JF1827: Is Your Short Term Rental Legal Or Illegal? With Erin Spradlin

Erin is here today to help us understand the different laws and restrictions that some areas are placing on STR’s. Along with her team, they help investors find, buy, and run legal short term rental properties. You may be surprised by how many different regulations and laws exist that investors may not know about until it is too late. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“If you want to be serious about this, don’t treat it as a hobby” – Erin Spradlin

 

Erin Spradlin Real Estate Background:

  • Co-owner and broker of James Carlson Real Estate
  • They focus on setting people up with legal Airbnbs to cover their mortgage or reduce it significantly
  • Erin also focuses on female investors, they’ve done a BiggerPockets video series, and she is a blogger for on BP
  • Based in Denver, CO
  • Say hi to her at https://www.jamescarlsonrealestate.com/
  • Best Ever Book: Long Distance Investing

 


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TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? 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, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Erin Spradlin. How are you doing, Erin?

Erin Spradlin: Good, how are you doing today?

Joe Fairless: I am doing well as well, and looking forward to our conversation. A little  bit about Erin – she is the co-owner and broker of James Carlson Real Estate, where they focus on setting people up with legal Airbnbs to cover their mortgage or reduce it significantly. Erin also has a focus on female investors, where she’s done a Bigger Pockets video series, and she’s also a blogger for Bigger Pockets. Based in Denver, Colorado.

With that being said, Erin, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Erin Spradlin: Sure. In the past I’ve had an 8-to-5 job, as I’m sure many real estate agents and investors did. Starting about 2014 my husband and I got into Airbnb here in Denver, and it just started to change our lives pretty rapidly, because there was a significant extra income. After that, we started to look at ways to acquire different properties in Denver. This was before Denver had established laws around Airbnb… So like a lot of other cities throughout the country, they had a law where it made it illegal, because it was under a 30-day rental, but the city wasn’t really following up with that, they didn’t really have the zest to look into that… So at that point we were looking at other rentals, and we started seeing other people that were doing that as well, so then we ended up getting our real estate license, dropping out of our 8-to-5 jobs and going into real estate and helping other people identify Airbnbs and properties that were good for that.

Then the laws changed, so now our focus really is getting people into legal Airbnbs, because as an ambassador you wanna know that what you’re doing is okay and it’s not gonna change significantly in the next few years, depending on what the city council decides.

Joe Fairless: Yes. And as a human being it’s good to do legal things…

Erin Spradlin: [laughs] That too, that too.

Joe Fairless: That’s normally good advice. [laughs]

Erin Spradlin: Laws exist for a reason…

Joe Fairless: Yes. What were you and your husband doing professionally, prior to getting your real estate license and going all-in with real estate?

Erin Spradlin: I was a digital marketing director and he worked for the State Supreme Court in communications. I actually think both of those past careers have been really beneficial for us… Because I think we came to real estate with a professional background, so we had an idea as far good communication, or what that looked like, and also being able to support or justify whatever recommendations you’re making to clients, and then also just understanding — I know we both felt like we didn’t understand really the value of a real estate agent before we got into it, so we felt like being professionals, we could kind of explain what our value-add was, and then also get back, have good communication, explain things in a way that we didn’t necessarily feel like we’d had that experience in the past when we’d worked with real estate agents.

Joe Fairless: Let’s talk about what you offer exactly. Who is your ideal client and what do you do for them?

Erin Spradlin: Our ideal client is usually a homebuyer, and a homebuyer that’s looking to knock down their mortgage, or cover their mortgage primarily with short-term rentals. The way we go about that is that we research the laws for whatever city they’re looking in; whether or not that city has passed the law, if they haven’t passed the law, what that law looks like, also the temperament of the city council, if the city council is discussing it and researching it and just hasn’t made a decision yet… And then installing them in some kind of property that works for them.

A lot of times what that looks like is a basement apartment. Sometimes that’s a full duplex, so it’ll be an up/down duplex, it’ll be zoned that way, and have a kitchen downstairs… And then sometimes it just looks like a basement with a back entrance, where you can really knock out the rest of the house, but then you’re not seeing the Airbnb guests all the time, it’s still legal… But that property might not have a kitchen and it might still be zoned for a single-family house, but it’s still good for an Airbnb, and legal.

So a lot of our clients that come in have that profile, like “Okay, I wanna do this, but I wanna do it legally and I don’t know how the property works for that.” I think our value-add is coming in and saying “Okay, this is the law for that city, and these are the kinds of properties that work for that.”

Joe Fairless: So how do you make money when you do that?

Erin Spradlin: From my end or from my client’s end?

Joe Fairless: Your end?

Erin Spradlin: From my end, I’m a real estate agent, so I make the commission off of that. And then we have ongoing relationships; [unintelligible 00:06:43.23] if people will come in, they’ll buy their primary, and they’ll end up using that money to cut down their mortgage, and then they’ll turn around and buy an investment property… Whether it makes sense to do it short-term, because some cities allow short-terms for investors, or if it just becomes a long-term investment. Usually we just have ongoing relationships with clients based off of that model. And then we do that model as well, on some of our own properties.

Joe Fairless: Okay. You’re in Denver, Colorado, so you’re able to make commissions on places outside of Colorado?

Erin Spradlin: No. We do it primarily for Denver and Colorado Springs. Denver has different laws than Colorado Springs. Colorado Springs is a total free-for-all; you can go own, buy anything. The city actually is positioned as far as they are fine with people coming in and doing short-term rentals, whereas Denver is not. Denver has a primarily residence-based law. So we do both, two different communities, based on what our clients are looking for.

Joe Fairless: Okay, that’s the part I was missing. When I asked how you make money on it, I was thinking you’re working with people in New Jersey, so I was wondering how–

Erin Spradlin: No.

Joe Fairless: Okay, alright. So you’re making commission as a real estate agent, for the properties that you find for them. Let’s talk a little bit more about that, and your business model. So you’re helping them find the property, and then do you consult with them after that, or do you not have that part of the business, and it’s just “Here’s a property. It’s gonna be good for Airbnb. Now go execute the business plan.”

Erin Spradlin: I think that’s a great question, because people definitely have that curiosity about us all the time. I will say upfront, we don’t do property management. I have a lot of respect for people that do do that, but that just seems like an awful — or a job that is very hard. How we set people up is we do the front-end as far as figuring out if the law makes sense, the property makes sense, and what they can expect to make money-wise. Then we help them as far as talking about how they wanna furnish it, getting checklists  in front of them, how they would wanna set up their Airbnb advertisement, and what that looks like. Some of the things that you wanna highlight, how you would be different… And then also introduce them to people. Obviously, we have relationships with property managers, general contractors, so we put [unintelligible 00:08:55.13] with them post-close, just to make sure that it’s going well.

It’s really important to us that our clients do well, because we care about them, but also as a business model it’s not good to have people where you set them free and they’re failing, or whatever… So we have a pretty intense check-in after the fact.

Joe Fairless: When you have intense check-in – will you elaborate on that?

Erin Spradlin: It just means we have that relationship with the property manager, so we’re always checking in with them to see what the numbers are, and then we’re checking with our clients every once, two months, in the beginning, not after that; maybe six months to a year after the first one or two months… To see how their setup has gone, if they’re having any issues, if there’s anything that we can help out with, and just to make sure too that the numbers are running, and that they are meeting the expectations of what we told them.

