JF984: She Beat Airbnb to It, and Here’s How
Furnished residential real estate with high-yields is not a new thing. Our guest was doing it for decades… and she even knows the right connections with high paying customers for top-of-the-line quality and furnished spaces. She covers traveling nurses and other niche tenants that fit well into her operations, this is an episode you won’t want to miss!
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Kimberly Smith Real Estate Background:
– Owner and CEO of AvenueWest Global Franchise, a multi-million dollar success story
– Accomplished entrepreneur and real estate author
– Over 20 years experience as an entrepreneur in real estate, property management, corporate housing, website development and franchising.
– Based in Littleton, Colorado
– Say hi to her at https://avenuewestfranchise.com
Click here for a summary of Kimberly’s Best Ever advice: http://bit.ly/2rd0ecT
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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.
With us today, Kimberley Smith. How are you doing, Kimberley?
Kimberley Smith: I’m doing great, thanks for having me!
Joe Fairless: My pleasure, and looking forward to digging in. Kimberley has over 20 years of experience as an entrepreneur and real estate property management corporate housing. She is an accomplished entrepreneur and a real estate author. She’s the CEO and owner of Avenue West Global Franchise, which is a multi-million dollar company. She is based in Littleton, Colorado. With that being said, Kimberley, do you wanna give the Best Ever listeners a little bit more about your background and your focus?
Kimberley Smith: Sure. My focus is corporate housing, which is furnished monthly rentals. In 2016, furnished rentals on a monthly basis in the United States was 3.2 billion dollars in rental dollars. So for dozens of years, long before there was an Airbnb, there has been an industry that provides furnished residential properties for businesses relocating and needing temporary housing. It’s amazing how it’s now the new key thing and everybody wants to be part of Airbnb and figure out how to do this; we’ve actually been doing it for decades.
Joe Fairless: [laughs] It’s old news to you, right? Alright, well let’s talk about this; this is gonna be an interesting conversation. I’ve got apartment communities; they’re B-class apartment communities, built between 1980 to 2000, in working class neighborhoods. Is this relevant to me?
Kimberley Smith: Absolutely. It’s relevant to anybody who owns residential real estate. When you’re providing a rental property, all you have to do to be successful is find the right tenants, set the expectations and then meet or exceed the expectations of the tenants.
In the United States there’s about 100k-200k traveling nurses in any given year, and they go and they have an entirely fun lifestyle where they pop from city to city, and they work for 6-12 months on a contract basis, so a B property would be a perfect situation for them. But what I want to say – what’s most important for me is what I call portfolio of diversification. We talk about all these fun and exciting things, and everyone has a bad habit of just jumping in; so let’s say you have an apartment complex with 10, 20 or 100 units in it. How can you maximize the revenue by making sure your long-term ROI is stable?
If you could take 5-10 of those properties and make them furnished monthly rentals, it’s a lot less work than doing painful dollar with your vacation rentals. You’re talking about getting 2-4 renters a year, but if you could make an extra $5,000-$10,000/year/rental property, that might be interesting. But as we know, in real estate everything goes in cycles, so you wanna keep a large portion of your portfolio; still in those monthly rentals where you can pay it on the first of every month, and that’s consistent… But these furnished monthly rentals allow you to capture some of that increased revenue you would be getting otherwise.
Joe Fairless: That’s smart. I love it. After we’re done with our conversation, I’m gonna pretend that I’m going to make it happen at one of my properties, so I’m gonna ask you all the questions that I can think of that I would need to implement this at my property, because who cares about me? It’s all about the best ever listeners, and I suspect that the questions I’m about to ask will be relevant to them if they’re gonna implement it on their stuff. So 1) how do I find people who are going to rent a furnished property?
Kimberley Smith: That’s one of the key secret sauces. In the old days, this 3.2 billion dollar industry that most people have never heard of – unless you’ve been relocated by your company – was a B2B business. So I would set up a corporate housing business, I would set up hundreds furnished rental properties and I would go out and I would do old-fashioned request for proposals with major corporations, and they would say “Okay, I need 103 one-bedrooms for six months. Can you get them all ready for me?”
