All Forum Posts by: Sean Bramble

STR isn't necessarily worrisome if you're approaching it strategically. Force fitting commodity hospitality assets into normal single family homes is what's risky bc it's so easy for John Doe and Joe Schmo on the same street to do the same

Remember that a hotel room is an STR ... so is a luxury villa with full staff and in-house chef in the French Alps ... and so is your basic 3b/2ba Airbnb listing in Normal-ville USA (sparingly furnished with IKEA furniture). It's a huge spectrum with different price tiers, service levels, and product quality. Where should you play? Not in the commodity space IMO

The STR boom reminds me of the boom I saw with marijuana dispensaries when it became legal in my state. So many ragtag operators popped up overnight to cash in on high demand and almost no supply. Most looked like 16 year old boys started them - terrible location, pitiful neon green logos and branding, etc. I'm not a consumer, but I'm sure the service wasn't great either. I bet they made money for a few years. But fast forward to now and there are a few market leaders who clearly know what they are doing, and the long tail of poor quality operators are shutting down bc they can't compete. It's literally a page out of an economics textbook

Sure, SFR STRs aren't "new", but the OTAs made them mainstream and demand has skyrocketed to levels unheard of before. It's basically a new industry … heck, in many places it really is

if you think about it, buying a house is the closest thing to buying a business that the average person will experience, and given the fact that so many of us have gone through the process of doing it for ourselves, the process is even more demystified. That, plus the fact that the OTAs essentially created a model where owning a single hotel room makes business sense means barriers to entry in the STR space are INSANELY LOW. It's anrguably easier than starting a bad dispensary. So supply has skyrocketed. And guests aren't too impressed with the average STR.. because .. well .. the consumer experience sucks (we've all seen these listings)

but supply will continue to increase further. BP reaches a HUGE audience. The cohost is literally an STR guru. This influences investors at an enormous scale. Plus yields on LTRs are pitiful right now … who in their right mind wouldn't choose STR in this environment? Who cares if yields on these riskier assets resemble LTR yields several years ago … it's the best option we have

So more supply is on the way while demand is normalizing post-covid, bringing revenues down

And yet more headwinds are on the way. another threat is an emerging class of better designed group hospitality assets. It will take some time for these all to come online, but these properties are designed with the end consumer in mind and will no doubt outperform the average STR. Ideally, many of us will be building and buying these (some already have), but many larger businesses/ hotels will be playing in this space as well. Branding and large portfolios will offer a remedy to all of the guest complaints you hear today - no more inconsistency in amenities or service, and certainly no more hosts asking you to "start the dishes when you leave and put the linens in the laundry room". Don't overlook this - big developers can add a TON of supply in a very short period of time, and can rent at a higher $psf making that a sound investment on their end. There is just no reason the average STR will be able to truly compete here. It would be like if all the restaurants in town were just random people serving mediocre food in their living rooms, but then one day a bunch of real restaurants opened on Main Street. Where would you choose to eat?

And then … a (significant) recession hits and demand truly falls off a cliff. Not the kind where people have to say things like “we’re technically in a recession”  .. a real one where tons of people are getting laid off and cutting back hard on discretionary (travel) spending. Who will be left standing when the dust settles? Will make an interesting case study (and probably bring down home values in several cities along the way) 

Long-winded way of saying there are many other drivers of the declining revenues we’re seeing. I’m sure some talking heads on the left turned off a few guests, but the elephant in the room is increasing supply 

… and we’re all to blame 😉

Maximizing revenue may mean a different type of guest is booking altogether, and you'll have to decide if it's worth it to you. Different types of guests book w/ shorter lead times and lower prices (and vice versa). I've noticed in my listing that our low season attracts more difficult guests bc our prices are lower ... but to me i'd rather attract a difficult guest instead of letting it sit vacant. Cost of doing business.

The only real way around this is to operate higher end listings that will garner a relatively high ADR even when you have to lower your prices to boost occupancy ... better quality listings attract a different consumer group altogether with a much higher willingness to pay.