Joe Fairless: Okay, great. Is that all part of the initial commission that you receive, or do you have a consulting thing that covers how to furnish it, how to set it up, advertising, introducing them to the team members?

Erin Spradlin: Yeah, for our clients there’s no extra charge for that, so it would just be the straight commission. In Denver typically it’s 2.8%, and then in Colorado Springs it’s 3%. But from our clients, that’s all they pay. For people that aren’t our clients, we do charge an hourly consulting fee.

Joe Fairless: Let’s talk about your Airbnbs. What do you have?

Erin Spradlin: We had two in Denver that we’ve actually converted to medium-term rentals, because Denver’s laws changed, so we didn’t wanna be outside the law. We have converted them to furnished medium-term rentals, which means 30 days or more; but they’re still furnished. Typically, the types of people we’re going after are corporate professionals, traveling nurses, people that have gotten divorced and that are kind of figuring out their situation, or are in the middle of the divorce, people that have moved here… That’s what our situation looks like in Denver.

And in Colorado Springs we just have a straight duplex that is about a mile from downtown, and people do Airbnb there, because again, it’s legal in Colorado Springs, whereas here it’s not. So I say Airbnb broadly, but it’s actually all the short-term rental markets, whether that’s VRBO, or Booking.com, or HomeAway – that falls under that – [unintelligible 00:11:07.19] Colorado Springs, and then obviously in Denver the law is a little bit different.

Joe Fairless: Okay, so you don’t help clients get short-term rentals in Denver, you help them get medium-term rentals in Denver.

Erin Spradlin: Well, you can do short-term rentals, and we definitely do help people do short-term rentals in Denver, but they have to live in that house.

Joe Fairless: Oh, okay.

Erin Spradlin: So it can be a room in the house, it can be a basement in the house, it can be a mother in law suite. The rule here though is that it has to be where you take your mail. So we help people with that kind of configuration, and again, how to do it legally. I would say probably 50% of our investor clients in Denver do Airbnb, and they do it in the house where they take mail. Whereas Colorado Springs, which is also a big part of our investor pool, they don’t have to live there. It can just be a straight investment, and then you bring in a property manager obviously, because you can’t do short-term rentals very effectively long-distance, unless you have a property manager on it.

Joe Fairless: Let’s talk about the last deal in Denver that you found for a client. What’s the purchase price and what’s the income-producing potential for it?

Erin Spradlin: Sure. Right now we had someone buy a four-bedroom house in Arvada, Colorado. That’s a city outside of Denver. They are doing it in their basement. The purchase price of that house was 425k, and for their first month it paid $1,600. They are doing a bedroom downstairs; there’s another bedroom downstairs, but that bedroom they’re using as an office and a kitchen space, so… It’s not a true kitchen, but it has a microwave, a mini-fridge, whatnot. So they pulled in $1,600.

I don’t think that they were overly aggressive; I think they could make more, but they kept their prices lower because it was their first month, and then also because they were just kind of trying to figure out what they were doing.

Joe Fairless: Okay. $1,600 a month?

Erin Spradlin: Yup.

Joe Fairless: Okay. Which would probably not cover the mortgage, depending on how much they’d put down, I guess, but… It’d knock out a  chunk of it, right?

Erin Spradlin: Yes, definitely. And we try to be clear with people about that; depending on where you’re at, what you’re doing, sometimes it can cover the mortgage. A lot of times it won’t. But it will make the payment a lot more comfortable.

Joe Fairless: Oh yeah, absolutely. The background of people who do this, your recent clients, maybe your last three clients who have closed on a house… Obviously, without disclosing who they are, but just tell us a little bit more about their background, and their age, and maybe their life-stage, that sort of thing.

Erin Spradlin: That’s also a good question. I think in general they tend to be first-time homebuyers, or a little bit younger. By younger I mean like 45, or 40, or younger. But I think that is because – honestly, a lot of that profile is more interested in Airbnb, and has had more exposure to it. Sometimes with an older clientele it’s hard to get them to have buy-in on that, or they’re new to it… And it’s interesting, because I think that seniors actually are the fastest-growing demographic for Airbnb, but they tend to do a room in their house, or  a house that they already own. They’re not looking to purchase a house and do that.

So typically, our clients tend to be in big life stages – they’ve just gotten married, or they’re just having a baby, or they’re just purchasing that first house, and then they’re open to doing something to cut down their mortgage… And usually, they’ve heard of us, because they’ve done some research online, or they’re hearing about it through Bigger Pockets, and/or they’ve had that experience where they’ve gone and stayed at an Airbnb [unintelligible 00:14:33.11] and then thought to themselves, “Oh, maybe I should try and do this.”

Joe Fairless: What are some misconceptions your clients have when they initially start working with you and they’re asking questions about the process?

Erin Spradlin: Two things. I think the first – sometimes people think it’s easy money, or free money… And it’s like, it’s good money, but it’s neither easy, nor free.

Joe Fairless: [laughs]

Erin Spradlin: I think they should have that expectation. If you’re doing it in your house, you are going to be doing cleaning, sometimes you’re gonna be fighting with your spouse about the furnishing, and things like that… So I always try to knock that down immediately, like “Expect this to be sort of a second job, and also expect to think about it as a business.” If you really wanna [unintelligible 00:15:15.24] don’t think about it as a hobby… And honestly, that’s true for any second business, or a business that you own – not to think of it as a hobby, but to think of it seriously, and run your numbers, and have your sheets, and everything. That’s part of it.

And I would say the other thing is getting them over the hump of what you can make. Sometimes they’re locked in on the long-term rental numbers, and they have a hard time getting over “This is what you can do short-term” and “These are the nightly rates, and this is what’s happening in your neighborhood.” So I feel like there’s an education piece as far as getting that into their head that this is actually what the numbers are… Because they’re looking at long-term numbers, or likely, if they’ve decided to go into investing, they have a family member that did it before them, and that family member is saying “No, you don’t want a two-bedroom. I’m cash-flowing $100”, or whatever. So just getting them to come along on that.

Joe Fairless: Wouldn’t the short-term numbers nine times out of ten be more favorable than the long-term renter numbers?

Erin Spradlin: Yeah, 100%. Usually what we see is about 150% to 200%, if you’re doing it full-time. So definitely not that example that I told you about with the $1,600. If you’re a full-time investor, usually we say 1,5x to 2x. We try to back that up obviously with neighborhoods; unless you’ve made a pretty bad decision, usually I think the short-term rental numbers are better. But there are additional costs you have to take into account though. Now you’re paying the utilities, the [unintelligible 00:16:41.20] in the beginning to furnish the place… Usually, your insurance is at 1,5x higher, because even though Airbnb promises insurance, we usually like our clients to have an additional insurance product on it.

So there are other expenses, and I would say in the beginning that can be a little bit more expensive, but long-term your monthly should definitely be better.

Joe Fairless: When you do those follow-ups with your clients, what’s one thing that someone’s complained about, or they didn’t take into account initially as much as they should have?

Erin Spradlin: Setup, honestly. I think that’s always an issue. That’s where we ran into problems, and it’s definitely where we see clients run into problems. There’s just a lot of decisions that have to be made on the furnishing, and how long that takes. I think there’s different philosophies on that, as far as whether or not you wanna go through a Craigslist, or Facebook Market, to acquire cheaper furniture, versus just going to IKEA. I think you see people maybe stretch out a timeline longer than they should based off of that, or you see business partners and/or couples getting in fights over how they think they should do it.