What’s happening today with the transformation of the internet is there are these new distribution portals. Now, if you’re watching any of the news right now, the Airbnb’s are just now starting to think about “How do I talk to a corporation?” So there’s a learning curve.
Part of the challenge right now is finding those right tenants, and it’s done through a number of different ways. Some of it is through distribution portals, some of it is through old-fashioned relationship-building… Is there a university in your area? Is there a hospital where there’s a housing coordinator? Are there human resource directors who do this on a regular basis?
One of the first things that you’re gonna do before go anywhere into starting anything with your property is for the last eight years, Corporate Housing By Owner has created an annual report; you can get it on Amazon.com or you can register for free at CorporateHousingByOwner.com and you can download it for free. And it will tell you — we asked hundreds of people across the country “How do you market your furnished rentals and where do you get your best results from?” We have eight years of data in that report and it’s gonna start by just reading the details.
Joe Fairless: Distribution portals – you’ve said that a couple times… What are the distribution portals? Can you name them?
Kimberley Smith: Sure. So Corporate Housing By Owner is an old-fashioned distribution portal that’s created relationships over the last 11 years with major corporations, and it’s a subscription-based marketing platform. What that means is you put your property there, it calls you and you do the deal on the side. The great news is it’s a fabulous return on your investment. You’re investing a couple hundred dollars to get someone who’s gonna make you 5k-10k/year.
The Airbnb’s are there, and in certain markets like in San Francisco, where businesses like to be high-tech. You do your rental transaction through the Airbnb’s of the world, and you pay a much higher return on that for their platform to transact your rentals’ processes. So you’ve got HomeSuite, you’ve got Airbnb, you’ve got Booking.com, you’ve got HomeAway… All of these guys are just starting to think “How do we best service the needs of the business traveler?” So in the short run, you wanna be in all of those places.
The good news is if you understand your technology, you can sync your availability calendars from one platform to another to keep everything organized. So you can sign up with a reservations program like Access.com, list all your rental properties in there, and then you can see all your properties through APIs to these distribution portals. That’s a lot of detail, sorry.
Joe Fairless: No, we love details, especially for those of us like me, who take notes on these calls. So that’s great. What about if we have a third-party management company and they’ve never done this before?
Kimberley Smith: That’s actually what I do every day, and part of it is understanding the difference between the tortoise and the hare. In unfurnished property management, you are the tortoise; you’re renting a property for a year, and if your kitchen sink has a leak, you report it and they come out in the next week and they’re gonna fix it for you. In corporate housing, if I’m there for 30, 60, 90 days and there’s something wrong, I need you to deal with that. As a corporation, I need you to deal with me on a business-to-business type transaction. I need to understand that, I need to be invoiced in a certain way. I’m not gonna pay you a security deposit, because I don’t wanna tie up my cash. I need you to understand my reputation as a business client and [unintelligible [00:10:04].10] responsibility.
Typical unfurnished property managers do not understand corporate housing, so what I do is I work with real estate brokers and property managers to develop Avenue West corporate housing, which is a management brand that focuses only on furnished rentals.
So right now there are eight Avenue West property management companies across the country, and our goal is to get 50-75. I would be a little wary in just handing a furnished rental that you’re expecting to get a business client into an unfurnished property management, because they don’t really understand how to find that right tenant.
Joe Fairless: There’s a couple scenarios, and I’m gonna give you both of them — well, I’m sure there’s more, but I have two on my mind. I’m gonna give you one, and then I’ll give you another. One is I have a single-family home in Dallas, and I have a management company that I’m happy with, but certainly your idea piques my curiosity and intrigues me. Do you replace the current management company, or do you educate them? How does this work?
Kimberley Smith: Dallas is an easy answer for me, because there is an Avenue West Dallas office. So you would replace your management company with Avenue West Dallas, if you really wanted to make it a full-time corporate housing company. You could sit down and work an educational basis with your property management company and say “Hey, I really just need to be able to call you when there’s something wrong, and I need you to deliver the keys when I need the keys delivered, but I’m personally gonna go out and I’m gonna start meeting the needs of the corporate housing travelers.”
