Ep 25: How to Squeeze the Most Income out of a Short Term Rental

Today we're talking about starting from scratch and investing in a property that will be an income generator as a short term rental (Airbnb or VRBO).

We are bringing in our numbers experts, Robert and Ricky Grand, from Grand Real Estate Investments to talk about Financing, how the size of the property influences your income, gross income vs. net income, and how to plan income increases over time.

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Full Transcript

0:00

Welcome back to the value driven investor podcast where we forge value driven investors on a mission to live life on their terms. No matter where you have come from or where you are going, becoming a value driven investor is in all our best interests. Because becoming financially free allows us to focus on what matters most fulfilling our purpose, our community of value driven investors is committed to showing you the way with the support of this community, you are sure to reach your goals for all of us in the value of an investor community, there is no greater gift than the gift of giving because together, anything is possible.

0:49

Alright, today we are back on the value driven investor podcast and we are talking about short term rentals. But we're not just talking about short term rentals, we're talking about how do you make an extra 30k on your short term rental, that's $30,000 in net profit, that means you're gonna put that in your bank account. And for some people that might even supplement their income for the year. Okay, so this is a big episode. And I'm excited because we have a special guest, Ricky Grande, Ricky grant. Thanks for coming on, buddy. And thanks for having me. And obviously our famed

1:27

man, he's back going on these episodes, but

1:30

I'm back. Yeah. Grando. You know, it's awesome, though. Because you we've released the other episodes on short term rentals, vacation rentals, Airbnb is whatever you want to call it. And we're getting a great response. I think this is definitely like you and I thought this is definitely a hot button. And today, I feel like this episode could be another fantastic episode, because everybody's asking themselves, okay, okay, you guys tell me that I should do this. Everybody's talking about it. But how do I really make money doing this? And how much money can I really make? And in one of the past episodes, you had said, I make a really good living off of these properties. And that's why I'm doing more of them. But $30,000 I mean, you guys $30,000 is not chump change. You can't, you can't just like be like, Oh, well, that's not a big deal, right?

2:20

Like, it's pretty good money. I mean, 2500 bucks a month, how many properties you need to do that, you know, if you're getting 200 bucks a property, and then mortgages, there's all the stress with

2:29

all that's a lot of single family properties as regular yearly rentals. I mean, that's a lot of good cash flow. So that's what we're going to go into today. And we talked about a specific property, which we're going to call the university

2:41

bungalow

2:42

pongola. Recalling us

2:45

below houses did

2:48

you actually in our video on a YouTube, we went through the video, and we actually showed you that property? In the I believe it was the last episode that we just aired? And so we're gonna use that episode, as are that property as a point of reference? In this episode, we're talking about how do we get to 30k in income on a vacation property or short term rental? So Bob, why don't you get us started on breaking this down? No, I what I want you guys to know is that we're going to go over a couple different things. Now we're hoping to hit all these main topics. But these are the main topics that we're hoping to hit because we feel like it's going to sum up, how do you make $30,000 on your short term rental? Now, don't get me wrong. There's a lot more questions that are going to go into this. And there's a lot more that goes into this and what we're going to hit today in this short podcast. But you know what, what we're going to kick off with is we're going to talk about financing on the short term rental, how do you finance a short term rental? We're going to talk about the size of the property like does the size of the property actually matter? When it comes to the bottom line net income? We're going to talk about the gross income and what does the gross income mean? It means how can we squeeze as much income out of these properties? And what are the different ways that we do it? We're going to talk about net income. What does net income mean? It means? Well, okay, all sudden, now I'm making all this money called $70,000 a year in gross income, but I have all these expenses, what are all these expenses? Which what expenses? Do I have to what are obvious expenses? And then what are the expenses that are like? Well, I didn't even know that that would be an expense, because there's plenty of that and vacation rentals. We're going to talk about income goals. If I invest $100,000, into buying a property, I turn it into a short term rental. What should I expect to get after year 1234? And five, like, what should i What should my plan be? Because, you know, we're big believers in designing your life. Well, you have to design a plan around a short term rental. And then finally, I'm hoping we can get to it, but we surely are not tax advisers, but we can give you a little bit of information on the implications and the impact taxes will have on your bottom line. So Grando take it from here, buddy, and I'm excited for this episode.

4:58

Yeah, yeah. So Brought Ricky on for this one because I'm not the numbers magician like he is he really understands the numbers the right way, he has a spreadsheet that he breaks it all down with. And, you know, just in the last like year, it just really hit me like, I need to do more of these short term rentals, a because they're great in our market be because they generate really good income when you get going. So we're in progress of getting, you know, another two, Ricky and I are up and running, which will actually be three total units. And then my wife and I shall her and the progress of buying another one to do the same thing. So we've had a couple before that we've sold, you know, like houses primary residence that we sold. But today, we're just gonna focus on the university Bunglow cuz that's the one that's just been consistent, tried and true. And it's the one that we've really thought about a lot. Like, how do you optimize it? How do you squeeze the most out of it? And how did we do it? You know? So that's, that's the number one thing that I think that we'll focus on. And we'll kick it with Ricky here. And we'll start talking about and let him ask me some questions, I think. And we can start piecing this thing together and how we do it. And just to recap, real quick, university bungalow, I bought it in 2017. I did a studs up remodel on it completely renovated, it got a really good purchase on it. At that time. I did I think like just a conventional mortgage, you know, to buy it. Since then I've refinanced it because rates are super low, and I got a 2275 radon not too long ago, so. So that one was a conventional mortgage that we purchased and just put our cash into to make it look awesome. So

6:25

let's start off with that, because we want to talk about financing. So did you buy that as a personal residence? Did you buy that as a second home? Or is that like an investment property like number two, and three or four,

6:35

I actually bought it to move into back in 2017. So I was moving from another town into Eugene, I just needed a place I could get. And it was I wanted something close and convenient. My brother was right around the corner. So it worked out for me. I want to be close to Ricky. So