I think that part of it, and I also think property management. Sometimes you have people that have different ideas as far as how much the property manager should be involved, how much they should be involved… Those are some of the sticking points that come up a lot.

Joe Fairless: What are the fees that are typical for a property management company, should they be involved to the greatest extent that they could be involved?

Erin Spradlin: Usually, we see 17% to 25%. I would say 20% seems to be the average where we’re at, though those people are pretty intense. For our properties, the property manager that we use charges 18%, and we are really no part of it. We’re pretty hands-off. They provide us with a monthly report, and that’s it.

Joe Fairless: And that’s of the collected income?

Erin Spradlin: Yup.

Joe Fairless: Okay. So what are the responsibilities that they undertake, in your example, where they collect 18%?

Erin Spradlin: They are handling all the communication, which I think the communication on a short-term rental is a lot more intense. People have a lot of questions…

Joe Fairless: Yeah…

Erin Spradlin: You’re saying “Yeah…”

Joe Fairless: Because I’ve rented from one – my wife and I have – and I know she asks a lot of questions, so… I wouldn’t wanna be on the receiving end.

Erin Spradlin: [laughs] Well, there’s this idea — I mean it’s good; it’s why people like it and why it got started, but they wanna know the coolest places to go in town, where do you like to go get your beers, or what’s something that’s off the beaten path, that’s not just a touristy thing to do. I think there’s ways to limit those questions by building out your Airbnb profile correctly, but I think there’s just a lot of communication that goes on… So I think your property managers really dealing with all of that – cleaning, obviously is a  huge issue… If you have a long-term rental, you’re not worried about these things. But if you have a short-term rental, you’re changing out and doing a clean every single time someone stays… It’s honestly  a huge complaint that we hear about from the guest side – people always want it to be really clean, and they don’t wanna see a rogue hair somewhere, something gross… So I think your property manager has to put in place a really good team, and make sure that that’s done.

Those seem to be the stressors, and then again, dealing with just any kind of issue that happens, that would happen with a long-term property as well – your short-term rental management has to take care of it… If there’s a flood, or a backed-up toilet, or whatever. They’re dealing with that piece, so the normal long-term rental piece, but then on top of it the communication and the cleaning.

Joe Fairless: And what do you do?

Erin Spradlin: What do you mean what do I do? [laughs] I sit back…

Joe Fairless: Right, yeah. I have three single-family homes, and I sit back, too. I just get a monthly report… Is that the extent of it for you, since you have a property management company doing all this?

Erin Spradlin: Yes, it is. And that’s how we want it. I really feel like a good property manager — I really don’t wanna hear from them that often; I wanna have a relationship where we trust each other, and if I let them make any decisions up to $500, I feel like “I trust you, that’s why I have that relationship, and I really want you to handle this.” And then if something bigger comes up, or we need to change something, or I see a drop in numbers, then maybe we’re talking. But in general, I don’t wanna be involved.

Joe Fairless: Based on your experience, what is your best real estate investing advice ever?

Erin Spradlin: Short-term rentals… [laughs] It’s definitely been our market, and I think going after cities — we’re pretty bullish on Colorado Springs, and I think the reason for that is that you see a lot of millennials come in. It’s a city that had pretty depressed housing costs, because people didn’t wanna be there. It’s sort of interesting; it was on the front range, but now it’s benefitting from the fact that Denver is so expensive, so people are flooding into that…

So I guess I would say look at cities that surround cities that are very popular, because it turns out that the cities are probably gonna get expensive, and you’re gonna benefit from that overflow. And again, if you can find a place that will allow for short-term rentals, that is sort of a destination, I think you’re gonna do pretty well that way.

Joe Fairless: We’re gonna do a Lightning Round. Are you ready for the Best Ever Lightning Round?

Erin Spradlin: I am.

Joe Fairless: Alright. First, a quick word from our Best Ever partners.

Break: [00:22:05.22] to [00:22:45.15]

Joe Fairless: Alright Erin, best ever book you’ve recently read?

Erin Spradlin: Long Distance Investing, by David Green.

Joe Fairless: If Airbnb and short-term rentals became illegal, they had the same policies in place in Colorado Springs as they do Denver, what would you do with your business?

Erin Spradlin: I would try to keep our business model similar, but I would tell people to move into medium-term rentals, like they’ve done in Denver. I think it’s been a really positive experience for us. As people tend to pay more, they’re really responsible, and a lot of times they convert into long-term renters anyways, because they get into this situation – they think they’re gonna be there for three months, and just because of life circumstances they end up being a 6-month or a year-long tenant, and it just ends up being a good relationship for everyone. And I honestly think you could just build a business model around those people, without the short or the long-term on it.

Joe Fairless: Best ever deal you’ve done?

Erin Spradlin: Definitely my place in Colorado Springs. The duplex that we have down there is cash-flowing quite well. It’s a duplex, and then again, I just think Colorado Springs is a hot place, where the prices are increasing, and they have a lot going on down there.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Erin Spradlin: Buying in an HOA. No doubt. I know since then I’ve read about people not buying in condos, and that stuff has been true for us. We had a really good investment that was cash-flowing quite well, and then we were gonna get hit with a huge special assessment, and the HOA was just causing a lot of issues… So I don’t think we would repeat that.

Joe Fairless: Best ever way you like to give back to the community?

Erin Spradlin: We have something called [unintelligible 00:24:17.09] so every single commission we do, we give 2.8% back into a charity of our client’s choosing. That’s one way I think we like to keep it local… And then also we do a lot of free education, because like I said before, Airbnb really affected and changed our lives, let us quit our jobs, so it’s exciting to talk to other people and help other people get in that position as well.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing and your company?

Erin Spradlin: They can find us on jamescarlsonrealestate.com, that is our website. They can also find us on Bigger Pockets; I have a dedicated blog there, under Erin Spradlin, and then my husband (who is my business partner) also has a profile, and that’s James Carlson.

Joe Fairless: Erin, thank you for being on the show, talking about your approach to short and medium-term rentals, and talking about some misconceptions that are in place with people who are just getting started… And then also some challenges for furnishings, property management, and solutions to those challenges.

Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Erin Spradlin: Yeah, thank you so much. Have a great day.

JF1826: Saving Tax Money On Short Term Rentals & Other Properties with Robert Stephens

Taxes are a major expense for real estate investors, and Robert is here to explain some of the taxes that we may not know about, and how to save money on those taxes. In the short term rental area, there are lodging taxes. Much of the conversation focuses on that today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“A lot of people think since they’re not running a hotel that the lodging tax doesn’t apply to them” – Robert Stephens

 

Robert Stephens Real Estate Background:

  • Co-founder of Avalara MyLodgeTax (formerly HotSpot Tax), formed in 2002 out of his own necessity to understand and manage compliance with his rental property.
  • Helps homeowners, hotel operators, and other businesses with short term lodging tax regulations
  • Based in Englewood, CO
  • Say hi to him at https://www.avalara.com
  • Best Ever Book: The Big Short

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? 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, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Rob Stephens. How are you doing, Rob?

Rob Stephens: Great, thanks for having me, Joe.

