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
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.
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.
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.