Ron: Well hello everybody! Welcome to another edition of The Mentor Podcast. This is Ron LeGrand and I have Eric Moeller on the phone today to talk about vacation rentals, short-term rentals, or whatever you choose to call them. It seems to be an extremely hot subject today. In fact, it’s become the business opportunity of America and my students are all excited about it. Plus, Eric’s going to be at our summit here coming up at the end of March so I thought it’d be a good idea to figure out who he is, what it’s all about and why you probably should be interested, so welcome Eric.
Eric: Hey Ron, thank you for having me.
Ron: You’re welcome! So, let’s start by letting everybody know who you are, what you do and maybe a little bit about how you got started and what’s going on today. And then I got some questions for you on this Airbnb stuff that I keep hearing from folks.
Eric: Sure! Thank you again for having me. I currently live in San Diego and we have two companies. We run properties on Airbnb throughout Southern California and different parts of the world. Essentially what we do is we properties from other landlords and investors and then we re-rent them back out on Airbnb. The way we make money is between our cost of the property and what we generate on platforms like Airbnb.
Ron: Sure, yeah that’s generally the way people make money, charge more than they pay, right?
Eric: That’s it, that’s it.
Ron: So, your kind of unique because you just rent them from investors, is that true? You just rent them, you don’t buy them, you rent them from investors and turn them into Airbnb’s.
Eric: Yeah, yeah. So, my background is in real estate development. For about ten years, I’m originally from New Jersey, I was doing the whole investing thing. From single-family homes, all the way out to apartment buildings and I got burned out with that model. I was looking for a new type of business that was still in real estate but also was driven by technology and I came across the Airbnb model, about four years ago. I realized that I didn’t necessarily need to leverage other people’s money anymore, all I had to do was leverage other people’s property which I call OPP. The way that I do this is in different ways, I either find an investor, a landlord or a developer. We either lease the property from them on a lease from 1-3 years and then we re-rent it back out on Airbnb or we’ll partner with that landlord we’ll take care of the whole Airbnb process and then at the end of the month we divide up profits.
Ron: Well that sounds like a risk freeway, isn’t it?
Eric: Yeah! It’s a beautiful model. It’s a very minimal investment into these properties we’re able to scale it pretty quick.
Ron: Well Eric, I think we better start by making people know what Airbnb is cause there’s a lot of misconceptions about it. For example, I’m sure you don’t serve breakfast in the morning, do you?
Eric: I do not.
Ron: Yeah. You know Airbnb, what does it stand for breakfast in bed or whatever bed and breakfast
Ron: I don’t know where the name came from, but that is what they’re called right now. So really all you’re doing is renting them by the night instead of by the month.
Eric: Exactly. Yeah, so you know the funny story on how they came up with the name Airbnb. The owners needed a way to pay for their rent. They lived in San Francisco, this was over ten years ago, they made a website called air bed and breakfast and they blew up an air bed, put it in their living room and rented it out for the night and that’s how they came up with the name. There are so many different ways of making money on Airbnb. I was just staying with someone last weekend who still serves breakfast as a traditional Airbnb. Now that’s a great way to make money if you have one property, you have extra space in your house, and you want to be hands-on with the business. People still do that. What I do, because I’m a real estate investor by heart and by trade, I’ve taken the model into scale. Right, so I’ve looked at it and I realized that more and more people nowadays, they want to travel and experience the city in a different way than just staying at a hotel and what Airbnb has created is the process, the ability for people to stay center city, stay in urban markets. So, what I realized is that I can leverage apartments, I can leverage houses, I can leverage townhomes in these marketplaces and rent it out either by the night, by the week or by the month. What we do differently is offer concierge services so you know it’s a hotel in the urban market if you will.
Ron: Well really what you’re doing is just letting people choose an Airbnb instead, rather than a motel room or hotel room. You are kind of the Uber of the hotel business, aren’t you?
Eric: Yeah, yeah.
Ron: Those hotels don’t like you much.
Eric: No, they don’t. [laughter]
Ron: So, your simple plan is you rent properties from landlords and either partner with them and/or just rent them and do it yourself. What percentage of them do you think to want to partner with you?