Joe Fairless: Well, I’m glad to hear it, and looking forward to our conversation. A little bit about Rob – he’s the co-founder of Avalara MyLodgeTax, which was formed in 2002 out of his own necessity to understand and manage compliance with his rental property. He helps homeowners, hotel operators and other businesses with short-term lodging tax regulations. Based in Englewood, Colorado. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Rob Stephens: Sure. You touched on it, but… 20 years ago I purchased a second home in Vail, I wanted to generate rental income on it, because I needed to do that to be able to afford the property, which is pretty common. I put it up on some of these short-term rental sites, which were very new at the time. It worked great, but through that experience I realized there’s a bunch of other things I need to do to be successful at this, one of them being [unintelligible 00:03:15.23] remitting lodging taxes, which I didn’t know really anything about at the time. So it was really through that experience we built what we think is a very simple solution for people that are engaged in short-term rentals, and that’s really our focus – leverage technology to provide cloud-based or internet-based very simple solutions for people to be charging the right taxes, collecting them from their guests, paying into the jurisdictions at the right time. We handle all of those tax tasks for people, so that’s really our purpose – helping people with that kind of back-office function of tax, that are involved in short-term rentals.

Joe Fairless: Okay, let’s talk about this. I’d love to learn more. What are lodging taxes, and aren’t they already accounted for on the site that you have your house on?

Rob Stephens: Great question. Two-part question. The first is what are lodging taxes… So really the same taxes that hotels pay. By and large, the hotel is going to be paying the same sales and lodging taxes that a short-term rental apartment, single-family home, condo, whatever the property type is… With a few exceptions. Generally, it’s the same types of taxes. It’s called different things – sometimes it’s sales tax, sometimes it’s hotel tax, room tax, lodging tax, accommodations tax. It’s a tax on short-term renting, and I think some people miss that at the beginning; they think “I’m not a hotel, this doesn’t apply to me.” If you actually read the law, it’s pretty broad. Any type of property where you’re providing overnight accommodation is gonna trip these taxes.

Secondly, yeah, there’s a lot of change going on in the short-term rental industry. One of those things is the big platforms, one of them being Airbnb, starting a couple of years ago, have decided to collect and remit some of the taxes on their own. So in certain markets they are collecting and remitting some of the taxes. Usually, they’re doing state taxes… And I don’t know how in the weeds we wanna get, Joe, but a lot of these taxes, for most locations in the U.S, there’s a state tax you have to pay, at the Department of Revenue, but then there’s very often a city or county tax you have to pay, too.

What’s happening now is Airbnb is paying most of the state taxes, but they’re not paying the city and county taxes. That then leaves the host the responsibility to collect and remit some of these taxes. And they’re really the only platform right now broadly paying taxes. So if people are on VRBO, or Booking.com, or TripAdvisor, they’re gonna need to collect and remit the taxes, because that platform isn’t handling it.

Joe Fairless: How much are we talking? Just specific, maybe use an example for a certain market.

Rob Stephens: Sure. I think these taxes are a lot. The average I would tell you is 10%-12%, and that’s of gross rent. So if you’re charging a guest $200 a night, or $2,000 for the week, it’s an extra 10%-12% on top of that. When you get in urban markets, the taxes typically are 15% or higher. Chicago actually has over a 23% tax on short-term rentals now… So if you get into big, urban cities… Kind of like rental cars, hotels – it’s easy for those big municipalities; it’s a good revenue source for those cities to tax those types of activities, because it’s not residents, it’s travelers and guests tom the community.

So these taxes tend to be very high, and if you’re missing it, you’re not doing it, it can add up to be a pretty significant amount over time if you’re not collecting it from your guests.

Joe Fairless: I would imagine the majority of people are not accounting for this, or even paying it. What would your guess be?

Rob Stephens: That’s a great question. We have that debate here internally, and I generally think you’re correct. Look, it’s gotten a lot better; I’d say in the last couple of years there’s a lot more awareness and focus on this issue… And look, short-term rentals have really become a mainstream part of the travel segment. I suspect a lot of your listeners are engaged in this, or they have long-term properties… They may be actually looking at getting into that market. And I do think, by and large, there’s some people doing it, but I think there’s a pretty high non-compliance rate. Now, whether that’s 80% non-compliance, or 50% – I don’t think anybody knows for certain, but we’re hoping to help with that. There’s a lot more room to go in terms of being compliant, and I believe it’s just a matter of time. If we’re gonna be a real, legitimate industry, protecting our property rights in these cities and these communities, one of the things we’re all gonna have to do is make sure we’re paying these taxes.

Joe Fairless: What are the consequences of not being compliant as  a rental property owner?

Rob Stephens: Your obligation is to collect the tax… And typically, the way to think about this is the guest, the traveler – they pay the tax. If it’s a 10% tax, you charge that guest an extra 10%, they pay it. Your obligation as an operator is to collect it and then remit it to the different agencies.

I always tell our customers, “Look, this isn’t really an economic cost to you. This is kind of a passthrough; it’s your cost for doing business, you have to collect these taxes from your guests.” But if you’re not doing it, typically what they’ll do is audit, or inquire and go back typically at least 2-3 years – typically not more than 4-5 years, unless they believe there’s some sort of fraud or something like that involved – and they’ll look to pull your income tax returns or whatever records they can to validate how many rentals you had… And then if it’s a 12% tax and you’re doing $30,000/year in rent – which is pretty typical for a short-term rental – you’re looking at $3,000-$4,000/year in tax. So the liability can add up quickly, and then they’ll slap on penalties and interest on top of that, which can unfortunately be pretty significant. Those penalties can be easily 25%-50%.

We’ve seen it happen unfortunately to customers, or new customers coming in with the problem. It could be thousands of dollars of back-taxes, plus penalties and interest.

Joe Fairless: What’s the worst scenario that someone’s come to you with?

Rob Stephens: The worst scenario… These governmental agencies have a lot of power. In the tax world, in your market, or multifamily or long-term rental markets, every property has a property tax; and if you don’t pay your property tax bill, ultimately the tax agency can put a tax lien on your property. Same thing in the hotel tax, lodging tax world – if you’re not paying your taxes, they can make an assessment against your property for back-tax due, and if you don’t pay it, they’ll put a  tax lien on the property, and then anytime the property is sold, that’s when they can step in there and recover their funds. Obviously, the worst case is they’re seizing the property.

I don’t know that we’ve ever seen a property seized, but we’ve certainly seen people with tax liens, and had to sell their property just to get out from under that liability.

Joe Fairless: Tell us more about what you all have come up with as a solution.

Rob Stephens: Historically, all these taxes – it’s a manual process. If somebody’s short-term renting, they have to go to the state site, figure out the state requirements, go to their city site, figure out what the requirements are for the city, maybe even go to the county… So there’s multiple agencies involved, multiple forms, you have to register with these different agencies, you have to pay tax, usually monthly and quarterly to these different agencies… So there’s a fair amount of moving parts and complexity.

What we were talking about earlier, Joe – the rank and file person involved in this space just has never dealt with these types of taxes before, so they’re not aware of it. So what we’ve really tried to do is really just with technology solve all of that. Sometimes I’ll use an analogy – think of it like TurboTax, but for hotel taxes. We have a software platform, the customer can sign up, they put in the property address that they’re renting, we immediately tell them what the correct, accurate tax rate is to charge from the guest, then they [unintelligible 00:10:51.12] Airbnb account, or VRBO account, they collect the tax from the guest, we handle all the moving parts of registering them, filling out the paperwork, get all that in place, whatever licenses are needed… And at that point they’re really all set up; it becomes a monthly cadence of just they report whatever the rent was for the month, so there’s automated processes around this; they report their monthly rent, and then based on that we calculate the taxes, file and remit them on their behalf.