6:49

what is your perspective? Like is a baker looking at this and saying, Okay, I'm going to finance this like this is a personal residence and home or like an investment property? Yeah, personal

6:59

residence and and that's a good strategy to is hopping from your primary residence, and then saying you want to rent that one out, you know, and then Airbnb it out later, and then jumping into your next one and trying to get as many as you possibly could, under conventional standards, because if you put money into them, you clean them up, you could get in with 5% down, clean it up and refinance it down the road and have built in that, you know, that equity window to have 20%, which is great. Okay,

7:22

so let's I want to ask about this. Because if I'm a banker, and I'm like, okay, so you own this house, and now you're going to rent this house out, which you bought as a personal residence, and we're just gonna leave your financing that way there. But then now you're gonna go buy a new house, and you want me to finance it as your personal residence, and then you're gonna rent that out. And this is gonna be your second house, but it's gonna be so can you just keep jumping like that and always be giving you a you

7:46

can I think you can get a couple. I think you can get a couple like that you're not going to get 10 You know, but uh, you know, the one that, uh, that we're working on right now. So the Harris house, you know, I did that right, then we we moved to our Spyglass house, which we sent some sold that we Airbnb, that way we live there. And now we're back at the Harris house, kind of because they're being beat out all the time. So I live in a trailer most of the time, which is awesome. And I'm working on a house that I'm going to be staying and longer that we're actually buying, we did that because we're like, hey, you know, here's, we're in the Harris house, you know, we have it, you know, we want to re rent it back out, you know, just focus on it being a rental, and boom, we're gonna go buy this other one. And we're gonna call that our primary residence. So it's all about the time and the window that you're looking at and what you're doing at that time. Okay, if your primary residence is your primary residence, and you want to rent it out, they're okay with that, right? But your debt to income ratios have to work in order for you to do that. So if you find the next one, you're like, This will be my primary, I'll turn this one into a rental. That's a very plausible thing for you know, anybody that's a banker or a mortgage lender to understand.

8:54

Like, if we're sitting here trying to make this happen, that is the best way you can finance something like this, right? Oh,

9:00

god. Yeah. Yeah, I mean, the other one, that we're buying the rates to nine, nine, you know, it's like, hopefully it closes as a short sale. So like, hopefully, it'll close it's kind of you know, we're kind of wondering if it'll close but a 299. Right, if we get that, you know, it's a another $440,000 property, that's a great mortgage, you know,

9:18

to go okay, now, you got a couple more that you're building out. So I this financing thing, I think is very important for people to understand this. Most people do not understand financing at all, are you going to be able to do the same type of financing with these other properties that you're building out? Or Okay, so how are you financing these new projects that you're going to build out and you're gonna have as short term rentals.

9:37

So Ricky and I like, say the two projects that we're buying we use private money or hard money for those those those acquisitions on those things. And specifically, he's kind of a hybrid quasi hard money lender that we use, the rates are anywhere from 10 to 11%. You know, that you you on the initial purchase. So we do that and then we put our own cash into it, and then we take it more refinance it out as an investment property. But we're building that 25% equity window into the property that we need in order to get it refined that refinanced out, including get most of our cash into it out, you know, so that's kind of like that's kind of a burr method, right? Yeah, yeah, it's yeah, it's like a burr method, but you're using it for an Airbnb and it works for anything. It's just your end goal. Just you just have to decide what it is we, we look at everything, you know, it could be a single family rental, that we want to just make a single family rental do the exact same strategy. But you know, in certain locations, the profits can be really huge. And Airbnb. So it's like, what is the right, you know, what is the right thing for this property and just clicking through the gears, you know, trying to figure it out. And it's like, it just so happens in our downtown property. It'd be a great single family rental, for sure. But it would be a phenomenal short term rental, you know, like two to three times what you know, you could possibly get from a regular rental.

10:49

Okay, Bob. So let's clear this up. Now. All right. So you're going to go out and you initially acquire this property using hard money, you have a 10% rate, you have to put some money down, obviously, you're going to fix it up. Now it's worth more money, because you got a new appraisal. Now you go refi it now when you refi it or you refine it back with the hard money lender? Or are you going to conventional bank or who are you refinancing once

11:12

again, question, we actually, this was a struggle that we had over the last year and a half for my brother and I it was really hard for us to acquire and hold properties. Because we couldn't we didn't find the right lenders. So that's another great list that we can provide to people is off market lenders that don't go with the conventional standards, you know, of lending. And we've got a handful of every time we see him now we just put them down and we hold them and we have them. And right now, you know, we have one that we're really working with that we've got that we just refinanced one property through which went really smoothly, don't you think? Ricky? Yeah, yeah, went smooth with them. And so that, that's probably the biggest thing. And what these type of investment lenders do, is they understand that there's investors out there that can't use the conventional world. And really quickly, if you live in an area with high price houses, you know, your debt to income ratios get crushed really quick, when you got a couple of properties. So you end up having to figure out that route very quickly. And that's just something that we both focused on, we're like, we got to figure this out, we got to be holding more than we're selling, you know, cuz we're just selling, selling, selling. It's like we're making cash. We're paying taxes, but we want to hold, you know, we're investors for the long term. So this is awesome.

12:20

Okay, so that really gives me a good feeling of how you're pulling this all from a financing perspective, because everybody number one thing you have to figure out is the money, you have to figure out how you're going to finance these things, multiple level hold on to them, how are you going to let them because the leverage in real estate is the value of real estate. Yeah, everybody thinks the assets great. And it is great, you get appreciation, you get cash flow, but the beauty of it is the leverage that you get, you get leverage, because a bank will give you 80% of the value of the property, they'll loan it to you. So you only have to come up with 20% of that. The leverage is is all the tax leverages, and the tax benefits you're getting from these properties. So the leverage you get in the financing, you have to understand the financing. So let's move on. Let's go to the university bungalow here and let's start breaking that property down. I just wanted you guys to get really clear on the financing. It's very important.