Eric: So, every single time we sit down with the owner we offer them two options. We say we could either rent this property from you and if you’re less risk-averse we’ll guarantee you a payment every single month for the next 12-24 months and they’ll lock that in. Or we say if you’re more risk-averse what we’ll do we’ll partner with you and we’ll focus on the marketing, the turnover, the cleaning, the guest communication, all of that the whole Airbnb side. You take care of the property and at the end of the month we’ll divide up the profits. The owner keeps 70%, we typically keep 30%. Right, so it’s a little bit more of modern property management for short term rentals.
Ron: Okay, do you have to have a license to do that?
Eric: As of right now in most states, you don’t need a license, unless you’re managing 30 days or more on these properties. With that said, short term rental laws are changing so fast all around the world that I would recommend if anyone who is exploring that to contact their local city or state to confirm that.
Ron: Absolutely, especially on these things because I know there are states like Oregon, for example, has some nasty rules, so does Washington, doesn’t it?
Eric: Oh yeah.
Ron: It’s pretty much not available there. I know there’s a couple up in the Northeast that, Boston for example, just made some ugly rules there.
Ron: I don’t know what they are. I know you have to live on the property to even do an Airbnb so that would probably knock most of them out, but anyways I don’t want to dwell on the law. Firstly, you guys better take notes on is you better write, find the rules before you do any of this. Back to your need a license thing. I would think that all I would have to do is rent the house from the landlord and forget the partnership program and that would probably kill any licensing issue anyways.
Eric: Yeah, exactly it comes in under property management laws so if you’re managing properties for 30 days or more and you’re collecting money on behalf of somebody else most states require a license for that.
Ron: But even on the partnership Eric you’re not, you’re doing a joint venture agreement you’re not doing it for someone else, you’re doing it as a partnership. I don’t know, I think the licensing issue will be a non-problem, but you still have to check with an attorney. So, you put them on Airbnb.com or other sites or what? What do you do with them?
Eric: Yeah, so the first step is we get them up on Airbnb. That’s easy. I can get a property up on Airbnb and rent it within under an hour.
Ron: As long as you have photos?
Eric: As long as we have photos and an address, we can get it up and going. Once we get it up on Airbnb, we syndicate it across about 250 different marketing sites.
Ron: Hmm, so you know some people think that the Airbnb house has got to be in some sort of vacation destination. True or false?
Eric: Right, right. False. 100% false.
Ron: Yeah, we’re not talking about vacation rentals here, we’re talking about rentals. Basically, anywhere there’s a hotel there should be Airbnb’s, right?
Eric: 100%. Yup. What we realize is that we have separate markets, of course, the vacation rental markets are still extremely exciting and there’s a certain niche for that, but I mean to your point it’s wherever anybody is traveling there’s a need for short term rentals. Now what the demand is going to be is up and down depending on the marketplace, but you know they’re in 191 different countries right now and 87,000 cities around the world. So yeah pretty much anywhere you can build this model.
Ron: Except where it’s illegal.
Eric: There are still models around that, but I’d definitely recommend staying away from cities like New York City and San Francisco, Portland.
Ron: All the liberal cities, stay out of them.
How do you take care of the turnaround when the tenant moves out? Who does the cleanup work?
Eric: Yeah, so this is part of, and this is going to be a bit of the story I’m going to share at the summit is why I got into this model from the investment side. 90% of the business, of the short-term rental business, is outsourced and managed through technology so all of our cleaning everything is managed through our pieces of technology and 3rd party cleaners. So, we don’t have anybody on staff. We have 3 people, in-house, that manage our properties. As far as the cleaning that’s all outsourced.
Ron: Okay so who finds these people to do the cleaning?
Eric: Yeah, so because Airbnb came on the scene and they injected a bunch of technology into this old vacation rental industry there’s been a whole ecosystem of technology that’s blow up and all these old industries have really been redeveloped into new ones. So cleaning, short term rental cleaning companies are popping up everywhere. It’s really easy to find cleaners. It’s not easy to find good cleaners, but it’s easy to find cleaners. And then there’s a handful of technology out there to help manage it.
Ron: Okay and this is part of what you teach, right?
Eric: Yeah, exactly. I always tell people the biggest thing about this business is breaks down to your space, the experience, and the hospitality and at the end of the day we’re running hospitality companies through these Airbnb properties and the cleaning needs to be 5 stars or above. So yeah, we teach how to find them, how to hire them, how to manage them, and just make sure that the hospitality side, the cleaning side is world-class.
