How did you get started with your first short-term rental property? 1:06
Jae
So my first question is, yeah, I can see that you have four listings. And are they all in the same location, same building?
Earl
They’re in the same building? Yeah.
Jae
How did you get started with your first rental?
Earl
So, this is my first and only short term rental property for now with the four listings. My first long term rental was… I got it the year prior. I had done some creative financing. Not the short term rental. The short term rents I can go into a little bit as well, but the long term rental I have is a three family also in the Albany area. I had saved up about $23,000 but the cash to close was about $38,000 I was short 15 grand. I pulled it from a credit card balance transferred from a 0% APR credit card and then, you know, deposited a check into my savings account and let it season. So when it comes time to close, you know, it showed enough cash to close for the loan to approve for the remaining 75% of the loan to value of the property. That was the first one.
When I had done that, shortly after I’d done that, some folks that I went, well, one guy I went to school with, at NYU, he was just about getting his real estate agent licence. But he ultimately wanted to do investing and real estate agent doesn’t teach you how to become an investor. So he partnered up with me and brought along another friend of his to go into this next deal. My second deal – their first – and this is what ended up being the short term rental. So the short term rental, we had acquired that last… we had acquired in November of 2018, after you know, spending a lot of 2018, trying to find the right property. We weren’t necessarily targeting short term rental initially, actually, it was a bit of an accident, we found a property that had some bonus units, and we’re like, “Oh, we could do long term rentals on the main units and short term rentals on the bonus units”.
So we started with, you know, purchasing that. So I went into that deal, actually with them, they had put up the downpayment and closing costs of about $48,000 on a 240,000- $233,000, purchase price. So they put in the down payment and closing costs for that one, but borrowing my credit, really putting it on my credit. That’s the way we went about it, just to get their foot in the door. And then, so I had used some promotional credit cards to furnish one unit, then two units, then eventually three and four units. And then we had paid that back from the profits right away so that I was all in my own pocket, you know, about three grand only from my credit cards, ultimately, which I paid back from the subsequent profits, of this unit, of the property
Jae
Your first short term rental, you mentioned that it was $230,000.
Earl
Yeah, the whole building. Yeah, it’s four units.
Jae
Oh, so it’s with the four units.
Earl
It’s all yeah, it’s technically a duplex, but it’s got the bonus basement and attic. So we were initially thinking those would be the only short term rentals. However, it worked out that, you know, we just decided to turn all four units into short term rentals.
Jae
Right. Okay. Makes sense.
Earl
Yep.
How has COVID-19 affected your short-term rentals? 4:33
Jae
And what’s your current situation with your rental? Like, among the COVID situation?
Earl
Yeah. So I was surprised, you know, in the second half of March, I had a whole wave of cancellations. You know, my phone just kept dinging, and dinging and dinging. And everything, everyone was cancelling straight through, you know, April and May. And right now, you know, it’s, I was quite surprised when I started April, it was about 5% occupancy, or something very, very low. That was the beginning. And usually you want to start the month. A good start of the month would be about 50% occupancy, and then as the month goes on, the rest of the remaining 50% gets filled up. But we started the month with 4%. And we ended the month at 95%. So that was cool.
Jae
Wow. So you’ve managed to hit like 95% across the four listings.
Earl
Yeah. And I didn’t really change anything. It was a matter of guests who stayed there. And similar to you know, your guests, they, they stay there for a week, and then they stay there for another week and another week. Anyway, had some people checked out and then other guests filled in and then you know, those guests came back later. So it’s a bit of intermittent guests, repeat guests. And yeah, it just ended up being… there was a good chunk early April for one of my units that was like, you know, over a little over a week long that was empty, but the other three units made up for it. So that’s why it came out to be 95% occupancy. That’s across the four units.
When are your busiest seasons? 6:10
Jae
Okay, that’s awesome. When are the busy seasons and when is the quietest month for your rentals?
Earl
The busiest… so I have noticed that similar to others, it is a little bit seasonal, but not quite. January is surprisingly busy. For some reason. February, is you know, normally dead and you know, so didn’t think much of it, February and March. But you know, until all the cancellations came in, you know, I thought it was just normal February and March. July and August are also very busy and actually so is May. May is always booked because it’s graduation season and there’s several colleges in the area that have graduations. So a lot of family members use Airbnb instead of hotels.
Jae
Right? So do you increase the price during the graduation season?