Part of the challenge is in unfurnished we’re used to being able to plan ahead and do things slowly. Most corporate housing tenants call you today and they actually wanna move in within seven days. So if I’m an auditor and I’m going to a new city to do a project, I’m not gonna need my corporate housing until I’ve actually signed that deal, but once I sign that deal, I need to be there tomorrow. So there’s a speed to that. Now, with you as the investor, maybe in the short run you want to answer those calls and figure out the best client for you, and then just have your property management company back you up, but there is a bit of a learning curve there.
Joe Fairless: And then the other scenario I can think of is I have an apartment building – I’ll give you a real example… I’ve got a 296-unit apartment building in Dallas. As you said earlier, have a small percentage, not the whole thing, that way we have a diversified portfolio. How do you work with that management company? Because I imagine since you’re only taking a very small piece of the pie in terms of number of units, that you wouldn’t want to take over the whole management of the apartment community.
Kimberley Smith: Maybe we should go back one step before we get there. When I talk to investors, there’s three things that I really wanna focus in on. One is I want you, the investor, to know thyself. What is it that makes you tick and what’s your threshold of pain when it comes to real estate and cash flow? That next step is understanding your pain per dollar, and there’s lots of opportunities out there, but you need to understand, if you have absolutely not a single ounce of time left in your day at any given time, the idea of making an extra $5,000-$10,000 a year may not be of interest for you, so you need to understand…
In certain markets you can do vacation rentals, but you’re flipping something all the time, but that’s a lot of work. So you need to understand what your pain per dollar is, and then you need to understand the lifecycle of real estate. Every market and every type of property will have ebbs and flows, so if you can understand that a little bit more, you have some flexibility.
So a 296-unit… You would probably wanna sit down and say “Hey, let’s put together a business plan. Who in my area — is there a hospital? Are there traveling nurses there?” So I’d create two different levels of corporate housing. Could I create what I call a CHBO complete property, which is really designed… Have 5-10 units that are perfect: they have Wi-Fi, cable, exactly the right number of forks, and king-size beds and TVs in every room. That really works for that business traveler.
Now, are there 10-20 units that I could use more for the traveling nurse? They just need basic accommodation. Then if you have an on-site property manager, every couple of years you may wanna say “Hey, this year they’re working on a power plant that’s down the street, and they’re gonna get a whole bunch of extra contract workers, so for the next 12 months I’m gonna do 30 units that are gonna be basic, furnished units.” “Oh, but you know, that power plant contract is done, so I’m gonna take 20 of those this year and just do the typically furnished/unfurnished.”
So if you’re really talking about a 296-unit building, sitting down, putting together a business plan, saying “What clients am I gonna get now?” and then reviewing that on an annual basis is gonna help you through that process.
Joe Fairless: Fascinating. The business plan and the opportunity just molds to however the market shifts, as you said. So you’ve got traveling nurses, business travelers, if there’s something happening – okay, that makes sense.
Let’s talk about money. How much more money can we make?
Kimberley Smith: Return on investment – that’s what everybody wants. I talk to investors and I say “Hey, you have a furnished rental… Let’s just look at the numbers and say you have an annual occupancy of 80%.” Okay, so you wanna look at the extent of stays in your neighborhood, you wanna look at the hotel rates in your neighborhood, you may even be able to find exact corporate housing rates in your neighborhood.
Last year, in the United States, the average daily rate on a corporate housing rental was $150. The average U.S. corporate housing rental is also a one-bedroom. So if you take a one-bedroom unit and you say “Okay, I’m getting $150/night” and run that at an 80% occupancy… Now, most individuals are not gonna get that $150/night. You have to understand your individual market and figure out where you fit, and you can purchase something called Corporate Housing Industry Report, which this year is a 206-page document that goes through all major metropolitan state areas and looks at “What’s the average rent that was collected last year on a studio on a one-bedroom, on a two-bedroom…?”