Ron: What kind of houses are you looking for?
Eric: Yeah so, my business I focus on luxury properties so I’m signing this week actually I’m signing a lease on a property here in San Diego that you know rent is $14,000 a month on this house.
Eric: It’s a 4-million-dollar house, it’s right near the beach, a gorgeous home. My business I focus on luxury; however, in this industry and what we teach is that we can go after any type of niche, but it’s like real estate investing right as you can get into apartment buildings. You can get into condos and single-family homes and whatever that is. It’s the same model here what works really well is it has to be in an area people are traveling to and it has to be a property that people are going to have a unique experience at. So, apartments work really well, single-family homes, luxury homes, unique properties. What I tell people to stay away from are condos, stay away from any homeowner associations or condo buildings.
Ron: So is bigger better?
Eric: Not necessarily, for me, it is because of the location I’m in. I’m in San Diego and you know we get people who travel here all year long and we have big groups, families that kind of stuff come out here. For an example that house we’re going to lease for $14,000 a month, we’re projected to generate about $70,000 a year in profit. I should say net revenue on that home, on one property, one single-family house.
Ron: That’s good for one house, isn’t it?
Eric: It’s not bad.
Ron: What percentage overall would you say is your vacancy rates?
Eric: Yeah. We shoot for, our goal is to get our properties occupied 70% of the month. We look at a 30-day schedule; we want to have people in there 21 days every single month.
Eric: Year-round, yeah. That’s the goal is 70% occupancy for the year. A lot of people think hey we have an Airbnb we want it to be occupied 100% of the time and the challenge with that is if you’re occupied 100% that means your rates are really low. So, what we’ve realized is that sweet spot is at 70-90% occupancy within these properties and if we can do that our goal is to 2x the rent on the property.
Ron: Uh-huh, not to mention it would be kind of hard to clean the place up and not lose the day wouldn’t it?
Eric: Well we’ve got our systems to the point where we can clean these properties in between turnover, so we have a 4-hour window and we turn those properties over in 3 hours.
Ron: Okay, so you obviously would get more, you would get tenants easier in vacation locations, but you’d also get a heck of a lot more competition. So, what do you think is better vacation locations or non-vacation locations?
Eric: Yeah, so this is what we’re running into right now when we look at those models in vacation markets. Typically vacation markets are seasonal markets as well. Okay, there are a few markets around the world that are year-round, but even places like Orlando there’s a season to it. San Diego, there’s a season to the vacation markets, right.
Ron: I didn’t know Orlando had a season [laughter]
Ron: Yeah, it’s busy all the time, Disney.
Eric: Yeah it is busy all the time, but when it comes to vacation rental markets it seems like in most vacation rental markets, we have 1 or 2 months that really slow down. It’s the same thing here and back in New Jersey of course. The winter months obviously just stop for those marketplaces. So that’s a challenge right, but then you also have high competition. What Airbnb brings into the model is being able to tap into the urban markets. What we’re seeing is big investors and operators going in and leasing up entire buildings in the center city of their marketplaces. So, leasing out floors and leasing out 100 units or 10 units at a time and then renting those out. The challenge with that is now you’re running into and competing with your hotels in those marketplaces. So, what I tell people, I don’t think it’s black or white, it comes down to what business do they want to build and what type of property they really want to focus on. If it’s the urban side then that’s a new style, short term rental operator. If it’s the vacation rental markets, you are kind of running up to the older vacation rental operators/managers that have been in that space for quite some time.
Ron: Yeah, that doesn’t matter. Competition doesn’t matter.
Eric: Yeah, I agree.
Ron: Yeah, there’s plenty of people coming in. I’m living here in Jacksonville for example and I’m just shocked at the crap on Airbnb that they’re putting up.
Eric: Oh yeah.
Ron: I mean areas I don’t even want to go into they’re still renting them out and by the way, you know Brian and [name] I just sold them an RV and guess what they’re doing with it. One of our students put it out in a park that’s owned by the state for crying out loud and they’re Airbnb-ing it.
Eric: Oh, that’s hilarious. Yup.
