Repurposing underperforming short-term rental properties

The Remote Investor

Short-term rental property is an amazing investment, as long as the conditions for it are right. Often, conditions change and we have to be able to adapt quickly. In this episode, we discuss what you can do if your vacation rental is becoming a liability.

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https://www.myfiacademy.com/

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Transcript

What's going on everyone? Welcome to another episode of the remote investor. I'm Michael Albaum. And as always, I've got my trusty co host with me,

Pierre Carrillo.

And Pierre, what are we tackling today? Man? Tell me.

Yeah, so some people get into short term rentals and they don't perform like they underwrote them, or they're no way or certain markets are no longer friendly to short term rentals. We've seen local governments come in and outlaw them, what do you do? Like, how can you repurpose that property instead of just selling it?

How do you not get stuck with this thing? Yeah, it makes sense. Because I think too, like it's, I think it's a great topic. So many people bought short term rentals as short term rentals. And so to then go sell this thing as a short term rental in a market that either isn't friendly to short term rentals, or the property hasn't performed might not make sense. And so you could be getting totally hosed on the exit because of that. So I love this topic, man, repurposing, re engineering, if we will, the particular property to perform and get through kind of weather the storm. So I think what makes a lot of sense for a lot of people, in a lot of instances, I use the word a lot, many times and that sentence is going from short term rental to mid term rental. And basically what a mid term rental is, for anybody that doesn't know is it's not a nightly or weekly rental, it's going to be monthly, usually 30 day minimum, is what distinguishes between short term and long term. And so a lot of cities and counties and markets that are pretty hostile to short term rentals, make that distinguishment as well at the 30 day mark. And so if if you're in one of those markets, look up the rules and regulations for your particular market to see okay, what is your market, consider mid term, but my guess is going to be 30 to 31 days. So going from short term to midterm might sound scary, but I think it's, it might be necessary. First and foremost, even if it's scary, I think it could be a critical thing to do. And secondly, I don't think it's it's as difficult as maybe a lot of people are making it out to be. So one thing I always recommend is when it comes to your pricing, figure out what your bottom bottom bottom line number is that you can afford to charge on a monthly basis given all of your expenses. So you're the operator, you're the owner, you should know what your monthly mortgage payment is, if you've got one, what's your taxes, insurance, utilities, all of the expenses that go into operating a short term rental, we need to figure out what they are, because that's where we're going to start from. The nice thing about converting from short term to midterm is all those cleaning expenses. You can kiss him goodbye, you get to divorce, you get to divorce those, those for a lot of people are going to be their biggest expense on a monthly basis, other than a mortgage. So we got to figure out where we're starting from. Once we know that number, then we can go do some market research and see what our midterm rentals going for in your particular market. And PR before the show, I know you were rattling off some great resources for people to check out what are those

k opa.co. Landing furnish finder, Facebook marketplace is always one. And what's cool about Facebook marketplaces, you can kind of go and look at their profile and see the person but the end the MLS as well as more general but people do post midterm rentals. They're

awesome. Love it. And one other one like In addition, Facebook marketplace too is there are market specific housing groups on Facebook, so or met or whatever, whatever the hell it's called these days. So we still fit Yeah, I think it's rare. We're gonna be Facebook in my day. So go check out some of these some of these areas and see what people are charging for mid term rentals. And that'll give you an idea of okay, if you got to make $3,000 a month say to meet your your requirements for your expenses are even in the realm of possibility based on what other people are charging. So you gotta go do your market research, you gotta go do your due diligence. So the other thing I think it's really important to keep in mind is a lot of short term rentals are kind of built, very purpose built and designed around what I call like the Instagram factor, or the photogenic NIS factor where people can go and take pictures at these places. And that's why they want to go stay at these short term rentals. Well, if someone's coming to state your property for a midterm basis on a midterm basis, it's probably because they're either doing remote work, or they're having a job in an area doing a stint for a company or an employer in the area. And so they're probably less concerned with that wow factor, I would say. And so we want to be thinking about what are the amenities and what are the things that somebody who's actually living in this property? Where are they going to be cared? What are they going to care about? Here? Pop quiz, if you're gonna go stay at a place for 30 days, what are some things that you want to make sure definitely has

comfortable bed, strong Wi Fi and office. Those are the main things. Yeah, maybe yeah, maybe a little peaceful place to sit. And I think