13:07

Alright, guys, it's the most important part in that, which is what Ricky focus on all the time. So, yeah, yeah. Alright, let's break down the university bungalow, Ricky, maybe ask some questions, break out your spreadsheet, we can walk it backwards, I can tell you everything I can tell you off the top of my head. Of course, these numbers are my ballpark figures. I haven't looked at our exact numbers, but I'm pretty close on them, I'm

13:28

sure. Yeah, we can ballpark some of it. And you and Tim on this. And because we're always looking for value add property. So it really depends on you know, what's the route that someone's taking when when people are new. And they want my advice, I say, hey, find one that you can buy as a primary and then turn it into an Airbnb, right, something that's a little more turnkey, it's not a good job, it's not an update, like we do. So you know, change my spreadsheet a little bit, just to kind of fit that mold that, you know, alternates.

13:55

That's a great thing right there. Because that's a very good way for people to get started. And that's exactly the way that we're having, we're helping our own real estate agent and our brokerage get started. She wants to do exactly that. And that's what we're helping her do. So it's exactly what we're talking about, which is,

14:09

if you want to get into it, it's the best way to do it. Yeah. So yeah, just you know, I'll just walk through some questions with Robert and, and then I'll plug the numbers in and then we could talk about the numbers. You know what they come they come out,

14:21

right? Promise.

14:27

But yeah, but So, Robert, what's what's what's your annual insurance on the property?

14:33

annual insurance on that property? $750 ballpark, it's between seven 800 But I think it's I think the last thing I saw was 750. Okay, and what about your property taxes? Property taxes are 3600 That's one of the reasons why we love University bungalows is the property taxes don't go up on the sale of properties in Oregon. They maintain off their original Yeah, it's only 3% per year, which is makes them awesome. Yeah. So doesn't do that. Yeah. No. overturn it said, Go ahead, Ricky. Sorry,

15:06

average cost per night.

15:09

Actually, on that property, it goes anywhere between, you know, so 250 to 400 right now. So I would say you're probably average is probably 325.

15:19

Okay. We'll just use that across the board. And yeah, it will have three scenarios here. So people can play with it, you know, and make some of their own assumptions. And then over here, which I'll go over later, but this is it's called a sensitivity analysis, and I'll show you changes, you know, depending on your assumptions, so you don't have to keep making changes, and it'll kind of show you what it does. So, you know, working here, I haven't built it. 6070 80% I think that's pretty enough.

15:47

Yeah, I think we're probably about 70%. You know, we're holding it back right now, because we're trying to get nice there so we can finish that project. So let's get up there. Kincaid.

15:56

Yeah, so looking at it right away, you know, you're looking at, you know, close to $82,000 a year of revenue. And that's just you know, your rent times the number of days in the month and we just use an average of 30 You lose a couple days. Yeah, cuz you have a 365 a year but and then multiplied by the 70% occupancy rate. So you can see here and then so now, I haven't built so you know, once you plug in your insurance and taxes, it breaks it down. But Robert, how much you pay for internet is

16:32

77. What are your utilities utilities I think on average are a little bit higher than that. Probably about for the electric has been higher lately. So I think probably about 225 to maybe 250 up to 50.

16:50

Okay, so what we'll do since we're talking 6070 80% We're gonna do it this way. More people more. Oh, yeah.

16:57

Yeah, kind of a growing scale. That's really good. Call. garbage and land garbage? Uh, yeah. 70 I think it's 60 bucks a month for garbage. We get the huge bins, you know, so people don't overflow garbage. So, neat Tip Get the biggest garbage cans you can get. Yeah. Yeah, landscaping 120 a month.

17:20

Okay, so for anybody on the podcast, I just want you to know, you should go to our YouTube channel, that hydrated investor YouTube channel, we will have like you can actually see Ricky go through the spreadsheet here. So you I don't want you to miss out on that. Because I think that's the biggest value prop right now. It's really you're just listening to this right now. You should be on our YouTube channel. And you should check out this spreadsheet that we put together. It's it's ridiculous.

17:44

Yeah. I think we I actually just refinanced it. So we could run the refinance scenario. Yeah, that's

17:49

what I'm done. Next. Yeah. Is what did the appraisal come in? At?

17:53

came in at a I think it was 599? Yeah.

18:02

Okay, and then, what is your? Well, you're making a purchase. So what is your well,

18:08

the loan amount is 275. I believe that's what we were we landed at so. And I and I can tell you how much I have. I probably have just over 100,000 into the property. I don't know if there's a spot for that.

18:23

I, I don't because I changed this one because that's kind of our model is doing Oh, can vacation one. So now that's good, because it's perfect for somebody? Yeah, if they want that one, I can certainly put it back in. But that's definitely you know, it's a little more advanced for people and I'm happy to go over with them. Or, you know, we could do another quick video that shows that.

18:45

What's your whole series of videos? What's that? What interest rates to seven, five?

18:56

Okay, so less than 22 roughly as your payment for just the mortgage not touching the mortgage. Right? Okay. So, as you can see, you know, we're going to go off scenario to 70% the net operating income for this property right now is a little under $6,000 a month, which, you know, I want people to, you know, want to be very clear, like, that's, that's a great number, but there are other expenses that come into this as well. So it's not like, you know, you can retire. But, but you should immediately you see the difference between if he rented that thing out for, you know, $2,500 a month, which is probably pretty reasonable for that house, what it would, what it would look like, you know, the stark differences and how much income you can generate, but if there's also more risk to it, right. I mean, you know, if something happens in the travel market, you know, the travel industry dies down then, you know, Robert could could see that negatively impact his rental. So, just things to be thinking about, but So here we have $6,000 a month of income, and then his mortgage payments and another 1100. So, you know, roughly he's getting, you know, $4,900 a month, or I guess up here you can see I have 4048 40 is his current cash flow, but that doesn't take into account the repairs, stuff like that that is going to vary. And so that's not something I have included in this. But, you know, I guess that's where, you know, I the question I asked Robert is, ballpark How much are you spending on upkeep, repair stuff like that?