So from our customer perspective, really all they have to do is come to the website, sign up, put in their profile, their address, some of their profile information, and we take it from there – rates, we register them and file and pay the tax… And we just make sure everything’s done on time, correctly.

The way we describe it is it’s really a way for a host or a homeowner or an investor just to put al this on autopilot and make sure these taxes are done… And at a price point of $20/month/property. We think it’s good value, and leveraging technology to solve what’s kind of a headache for most people.

Joe Fairless: Oh, absolutely… Big-time headache for most people. And if it’s not a headache for them, then they’re probably not doing it, so then it will be a major migraine in the future.

Rob Stephens: It’s funny you say that, because some of our best customers – the most eager to sign up – are often people that have been doing this on their own and understand the monthly filings that have to be done, and some of the paperwork, or have tried to do it on their own are were confused, or frustrated… Or simply don’t have time. At a $20/month price point they’re happy to say “You know what – put this on autopilot, take care of this for me.”

Joe Fairless: Yes. With certain markets, one of them being close-ish to you – Denver, Colorado – moving away from short-term rentals and then being more medium-term (over a month), because regulations are against the short-term, what are the tax implications and reporting implications for medium-term rentals versus short-term ?

Rob Stephens: Sometimes it’s really good on the tax side, for Colorado… So we’ve talked about taxes on short-term rentals; in most states, in most locations, that’s 30 days. Once you flip over and you use the term “medium-term”, so once you’re doing monthly rentals or longer, you’re gonna be out from under, having to collect and file all these taxes. That’s the good news, that bad burden is gone. Now, in some states like New York, New Jersey, Massachusetts, it’s 90 days. Big travel states, like Florida and Hawaii, it’s 180 days. So some states do have longer definitions of short-term. But to use your example, Denver would be a city where if you’re doing monthly rentals, then you wouldn’t have to deal with the hotel tax portion of it. So that’s good.

Now, I always tell people – unfortunately, short-term rentals are in high demand, and I’m sure you have a lot of your listeners that have realized that in certain markets they can generate very high rents on kind of a nightly, weekly basis, relative to a long-term rental contract. So yeah, it’s great – 30 days you avoid the complications and expenses, administering these taxes, but I think most people in this market realize that short-term is certainly the most lucrative… But again, there’s increasing regulation and limitations in certain cities on people’s ability to do that.

Joe Fairless: What else should we talk about that we haven’t talked about already, as it relates to your business and real estate investors in short-term rental tax?

Rob Stephens: I would say — I’m a short-term rental property owner myself, which is how I got into this… I suspect your listening audience probably has mainly long-term investors, but I’m sure a lot of those people are getting in the short-term rental space… What I would say is a couple things. I think the big platforms – Airbnb, VRBO – they’ve invested a lot of money over the last decade; it’s getting easier and easier to do. So if people are thinking about this, I would encourage them to take the leap.

The other part of it is you hear lots of noise about tax and regulation… There is some of that. Again, there’s services like ours that can cover the tax fees; I think that regulation sometimes is overstated. I mean, there are cities where there’s real challenges, but in most places across the U.S. you can still short-term rent without too many problems.

And the other thing is sometimes people have — look, we’re in a community. We have tens of thousands of short-term rental property owners; I go to conferences, there’s often angst about wear and tear, or partiers, or what that short-term rental crowd is gonna be like… And I can tell you, by and large these are responsible travelers, higher than average incomes. A lot of times it’s families going to events, or vacationers if you’re in a ski market, or a beach market, or a lake market… The issue of high turnover in your property, or damage — I’ve been doing this for 20 years and I probably have one instance where there was some sort of issue that I had with a guest.

So again, if people are thinking about it, I think a lot of people are very successful at it. It’s a hot space. The nightly rents can be very attractive. Again, I’m a short-term rental advocate; I would encourage people that are looking at it to not hesitate. Give it a try.

Joe Fairless: You’ve been doing short-term rentals for 20 years?

Rob Stephens: Yeah. That means a) I’m old, but yeah…

Joe Fairless: You’re experienced.

Rob Stephens: Yeah, we’ve bought this in 1999 and put our property in Vail on VRBO. So I’ve seen a lot of change; it’s a completely different industry, obviously, than it was 20 years ago.

Joe Fairless: Oh, my goodness. Yeah. Airbnb wasn’t around, right?

Rob Stephens: Yeah, Airbnb came around I think 2009 or 2010.

Joe Fairless: Yeah.

Rob Stephens: There was no online booking, nobody took credit card payments… You had to call somebody or email somebody. It was a much more difficult experience. Kind of one of my points – it’s becoming easier and easier, and travelers love it, and it’s getting easier for travelers, because the travelers want that instant book. They wanna have that same hotel-booking experience with a vacation rental, which is pulling more travelers into this segment. So it’s a  lot of progress, a lot of exciting things happening.

Joe Fairless: Let’s talk about your short-term rental. How many do you have right now?

Rob Stephens: I have one short-term rental and one long-term rental.

Joe Fairless: One short-term and one long-term, okay. So with the short-term — have you have multiple short-terms at one point in time?

Rob Stephens: I have not. I’ve had multiple different short-term rentals, but not multiple at one time.

Joe Fairless: Okay, got it. So this one that you have now is not the one that you started with 20 years ago.

Rob Stephens: Correct.

Joe Fairless: Okay. Tell us about how your thought process for buying one, selling it, and then continuing to go until you’ve reached today the one that you have now.

Rob Stephens: Sure. I live in Denver. For a lot of us on the front range, that grew up in Colorado, lifelong skiers, owning mountain property or property in the ski resorts is a big goal. So for us, that first purchase was I would say as much or more a lifestyle decision than it was investment, and I think when you get in the short-term rental space, especially the vacation rental segment of that, that’s a lot of the mindset. People are like “I like to go to Myrtle Beach” or “I like to go to South Florida” or “I like to ski in Vail. I’m gonna purchase a property there, anchor there. I’m gonna go there… I’m gonna build equity over time there.”

There certainly was the investment thesis too that if you looked over time, real estate in a market like Vail was phenomenal, and it just gets more and more expensive. So my psychology – and this was 20 years ago – was at some point you’ve just gotta jump in, make that commitment. And when we did that at the time, we could afford just to own a second property on our own and pay that mortgage, so we needed the rental income to basically help cover the carrying costs. So that’s what we did, and it worked great.

We looked at using a property manager at the time. Property managers in Colorado at the time took about 50% of your gross rent for their management fee, so… We were looking for a better option, and that’s when we found the websites, VRBO, and for really nominal dollars put it on there, and it rented up very successfully.

So that was 1999. We ended up selling that one to our partner in 2007. Joe, you’ve been in real estate [unintelligible 00:18:48.05] 2007 was probably the peak of the real estate bubble, so we saw a huge appreciation. The property tripled in value in about 7-8 years. So when you reflect back on that, you say “Well, that was great… Probably a bubble.” So we turned it around and bought another one in Vail. This is the Best Ever Show – that second one was probably the worst ever investment. We bought it at the absolute peak of the market.

I remember doing the financing at the time, which — mortgages seemed to just give away; we had perfectly fine credit, and all that, but we were starting to struggle getting a mortgage, which was at the time a bizarre experience. Little did we know behind the scenes the mortgage markets were really melting down. Anyway, we closed that one, but bought it at the peak of the market…

Joe Fairless: What did you buy it for?

Rob Stephens: That was about $850,000.

Joe Fairless: Okay.