I would agree I'm the same. I'm the same. Having been a digital nomad for a long time. That's exactly what what my wife and I looked for. And so again, we want to put ourselves in the shoes of our end user. And if they're coming to stay for 30 days, plus, having those things is really important, versus if somebody is coming to take pictures at your house for two nights and spend a weekend and party or whatever, they might be less concerned that the beds are super comfortable, or that there even is a desk and a desk chair to use. So we want to kind of reshift our thinking to who are our target clientele is from the weekend warrior or nightly or to nightly guests to the person that's actually going to be living there. So just making sure that you've got those things. And if you don't, you might have to spend a little bit of money to transition your property from short term to long term. Most people, I'm one of those people that I want to make sure that I have really good guest reviews and all my short term rental. So I tried to have really comfortable beds and furniture, but I'm probably not prioritizing that quiet space as much as as somebody in a midterm rental would want. So looking to make that transition and make some changes at the property is definitely worthwhile. Something else to keep in mind is if you got to short term rental, a lot of the amenities like the pool tables, and hot tubs and video games are sometimes a must just to compete in whatever market you're operating in. I would argue that in most midterm rental markets, those things are going to be less important when it comes to getting clientele. You know, I operate a couple of mountains, a couple mountains, I have a couple cabins in the Smoky Mountains and hot tubs five years ago, were kind of a nice to have now I would argue it's almost a minimum requirement to be operating in the space, mid term rentals. If you don't have a hot tub, it might not be as big a deal. If you got it great, you can advertise it. But if you're converting and getting rid of stuff from your short term rental for your midterm rental, I don't know how tubs I think are kind of expensive to operate and might not be the make or break difference between getting someone to stay at your property versus not. Again on the midterm basis if they are in the short term basis. Def that's something you want to advertise and keep. But hot tubs Yeah, they're expensive, they use a lot of water, depending on how they're heated can be really expensive on the gas or electric. So getting rid of them. And I know a lot of insurance companies don't like them either. So maybe getting rid of it is is a step in the right direction. I don't know I would hate to have someone like we're gonna get some comments like Michael told me to get rid of my hot tub, I had to do it. For him. It's a rental and ruin, you know, don't take this the wrong way. It's it's a thing to think about just from a high level when it comes to amenities, short term rental amenities are gonna be different than than then your midterm. And then some other nice things to be cognizant of, or that you can offer your guests and then you could advertise, or like 30 Day gym memberships to a local gym, or coupons to local restaurants or pubs or eateries, whatever somebody's showing up. Again, they're living there, they're going to be living here for a month, two months, three months. So making it feel like home for them as much as you can, I think is going to make a big difference in their experience, and then what you're able to charge as well based on the amenities that you're offering. I think just like in the short term space, having killer listing photos is really important. A lot of midterm rental operators are mom and pop operators and are putting less emphasis on amazing pictures because they're happy to rent out a room or the extra unit and maybe are less concerned with with treating this like a business and having to make a return on these things. So if if and I would argue we should be treating this like a business, you want to get professional listing photos done, again, making it look like a homey place, inviting warm, like you would want to go stay there, right as someone who is going to go rent a place for 30 days or two months on an assignment. Again, what are the things that you're looking for? What

are some concerns or risks that might be involved with making this transition? Like what are some of the downsides you might think about?

Yeah, great question. Because I'm so now it's only been like, Hey, this is all this good stuff that you should consider for

news and everybody can switch over to midterm. Yeah.

