Mike's short-term rental performance update

The Remote Investor

Tom and Mike discuss the evolving short-term rental industry, including regulatory updates, tax implications, and property management strategies. They share their experiences and insights on adapting to these changes and maintaining a successful short-term rental business, with a focus on personalized property management and understanding the local market. Michael also highlights the importance of carefully considering the financial complexities of short-term rental investments, including overhead costs and potential revenues.

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Transcript

And I just have not had great experiences or good luck with those bigger box brand names. I'm more of someone who really likes especially for the short term rental space, the very boutique, the very hands on. Welcome to another episode of the remote investor. I'm Michael albaum, and today I'm joined with my co host, Tom Schneider, and today, we are going to get into short term rentals. What you need to know? What questions should you ask and could they be a good fit for you? All right, guys, let's get into it. We've

talked about short term rentals, you know, kind of on and off for the past five, six years. I have always been hesitant to get into it. And I want to kind of noodle on you a little bit on some questions. Just

rigatoni spaghetti. What kind of noodle? Yeah,

yeah, something like that. Anyways, I want to noodle on it a little bit. I have yet to make the jump into it. I've always, kind of like, had concerns you are good, like, plus five years on it, what has changed from when you, you know, first were evaluating the opportunity, to now that you have a bunch of experience, what have been your, I guess, changes of assumptions or hypothesis having been in the space for a while? Yeah,

it's a really good question. And there's been a ton of changes, both in just the environment that we find ourselves in today, versus when I started investing in them, and then also just in my experience, what I've learned and kind of takeaways and key learnings, if you will. So first and foremost, I would say, is just the competition, like everybody and their brother and mother and uncle seemed to be in the short term rental space now, because it was so on fire for so long, especially during the pandemic, it was pretty easy money in a lot of instances, and so people would just jump in and have a fair degree of success. FROM ALL OF THE anecdotal stories that I've heard from, how many people are involved that was during kind of a worldwide pandemic, so a very unique set of circumstances. Now things have changed. People are maybe going back to work, maybe they're not traveling as much, not working from home as often, and so the short term rental space, just in the amount of heads and beds on an average night, has decreased dramatically. So that's that's kind of one and two things that have changed. The other thing is just regulations. Local regulations in a lot of the markets that were very short term rental friendly have soured on them quite a bit. And so where you may have been able to own and operate a short term rental or go buy a short term rental, there might be more restrictions around existing even if you're an existing owner operator, there might be restrictions on new short term rentals. And so that's changed the landscape in a pretty massive way for from is it greater?

Has it impacted your short term rentals a little a little

bit, a little bit? And so what I mean by that is there are now licensing requirements for all short term rental owners to obtain a license, which requires an inspection from the city and the fire department, whereas the couple years ago, that was not the case. It was kind of the Wild West. So I'm personally a fan of that requirement, because I think it's going to help as an as selfishly as as I'm saying this, it's going to help the the lesser than operators kind of wash out of the market. If you're not able to keep your property up to standard, and you're not going to play by the rules, then you're not going to be in the space anymore, which then leaves professional operators remaining. And so I think that as unfortunate as it is, the people that get washed out, it's going to leave the rest of us in a better position. And that's also what I'm seeing. I own, I own two short term rentals out in Lisbon, Portugal, seeing that happen on a pretty massive scale there as well. So they've changed the taxes that short term renter short term rental owners pay fairly significantly. And so they've changed a bunch of the rules and regulations and financial incentives and financial requirements for short term rental operators. And so there are people that got in at the wrong time that I think are going to get washed out by that. And those of us who are remaining are, I think going to going to come out the other side stronger.

Is similar type regulations in I think Smoky Mountains. Is that right?

That the still, yeah, that's, that's where the majority of them are. Yeah.

Do you find that a lot of the competition is using, like, third party, professional short term or is it a lot of, like, owner occupied like, oh, I'll just, you know, I own it. Oh, yeah, I can do the work. Like, I'll be the short term manager.

It's a mix of both that I found. So there are during the pandemic when when short term rental was just having a total day in the sun, and everybody was getting into it. I think there are a lot of management companies that got stood up realizing that there was a need and there was some money to be made. And there are some big, kind of big box brand names, I'll say, national managers, that have a fairly big footprint in the Smokies. I'll get their mailers all the time. I'm like, Hey, let us manage your rental and boost your revenue by 30% or whatever it is. And I just have not had great experiences or good luck with those bigger box brand names. I'm more of someone who really likes especially for the short term rental space, the very boutique, the very hands on, the very client focused property managers and so because I think I'm a believer in it's like, it's all about the guest experience, I'm also a big believer in the folks that are self managing, that are good at it, are killing it, like you can go see who has all five star reviews and 1000 of them, and you know, they are just knocking it out of the park, the again, the third party management, it could just be really tough, because you're a name and a number, if you're an owner with them, as opposed to somebody that's managing their own rental. I don't think you're ever going to compete in the same on the same playing field as someone who's self managing locally and really knows what they're doing.

