Rookie Reply: How Do I Analyze Short-Term Rentals?

Ashley:
This is Real Estate Rookie show number 60. My name is Ashley Kehr and I am here with Tony Robinson. We’re back with another Rookie Reply. Tony, please tell everyone what we’ve decided to discuss today.

Tony:
Today we’re going to be talking about my favorite topic as of late which is short-term rentals. I think I’ve gotten a lot of questions both in the Rookie Facebook group, Instagram, email all kinds of places about how to analyze a short-term rental or how to specifically get the data for… about your average time you rated and things like that so that’d be a good place for us to start.

Ashley:
Yeah. So I have one short-term rental and then a very small market. There’s no competition and I just did it on a whim so Tony is definitely more experienced in this area. He has the Excel spreadsheet to analyze this and really fine tune the numbers. He’s definitely going to lead this conversation and I’m going to basically learn along with you guys. Tony let’s talk about that spreadsheet. What are some important things that you need to know right off the bat when analyzing a short-term rental?

Tony:
I think that there’s two maybe three really important numbers that you have to look at to really get an understanding of whether or not it’s a good deal as a short-term rental. First is your average nightly rate. Second is your occupancy. And in third like any other rental are going to be your expenses. I’ll start with the average nightly rate first because I think that’s the one that people struggle to really nail down. And there are a few different ways you can identify what your typical average nightly rate will be. The first way is going to a site like AirDNA or Mashvisor. Those are two websites that specialize in providing short-term rental owners with average timely rate data. I will caveat that with saying that data isn’t perfect. I’ve seen it in the markets that I invest in those numbers are typically a little bit lower than what we’re actually getting but I’ve heard other investors in different markets say that those numbers are a little bit higher than what they’re actually getting.
Just know there is a little bit of a fudge factor in those numbers. But sites like AirDNA and Mashvisor can take out a lot of the guesswork and put you in the directionally correct ballpark area on what your average nightly rate will be. So that’s number one, it’s using the site like that. The second way, which helped me a ton actually, as I was venturing off into the smoky mountains is partnering or having conversations with other owners in that market. Facebook is a really great resource, obviously bigger pockets, but find a way to connect with people who already own and operate short-term rentals in the markets that you’re thinking about and ask them, hey, what kind of nightly rates are you getting? And most investors are pretty open with sharing that data. I haven’t met anyone yet that holds that number close to heart, and it really gives you a good sense of what people are actually getting. So that’s a great way to get data.
The third and I think probably my most preferred method for getting your average nightly rate is by doing some manual research on Airbnb. So the way that I typically do this is once I’ve identified a potential property, and I know the square footage, the bedrooms, all those things, I’ll go on to Airbnb and try and find comparable properties and I’ll open up their calendar. And what I’ll do is I’ll check what are the actual rates that they’re currently offering people. And I usually check the current month, the following month and I might go three or four months out to get a good idea and then I’ll go way out to like a year out to see what they’re charging at that timeframe. And just put all that stuff into an Excel sheet, get your average rate and that gives you I think, a really good ballpark. So that’s the starting point for your average down the grid. So I’ll shut up there Ashley and see if all that makes sense.

Ashley:
I’m just wondering about when you look at the, so you go on Airbnb and you’re looking at the calendars because it shows you what the nightly prices for these other units, and then it shows you what dates are blocked off. So they’re already booked. So do you use this two to check the vacancy too in the area?

Tony:
Yep. So that’s the next metric that you’ll need to track as well, right? So you need your average timely rate, but then you also need your occupancy and same thing. Sites like AirDNA, Mashvisor can also give you projected occupancy rates. But again, I think the best way is to go into Airbnb and actually look at people’s calendars and see what their occupancy looks like. Now, this one is a little tricky, right because it’s hard to tell what their historical occupancy was. You can only get like a snapshot of how it stands today, but same thing you look at what’s their occupancy over the next 14 days, over the next 30 days, over the next 60 days and that can give you a good general sense. And if you get enough sample or comparable properties, it should give you a good idea of where you stand.

Ashley:
Yeah. So for myself, what I do is, there’s only three other Airbnbs in my town. So I still always look at what they’re doing even though I already have my Airbnb, even after I’ve had it, I’m still always checking and seeing what the market is doing and then checking the pricing too on those other units. But let’s keep going on analyzing. So we have to know what price point, we have to know what the vacancy rate is. What else are some of the top things you need to know to analyze the deal?