Ron: That’s hilarious, yeah. I find this out after I sell it of course.
Eric: Right, right.
Ron: They’re going to make a killing on that thing.
Eric: Oh yeah.
Ron: Cause believe it or not these people come in there rent that RV pays $200-$300 a night to live in that motorhome. Which, okay, it was a nice motor home, but geez.
Eric: It’s incredible what people will actually, what they’re renting on Airbnb and what people will stay in. I’ve seen there’s a famous story from a few years ago of somebody in Brooklyn building an igloo in the back of his house. When there was a big snowstorm and he built an igloo with all the snow and he put it on Airbnb and rented it out for 2 nights for like $50 a night. Airbnb stopped that stuff and you know obviously that’s not what they want to do. It’s just hilarious that people, if you create a cool experience, people will rent it from you, and you can make money on it.
Ron: Yup, well what about furniture?
Eric: Yeah, that’s a fun part of this, it’s a tricky part, but what we essentially do, the best model for this is to buy the furniture. We’ve tested out leasing furniture and renting furniture, but it gets too expensive. In the beginning, a lot of people will piece furniture together through secondhand stores, Craigslist stuff like that. We’re at the point now where we purchase furniture wholesale then we have a designer on call that we bring in and stages the property for us.
Ron: What kind of investment do you have in a normal size house?
Eric: Yeah, so on average you’re going to spend when you’re first getting started for a 1 bedroom. You’re going to spend anywhere between $4,000 and $7,000 on furniture.
Ron: With that new stuff?
Eric: Yeah that’s new stuff that’s also piecing things together and you know you can get it done for that price range.
Ron: You know we got a lot of ladies listening to this saying this guy’s absolutely nuts I know I can furnish that house a lot cheaper than that.
Eric: I’m sure they can.
Ron: If you can ladies first thing to do is empty out your own house on the first one, which you can of course. It’s your choice. You know as well as I know you can get a house full of used furniture for $2,000/$3,000 or whatever.
Eric: Sure, so let me clarify that a little bit too. When we’re staging these properties it’s not just about the furniture, we’re creating a home experience in that property. It’s everything from the furniture, to the forks and knives, to the first aid kits that are in the bathroom, to the shower curtains, to the 3 sets of sheets and blankets and everything else. We’re creating a full home experience. Plus, all the supplies that come along with it. Then you know it can go up. The property we’re renting here in San Diego we have a budget of $30,000 for furniture, but we’re going to be renting it out for nearly $900 a night.
Ron: Well for a million-dollar house. Let’s just not count that one. Okay, so when you lease these things do you an LLC to lease them?
Eric: Depending on the, ideally, we rent it out underneath our LLC, but that becomes challenging with some higher-end investors. We’ll also rent it out underneath our personal name.
Ron: Oh my god. You didn’t say that on my podcast. No, no he did not mean that he did not, scratch that, delete that, strike it from memory he did not mean that.
Ron: Cancel that. No way I’ll let you do that. I better not ever catch you doing that. You can lease them out of an LLC, but even then, you don’t want to put too many of them in one LLC. Here’s what concerns me. I heard this story about this guy up in Seattle, he had a whole bunch of houses that he owned then he was Airbnb-ing them and the state came down and shut him down, now what? Which is why I would want to insulate against the risk.
Eric: Right, right
Ron: I’d have a provision in my agreement Eric that said if for some reason this becomes illegal this lease is canceled.
Eric: We do, yeah.
Ron: At my discrepancy.
Eric: Yup, so we added that in. The challenge that we’re noticing is once you build this business in scale and for example, we’re negotiating a building now where they just finished renovating the whole property, there are 27 units in there, we want to lease up all 27 units, right. This is the next level from just running a few Airbnb’s. The challenge that we’re noticing is that the finance companies for the developers are running into those problems, so we have to get creative with the leases and who’s leasing it and who’s on the lease, what LLC and things like that. That’s where some personal signatures will come in, but every single lease has clauses in there if the laws change, we have the right to back out of those leases or sell them.
Ron: Good. I suppose all of your sellers/owners know you’re doing Airbnb, right?
Eric: 100% yeah. There’s no… that’s something I always tell everyone; everyone thinks they can get away with it. Always have to have the landlord on board as a partner.