Again, when you’re looking at houses, you could look at the Corporate Housing By Owner report; it’s gonna give you average rental rates… So then you’d back into that.
I just come up with round numbers of $5,000-$10,000 extra returns, because I’m talking very generally. But if you look at something like Phoenix, you could have a one-bedroom apartment that you’re buying for 100k-150k, that would rent unfurnished for like $750, but you might actually be able to rent it as a furnished rental for $2,500. Some markets have really big spreads, and then there are other markets that have unusual spreads that are reversed, like San Francisco.
San Francisco is a little soft this year, but if you look at San Francisco in 2016, you could actually in some cases get more as an unfurnished rental than you could as a corporate housing rental… But in San Francisco people don’t like to tie up their rentals for 12 months, because rents are changing so much. So by putting in the corporate housing rental model, they can turn that and get an increased rent every 90 days, depending on the market.
So you do wanna understand your individual market – the Corporate Housing Industry report can do that for you, which is put out by the Corporate Housing Providers associations and also the CHBO report.
Joe Fairless: What type of management fee should the management company charge for corporate? Because we know what they charge for residential or regular residents, but what about corporate residents?
Kimberley Smith: If you were a vacation rental property, the property manager typically charges 50% of the rent in order to do full property management.
Joe Fairless: Is that right, 50%? Is that what you said?
Kimberley Smith: That’s correct.
Joe Fairless: Okay.
Kimberley Smith: So for corporate housing, an Avenue West managed corporate housing brokerage would charge you between 25%-35%, depending on the market. If it’s a corporation, it’s paying the rents via credit card. Avenue West is incurring that expense, and not passing that on to you, the owner. They’re doing all the key arrivals, they’re doing whatever background checks are necessary; they’re doing all of that service for that corporate tenant. They have extensive software to do the invoicing and such that’s necessary as part of that whole thing… And they’re building relationships. They’re working with a management company that doesn’t say “Oh, I HOPE to find you a corporate housing rental.” You’re dealing with an Avenue West company who’s been around for 18 years, developing these relationships, that says “Hey, these are the corporations that work with me every day.”
Joe Fairless: Just running some quick math… I love specific examples. I’ve got a house that rents for $1,200 in Dallas, and let’s say I got $100/day for this house with a corporate rental. That’s $3,100, and then 35% off the top, so that’s $2,000. So basically, I go from $1,200 to $2,000 – so an $800 difference.
I’m sure there are other things, like paying for all the forks and Wi-Fi or whatever else that’s involved, so the expenses would be higher, but both the CapEx expenses and then the ongoing expenses would be higher, right?
Kimberley Smith: Yeah, that’s correct. But how many bedrooms do you have?
Joe Fairless: This one house example? Four bedrooms.
Kimberley Smith: Okay. So at four bedrooms, you’re really undervaluing the property at $3,100. It probably rents more for like $4,100/month.
Joe Fairless: Interesting. I had my conference actually a stone’s throw away from you, in Denver, Colorado, and we had someone speak about corporate rentals, and it makes a lot of sense, especially to diversify your portfolio. The key is – and this is where the genius of what you created – the management, and having the management team be experts in it. I think it’s a really smart business.
What is your best real estate investing advice ever?
Kimberley Smith: Best advice is a couple different things. One is understand yourself. It’s so simple to go to real estate conferences and get so excited… There’s lots of ways to make money in real estate, but know yourself first. Not all real estate is created equal, so you’ve gotta do your homework, you’ve gotta understand who your developer is, you’ve gotta kick the tyres, you’ve gotta know three different ways you can make money off of that rental property.
And then return on investment is an interesting thing. Understand that sometimes you do not want to cash-flow real estate. What happens if you went and bought that four-bedroom house today and you decided “I’m gonna put a 15-year mortgage on it and I’m not gonna cash-flow it at all for the next 15 years. But I just had a cute little baby boy today, and 15 years from now I’m gonna have to pay for him to go to college, and it’s gonna cash-flow like there’s no tomorrow in 15 years.”