Yeah, I feel like I've been burned in different areas of my life, like, you know, looking at the big box name versus, kind of actually getting to, like, know and understand, like the operation that's like a good general, like, life lesson on the home, like maintenance, like, some assumptions that I've always made that is that, like, short term rentals, you know, I feel like are more likely to get beat up just having, like, stayed in short term rentals. I mean, maybe it was like, more like bachelor party days, like, of them getting a little bit beat up. But how was your experience as it relates to maintenance and R and M and, you know, conditions of the home and those kind of costs, you know, in operating for four years as an owner?

It's a really, it's another really good question. So it's, it's a different animal in a couple senses of the word. And also, there's a deer outside my window. So I'm like, animal, different animal. So, yeah, yeah, different dough. So for one, there's the physical property itself, right? All of the things that are the same in a long term rental, and I have found that the condition of the property is actually better maintained in a short term rental than with a long term rental, because I've got folks going in there, a maintenance team and a cleaning team after every stay, and so every two days, every four days, every seven days, someone's physically getting into the property, being able to put eyes on and addressing the issues, versus with a long term tenant, long term rental, you might go a year or two years without being able to get into the property, and by that point people like, oh, the carpets trash, there's this leak that's been going on for the last six months. The walls trashed new paint throughout like So there, I think that there's the approach of, do you do touch up kind of minor repairs, which is what I would equate to the short term rental versus major surgery is what you're going to need with your long term rentals. So just from a beat up and use perspective, I think short term rental, I would argue, is almost better now, that being said, you do have the furnishings to maintain in a short term rental, which you probably aren't going to have in a long term rental. And so you need new bed sheets, you need new linens. You need new towels. You need new forks and knives and cups and dishware and all those sorts of things. Because those things break, there is insurance for that. Through Airbnb, they have, like host cover, I think is what it's called. So you can file claims and you can charge tenants or guests for for those sorts of things, but that can get a little bit sticky, especially if it comes time to getting a review from them. Like you're probably not getting a good review from someone. You charge 200 bucks to repair the couch that they ruined or what have you. So there are more dollars associated with maintaining a furnished property, and that, of course, does get beat up because of use as composed compared to a long term rental. So for sure, but grand scheme, property wise, I'm saying the property is going to be better maintained when it comes in a short term rental setup.

I like that. I heard a good analogy where it's like they're describing their short term rental as like a fire truck, and that it's getting used but it's going back to the house and getting washed up all the time. Super

good analogy.

So with so much hands on in that, you know, you're doing a cleaning after every stay, there's just like, a like, you know, everything you talked about, like, how would you compare the overhead of the fees versus longer term? And with that question, the actual, like, revenue side, you know, monthly versus, kind of the weekend, so you could kind of speak to the financials of being, you know, in a space, you know, seeing actual performance

totally. So it can run the spectrum. So I've had really great experiences with short term rentals being managed. And I've had great experience with short term rentals. Short term rentals, operating and managing them myself. So the fees, I'd say, your biggest fee is going to be a cleaning expense, just when we're looking at dollars in versus dollars out. And so some people will say, Oh, the cleaning expense is a pass through. If I pay my cleaning team 100 bucks per clean, I can charge again. Rest 100 bucks per stay, and then so it kind of washes out. So yes, you can do that, but what I found is that the cleaning fees you're able to charge are going to fall a little bit short in terms of what you're going to have to pay the cleaning staff in general. So in terms of dollars in versus dollars out, we're collecting a fee for the stay and then a fee for the cleaning and then we're paying out this fee, the fee to our to our cleaning staff, that tends to be bigger than the fee we're able to collect. So tends to be a net loss there, in general. Then when it comes to utilities, I think this is one that I massively underestimated

anyone being one a little like under the rug, but you don't necessarily think about Yeah, because you're like, Oh, I

