: if an investment pencils as cash flow breakeven or a small positive cash flow, using conservative underwriting assumptions, it would be worthwhile to buy despite the high interest rates.

Real estate investing has three main sources of wealth building: cash flow, appreciation, and tax benefits. So I figured that if I could avoid negative cash flow, the other two sources would carry us until rates declined and we could refinance to lower interest expenses. Lower expenses means higher cash flow. Furthermore, if rents rise in the coming months/years, this too would increase cash flow. 

When underwriting, I did not use these positive assumptions about declining rates or growing rents. It needed to be at least cash flow neutral to meet our "buy" requirements.

One year later our thesis is working. Our net operating income (NOI) margin is 54%. After subtracting interest expenses from NOI, our cash flow margin is only 7.4%. But it's positive!

With a half point rate reduction by the Fed, our HELOC rate was reduced by the same amount, and we've begun the refinance process. The property appraisal came in at a 5.3% increase versus our purchase price.

On tax benefits, last year we had a tax loss on our MTR business that lowered our personal taxes by an amount equal to 20.8% of our MTR gross rental income. In other words, this is cash we didn't need to spend (to pay taxes) due to our MTRs.

Taken together, cash flow of 7.4%, appreciation of 5.3%, and tax benefits of 20.8% is a promising start for us. The tax benefits have been the largest source for cash income so far; in future years this will likely be lower because much of our tax savings has been due to one-time costs related to purchasing and furnishing a new property. Depreciation will continue to provide tax savings for years to come, of course.

Appreciation isn't cash earnings, of course, until the property is sold, but it does factor into the overall wealth building opportunity in real estate investing. And it grows tax free.

I hope this is helpful to you, Krysten, as you figure out how to proceed. I recommend Real Estate Rookie by Ashley Kehr; she covers these topics better than I've done here. For MTRs specifically, I recommend 30-Day Stay by Zeona McIntyre and Sarah Weaver; they helped us run a lean operation. Both are published by BiggerPockets.

All the best!

-Wes

Totally agree - Wes nails it here. There are many ways to make money in real estate, and cash flow is only one of those ways. That strategy is the more dependent on the current market conditions (specifically interest rate). When your strategy is more on the tax/depreciation side of things, you can make a lot more money and the current market conditions don't factor in much. So, you can absolutely make money now with real estate, and the mid term strategy is a great one for both cash flow and tax/depreciation. My personal investing strategy is more in line with what Wes is doing and I make WAY more on my properties through taxes and depreciation than I do in cash flow (specifically my short term rentals that I self manage). 

That strategy is market/area specific though. My market (Indianapolis) is an excellent one for this strategy and there is a lot of demand here for furnished mid and short term rentals. It's a strategy that has grown in demand *because* of the higher interest rates due to the higher potential income (vs traditional 12+mo leases). 

I would also argue now is a great time to buy because of the interest rates. Of course this is market specific, but in my market (Indianapolis) we are still in a strong sellers market. When rates drop I anticipate demand to increase and inventory will probably stay about the same, so prices will rise. Like the saying goes - you date the rate and marry the house. I'd rather pay less now with a higher rate that I can refi out of than wait until they are lower and pay more (and probably have worse terms in the contract too due to multiple offers). 

Get a HELOC against the property. Yes, the rate is variable and will be higher than a cash-out refi. But, you can pay it off and the HELOC will still be in place so you can use it again and again. Rinse and repeat. And you only use the amount you need (Ex: $100k HELOC but you only need $60k, so you only use $60k).

If you do a cash out refi then you have the money, but you most likely got more out than what you needed, and you're paying interest on that money. And, if you pay it off, the loan closes out and you have to start from scratch if you want to use it again. 

Without seeing a link to your property it's hard to provide specific advice, but generally speaking it sounds like you need to "optimize" your STR listing.

To boost your activity I would do a few things:

1. Make sure you have professional photos and your staging/decor is top notch

2. Make sure your listing description is detailed, catchy, and easy to read (not just a jumbled mess of a paragraph)

3. Use a dynamic pricing tool (like Pricelabs) to be more competitive - you may have #1 and #2 dialed in, but if your pricing is off (too high) then you won't get bookings.

4. Exposure - make sure your listing is on all the main booking sites. Between Airbnb and Vrbo you probably have 95% of the market covered, but you can also get on sites like Booking.com and Google Vacation Rentals, etc for additional exposure. 

5. Utilize the enemy method - like @Bradley Buxton said, take a look at your competition to see how yours compares and make adjustments accordingly