Rob Stephens: It dropped precipitously. I think the market just came back. It took about ten years to come back. It just came back recently. In fact, we’ve just sold it a year ago for a little bit less than $900,000.

Joe Fairless: Good for you.

Rob Stephens: But we’ve put about $100,000 of improvements into it, too.

Joe Fairless: Oh, there’s the catch!

Rob Stephens: And the first several years we had to support it operationally. Again, this is my worst deal ever, and anybody who does anything – not everything always works out great.

Joe Fairless: Yup.

Rob Stephens: But we sold that one and then bought a very tired, rundown property in the heart of Vail, which is a great location… And kind of immediately saw the opportunity. I had a contractor that had done some remodeling projects with us in Vail, and immediately — we gutted the place last summer, ripped out everything… So we’ve put in all new everything. It’s a small unit, 850 square feet, but a great location. It’s 75 yards from the Gondola… We’ve put it on the short-term rental market, and that type of central location – the rentals were just super-strong, and the property turned out great. The rentals are super-strong and we’re personally excited to be really close in where we can walk to restaurants, and the slopes, and bars, and that type of thing. But from a real estate perspective – we’ll see over time, but I’m excited about getting in… This property was very beaten up, and I think we got it at a great price, put in the work and dollars to improve it, and I think we’re well-situated now on that one.

Joe Fairless: Nice. Lessons learned, that’s for sure. When you think about your experience as a short-term landlord, and then also you have one long-term, what is your best real estate investing advice ever?

Rob Stephens: I was in this camp for years. I’ve always [unintelligible 00:21:12.02] myself. Joe, I’m sure you’re a real estate expert; I have a couple of properties and I’m in the short-term rental space, but we have this tax automation solution… But I still think of myself somewhat as a real estate novice, or did for years… And I’m always kind of looking at doing things, but not pulling the trigger. So my advice is to just take action, jump in, do something. That doesn’t mean you wanna do anything stupidly, obviously, but I was just talking to one of the young folks here; they’re looking at buying a house in Denver. Denver has become  a very expensive market for real estate over the last several years, and I was talking about — the first time [unintelligible 00:21:45.13] 25 years ago, and I got married, and we upgraded, and that whole story… I said “Look, this was the mid-90’s. We thought it was all super-expensive and super-hot then.” I remember friends telling me “I wouldn’t get on this market”, and the first time we bought in central Denver, we sold 3,5 years later for 60% appreciation.

So I guess my point is you can also look to time the market, or wait for the next correction or crash, but just take action. If you have an interest, you have some capital, you think you have a sound investment plan… It’s obviously important to have a plan, and run the numbers and the math and make sure it makes sense, but… At some point you’ve just gotta jump in and take action.

Joe Fairless: And I think with that taking action, it’s also having a fallback plan, or at least a reserve or something, because if you do accidentally time it for a 2007 purchase, then you’ve gotta be able to float that property for a period of time, right?

Rob Stephens: That’s a very good comment. You can’t necessarily go all-in; you need to be capitalized such that if the rental market doesn’t materialize as expected, or rates drop, that you do have the capital or the staying power to ride it out. You don’t wanna be over-leveraged, or that mortgage payment too high, or extend too much for a property; that’s gonna put you in a really bad position. So absolutely, there needs to be a level of prudent planning and thoughtful analysis that goes into these.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Rob Stephens: Let’s do it.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:23:24.23] to [00:24:03.06]

Joe Fairless: Best ever book you’ve recently read?

Rob Stephens: The Big Short.

Joe Fairless: What’s a mistake you’ve made on a transaction that we haven’t talked about?

Rob Stephens: Not enough due diligence.

Joe Fairless: Best ever deal you’ve done?

Rob Stephens: That would probably be my first condo in Vail. It tripled in value over eight years.

Joe Fairless: And with not enough due diligence on the mistake – will you elaborate? An example of where you didn’t do enough due diligence?

Rob Stephens: Just not researching the market well enough, and maybe understanding the property well enough.

Joe Fairless: Best ever way you like to give back to the community?

Rob Stephens: This is gonna be self-serving, Joe. I’m an entrepreneur, I started a company, so I think employing people is very powerful. For the people that work here – I really take care of them, I give them an opportunity.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

Rob Stephens: Anyone interested – go to our website, MyLodgeTax.com, and learn all about our tax automation solutions.

Joe Fairless: Well, thank you so much, Rob, for being on the show. It sounds like you’ve got a great out-of-the-box solution for short-term rental landlords to help them make sure they’re compliant with the taxes that they will need to pay; whether they know it or not, they need to pay them. And I did not know the taxes were so high. You said the average tax is 10%-12% of the gross rent, and in some markets 15% or higher if it’s an urban market. And Chicago… Oh, Chicago. It doesn’t surprise me that they’ve got [unintelligible 00:25:30.29] tax on this.

Rob Stephens: Yeah.

Joe Fairless: They’ve got some things to work out…

Rob Stephens: Indeed.

Joe Fairless: But thank you, Bob, for being on the show. I hope you have a best ever day. I really appreciate your time, and we will talk to you again soon.

Rob Stephens: Happy to do it. Thanks, Joe.

JF1825: Building A Short Term Rental Business With Other People’s Properties #SkilSetSunday with Michael Sjogren

Michael is here today to tell us more about short term rentals. We’ll hear three different ways to make money from short term rentals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Here is how I will mitigate all these risks” – Michael Sjogren

 

Michael Sjogren Real Estate Background:

  • Michael and his wife Krysten are the founders of Occupied, LLC, a short-term rental investment and management company
  • They have a portfolio of six properties across three markets and are actively expanding across the northeast
  • Recently launched an education platform called Short Term Rental Secrets to help real estate investors launch their own STR business
  • Based in Boston, MA
  • Say hi to him at https://www.occupiednow.com/

 


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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? 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, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. First off, I hope  you’re having a best ever weekend. Because today is Sunday, I’ve got a special segment for you called Skillset Sunday. The purpose of this conversation is to help you acquire or hone a skill in real estate investing.

The skill we’re gonna be talking about today – and I suggest, if you’ve got some rentals, this is a skill that you at least become aware of, and then you can choose what to do with it – is the skill of making money on short-term rentals. Our guest today has been on the show before; he is an expert at short-term rentals, and he’s gonna talk about three ways to make money on short-term rentals. One of them is gonna be fairly obvious – you have a property and you make that a short-term rental, but we’ve got two other ways that are gonna be interesting, and we’re gonna dive deep into.

First off, how are you doing, Michael Sjogren?

Michael Sjogren: Hey, Joe. Thanks for having me back.

Joe Fairless: Yeah, my pleasure, and looking forward to our conversation. Best Ever listeners, you can just search Michael’s name and my name, and you can listen to his previous episode that he was on. We’re gonna dive right into short-term rentals. First, let me introduce you, Michael, just to refresh memories. Michael and his wife, Christen, are founders of Occupied LLC, which is a short-term rental investment and management company. They have a portfolio of seven properties across three markets, and are actively expanding across the North-East. They recently launched an education platform called Short-term Rental Secrets, to help real estate investors launch their short-term rental business. Based in Boston, Massachusetts.

Here’s what we’re gonna talk about – three ways to make money on short-term rentals. What are those three ways? And then we’ll get into the details of those three ways.