So there are lots of interesting ways through financing in what you need. If you are a young investor and you wanted to cash-flow today so you can buy the next one, that’s cool, too. But the way to get the long-term return on your investment is not necessarily about making a dollar today, so have fun learning about some of those different ideas.
My figure book is The Idiot’s Guide: Making Money With Rental Properties. You can check it out at most libraries, you can buy it on Amazon.com. It talks about all of those ins and outs. There will always be a “What if…” in real estate investing, you just need to know a scenario and a solution to all of those what ifs as life changes.
Joe Fairless: Are you ready for the Best Ever Lightning Round, Kimberley?
Kimberley Smith: Sounds scary.
Joe Fairless: Alright, great. Well, let’s do it. First though, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve read?
Kimberley Smith: That’s a great one. I was thinking about it, and I’m on whatever great book I’m reading now… So read something now, right?! Right now I’m reading Stealing Fire, and it’s how if you create great, amazing teams, you can exponentially outperform the individual. The navy SEALs do it, the googles of the world do it… So my advice is just to always have a book in your hand. I read non-stop.
Joe Fairless: Best ever deal you’ve done?
Kimberley Smith: I was a couple months out of college; I found a 400 square foot studio that I bought for $89,000. I got a first-time homebuyer’s loan on it, I put $2,300 down. That 400 square foot studio happened to be in San Francisco before the dotcom era, and it grew and grew and grew. I was able to rent it for $3,900/month, I was able to eventually sell it for $400,000 and buy my primary home during — the dotcom bust happened, September 11th happened, no one could sell real estate, and I could sell that 400 square foot studio to finance an entire primary house. So always buy that smallest property in the best neighborhood.
Joe Fairless: Best ever way you like to give back?
Kimberley Smith: I love to connect people and ideas. It’s amazing what is possible. I work a lot with mentoring and business development; that’s why I love doing the franchising side of my business, because I get to help other people build their businesses.
I support [unintelligible [00:24:38].06] healthcare innovation. We are currently functioning in Nicaragua. We are now working with the Nicaraguan government to renovate and manage a rural health clinic, and it’s amazing, when you take one step at a time, the incredible things that you can accomplish.
Joe Fairless: What’s a mistake you’ve made on a particular transaction.
Kimberley Smith: Trusting a developer. I have a hard time buying things pre-construction. Don’t just assume that the permits and all of the things are gonna do all of the checks and balances for you. Learn what other things that developer has built in the past, what are the reviews on that building… In my particular case, when [unintelligible [00:25:17].12] prior to close, I was so disgusted that I actually walked away from my security deposit. So don’t just buy something and think that all properties are created equal.
Joe Fairless: Where can the Best Ever listeners get in touch with you, Kimberley?
Kimberley Smith: Kimberley@AvenueWest.com. You can look up AvenueWest.com, which is the property management side of the business. I’m always happy to answer questions.
Joe Fairless: I enjoyed our conversation, learning about corporate housing, how we can benefit by diversifying our portfolio by using corporate housing, and how we can maximize the income by just maybe swapping out maybe on a single-family house for corporate housing tenants. How to find them through distribution portals (like you listed earlier), relationship building, are there any hospitals close by for traveling nurses, talking to the housing coordinator if there is one, or at least a human resources contact; a university would be another source for this type of housing… And then the management side of things, too. You’ve got your own business; you’ve got Avenue West Dallas, Avenue West Fill-in-the-blank-for-the-city… And then also the type of money we can make with corporate housing – you went through that.
Basically, if we want a rough estimate from what I took from our conversation, we project 80% occupancy and look at the extended stay businesses in our area, and see what they’re charging, look at the hotel rates, look at Airbnb, and we’ll have a general idea of what we can charge, then we can back into some numbers, and assuming 35% off for the rent, and then factoring in some other CapEx expenses that we need to put into the property in order to get it ready, as well as some other ongoing things as well that we would normally have.
Thanks so much for being on the show. I hope you have a best ever day, Kimberley, and we’ll talk to you soon.
Kimberley Smith: Thanks so much, Joe. Have a good day, too.