20:34

Yeah, that's a good question. So I mean, with an Airbnb, you know, so that's why you see the number, it's big, but it's very true, there's time that goes into it, right, because it's an active investment, you're actively investing, you have to put some sort of value on time. That's why we say, you know, 30 to 40k. Net extra per year, because you're spending some time, but I would say that, you know, supplies and all that stuff, you know, per year, you could probably put about $6,000, so about 500 bucks a month, you know, would probably be very legitimate, and have upkeep and maintenance, you know, like, that's, that's one of the harder things, that's why it's really good to go studs up, right, you know, on something because then if you go studs back and completely remodel something, you get that opportunity to get kind of deferred, you don't have to do the maintenance for probably 10 to 12 years, but you do have wear and tear on your property that you have to deal with. So I would say you know, an average, we have our guys out there, you know, once every couple of months working on some incidental things. So that's probably another 100 bucks a month, you know, so 12, you can just put $2,000 a year, you know, in that age for that, that helps includes like, ah, back filters and all those things that you would break down with a property like that. And you know, what you're thinking so, so, you know, getting new bedding and all sorts of stuff when you need it, you know? Yeah,

21:48

it's pretty safe to assume. And then, I mean, obviously, because you got to furnish this thing, too. So yeah. Yeah. You know, you got to replace couches, cushions, stuff like that stuff that gets incidentals, I would say, it's probably safe to assume, you know, $1,000 a month of, you know, on average, because this isn't every month, maybe one month, you have to replace a couch or something, you know, $1,000 a month on on your incidentals?

22:13

Yeah, that's probably I mean, a very, yeah, I think that's probably a good number, because then you could, you can break that down, you'd say that I'm gonna have $12,000 a year in upkeep for this property, which I think would make a lot of sense, because you have to buy bedding, sometimes you do have to furnish it. And that's, you know, as we dig deeper, that's like, this is a real basic spreadsheet for people to get a good grasp, like the other spreadsheets that we can, you know, develop and have, you know, can really break down those numbers. And we can really get finite with those things. Because each property I mean, when you look at a bedroom, you can you can go hey, this is the number I need for each of these things. For me, you know, that's why I set out about a, you know, 100 to 100, or probably 100 and a quarter into the property with it all furnished out and everything like that, you know, but yeah, I think that's safe to say 1000 bucks per month, you could 12,000 per year, you know, for property expenses.

23:04

Yeah, I think that's pretty, pretty fair. And and, Tim, if people want this, I can I can make some edits to it so that it's a little more user friendly. For

23:12

what Okay, let's like when you say we're trying to put together a ballpark number for all for the expenses now. Yeah. Is there something that doesn't isn't included in the expenses? Like, like, Let's list off, what does this ballpark number, this round number include, and it's expensive, because what it's, it's sounding like is like, you're kind of assuming, okay, I had to spend, you know, $15,000 on furniture to get the house furnished, and I'm basically going to just allocate that over the life of the property, quote, unquote, so I'm gonna break it down to a monthly expense. Yeah. But there's also I mean, like, this is what you have to think about, too, is that there's also a tax gain on that, because you can write that off. And so that is that actually increases your income. So you guys, that's why this is so complicated. There's no way you can come up with a perfect spreadsheet to to break this thing all down and factor in, like taxes and write offs, and all that into your net net. So I just want you to know that this won't be a perfect number. If you go into short term rentals, and you're doing I mean, look at Ricky spreadsheet, it's it's ridiculous. Like it's factored in so many different things. Yeah. But it's still there's no spreadsheet that Ricky can put together, that's going to nail it right on the head, because there's so many different variable costs that come in and out of managing a short term rental. Is that fair to say, guys?

24:35

Oh, yeah, that's, that's exactly right, man. No, when you look at those numbers, and just trying to sum that up for you, you know, that 12,000 year you should be you should be banking, something like that, right? Just because you never know like a furnace goes out just like a regular rental property. You know, so if you're planning like, hey, if I can make this amount of money, I should bank, you know, 1000 1500 bucks a month to build a reserve account out to weather a storm. You know, just like Ricky said, if, if, like when COVID hit, boom, Airbnbs took a chop, right? They came back really quick, you know, and we ended up doing really well. But we're like, what's gonna happen, you know, I was like, Ooh, this might not have been a great program turned out to be just fine, you know, which I was like, This is awesome, it's going good. But that's always something you should plan for, and have a reserve account built. So that number, that's why I was like, you know, it's actually really smart. Because say, about 1000 bucks a month, it might be a lot less than that, you know, I don't know, like how many times we have to replace the sheets, the you know, the, the, the cups, you know, the the the utensils that go missing, something gets broken, that you don't realize that you don't get reimbursed for it, you just got to buy it, you know. So having that slush fund set aside, when you're focusing on it is such a smart thing to do, you know, especially for the first couple years.

25:48

Yeah, and, Tim, I want to be clear here, I think that you're gonna have, you know, on average, with this property $12,000 A year of ongoing expenses, so I'm not I'm skipping the step of the rehab, because that's a whole nother video. Yeah, that's way more. So this is, in my mind, ongoing expenses that people are going to have, you know, and we try to be conservative with numbers I want people to know, you know, hey, like, you want to, you really want to be conservative and look at kind of what's worst case scenario type of situations, you know, and, and I know this, you know, I've added some stuff to kind of, you know, fit what we're talking about here. But, you know, I think the important part to also remember is you need a CPA, you need a good accountant to help make sure that you're getting everything done correctly because you have depreciation that you get and that's a non cash expense and then you have taxes and while this is an investment property you get long term capital gains if you sell it and then ordinary income tax on on the on the profit that you generate annually or monthly. Versus if you flip it, then you just always play it pay ordinary income tax. So there's ways to get creative to reduce that tax burden to so you know, one thing I really want to point out here is that okay, you know, we're just assuming an 8020 rule for your your depreciation and what that means is that 80% of the property is considered depreciable 20% is considered land of that value. This is based on the price you paid when you put it into service. So for this sake, I just left it at the loan amount for simple math right now. So you have a taxable income of $38,000 on this thing you know when all said and done so now you get down to you know how much you're gonna end up paying in taxes or income after taxes because you're gonna end up paying 70% of your or I mean 30% of your and taxes ballpark everybody's tax rates also different so you get a look at what your effective tax rate is. And that's where your CPA comes in. So income after Robert pays taxes is essentially going to be $26,000 on this lease from a federal standpoint, but you do get it add back the depreciation so this is a non cash expense so that's where you're going to end up if you add it back. You end up with for Robert situation $34,000 A year and his profit.

