All Forum Posts by: Sean Bramble

He's not overthinking it.

Many are unaware that Airdna and Pricelabs account for cleaning fees in a totally different way. Pricelabs reports revenue EXCLUDING cleaning fees, Airdna INCLUDES them. Seems minor, but in this era of compressed yields accounting for this the right way is mission critical.

Here's an example from a deal I just underwrote:

-- Cash investment = $100K

-- Airdna reported revenue (of a like-for-like comp) = $100K (INCLUDES cleaning fees)

-- Pricelabs reported revenue (for the same comp) = $85K (EXCLUDES cleaning fees)

-- Implied annual cleaning fees = $15K

-- Other annual expenses (excluding cleaning fees): $70K

>>Cashflow/ COC (correctly VS incorrectly accounting for cleaning fees) = 15K vs 30K (15% vs 30% COC)

i.e., if I didn't reduce Airdna's revenue estimate by estimated cleaning fees my underwriting would have been WAY off, but I could use Pricelabs' estimate "out of the box" and ignore cleaning fees altogether in my underwriting bc of how they report their data.

Adjust your prices to manage occupancy up or down .. it’s really that simple

Quote from @Steve Vaughan:

Quote from @Sean Bramble:

I'm considering buying an STR property with a land contract (also known as an executory contract or contract for deed) with 0% interest payments … meaning each payment would be pure principal pay down. No interest expense to deduct on my taxes 

Question: how is this treated for tax purposes? Would I have to pay income taxes on principal pay down? I could imagine a scenario where taxes owed could exceed cashflow if this is the case, but that doesn’t seem right 🤔 

example:

Gross STR revenue = $100k

Annual principal only pmts = 60K

Operating expenses = 20K

Net Cashflow = 20K

do I owe taxes on only my cashflow of 20k, or do I owe on my combined cashflow + principal pay down of 80K?

Nope- principal payments aren't taxed. 
The elephant in the room isn't taxes. It's not owning the property.
Hope your seller remains solvent and not sued so his property doesn't get a new lien against it while you're making all those principal payments.
  

 @Steve Vaughan .. just to clarify, I know principal payments themselves aren't taxed, but my question is whether I can deduct them from my rents received to reduce my taxable income? So if my rents are 100, operating expenses are 20, and principal-only payments are 60, is my taxable income 20 (my cashflow)? or 80 (my rents minus operating expenses, but excluding principal payments)?. Unsure of how depreciation comes into this equation (and if I can even claim depreciation on a land contract). Any clue?

Quote from @Steve Vaughan:

Quote from @Sean Bramble:

I'm considering buying an STR property with a land contract (also known as an executory contract or contract for deed) with 0% interest payments … meaning each payment would be pure principal pay down. No interest expense to deduct on my taxes 

Question: how is this treated for tax purposes? Would I have to pay income taxes on principal pay down? I could imagine a scenario where taxes owed could exceed cashflow if this is the case, but that doesn’t seem right 🤔 

example:

Gross STR revenue = $100k

Annual principal only pmts = 60K

Operating expenses = 20K

Net Cashflow = 20K

do I owe taxes on only my cashflow of 20k, or do I owe on my combined cashflow + principal pay down of 80K?

Nope- principal payments aren't taxed. 
The elephant in the room isn't taxes. It's not owning the property.
Hope your seller remains solvent and not sued so his property doesn't get a new lien against it while you're making all those principal payments.
  

Thanks @Steve Vaughan - I hear you on the risks. He’s unwilling to do a subto/ seller carry hybrid on this one, so this is the workaround. I know land contracts expose me to this risk, but are there any tactics I can use to at least reduce it somewhat?

I'm considering buying an STR property with a land contract (also known as an executory contract or contract for deed) with 0% interest payments … meaning each payment would be pure principal pay down. No interest expense to deduct on my taxes 

Question: how is this treated for tax purposes? Would I have to pay income taxes on principal pay down? I could imagine a scenario where taxes owed could exceed cashflow if this is the case, but that doesn’t seem right 🤔 

example:

Gross STR revenue = $100k

Annual principal only pmts = 60K

Operating expenses = 20K

Net Cashflow = 20K

do I owe taxes on only my cashflow of 20k, or do I owe on my combined cashflow + principal pay down of 80K?

Context: I've got a deal in the pipeline that would require a contract for deed/ executory contract ... meaning I would take equitable title, but legal title would stay in the seller's name until I pay them off. Long story, but it's a creative solution that makes sense for this deal. 

Question: if the county the property is in starts an STR permitting process (they don't currently), will I be able to get a permit even though I am not the legal title holder? I imagine people doing rental arbitrage ponder similar questions ... would love some input! Thanks everyone

Quote from @Erik Stenbakken:

I think that @Ryan Moyer is 100% spot on with the stock analogy. Yes, the supply and demand thing is one of many, many factors that contribute to the success or failure of a property. I think demand in our STR space is the proverbial 800 pound gorilla. It's going to go wherever it wants to and we can't do much about it. I think the recent over supply is going to have direct impact on the demand. Probably more so than many other factors.

However, in the STR space, many new investors did NOT stop and make the calculation Ryan points out regarding Zoom or Target RE the stock market: that that those were temporary peaks in demand. The market conditions that made demand soar (Covid and Christmas) are not permanent factors. Most investors recognized that.

I see newbie taking earnings from 2021 and projecting them on forever into the future. I just ran across a seller who took May through August then multiplied that total by three to come up with their “projected earnings” for the year. This is on a lake property in the Midwest where the demand is going to be dead the other eight months of the year. Many new buyers don’t understand this, buy the property expecting it to cashflow awesomely (pumping up supply and prices), and then I believe in the next year or two are going to find the reality crushing. 

This is to say, we may experience a type of market cycle in the STR space that is somewhat of our own doing. Add to this all of the other market forces at play (and there are a lot) and it's going to be interesting over the next year or two.

Agree with this. Doesn’t help when STR gurus encourage new investors to only consider how comps are priced on Airbnb that month regardless of season … and call the use of software that reports historical annual totals “analysis paralysis”. Sure, we should discount the past few years to be conservative, but only looking at prices on Airbnb calendars is like driving full speed down the highway with your eyes closed 🙃

Thanks everyone. I agree with @Collin Hays - a 50% cut to rates to boost occupancy during hard times seems like reasonable assumption to bake in … but with the property prices I’m seeing people buy at (many buying at 10 caps or even lower for established properties) those daily rate cuts will need to come from reserves for most folks … I’m sure many are “swimming naked” as they say

Were any of you investing in STRs back in '07/'08/'09? I'm trying to understand how much (%) revenues drop in a down market so that I can factor this into my underwriting. Seems like most of us on here are relatively new to the asset class, but would love to hear from any of you who have been in the game long enough to know what happens to demand in a slow market first hand

Hey BP- curious what your market selection > underwriting > offer process looks like in detail for STR acquisitions. What are the steps and what specifically are you looking for/ doing in each step? Which data providers are you using? Seems like there is a ton of info out there about setting up and running an STR, but less on the acquisition side of things. Thanks everyone!