Earl
Yeah, I don’t do much of it. I don’t do much manual price. I don’t do any manual pricing. I use tools like Smartbnb and Beyond Pricing. Actually, Beyond Pricing is not available in Albany. So I use PriceLabs instead of Beyond Pricing. In other cities like Denver, New York City, the bigger cities have Beyond Pricing is available. But for PriceLabs, I set a minimum price, a base price and a maximum price. And with the Coronavirus and the lower demands, it’s been tending towards the minimum price, sometimes it will eat up a little bit for each unit. I actually have that only set for three of the units because the basement unit I just have smart pricing on. And surprisingly, the smart pricing has been pricing it higher than what I used to have as the minimum price. I had the basement unit for typically around $45 to $50. And I’ve been seeing people book it for $65 regularly. So it’s the Airbnb algorithms.
What is your occupancy rate like in the last 12 months? 8:19
Jae
How has been your occupancy rate like throughout the season? You’ve mentioned 95%. But how is it like in the last 12 months?
Earl
Last twelve months? Yeah. So the occupancy in the last 12 months typically hovers between 85% and 95% on average. I have not seen it dip significantly. You know, I think on a slow month, a typical slow month, and a slow month might be you know, October, November. That slow month is about 80%.
Jae
Understood. When I had a look on your…
Earl
84%, that was for last November. I believe October was slower. Oh, no, it was not. October was 94%.
Jae
Yeah, that’s awesome.
Earl
And how’s December? December’s 87%. All right. Well, I guess I don’t have a slow month.
What’s your revenue like? 9:15
Jae
What’s your revenue like? If your occupancy is 80-90%?
Earl
Yeah, yeah. So okay, I found a slow month. That was February of this year, February 2020 was 80%. There we go. And in terms of revenue, that varies a little bit, but across the four units, gross revenue is averaging about $9000- $8500 to $10,000. One month or so I might have had slightly higher. February was low. So about 80% I was getting this past February was $6747. So that’s cool. And if I look at November. That was $8407. And December was $8700. So the most I got was in June of last year. Actually that was uh, that bumped up over 10,500, it seems.
Jae
That number seems to be…
Earl
…$10,600. Yeah. For four units. Yeah. That’s pretty good for gross. So yeah, in terms of just you know, not occupancy, but rather revenues. I can see June and August is your typical, you know, seasonal bump, right? But May is actually, May and October are surprisingly a close second.
What are your expenses? How much profit do you make? 10:39
Jae
Yeah. And what’s your expense, like for the cleaning supplies and all those things. So let’s say, if you make $10,000 per month in revenue. What’s your actual profit?
Earl
Yeah. So, other models, I know they own a property… or they don’t own the property. They might rent it but since we own the property, we also have you know, PITI: principal, interest, taxes and insurance. But not including that, you know, cleaning expenses tend to be approximately $2000 a month. And utilities, electricity and gas are about $500 a month. And then water, sewer, extra $30 small stuff and supplies, approximately, you know, for all four units, this one I haven’t, you know, really calculated out, but I would guesstimate about $150 a month, maybe less.
Jae
Right. So that’s giving around $90,000 to like $100,000 profit per year? Before like tax and insurance and all those things, PITI?
Earl
Yeah. So yeah. Without the mortgage,you mean?
Jae
Right.
Earl
Yeah, I mean, with the mortgage, I would net up probably about $5000. This was pre-COVID level. So we’ll see what 2020 will turn out, but we’re expecting about $4500 in net revenue. That’s after the mortgage.
Jae
After the mortgage. So you’re actually like earning interest-free? I mean, what’s that? You’re not buying equity at all? Or are you building…?
Earl
That’s also building equity. So that’s with the, you know, principal and interest and taxes and insurance, the principal part building the equity. So, you know, if we use other strategies on top of that, we could really knock out that mortgage payment in very, very short amount of time.
Jae
Yeah. How much of the equity are you building per year for that?
Earl
So that’s, that’s dependent on… For the whole building, you mean?
Jae
I mean, yeah, for the whole building, but for the rate of the mortgage that you’re paying.
Earl
Yeah, that’s based on the amortization schedule, and here in the US, you know… I’m not sure about the UK, but we have a standard 30-year, mortgage, conventional loan, right? And that’s based on an amortization schedule, where it’s front-loaded interest. So you’re paying much of interest. So very, very, very little principle gets built up in the first, you know, seven years or so, unless we apply other strategies like velocity banking, to apply the cash flow against the mortgage and accelerate it to build up equity way, way faster and save on the interest.
Jae
So yeah, if I just assume that you’re building towards the equity around $7000-8000, roughly, a year. That means that actually your gross yield is above 25%. Considering that your property was like $235k, and you’re making $45,000. And building some equity on top of it.