live in like, yeah, we use water, like, or I'm used to living in a house, and, you know, my utility bill is 200 bucks a month, or 250 a month, whatever it is. And so I'm going to apply that same thinking to this, this investment property. If anyone's been to a short term rental stay where they're a guest, like, if it's hot out, they're cranking the AC down to 60 windows are open like or in the Conversely, in the winter time, if it's cold, heats up to 80, windows are open like, you're just not being effective, because you're not paying for it, so you don't care. And so if you're not paying for it, you don't care. You're not paying attention to it. You're gonna not you're gonna not be as concerned with it as a guest, right? And so we just have to be prepared for that as owners of these are the type of things guests are going to do. I wish it wasn't the case, but that's the reality. And so your utilities, my utilities, I vastly underestimated. So Gas and Electric were big ones. Water is also a big one. So if you've got a hot tub, I'm fairly certain that the local laws and regulations are going to require you to drain that hot tub and refill it after every guest stay so that it can be adequately cleaned. Hot tubs are several 100 gallons, if not multiple, 1000s of gallons per fill. So just be aware of that. Now it's I'm kind of a unique situation. The only property that I've got a hot tub in, I've got a well, so I only pay for electric in that instance. So I've got my own water supply, so it's not a big deal, but it can sneak up on you. The heating and HVAC can definitely sneak up on you. The other one that I think snuck up on me and caught me a little bit by surprise is insurance. And so anyone who knows me knows that I come from that world. I've got a lot of experience in the insurance space and world when it comes to owner occupants and investment property and investment property and commercial insurance, and short term rental insurance has just is expensive. When you compare it side by side against long term rental insurance, it can double and sometimes triple. And so we just want to be prepared for that. And everybody listening, I want to encourage you to be prepared for that if you're going to get into the space, because it is not the same. Now you asked about revenues. Revenue is also not the same. It is much more cyclical, and there's a lot more beta. You know, there's up and down, a big upside and big downside. We want to remember that we have very fixed payments when it comes to owning investment, real estate, pity is the best one, principal, interest, taxes, insurance are kind of the four components that if you have a mortgage on the property are going to be fixed universally of whether there's someone in the property or not. Now the variable expenses are going to be when it comes to management and the utilities, and then your your miscellaneous expenses. So bigger revenues on the upside, but you also have bigger expenses. So you just have to make sure everyone's got to run their numbers on a deal by deal basis of eight. By deal basis of if it makes sense or not. I came to the conclusion on a couple different properties that yes, this makes sense. On my house hack that I used to live in, I lived downstairs in a duplex. We operate a short term rental upstairs. The difference in revenue at the end of the day after we paid out all of the expenses for the cleaning and the consumables on that stuff. I think it was like 400 bucks a month, something like that, and we were managing it ourselves. We were we had a cleaning team that was doing all the turns, but we were managing the cleaning team. We were doing all the guest communication. And I was like, my wife was doing the vast majority of it. And we kind of looked at each other and we're like, what if, what if we just didn't, like, is $400 really worth all of the time, energy, effort, stress of doing this, versus just convert it to a long term furnished rental, we'll make 400 bucks a month less, but we don't have to deal with any of this stuff, and we get rid of all the volatility of what if we don't get a booking, or what if we're on a trip and we get a booking, because that happened to us too. We were in the middle of nowhere in our van and got a booking request. We're like, oh crap, our cleaning team isn't scheduled, so it just it can be a lot more headache than it's worth. And so just because it's a short term rental just doesn't necessarily mean it's going to make more money. So a lot of word vlogs, yeah,

no, I'm into it. I'm into it. We're running tight on time. My I guess final two questions, you know, where there is season volatility. Is there an opportunity to do, like, short term during the high seasons and then sort of like a midterm in the off season, so like, a six month lease? Have you, have you ever seen or done that type of maneuver?

Yeah, we did. Yeah. Yeah, we, we kind of did that with this house hack that we decided to convert to, to a long term furnish. We could very easily have gone midterm with that. And so I think it's a big, a big question of just what the demand side economics are. So if you're in a market that sees short term demand spike in certain times of the year, but you also have fairly sustained midterm demand, I think that's really where you You hit the nail on the head and can blow this thing up. We do that with our with our midterm rental down on the Central Coast, it's a condo. We can't short term rent it for less than 30 days. So we've done one month contracts, and we've also done a year contract. And so having that flexibility, assuming it's going to be furnished the whole time, I think is a great way to go. Now, you just want to be careful, because the management of that changes fairly significantly. And so if you've got a short term rental manager, they're probably not going to be equipped to handle midterm rentals and vice versa. So but if you're self managing, absolutely if I would encourage everybody who self manages a short term rental to explore midterm rentals in their down season, because it can be a great way to smooth things out and minimize your vacancy.

Last question from me, are you going to do more short term rentals? You know, based on your experience, do you plan on kind of adding to your portfolio? Yeah,

you know, I'm opportunistic about it. I'm open to it. I just know how much work is involved, even even as like the passive owner, there's just a lot more risk involved. So I like the short term rental. I think the the big side, the big upside, is huge when it's done right, but I know that it's challenging to do, right? So if I see a property that doesn't work as a long term rental, but could work as a short term rental, and upside is pretty huge. Yeah, I'm open to it. It's just not something I'm actively pursuing right now, but I'm, you know, I've always got one eye on on the market for sure. Awesome.

Michael, last 60 seconds. Any final, final thoughts on short term rental.

I think it's great. I think it's an awesome asset class. I think there's a lot of variability that's kind of unknown and doesn't get talked about. And so I would encourage anybody who's listening go do a deep dive. Go learn as much as you can about short term rentals in your particular market of interest, because we always say real estate is hyper local, short term rental is even hyper, hyper more local. And so you could have some counties or some cities within a state that have different rules governing short term rentals. So the last thing I want to see is somebody go invest in a short term rental thinking they're going to kill it and find out they can't even operate it as a short term rental. So go do your diligence. Go do your homework. Don't get caught off guard. Learn from our mistakes, and I'll see you on the on the short term rental trail.

Awesome. All right, everybody. Well, thank you for listening to this episode, and look forward to catching on the next one. Happy investing.

Happy investing. You.