28:33

Oh, there you go. That's better than the 30 that we wrote. Well that I think that hit the number that we're talking about, right? Yeah, you got a pretty good Yeah. You guys let's Yeah, let's go back here though. Cuz I think we have I mean, the numbers obviously, you got to be watching this on our YouTube channel. So you can see Ricky break down these numbers and he and he completes the spreadsheet for you. Um, but I think let's get let's get to the nuts and bolts for our podcast listeners. Like Bob Do you feel like this property from a size perspective maximizes your return? Or do you feel like size doesn't really matter as long as you you know, the numbers like, like buying a one bedroom condo versus a two bedroom house versus a four bedroom house and I believe what is this? Is this a three bedroom house?

29:20

Three bedroom two bath? Yeah. sighs I think you know, I think bedrooms and bathrooms matter more than square footage. You know, so and when you look at that, you know, you could have a smaller house four bedrooms and you get more a higher amount per night right. So I think that's probably the biggest factor but it's always capacity. What's what's capacity in your area. Can your area is it a resort area Can it handle, you know, a 4000 square foot house like we Bend Oregon, for example, is a great location where people go to vacation, and you can do really big vacation rentals over there. You can do you know, a 3500 square foot home and it can house you know 12 to 13 people Your cost per night's gonna be, you know, 1000 to 1500. So you could get a really huge gross and then you know out of that, and then potentially get some really good revenue, you know, when you when you look at it that way, it comes with more expenses and everything just like that, you know, but uh, you know, our previous house that we had our Spyglass house that we had as an Airbnb that were kind of quasi living there, you know, that thing would, you know, it would pull 750 to $1,200 per night, because it was in a good location, people come into town, it's a three, it was a four bedroom, three bath house with a downstairs and other space that you could, you know, stay into. And so it just generated good money like that. So you can get more money. But I wouldn't want to say like, go buy the biggest Airbnb that you possibly can, and go huge, I'd say probably start small, test it, figure it all out, and then proceed up the line as you can. And having one big one might be really cool to have. And it might be a smart thing to do, as well as a few smaller ones, you know. So

30:57

this leads me to another question, Bob, because you had your Spyglass house. And then obviously you have this university bungalow. One of the questions that came to my mind is, is it more important to get, like $1,000 a night? Or to get $400? For three or four or five nights?

31:15

Yes. So that's a really good question. And I mean, you can look at both ways do you want your occupancy to be 100%. And this is what I see in Hawaii all the time. They're like, Oh, we can't even stay in our place. And our occupancy is 95 to 100%, while the Knights so cheap, that they're making the same amount as somebody that's, you know, charging the right price in there at a 50% occupancy, right. So it's like, there's like two things to balance right there. When you're kind of going back and forth, that that kind of makes sense. You got to kind of think about it that way. You want to drive your nightly cost up, you know, to start seeing, you know, bookings fall off. And then you might want to decrease it back down. And then you kind of know where you're at for, like, what you can really handle for that price. And there's websites that will help you tell you this, but nothing beats just test, right, like testing your area, because very specific. Exactly. So we went up, you know, and we tried, you know, I think on the university Bunglow we got like, 450 a night, we're like, Was anybody in a bucket here? It's like, now we're not getting bookings, you just start trickling it back down. You're like, Okay, what's, you know, what's 400 do? Oh, we're getting bookings. But we're, we don't have a full month. And we want to stay there right now. Because we're building something else. So we're like, okay, that's a good if people pay us 400 per night, we would totally move out of that for that, you know, so that's kind of one of those things. But if you're just saying, I'm only doing as an Airbnb, you would do that same method just to try to keep your bookings. And then you think about other ways to optimize, you know, there's more than Airbnb, right? There's VRBO, there's hundreds of booking sites out there. So

32:46

yes, you always want to maximize your dollar. But if somebody said, if you had the option of somebody comes in and says, okay, hey, I'm gonna take your property, like you're advertising it. $500. And, you know, you got me, I'm gonna negotiate, or I'm coming in, I'm saying, Hey, Bob, you know what, I know, you're advertising this at $500 a night. I am. And that's per night. I'm going to rent this for a full week. But I want to do it at 375. But then the next guy comes and says, Yeah, Bob, I'm only gonna rent this for two nights. But I'll pay you 750 Right now, and again, you're not living in the property. This is a crisis. This is an asset that you want to get the maximum on dollars that Ricky just went through, and you want to increase your bottom line net? Are you going to take the guy that's gonna pay a little bit less but give you more nights? Or are you going to take the guy that's gonna pay a little bit more, but isn't going to be there as

33:37

often? Is? The numbers the same, right? So you obviously want the highest amount with the least amount of nights? That I mean, is the concrete answer. I mean, that's like the Hawaii approach. You see, when people are charging 200 bucks a night, they're booked at 100% wear and tear goes up dramatically. That's basically having a renter in the property. But with a lot more turnover, you got a lot more cleanings a lot more stuff to do it. So that's why you want to go higher end, it's a really good point you're making, that's why we've went higher end, you know, to get a higher price and less nights because we can make the same amount of money is the guy that's trying to go really cheap and have just a flop shop Airbnb or VRBO. Just to get people in it, you know, so I'd rather have less wear and tear on my property, less things missing less things broken, you know, stuff like that, and less nights booked, but at a higher price.