If you're not doing midterm rentals, you got something wrong with you. So I think one of the risks first and foremost is going to be income. So there's definitely going to be a reduction in income when we compare side by side midterm rental to short term rental. Now, I say this with an asterix because while the income is going to be less, probably right, if the county has automatically now said you can't do short term rentals while your short term rental income just went to zero. So converting to midterm is going to be better. But if you if you performance wise if you're comparing last year from your short term rental to this year, mid term rental rates, it's probably going to be less. But again, the asterik is, you're gonna be paying a lot less in expenses. And we talked about cleaning. That's number one, that's a huge one. But number two is, I would argue that you can definitely scale back on your subscriptions, or the tech that's in the property. So if you're operating a short term rental, and you've got all of the sports packages, all of the movie channels, all of the streaming services, Hulu, Netflix, peacock plus Disney plus, like all this stuff, you can probably scale that back because again, the mid term renter is living there. And so you can maybe provide them with one or two of those services, again, as an added bonus, but if someone's living there, they might have their own subscription services that they can log into, right. So as long as you provide them with a smart TV, they can stream whatever they want, you don't need to have all of the cable packages, you got to have good Wi Fi, but you don't have to maybe necessarily have the best ultimate super streaming package. So there are definitely savings from an operational perspective that you can look to do. The other thing to keep in mind is that if somebody is living in your property, they're probably going to work or they're working in the property, there might not be as many people physically in the property as if it were a short term rental basis. And so your utilities, while there's somebody physically there for four more days a month, the way that the utilities are being used is probably going to be less than that on a short term basis. You know, when people go to short term rental, they're cranking down the AC, if it's a hot climate, or they're kicking up the heater, if it's a cold climate, and they don't care, and they're leaving, you know, that honors and out. Yeah, exactly. And like they're on vacation, when somebody is living in a property, they're probably going to be more mindful of those type of things. And you as the owner, also have a bit more latitude to coach them and, and make those types of requests, hey, when you leave the property, please turn off the AC or the heater, please don't take super long showers. It's just a different dynamic. And so if you ask your tenants in a short term rental, hey, please don't take long showers, you're getting a one star review, almost guaranteed, right? But if, again, it's a different tenant owner relationships, you can ask those type of things. So I would argue, well, yes, the income is going to be less on a top line basis. Bottom line, because we have less operational expenses associated with the property, it's going to be different. The other major difference, I would say, in terms of the expense is going to be the insurance. And I know this is everybody's favorite topic to talk about. It's like oh, wait, like people are gonna be playing this for their babies to go to sleep to because it's the most boring topic ever. But I cover the insurance world, I think it's a really, under the importance of it has been under highlighted for a long time. And we're seeing insurance tank deals nowadays, like the insurance market is really driving a lot of change in our current real estate market. So with a short term rental, you gotta have short term rental insurance. If you're listening to this scratching your head being like, I don't know, if I do go check, it is super important, because that is one of the easiest ways for an insurance company to deny your claim. If you have one, if you don't have the right insurance, they can say you didn't you lie to us, you didn't show this properly. Good luck. So make sure you've got short term rental coverage, if you're operating a short term rental, if you're going to now midterm rental, you get to change that coverage, you get to now go tell the insurance company, hey, I'm doing month minimum leases, with tenants, they're gonna say great, that's perceived as a less risk in our book, you get to pay a lot less for that. So that's going to be a big, big big saver as well. Depending on the type of property, the savings can be less, you know, less significant or less impactful. But I know for me, like on a on a single family home, the insurance was double for that of a short term rental, it could be even more for some really premium insurance packages. So there's again, a significant savings to be had there. So fear, long winded way of answering your question, what is the biggest one of the biggest risks is income for sure. Other risks, I mean, I think the property is going to be treated probably a little bit better than then if it's a short term rental again, for all the reasons we talked about. Depending on the property

management fees look like in this, you know, with the long term rentals, we see like eight to 12%. In the short term rentals, we're close to 25%. Like what is the mid term rental property management fees look like? Yeah,