Michael Sjogren: Sure. The first is to purchase a property. The second is to lease a property from a landlord, you furnish it and then you put it on Airbnb, or HomeAway, or Rent It Out, however you want, and you make the difference between what your rent payment is to the landlord and how much revenue you can generate on a nightly basis. And then the third is to partner with a landlord, or landlords to partner with somebody that knows how to run a short-term rental business, and you set up a management fee, a percentage of the revenue collected. What I find is typically the landlord makes more with this model, obviously, than if you’re just gonna rent it out on 12-month leases to somebody.

Joe Fairless: Alright, let’s talk about number two and number three, because the first one is the “Buy  a property, make it short-term.” If you are interested in that, Best Ever listeners, then go listen to the first conversation I had with Michael, where he talks in detail about how to do that. You have a webinar for that… What’s the webinar?

Michael Sjogren: It’s STRSecrets.com.

Joe Fairless: Okay, STRSecrets.com. If you wanna do that, then go to STRSecrets.com, and/or listen to the interview. So let’s talk about number two and a number three – lease a property from a landlord. How do you approach a landlord and convince him/her that this is a good idea.

Michael Sjogren: I think the first thing to think about before you approach someone is what problem are you trying to solve for them? If you’re approaching a landlord that has a vacancy at their property, what is their biggest problem? Their biggest problem is vacancy. Every month that that property sits vacant, they’re not making money but they still have to pay their mortgage, and their expenses, and everything else. So the problem that you are solving is that you’re going to fill their vacancy, and that you’re going to take better care of their property than anybody else, and not be a pain in the butt and calling them every time a toilet gets clogged. Those are the three problems that you’re solving.

I know a lot of folks think “Oh, short-term rentals – that sounds like there’s more wear and tear on the property. How can that possibly be better for the property?” If you think of it, the last time you stayed at a hotel, or an Airbnb, or wherever you traveled to, how much time did you actually spend in the property? Probably from 8-9 o’clock at night until about 9-10 o’clock in the morning, and the majority of that time you’re sleeping. How many of you actually use the stove, or the dishwasher, or the washer and dryer, or any of the major appliances in there? You probably didn’t. And for those of us that are landlords, ask yourself this question – when was the last time one of your tenants hired a professional cleaning company to come in and sanitize and deep-clean that entire property? Probably never.

So with this model, the property stays in pristine condition, because it has to. It gets professionally deep-cleaned multiple times a week, and it has to look pristine every single day, otherwise we don’t make money. It has to look great every single day. So those are the problems that you’re solving. If you’re gonna sign a lease with a landlord, or if you’re approaching a landlord and saying “Listen, I’m happy to sign a 12, 18, 24-month lease and take care of your vacancy problem. And by the way, here’s why I’m going to take way better care of your property than anybody else… Oh, and by the way (and this is totally up to the listeners if you wanna go this route), I’ll actually take care of any maintenance requests that are $250 or less. I’m not even gonna call you, I’ll just handle it. If anything major happens, I’ll let you know, but otherwise I’ll take care of it myself. And if you ever wanna go inspect the property, just give me a heads up; I’ll make sure nobody’s in there, and you can go in there any time you want.”

Joe Fairless: That sounds like a very compelling case. [laughs]

Michael Sjogren: Right? So many folks get scared, like “Why would somebody rent me their property?” Well, what problem are you solving for them?

Joe Fairless: Yeah. So I’m gonna flip the script on this… If the listeners are listening and they’re like “Well, sold”, how does a listener or real estate investor find people who want to do this at their property?

Michael Sjogren: Email me. I’ve got a whole database of students that follow my exact system. Or just go on some of the platforms. Go on Bigger Pockets, go on the different groups, and find out who’s active in the space. Then it’s just like “Okay, well, show me your numbers. Show me your data.” If they don’t’ have experience, “Okay, well who are you learning from? Who are your mentors? What has been their success, and how involved are they gonna be?” So if you’re on the other side, like some of my students – they’re just getting started – they get so nervous, like “Yeah, but I don’t have a track record.” That’s fine, leverage my track record; say I’ll analyze the deals. You’re following a proven system from somebody who’s been in the business for two years and has trained a bunch of students doing this, and walk them through. Figure out what their fears are, and then walk them through how you’re gonna address those fears.

Joe Fairless: And one last follow-up question on that line of thinking… If a Best Ever listener has property, and they’re thinking “Well, I’d like this, too. I’d like my property in better condition than full-time residents, and I’d like to make more money than I could, and I’d like somebody to handle $250 or less in expenses, because then I would make more money (whether or not they offer that is another story).” How can a landlord quickly determine, “Hey, does my property qualify to be a short-term rental or not?”

Michael Sjogren: You can go back and listen to the interview that Joe and I did a little while ago, where I broke down the nine different traveler profiles. I’ll recap them real quick, and we’re not gonna go into detail. If you’re anywhere near a vacation town, that’s great. If you’re anywhere near an employment base… It doesn’t have to be huge; but are there decent-sized offices anywhere near you for corporate travelers that are coming in? Are you near any medical offices or specialty treatment centers, or major hospitals? Are you anywhere near a university, or a cosmetology school, or any type of trade school? Are you anywhere near an entertainment area, like a music hall or a convention center, or a professional sports stadium? Are you near a military base? There’s a few other ones, but those are applicable in any market; emergency situations, life events like birthdays, Christmas, wakes, funerals, all that stuff. And then relocation. People are always relocating, people are always moving. So if you’re anywhere near those… Basically, if you live anywhere near other people, it probably will work in your market.

Joe Fairless: Now let’s talk about someone who is facilitating this, so you in this case, or someone who’s in the industry… How much can you actually make on the spread when you are renting from a landlording and covering all this stuff, and then you’re getting short-term people coming in?

Michael Sjogren: As one example – we’ll take one property that I have, it’s a 2-bed 1-bath, about 40 minutes outside of Boston. It’s in a small city. That property previously was renting for $2,000/month. Now, during slow season in March, that property generated $4,400 in revenue. In July it’s gonna bring in close to $8,000 in revenue. In October probably closer to $9,000. So for somebody to go in and pay you $2,000 in rent, they’d be happy to do that.

Or on the flipside, like I did with this landlord, I said “I’ll give you the 2k, but quite frankly, you’re way better off staying in the deal. I’ll build it out, you invest the $10,000 to furnish it, but you’re gonna make way more money if I just manage it for you for 25% of the revenue. You’re still gonna make way more money than if I just rented it from you long-term.”

Joe Fairless: What did they decide?

Michael Sjogren: They decided to partner with me. This person’s been clearing at least 25% more than they would have made as a long-term rental.

Joe Fairless: Let’s talk about the third option. So there’s three ways to make money on short-term rentals. One, you buy the property and you do it yourself. Two, you lease the property from a landlord and you make the spread on what you lease it, and all the expenses, and what you actually rent it for. Three is you partner with a landlord and you get a management fee. Will you describe that model in detail?

Michael Sjogren: Sure. Real quick though, just to recap, when you look at the three different models, it kind of goes from based on how much capital you have. If you have capital to purchase property, great. Do the first model. If you’re got a little bit of capital, say 15k-20k – okay, great, you can do the leasing model. But if you have no capital and you’re just getting started, the co-hosting or the management model is the way to go. I’m not blowing smoke, you’re literally doing this with none of your own money. This is how I built my portfolio; other than the property I own, I have no money in these other deals.

Joe Fairless: Thank you for putting that in context.