34:26

Okay, cool. Yeah, I mean, my stretch to add to it, Tim, I think it's about maximizing the property. Right. And that's, that looks different ways at different times. And, you know, and I, everybody's always like, how do I maximize revenue? How do I get more money? How do I get more money, sometimes you get more money by reducing your expenses. I mean, that's just as important to great. So managing that, you know, buying the right furniture that's gonna last maybe it's a little more expensive, but maybe it'll last for a year long. You're not buying it as often. You know, you're putting nicer things in there. So maybe it's also giving you more money on you can charge more For right, like, I got Ikea furniture in that house versus, you know, wherever Shelley buys, you know, the nice stuff, you know, all that stuff. And well, there's a different ambience in the house itself. You know, so if you can reduce those costs, too, I think that's, you know, an important component for people to look at, you know, that's why we like to rehab, right? Got it, get it all fixed up, we know that the maintenance is going to be minimal on these things, right.

35:25

Um, I think another key point that you bring up here is that when you're calculating the Rubik's Cube, or the algorithm for how to optimize it is the turnover ratio. So if I can maximize how much I'm able to get per night, and reduce the turnover, the number of nights I have to turn this thing over, I think that will keep your expenses down, keep your wear and tear down, but also increase your income. So I think is that Nikki, would you agree with that?

35:55

Yeah, that's where the balancing comes in. Right? Like Robert was talking about, you know, it's trial and error. There's no like formula. Oh, this is what you charge, right? It's what's trifling 50? Are we getting enough? Does that make sense? Right? And, versus okay, we charge 200, we're 100%. Free. But if we're 100% full, then there's a problem. You're not charging enough. Like you shouldn't be the percent. Yeah, it should never be 100% occupancy, I think the goal should be, you know, 75%. Where's that sweet spot where you can get that because at least from some of the experience that shows that, that's where you're maximizing your revenue. And then you have to look at how do I now minimize the cost? So then I'm maximizing my profit,

36:36

that Okay, so like, guys, because he did, you don't want 100% occupancy? Because then you're probably not charging enough. And the magic number, you know, again, this isn't a perfect formula, but Ricky's magic number is, you know, you want about a 75% occupancy rate. That means you're, you're charging close to the top, but you're not charging too little. And you're also reducing the amount of wear and tear on the property because of the turnover ratio. I think that's, that's huge. That's a huge tip that you're giving people? No, I think part of this algorithm is seasons, right. I mean, I'm in Minnesota, you guys are out in Eugene, I know, I have more extreme weather than you probably have. But seasonality has to play into the algorithm of both pricing and the turnover ratio, correct.

37:23

Yeah, you know, we're fortunate here in Eugene, that there's a lot of stuff going on year round, you know, so there's like, basketball, you know, you have AAU basketball, University of Oregon football track, like all these different things. So that's, that's back in the episode that we talked about before just knowing your area, maybe area is the right one to invest in. Maybe it's not, you know, if you live out in the middle of nowhere, you know, might not be a good Airbnb. But yeah, I think, you know, seasonality can play definitely a factor like it probably does. And like, you know, places like Hawaii and stuff like that. They're probably way more booked during the winter months, less booked in August, when it's, you know, a UV of 15 and 50 degrees on the island, you know, so there's definitely those seasonality is

38:03

Yeah, and that's the price though, right? I mean, like, you're gonna have to be aware of it and say, Okay, I gotta adjust if it's like in Minnesota. Oh, it's snowing out. It's not beautiful summer weather, and I have a lake property? Well, I have to adjust that, because there's probably going to be fewer people there. I mean, how big of an impact do you think that really makes in creating a bottom line? You know, net profit. I mean, just seasonality. If you pick the wrong spot, you're screwed.

38:29

I think it could like definitely dramatically affect things right. If you have a place that only books over the summertime, you better have an amazing summertime rate to figure out that whole year because you know, like, if you're in whatever, Canada, and all of a sudden it becomes an ice storm for the next six, eight months. Who's going to go there? If you're in Eugene, Oregon, the weather's way more modern. You know, across the board, there's a lot of things going on here. Probably December and January. You know, we still booked out those holiday things, but we booked them for a really high price and then there's games and stuff that happened during that time. It's a little bit slower during that time but it kicks back up really fast you know so that's the thing to look at in your market you know?

39:08

Yeah, want to go Oh, go ahead Rick. Have you got oh

39:10

just destinations right like things going on. Like we have a college town and we you know, we've been fortunate that we've had a lot of investment going in as well so we have the track and field the brand new track so there's a lot of events going on there we actually I mean we have even Matthew nights we have basketball men's and women's but we also they do concerts, comedy stuff there. We have Autzen Stadium for football Yes, we have these different things that are attractions for our area that help with that. So when looking for an Airbnb, what are the attractions that are around the neighborhoods that would benefit you know that Airbnb and get that short term clientele because you're looking more for vacationers, right, you're not looking for college students. You're not looking at long term renters. You're looking for people who are looking for things to do Yeah,

40:00

no no you're

40:01

coming to visit their kids visiting military people, you know all that tourism type stuff.

40:06

Yeah. So Minnesota has you know, great winter stuff, then it's not hockey.

40:10

You got hockey dude like, Oh, yeah. Once it freezes don't you guys just skate around on ice all the time? Well,

40:17

yes. Feelings, snow shoes, snowshoeing.

40:19

Cold weather sports. sounds attractive to me. We like it, where it's here. It's moderate. When we go out to those places, we don't live in that type of

40:32

Robert, I'm an extremist. Okay.

40:36

Yeah, I

40:37

want to get into the next topic. Net income. Okay, cuz I think this is another important cop topic, we kind of hit on it because you guys took that lump sum of $1,000 a month and like, put it away for you know, expenses. But let's dig deeper into that number like, Man, I know you guys have your do your own management. But if I'm someone that isn't really advanced in real estate, and I want to have a short term rental, and I don't really want to manage it, how will you know our management service fees gonna kill me? What about licensing fees? Like, do I have to license the property and pay a fee to have the license and the property license as a short term rental? Or what about like, cleaning fees? Like how do I manage those cleaning fees all these little knickknacks these maybe there's some fees that I can't even think of on the net income side that have to be factored in, can you kind of break down some of these fees and almost to into a list that people have to factor in and, and especially include some of the fees that, you know, most people wouldn't think of unless they actually ran the short term rentals.