this man, it's such a good question. I don't know. I have not come across a property manager that's set up and purpose built for midterm rentals yet. So all of my midterm rentals, I'm self managing. So I've talked to my property managers that handle short term rentals and asked the question and said, Hey, this property because I'm actually in a very similar boat, I've got a property, it's a short term rental, it's not performing well. And so I'm going through this exact thought experiment and probably going to be transitioning it over to a midterm rental for this very reason. So I asked them, Hey, can you handle a midterm It sounds like now we're really not set up for that we're not equipped for that. And the reason is because most of the time, right, I can't speak for every property manager out there. So the long term rentals, they deal with tenants applying for a property probably once a year, they set up the lease, they interview and screen that applicant, place him in the property given the keys, and then like deuces, they're paying for their own utilities, right? It's very, it's very transactional. The short term property managers are set up with the interfaces with Airbnb VRBO, these other hosting and listing platforms, and they're having constant interaction with tenants. But it's all virtual, they 90% of the time aren't coming face to face with these tenants. Because there's no screening application needed. There's no key exchange, right, the tenant goes to the property, and probably never meets the property manager in person. And so this midterm rental is mixing those two worlds. And so most of these property managers are purpose built for one or the other. So if you're listening, or if you know someone out there, that's a great midterm property rental, midterm rental property manager to that five times fast. We would love to hear from them. We would love to have him on the show and talk to them about what their strategies are, what makes or breaks a great midterm rental investment because I'm only one person sharing my own experiences. So please leave us a note in the comments. We would love to hear from from you or from them. But I will say it's, it's not that hard. Yeah, it's a lot. It's a lot easier. Yeah, it's a lot easier. So I manage I self manage a midterm rental fully remotely. It was my old primary we moved out of it. It was a condo, it is not was it is a condo on the Central Coast. HOA rules say that we can't rent it out. Short term basis. So everything is 30 days or minimum. We we've had like, zero vacancy over the last. I think it's pronounced like four years or three years. Like that's amazing. Maybe a couple of weeks, we did a big turn. Oh, but that's one other thing I wanted to share up here, you asked such a question about some of the other risks. If you're not getting into the property on a really regular basis, short term rentals, you're in there after every day. So two, three days, four days a week, what have you, and then somebody is getting in the property putting eyes on it, your cleaners are going in, if you're self managing, you're getting in mid to rental, you're not going in on that on that frequency. So you're gonna go in at the end of a tenant, a tenancy, which could be, you know, a month, two months, three months, six months, so you just have to be comfortable with that. And again, you're gonna get a lease, right? I would, I would definitely recommend if you're doing this, do it with a proper lease for your state and your specific market. Don't do it by word of mouth, or, you know, I don't know how these how the mid term rental platforms do it furnish finder is is is a marketplace connector, they don't have they don't provide you with with the documents. So I use a California State lease, all the midterm rentals are in California, I make them sign the lease, and I get a security deposit. And I get them to get renters insurance, naming me as additional insured. Again, my favorite topic, we always it always seems to go back to insurance for some reason. And then I'm collecting first month's rent. So it's again, it's it's feels like a traditional long term rental in that sense, because I'm putting all of these safety precautions in place, such so that if there is damage on the way out or additional cleaning expenses, what have you, you know, I'm covered. And I also charge a cleaning fee. And so we said that the cleaning fees are going to be less than if they would be for traditional short term rental. So the physical clean might cost more, because someone's been there for 30 days or two months or three months, what have you. And so if you're charging 100 bucks and your short term rental, maybe you're paying your cleaners 300 bucks to go do a cleanup after a month. But again, you can build that into your to your costs. So it's really a pass through or depending on how you structure it. If you've got super cheap cleaners, maybe that's a mini profit center for you. Maybe your cleaners willing to charge you 150. And then you turn around and charge a cleaning fee for 350. So that's a way to help recoup some of your lost income. But so I think those are your your big X your big risks that you need to be on lookout for and be aware of if you're going to convert to a midterm rental, but if you couldn't tell by my excitement for this episode throughout the entire episode, I think it's a great strategy. I think it's one that's very underserved, underutilized. And it's just not that hard. This is I think it's a super relevant topic right now, given everything that's going on throughout the country. I mean, we're hearing so much of these markets, clamping down on short term rentals, kicking them out entirely, putting in new taxes, putting in new licensing and fee requirements. So I'm really glad we got to cover this. It's something that I cover a lot of in the educational real estate education platform that I started my fire academy. So if you found this interesting if you're looking to learn more about mid term rentals in general, or frankly short term rentals, we covered that as well. Come check us out my fire academy.com It's m y Eph eye academy.com Short for my financial independence Academy. We talked about this and all that a lot more. So PR what you think should get out here?

Gotta stay quick on your feet. Yeah,

let's go. Thanks everybody for hanging out with us. We appreciate it. As always love to hear from you in the comments, ratings reviews are always helpful. Let us know how we can do better what you want to hear more of or less of on future episodes. We'll catch you in the next one. Happy investing