Ron: Basically, your landlord, not certainly a partner, has to know what’s going on and approve it and in writing, right?
Ron: Okay. What kind of money, oh I don’t know to get me out of San Diego now…?
Ron: I am, where do I want to be? I’m in Atlanta. I mean I don’t know why I’d want to be in Atlanta, but say I say Atlanta. We’re going there tomorrow, what am I saying, and I got a $300,000 house. It’s a 3-bedroom 2 bath. Atlanta’s not the vacation capital of the world, but it’s certainly a very high-volume place and nothing is going on, the Super Bowls not there. What kind of money could I make on a house like that? Do you think? Just a wild guess, I know.
Eric: So, first of all, Atlanta in an incredible market that’s for short term rentals, for Airbnb. You picked a good one there, so on average when we’re looking at the lease model, right. We’re looking at someone going in and leasing a property and then re-renting it back out. On average, what I find in most markets around the country that person will generate a minimum of $1,000 a month in profit. That’s above their maker rate there rent and expenses. That’s typically what they’ll bring in, into their pocket.
Ron: Is there a multiplier, if it will rent for blank? Can I get X times that for Airbnb?
Eric: Yeah, we have a formula we go through for all of our properties and it’s a quick snapshot of what is this property going to generate? What we do is we just like if we’re buying a house to renovate and flip, we look for comps. We look for 3-5 comps on Airbnb that are similar to this property. We figure out what that average daily rate is for. What that average daily rate is on those comps. Once we determine the ADR, the average daily rate, we multiply that by 21, so 21 days, that’s 70% occupancy. If that number equals 2 times the rent, 2 times the amount of the market-rate rent, then we know that’s a solid Airbnb, a solid property we can lease or partner with the owner on.
Ron: That’s a valuable formula.
Eric: Yeah. Really, really quick it’ll take us, you know, 15 minutes to determine if a property’s going to if we’re in the ballpark to run on that property.
Ron: What about the repairs on that property itself? Do you handle those or does the owner handle those?
Eric: Yeah so if there’s damage done to the property…
Ron: No, no damage, just ordinary repairs like I don’t know needs painted or whatever all that stuff you do to houses.
Eric: Every property that we take on is essentially a turnkey. Now we’ll go in there and we’ll paint. I’ve added hardwood floors into properties things like that, but nothing major. The most we’ll do is paint and/or upgrade some items throughout the house, but nothing crazy. So, everything would be on the owner.
Ron: Everything would be on the owner probably more like on the outside and the systems.
Ron: But decorating and stuff like that would be you?
Eric: Yeah, everything from paint to decorating to furnishing is on us. Plus, all the technology that we add to the house. So yeah, we have a whole process that we go through, but we always look for turnkey properties.
Ron: Okay, you put the locks on the doors so that I can change the code from anywhere in the world?
Eric: Yeah. That’s something that we’re going to go into further at the summit and this is what I love about this business and why I went from the investing side/the developer side to growing this Airbnb business. I’m able to inject technology into these properties to run them literally anywhere in the world. Like you said, remotely. We put locks, we put cameras outside the house, we have cell phone detectors in the house, noise detectors, all kinds of stuff that helps us manage properties remotely. It’s a beautiful business and through all of that now we’re able to expand our portfolio. I live here in San Diego, we have some properties here, but between myself and my partner we’re picking up properties in Dallas, we’re picking up properties in, he just bought a property in Columbia we’re going to be running. We’re looking in Puerto Rico and the beauty of it is if it’s legal and people are traveling there and they have internet we can run an Airbnb there, which is a lot of fun.Ron: Okay, for my listeners we buy and sell houses, we buy houses with terms, mostly beautiful houses in beautiful neighborhoods and want to keep this in the back of your mind listeners. Do I Airbnb it or do I put a lease option tenant-buyer in there? Of course, I put a tenant in there I’m going to take less per month, but I’m going to get a big multi-thousand dollar down payment. Whereas Airbnb I’m going to get a lot more per month, but no multi-thousand dollars down payment. It’s also great for properties you’re having a problem perhaps. Getting exit from. Just think of Airbnb because you don’t have to rent them, we can buy them and let the debt pay down and keep the depreciation and keep all the upside all the benefits and make a ton of cash flow.