41:39

So I'll I'll start, but I'll let Robert jump in as well. So I made a couple of adjustments to the spreadsheet while you guys were talking. So he cleaned it up, people who want to watch the video can now see it a little, just a little bit better with the inputs. So I moved the repairs and maintenance over here and made it a percentage, which is how we do at least how I do the long term rentals. So I figure it's a good way to at least set up this one. And then since you're talking property manager, yes, we manage our own, you can get property managers that will manage it for you. I plugged in, you know, a 10% fee, because it's more active management. So you're probably going to pay a little bit more for that. So that's now included, you know, so that you can see what the net operating income is and then go over here, see your cash flow again, 3134, you can look at some of your metrics, but also the depreciation. So now your taxable income comes down to 29,600. So you know, you're trading some of that income for to be more passive, whereas like Robert and I are very active in our investments. So people who want to be a little more hands off, you got to trade some of that income for it, and then your taxes again, and then your annualized after tax cash flow, because you get that depreciation added back ends up still being pretty close to what your taxable income was anyway, in this scenario that can change depending on the purchase prices, and what your taxes end up being.

43:08

And Ricky and your Airbnb assumptions block there. I don't see anything for cleaning, like where do you factor, meaning when we're lining as

43:15

charged to the client. So I leave it out to you because you charge a cleaning fee. On top of

43:21

that, see, like I screwed that that's a really good point, if you charge, like what else gets charged to the client? Well,

43:27

the cleaning fee is pretty much it their nightly rate, the property tax, you know, the room and lodging tax, if your city requires you to do that, all that stuff is billed in the US in the actual whole package price, what they what they pay, so I may be charging them 350 A night, it may actually cost them 400 A night by the time it's all said and done my time they paid cleaning, and they paid the lodging, tax and all that type of stuff. And a lot of cities are getting very aware of Airbnb ease. And they're starting to force a lodging tax and Airbnb VRBO all the big ones they withhold the lodging tax, and they pay it directly to the cities on your behalf all the really big providers do. I don't know about some of the smaller ones or if you want off debt with somebody that's different. But yeah, so they'll pay all those things for you. And then circling back to property management fees that Ricky was talking about. If you know a lot of property management companies are getting savvy to a tee, right, they want to make more money, and they're thinking of ways they can, you know, optimize their own business. And so yeah, 10% would be reasonable. The cost is probably one of the bigger ones out there, or the biggest manager of Airbnbs for people, they charge 30% of your profit, but they pretty much like guarantee they'll optimize it way better than you ever could. And so I've been intrigued by that. I've had a couple of conversations with them never pulled the trigger on anything. But if say if I ever want to just pull out and have somebody else manage it, I might, you know, look at who are the players out there, but you could pay up to 30% You know, but they say they will make up their fee basically inside of your bookings and everything like that, because they book it with their own technology and their own systems on like, say 1000 platforms or something crazy, like real estate, like, you know, MLS syndication. So it's just a, it's such a spectrum across the board. And that's, it's kind of like that rising tide lifts all boats, you know, this is just a rising market. And a lot of people are saying, oh, gosh, places are so topped out with Airbnb ease. But I really don't think they are. I think that it's a very cultural shift. You know, for people, like, do you want to go stay in a hotel room with your family? That kind of sucks. When you're traveling with your family, you need a house, you know, and that's the drive here. When you're by yourself like when you know, Shelley and I go to Austin, Texas, we just got a hotel room. We're good with that. Yeah, we don't need a full house. You know, all

45:38

right, well, I want to move on, because we're kind of hitting on that 45 minute mark. And but I want to talk one more thing, I think it's important, I don't think we're going to be able to get to taxes, which is probably a good thing, because you should talk to a CPA about all the different things that can go into this, because taxes are a big factor in your bottom line net. But if I'm at Bob, let's say I'm the listener and I have $100,000. And I want to go by the university bungalow house, what should I expect for my return your 12345? How should I like how do I know if I'm making a good decision? Or I'm making a not good decision about buying a short term rental? With my

46:16

buyers are really, yeah, so obviously, you know, you're deciding how you're going to do it, let's just take this scenario, you go buy it, you say, I'm going to call this my primary residence, move into it, get it, get it set up, right, just to get a setup, and you're gonna, so you can put 5% down, and you use your money, you know, to fix it all up. Number one

46:34

is on the financing side, I want to buy it as a personal residence, and then try to migrate away from that, because I'll get the best financing terms.

46:41

Yeah, exactly. Control the property, right. I mean, that's step number one. So you get that and you get it done. You you optimize it year one. I mean, you're, that's you got to go cheaper on the price. Because you're trying to get bookings, you're trying to get reviews, right. So because people really are into reviews on those things. So you really want to be careful about that. So you might want to book it out at a cheaper price. And I actually think my, the university bungalow started out at like, 175 a night. You know, I think it started out as that but it also didn't even have siding on the outside. It just had house wrap. And people were still booking it was like these people are crazy. They're like, Oh my God, this looks really weird on the outside, then they get inside, like, this is amazing, you know, and then we fixed up the outside is we kind of had more money and stuff as we kind of grew so that

47:23

you're number 1am I should I take a lunch I predict a loss should I break a predictive breakeven should I predict like,

47:30

whether you could probably I mean, if you got say, you go in your you buy a clean property that you can just go and you say, you're gonna optimize it, you go put it in, you know, I do major reconstruction or anything like that looks clean and great. You definitely are going to profit in year one, you know, but you're building, right, so you're building and every, as those things go up, you're gonna, you're gonna go and you're gonna start increasing your price in year two, and then you're gonna increase it in year three. And now like, where I'm at year four, I'm getting, you know, 400 bucks a night. So starting out at 100, you know, 175 a night increasing to over 400 We've got, you know, a ton of reviews on that thing. And they're all like, I think it's like 4.9 out of five stars or something. So

48:08

Ricky, like, you're the math guru here, I mean, break it down. So if I got $100,000, and I'm gonna make Bob's basically, like, you're gonna make a profit, like, if you're not doing like, construction, but it's basically an asset you can come into, you can furnish it, and you can rent it and it's consistent. Like, should I expect a 5% return? And then the next year 6% return and then a next year 10? Like, give me some number oh, by the

48:31

spreadsheet, go back the spreadsheet and then diminish the your occupants? Occupancy down to like, 30% or something like that. And by the numbers, yeah, we can just kind of see.