Tony:
One of your biggest expenses as an Airbnb owner is going to be your cleaning fees. After every turn you’re going to have to pay someone to come in and clean your properties for you. Our cleaning fees vary, right? Depending on the size and the market. On the low end, we pay $80 per turn. On the high end, we pay $250 per turn. So it really depends on the market and the property itself. It’s pretty easy to figure out what that number will be. You can call a few cleaning companies and give them a general size of the property that you’re looking at. And they can usually give you a ballpark quotes over the phone on what they’ll charge you. Then obviously you can look at other listings on Airbnb as well to see what they’re charging their guests for cleaning fees.
And once you’ve got the cleaning fee, you can estimate how many turns you’ll have per month. Six, eight, 10, however many and that’s a good number for you to use. Now, one thing to remember is that your cleaning fees are both an expense and revenue. So you charge your guests, the cleaning fee directly, and then you pay your cleaner a fee as well. But you have an opportunity to turn your cleaning fee into a revenue generator for you as well. So for example, in one of our properties in Joshua Tree, we pay our cleaner $100 per turn, but we charge our guests $125 for the cleaning fee. So every time our property turns, we’re getting $25 of pure profit on that property. Same thing in Tennessee, I think we charge our guests $280 for cleaning, but we pay our cleaner $250 so there’s a $30 spread there as well. And it might not seem like a lot, but if you’re turning your property six, seven, eight times a month, over the course of the year, it helps boost up your cashflow.

Ashley:
When you are pricing this and say, you’re going into a new market. You don’t already have a cleaner there. Are you reaching out and finding what other people are paying or are you actually getting a cleaner in place already before you are actually making an offer on a property?

Tony:
We’ll usually put the offer on the property first and then we’ll go back and find the cleaner. Afterwards. We invest in markets that are pretty mature when it comes to short-term rentals. So there’s usually a healthy selection of people that we can choose from. But if I was maybe investing in a place that was more remote, I might want to find that cleaner first before I put that off for him because the last thing you want to do is buy yourself a property where you have to clean it yourself.

Ashley:
Yeah, exactly. And that’s how I actually started out. So I did it with a business partner and we actually would take turns, cleaning the Airbnb whoever was available, then do it. I think we did it for three, four months. And we just got to the point okay, this is silly. We don’t want to do this anymore. We’re charging the cleaning fee anyways so why not pay that out? So it’s been so great to have that done.

Tony:
So for the listeners, right? If they want to meet Ashley in person, they’ve got a book a stay at your Airbnb and maybe they’ll meet you on the checkout right?

Ashley:
So yeah, I just pulled up the bigger pockets, Airbnb, the short-term rental calculator. So that’s a great resource too, if you guys want to analyze the deal and you can actually just put in the property address of where you’re thinking, click a button and it will tell you your potential earnings on that property of what you could potentially earn. And then it actually links to AirDNA that Tony had talked to. So most of us know the normal expenses of a house. So you would actually include those when analyzing your short term rental. So you need to know what your utilities are. You’re not going to have any tenants paying any of the utilities so you’re going to make sure you include that in your cost. Any property taxes, make sure you include that. What are some other things, Tony, that I’m missing? Landscaping, Snowplowing and Buffalo?

Tony:
Yeah, repairs and maintenance as well. We group our repairs and maintenance and CapEx into one bucket. And we do typically about 5%. And we’re comfortable with that 5% because 5% of a short term rental revenue is probably equivalent to doing 10% of a long-term rental, maybe even more. So we typically budget about 5% for that. The other costs that you and this is more of on the startup cost side is, you have to also budget for the furniture. We’ve bought a lot of Airbnbs that are turnkey. It’s like we bought it and everything was in there. Furniture was in there, everything down to the forks, we’ve bought others that were blank slates. So you have to know as you’re going in what those costs will be.
It can be a little tricky to get right your first time. I think my advice would be again, I would go back to someone that’s in that market and ask them how much it costs them to furnish that place. If you’re buying it off of like the MLS and someone staged it, maybe ask the seller what the potential cost would be if you wanted to purchase all that furniture from them. So there’s different ways estimate what those furniture costs will be.

Ashley:
You could also start an Amazon account and be, okay, there’s two bedrooms, a kitchen, a bathroom, and start adding stuff to the cart and see it total up. Okay. And I remember when I first did furnish my first Airbnb, getting all of the utensils, all the kitchen stuff, I was wow, this is really adding up fast. But I think if you even go online and add stuff to your cart, so you get an idea of what it would cost for you to furnish that. So, okay, there’s two bedrooms. I definitely need two bads. I definitely need two dressers. I want to put TV in each room. I need a stand for the TV and on and on all these things and try to get a good idea of what that’ll actually all costs and go through your own house. Okay. So in my kitchen, I know that I need a set of silverware. I know I need a set of knives. I know I need plates cups and a blender, whatever else you want to supply in there to actually get an idea of what that will cost for you.