Earl
Yeah, yeah, I guess that’s one way to think about it. I believe, you know, that would be the capitalization rate. Right? But, you know, we were more looking at the cash-on-cash return, meaning the partners had put in $48k, when are they expected to get paid back essentially, from the profits? And we’re estimating about three years.
Jae
About three years. Yeah, for the cash-on-cash return.
Earl
For the cash-on-cash return. Yep.
Jae
Right. How does that work with you? Your net revenue is $45,000 a year?
Earl
Approximately, yeah.
Jae
That’s your
Earl
Yeah. If that’s the net revenue, then they would be paid back in one year. Right. Is that what you’re saying?
Jae
Yeah.
Earl
And we also split it up a different way. So because they put in the money, and I did not put the money in. So I get a fraction of that. But also, let’s see. So that would actually Yeah, no, I think you’re right, that the two, three years was prior estimates for when we would be getting the money back. However, the setup costs also played a factor into the first year. That first year was basic, like, yeah, it netted $85,000… No, sorry, it grossed $85000 in the first year, that one I know from just the Airbnb’s printout, transaction report. However, there was a lot of setup costs that were used to, you know… the revenue was not the profit. So profit was probably closer to $30k.
Jae
Right, in the first year.
Earl
In the first year, so there’s that first year. And then the second year will be, you know, we’ll make up for the difference. And so we’ll have all our money back. Or at least the partners will have all their money back. After the second year, hopefully. So we’re in our second year now.
Are you looking to expand? 15:58
Jae
I see. Are you running Airbnb elsewhere?
Earl
Nope, not yet. Not yet, have not gone to expand that yet.
Jae
Right. Are you planning to expand it into like other areas? Or that area?
Earl
Probably not in that area? You know, but I’m not sure yet. We haven’t really like… especially with, you know, with a little bit of downturn here. A couple months ago, we were looking to expand a little bit, but those plans have changed.
How are you managing your Airbnb rentals remotely? 16:21
Jae
Right? Is your partner living near there? Who is managing the Airbnb?
Earl
I’m managing it remotely,
Jae
Like, completely remotely?
Earl
Yeah. Yep. Completely remotely.
Jae
How many times have you visited there this year?
Earl
When’s the last time I was there? I think I was there for the holiday season. Yeah. So December, late December, I was there.
Jae
Right.
Earl
And the other two partners are actually living in New York City or no… One guy lives in New York City, the other guy moved back to Taiwan. But they’re more silent capital partners than anything.
Jae
Okay, what are the tough challenges about running remotely?
Earl
You got to have the systems in place. I think. Challenges involve… Okay, so I was on vacation once in Hawaii. So there was a big time difference. So time difference, I’ve gotten used to at least, with only a two-hour difference. It’s not too much. And we used to have a lot of, you know, a lot of guests, you know, one night stays, so there’d be constant turnover. So handling that was, you know, I have automated messaging with Smartbnb, and all that. So that was crucial, but some challenges still exists.
And you know, and those usually lie when guests don’t read the instructions. I have all the instructions in place, and maybe too much instructions. But sometimes they just straight up don’t read it, and maybe they don’t read it because it’s too much. I don’t know. But the point is that they get an email, I have August Home locks, they get an email as soon as they book with the codes in it and also the instructions if they wanted to use the app. Sometimes they completely miss it. Maybe it goes to spam. I’m not sure, but I do have in my Airbnb chat to confirm that they received it and most people do confirm that they receive it but the ones that don’t, then it gets a little wary.
But 48 hours prior to check in I have an automated message as well that gets sent out with all of the detailed step by step instructions. The instructions include “Hey, get that code from that email. If I can just figure out a way to get the August Home codes directly into the Airbnb chat message then that would slightly streamline some things but you know…
When I was in Hawaii, there was a sewage backup. So the basements started getting flooded with sewage.
Jae
Oh and the guests were there…
Earl
The guests were there.
Jae
How did you do?
Earl
So yeah, they reported it, I got emergency plumber to come by. My cleaner had done a lot of work cleaning that up and I believe we had also shut off the main water supply just to prevent it from getting worse. But yeah, I had a plumber, you know, commercial plumbers clean that up, but just like clean out the pipes. And then I had the guests the guest situation obviously- well not obviously- but they couldn’t stay there. I believe I had ended up, what did I do with them? Either I moved them to a unit upstairs or I had booked a hotel, you know, at my cost, at my expense for them.
Outro
Many thanks to our guest, Earl, again for sharing his story with us. If you’d like to hear more about what it’s like to host and manage Airbnb properties, make sure to follow us to be notified of the latest episodes.