Michael Sjogren: No problem. So the third model is similar to a property management company for a long-term rental, except now you’re doing it on a nightly basis. You’re basically running a distributed hotel. In this instance, in that example, he was getting $2,000/month for this two-bedroom property, unfurnished, as is. So I said “Okay, if you invest 10k, I’ll have my wife design it, because I don’t have an eye for that; she’s an interior designer, so she’ll design it. I’ll build it out, and then I will run the operations for you and take 25% of the revenue after cleanings.” Because I didn’t feel it was right to take my cut on top of the cleanings; that just didn’t feel right to me. So if this property brought in 4k/month in revenue, and say the cleanings were $500 for the month, then I’d take 25% of $3,500, and then he’ll clear the rest of it.

Joe Fairless: Okay.

Michael Sjogren: So for him, if he can get anywhere from $2,4000 and up per month, he’ll get his initial investment back within 15-18 months, and then he’s just increased his profitability by 25% forever.

Joe Fairless: When you’re starting out and you propose that fee structure, is there any negotiation that takes place with the landlord?

Michael Sjogren: I’ve had some landlords push back and say “I don’t know…”, and I said “Okay, fine. Here’s the deal. I have one landlord that actually will do the cleanings. He’s a retired gentleman, great guy. And I tell him he’s nuts to do this, but… He’ll actually do the cleanings, just to make an extra $70 or whatever it is per clean… And he’ll manage the supplies. So I don’t have to deal with coordinating supplies, he takes care of all that, so I charge him 15%.”

I’ve got another gentleman who handles a similar amount of the work, and I’ll do 15%. But if I’m doing everything, soup to nuts, I’m charging 25%. And quite frankly, I show them the numbers – and I’ll give the listeners another nugget, to give them some ammunition… You can go to a site called AirDNA.co, and that is a site that pulls all the data behind Airbnb and HomeAway, and you can plug in any address and it’ll spit out 5-10 comparable properties and what they did for revenue and occupancy last year, and what the site thinks this property will do for occupancy and revenue.

So I would just print that piece of paper out and I’d go to the landlord and say “Listen, you’re bringing in $2,000/month right now. This thing is telling me that you should bring in like $50,000/year as a short-term rental. I’ll manage it for you. What do you think?” And then obviously, we go through and talk about all the other controls that I have in place, around security, and locks, and all that fun stuff that we talked about on the last interview.”

Joe Fairless: That’s great. Anything else as it relates to these three ways to make money on short-term rentals that we haven’t talked about, that you think we should in this conversation?

Michael Sjogren: Now, I’ll just reiterate – just put yourself in their shoes. If they’ve never considered this, what are their biggest fears? Typically, it’s that their place is gonna get trashed, so how are you gonna mitigate that risk and how are you gonna explain that to them? Because it almost sounds too good to be true. At the beginning you’re like “Wow, okay…” But if you can explain it and just show them… I have all these credibility packs that I bring to these meetings, and I just show them “Okay, here’s what this property could do, here’s how I’m gonna mitigate all these risks”, step by step, with screenshots, and past experience, and reviews, and everything else… And I just show them. If you’re interested in this, great; if you’re not, that’s totally fine, too. Never get attached to it or try to force somebody into a deal that they don’t wanna do. There’s plenty of fish out there, and I see so many people get caught up “Oh, I talked to ten people last week…” Okay, go talk to ten more. It’s a numbers game. Keep going, man… You’re not done yet.

Joe Fairless: Yeah.

Michael Sjogren: Go back and listen to Joe’s podcast; how many guests have you had on that — I was listening to one the other day that you had… He emailed brokers for like nine months, every two weeks… I’m like, “Yes! Grind, man. Go make it happen.” It will happen.

Joe Fairless: Yup. And on the ninth month he got his largest deal he’s ever done, and then he’s continued to scale from there, to like a 50 or 60-unit property.

Michael Sjogren: Another piece of advice that you gave me a long time ago, that I took and it worked, for this model, was “How can I become an authority figure?” I started a local meetup called “Airbnb Mastery.” Every month I was getting people in a room, educating them about this, and I got three leads just from hosting that meetup. And it didn’t happen right away. That happened like five months in. And I had two months where not a single person showed up. And I said “Okay, fine. I’m gonna do it again next month, and again, and again.” So start a meetup, start putting content on social media, start becoming an authority figure in the space, and showing people “Hey, when I think of Airbnb, I think of so-and-so.” I changed my name in Instagram and Facebook to “The Airbnb Guy.” So anytime somebody thinks of Airbnb, I want them to think of The Airbnb Guy. How can you position yourself as an expert in your field?

Joe Fairless: And the last question real quick – this might be a larger question, but it can be a quicker answer… How can we determine if our property is in an area where the city or the township or whatever regulatory body there is, it is okay for us to do short-term rentals? Because I know New York City – not so much.

Michael Sjogren: Yeah, absolutely. Great question. For me, I always like to go to the source; so what I would do is I would google these exact words “short-term rental ordinance”, and then insert your city name. Try and go directly to their website. You can do a general search and just type in “Short term rental laws” and see what articles come up, but I always try and go to the source.

The reason that I am not in Boston, or in San Francisco, or New York City, or any of these major markets, is because these markets have a lack of “housing” or affordable housing. Lobbyists and everything else are going to say “Hey, you should put restrictions on short-term rentals, because they’re taking our inventory off the street.” So I would look for markets where they’re not seeing that message. And if you are, then just go 30 minutes outside of the city. If you’re in Manhattan – okay, go 30 minutes North, or go 30 minutes South, somewhere in New Jersey.

I told you, my property is three hours away in New Hampshire, and I manage that no problem. The last one we picked up was in Florida, and I can manage that remotely. So don’t be afraid to go a little bit outside your comfort zone.

Joe Fairless: Thanks for being on the show, talking about three ways to make money on short-term rentals. One, you buy the property, two, you lease the property, three, you partner with the landlord. And those are tiers based on how much cash you have access to. The value proposition to owners, landlords, of first identifying what problem we’re trying to solve for them, and then we are filling a vacancy, taking better care of the property, and we’ll be a painless person to work with, and actually might make their life even easier and even more profitable on the expense side if we’re handling things up to $250.

Thanks for being on the show. How can the Best Ever listeners learn more about what you’re doing?

Michael Sjogren: They can follow me on the social platforms @TheAirbnbGuy. You can send me a note at info@occupiednow.com, and for the free training that Joe and I were talking about, it’s a 60-minute class that I break down my entire business model, and help you kick off your own business within 6 weeks. Go to STRSecrets.com.

Joe Fairless: Thanks a lot for being on the show. I hope you have a best ever weekend, and we’ll talk to you again soon.

Michael Sjogren: Thanks, Joe.

JF1810: How Can You Build A Short Term Rental Business With Other People’s Properties? With Michael Sjogren

Michael has been building his company for the past few years and has seen success in a niche that almost anyone can do. He prefers doing short term rentals, and he doesn’t even own the properties (usually). Hear how he builds his business with property owner partners. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You can do it yourself, but what is your time worth?” – Michael Sjogren

 

Michael Sjogren Real Estate Background:

  • Michael and his wife Krysten are the founders of Occupied, LLC, a short-term rental investment and management company
  • They have a portfolio of six properties across three markets and are actively expanding across the northeast
  • Recently launched an education platform called Short Term Rental Secrets to help real estate investors launch their own STR business
  • Based in Boston, MA
  • Say hi to him at  https://www.occupiednow.com/
  • Best Ever Book: The Millionaire Fastlane

 


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