Tony:
I love it. That’s a great idea. And I guess like a little Ninja trick that we actually just learned is that, and this is more so helpful if you’re setting up multiple Airbnbs, but you can actually create buying lists inside of Amazon. So that way, when you, okay, here’s my property set up list and you can see everything that’s in there. So that way, instead of having to research every single time, you’re setting something up, you go to this list and you can add it all to your cart from there. So little Ninja trick for those of you that maybe you’re looking at expanding your Airbnb empire.

Ashley:
My kids do that to me for their Christmas list. Even when it’s not Christmas, they’re adding stuff.

Tony:
I love that. I love that. So I think furniture is the last big expense outside of your normal operating expenses. So once you have all of those items, the formula that you need to use to figure out what your annual gross revenue is and then your potential profits are, you take 365 days right because that’s how many days are on a year. You multiply that by whatever your occupancy rate is and then whatever that number is, you multiply that by your average nightly rate. And that will give you what your projected gross revenue is.
You can add in your cleaning fees, if you’re going to charge a little bit of a premium, because obviously that helps as well. But if you’re going to charge the guests exactly what you’re paying then you can leave it out. But again, that formula is 365 times your occupancy rate, times your average nightly rate and that gives you your gross revenue for the year. Once you’ve got that, then you’re subtracting out all of your annual expenses and then you get your profit from there. And the short term rental space, I think you’d be surprised sometimes at how much money is leftover at the end of the year, but it’s been a really good investment for us so far. So that’s how we’re doing our analysis.

Ashley:
Yeah. And the only thing I would add on to that too, is to check with your local laws. Do you have any fees or permits you have to get to? I know that in the city of Buffalo, you have to get some kind of license to have a short-term rental. So make sure you check that too, because that can be a very small amount when you look at the overall picture, but that’s still something important to add in if you have to pay any local taxes or anything like that. And then, this is something I never put into my numbers before, but professional fees. So the big one is an accountant. So I just started doing this, this past year when running numbers. But at anytime I start a new LLC, that’s another tax return that I have to pay to be filed each year.
So that’s usually for me, depending on the properties in an LLC, costs me 200 to $300, which is a little bit of change coming out every single month of those properties. So something else that you can think about. I’m sure there’s a ton more as if we kept talking about this. So you could come up like, Oh yeah, we did this too. All these little expenses, but that’s why it’s so important to get the big numbers fine tuned and get them accurate. One thing we didn’t touch on too, is insurance too. You need to make sure you add your insurance and just like you would a long-term rental property.

Tony:
Yeah. And I’m glad you mentioned insurance because one of the things that we’re exploring right now as well, this like short-term rental specific insurance, because you can have like your general home insurance and then Airbnb also offers a million dollar insurance policy as well. But we’re doing a little bit of research and we’re finding there’s a bit of a gap between those two insurance policies. So there’s companies that specialize in offering insurance policies for short-term rentals. So yeah another thing to add on, if you guys haven’t thought about that one. And then just really quick on the topic of permits, Airbnb actually does a really good job of letting you know how to find what permits are required in what city you’re in. And then you can go to your local jurisdictions website or whatever, and they’re typically listed out what those costs are. And even on the Airbnb website, sometimes they’ll tell you what the costs are for those permits as well. So if you guys are looking on where you can find that information to be a good place to start,

Ashley:
So did they just go on airbnb.com and search it in there?

Tony:
You put me to the test right now. I’m trying to think of, I’m trying to remember where you find that. I want to say if you go search the Airbnb website, there’s a whole section dedicated to becoming a host and there’s subsections in there and somewhere in there it’s talks about local policies and regulations and things like that. It’s literally broken down by state, by major city in that state and you can find your location that way.

Ashley:
Yeah. There’s a lot of great resources on airbnb.com about becoming a host and things you need to know and guides, and building a guide for your property for guests. So many great resources right there. So if you guys are interested in this more, definitely check that out. And then I also have a friend that I met on Instagram at The Young Retiree by 33. So you guys can check him out on Instagram. He is really great about short-term rentals and sharing everything that he knows about it. And he actually wrote a guide too that he has available so make sure to check that out too. But Tony, did you want to add anything else about analyzing a deal?

Tony:
No I think that’s it. Those are the big things. Like I said, the biggest question I get is how do I find out my average nightly rate? How do I find my occupancy? And I feel like we hit those ones on the head. So I’m, if you guys have any other questions, drop them in the Facebook group, right? The Real Estate Rookie Facebook group to search it out. I’ll try and be, do my best to be active in there and answer the short-term specific questions. But that’s all I got for today.

Ashley:
Thank you guys so much for listening and we will be back on Wednesday with another episode of the Real Estate Rookie podcast. I’m Ashley Kehr at Wealth From Rentals and he’s Tony Robinson at Tony J Robinson.