Longwinded way of saying that it's not Pricelabs' fault ;)

Will be interesting to see if Pace writes about this method in his upcoming Bigger Pockets book … 😬 

Also posting some less expensive resources I've found that are a good starting point for others interested in development:

-- Greg Dickerson has a very high-level course on commercial development for sale on his website for $99 https://www.dickersoninternati...

-- Udemy has some very inexpensive (<$20) courses on development https://www.udemy.com/courses/...

-- Columbia University offers a free course on construction finance and construction project mgmt https://www.coursera.org/learn... https://www.coursera.org/speci...

Makes sense - I suppose it all depends on your investment objectives. Looks like we're talking about two very different types of assets (a property vs a biz), with very different pros and cons. I know there are many on here who would argue for a more measured "buy and hold" approach (this is a Bigger Pockets forum, afterall), but my guess is your average hotelier would argue the opposite (though I doubt many are on here to read this in the first place).

For me personally, I started out relatively agnostic on which path to take. It seemed like there was a ton of upside with SFR STR yields where they once were, but now I'm taking stock of where the market is today and going through a bit of reckoning with myself ...

-- SFR STR yields are way lower now (essentially enough to cover property mgmt plus a small spread, or to pay yourself a property mgrs salary)

 -- Plus the significant appreciation we've already seen over the last 3+ years

All of that is leading me to be more interested in building an actual hospitality business bc there seems to be way more upside there (even if that means more risk and longer timelines for an exit). For me, that would have to come from underlying business bc I'm just not seeing the upside I'm looking for in the real estate itself.

Full disclosure though, I'm still having this debate with myself and trying to figure out my path forward ...

I may be using the wrong terminology here when I say "commercial", but think of a multiple (5+) cabin development on a single piece of semi-rural land. Or a dispersed hotel concept with standalone rooms spread out over the grounds and a central common area/ restaurant. Either way, it's zoned in a way that allows for business use, and the value is a function of NOI. The structures may indeed look like homes, but all the valuation and financing looks more like a hotel or multi-family development. Not entirely sure, but I think "build to rent" developments are in some ways similar.

 @John Underwood - just curious: how do you account for occupancy rates, and - most importantly - seasonality with manual projections?

Are there any of you who develop properties in phases, starting with some sort of "spec" property to start that then allows you to easily raise capital for phase 2 (and beyond)?

I am interested in buying land to build a multi-property short term rental development, starting with a single property. I would like to be able to build additional properties on the same land afterwards, but only have the capital to start with a single property. I'd like to use the success of the first to attract investment for the others.

I'm assuming this involves designing roads and utility infrastructure with the entire site plan in mind, but also realize this could mean more cost upfront than if you were only building the a single unit. Would be great to hear how developers think about a phased approach like this, and whether it's worth it or not! Is this common? What are all the things I should be thinking about?

Also - would love to connect if any of you are also building STRs!

 Can’t emphasize this enough - don’t overlook this! Underwriting with Pricelabs revenue comps is generally the best bc you can ignore cleaning fees. If you use Airdna you have to calculate manually and subtract 

in general though, you can think of your cleaning fees, debt service, capex contingencies, and other operating expenses (supplies, utilities, etc) as a sort of “hurdle” that you need to overcome with revenue before you start making a profit. A lot of less expensive deals end up making less sense when you factor everything in … even if the revenue as a % of the purchase price of the home seems high. 
On the plus side- you're clearly learning how the P&L of an STR works, which is a great step in the right direction that unfortunately many investors learn *after* they've made the purchase

Another thing to note: don’t “cook the books” in your underwriting by undershooting cleaning expense (if using Airdna) .. you should be changing your ADR dynamically to boost occupancy in order to *maximize* revenue .. but this in effect “maximizes” cleaning fees as well .. BUT you’ll still make more at the end of the year by doing it this way. So factor in cleaning expense based on the costs of cleaning x # of cleanings per year based on the average length of stay in that area and a relatively high occupancy target.

Good luck!