48:44

So let's say you're one you're getting 30%. Yeah, here's roughly and then let's say you're only getting, I don't know, let's say 200 bucks tonight. Yeah. 30%. Seems pretty, pretty small.

48:58

That would be how many nights? Would that be? 365?

49:02

What's it 120? And the

49:05

10 Nights? It See, I

49:07

told you some after he just did that in the head. Over here, like the calculator? Calculator.

49:18

didn't open it. Money at 30%. Right. So at 200 bucks a night, if I only booked it 30% of the time, I'd lose money. Yeah, that's why I mean, I think your starting goal would probably be you know, 50 to 60%. But I think that most Airbnbs can hit that so easily, even at a low cost per night. But that's, you got to know your number where you're going to break over at right. So, you know, back then 175 A night wasn't a big deal, you know, and it was booking all the time. And actually, it books so much that it was probably more like 175 to 202 and a quarter, you know, is probably booked at, you know, 80% and it was like so much that I was like, didn't like it, you know? Yeah, because it was too cheap. That's what caused me to think. Let's just slowly stagger up our prices. and see where people start trickling on.

50:02

So I want to add some here, Tim. So two things that people should be thinking about right is comparing this as an Airbnb short term rental versus a long term rental. Right, some different assumptions go in. But conceptually, there's some very similar things to it. And looking at it from those standpoints and saying, Okay, which one makes more sense for me? The second, Robert actually, indirectly brought up is the breakeven point, which is something I can add into this is it what you know, percent occupancy, and, you know, cost per night cost per night, and he's gonna make it where it breaks even. So looking at this scenario, 44% at $200, and I get you a current cash flow of $20 a month, right? So there's your

50:47

you're working for the people's

50:49

money, right, this is a long term event, it's a short term investment, or short term rental, it's still a long term investment, right? We're talking 510 15 years, a long term investment horizon is 10 years, that's, you know, one two years doesn't matter. In the scheme of things, I'm okay with breaking even I don't want to lose a ton of money, but I'll break even in year one, because I know in year 234, I'm going to start moving up to the 70 80% range. And at that, you know, I'm talking, you know, 80%, I'm now getting $35,000 a year, how many of those do I need before I retired? You know, I mean, or at least I can scale back, but, you know, so you have to one look at the long term to look at your breakeven three, look at it comparing the short term rental versus long term rental. And you also I think a lot of people don't think about is, you know, how much risk are you willing to take on with some of these projects, right? If you really want to take on risk? Well, you might flip properties, right, that's a risky endeavor. If you don't want to take on risk, then maybe you're just putting 25% down to have a rental and have that $400 A month cash flow. And you want to do that 10 times over the next 20 years. You know, so those things, you gotta be asking yourself,

51:55

right, Reggie, boy, man is awesome, Ricky, it's really awesome. And I think for everybody out there, if you want to get some type of analysis, or how Ricky breaks this down, hit us up. And we will put a way to get a piece of this, whether it's just, you know, just a breakdown, or if it's actually the spreadsheet, but hit us up in the comments, and we will get you something so that you can see how Ricky kind of broke this down. Because it just starts with the math. I mean, at the end of the day that any investment any true value driven investment starts with the math, and then you just go from there. And then like Bob said, it's all trial and error. I mean, especially in short term rental, I mean, you can you can try to overthink this seven ways to Sunday, but you really just have to jump in and you have to give it a shot. And that's why the best way to do it is on your own personal residence. And just kindly get kindly just gradually get more comfortable with it. And as you get more comfortable with it, then you can go buy a second property and turn it into a vacation rental. But Ricky man, this spreadsheet, it's just ridiculous to see this thing. Like, I don't think I could ever create a spreadsheet like this. So I love having you on man. Because Bob and I are we're creative thinkers, you are definitely an analytical thinker. And I think that, that that's makes you super valuable as as a partner on the value of an investor team, because you gotta think three different ways. Yeah, Robert, I

53:22

agree, a great team, and I want to punch. Well, you know, and we have some crossover there, right? It's like a Venn diagram. You know, we have a little bit of both, but you know, I'm more analytical, he's more high level creative. And so it works for us as a team and, uh, do you know, but it looks, you know, the spreadsheet, I know, it's, it's, it looks complex, but it's really not. It just takes a little bit of playing around with it. I gotta make some adjustments to it to make it automated so that people have a spot where they can plug their numbers into so I'll clean it up for people. So that sort of more user friendly if they want it. I don't as much because obviously I built it. So I know you know what I want to do it

54:02

and use it for robbery and lockout lockout fields and stuff.

54:05

Yeah, I've never had a reason to it. But But if people want it, I'll totally make it where it's more user friendly. scoresheet.

54:12

That's awesome. I appreciate it. Guys, this episode has been fantastic. I hope you guys enjoy it as much as I did. And the grand brothers Thank you very much for being on today.

54:22

Happy to do it, bro.

54:26

Thanks for listening to the value driven investor podcast where we lead by giving for more information about our community and what's new visit value driven investor.com the value driven investor podcast was produced by digital legend media in Minneapolis. Build your legend, digital legend media.com

Transcribed by https://otter.ai