Yep. You’re absolutely right about the higher premium you have to pay to get into a great neighborhood. Typically my chain of thought is to buy properties near 5 star hotels in a given city. Many cities the 5 star hotels are all clustered or concentrated in one area. It’s not always the case but where there are 5 star hotels, if you do your property right..you go after the same clientele and hope to poach on some of their clientele.
I’ve found a businessman would much rather stay in a bigger 1 or 2 bedroom apartment vs. a 30 sq. foot hotel with NO kitchen, mini-bar, pay for local calls, pay for internet, etc. It doesn’t even come down to finances as many times their company pays for it…. they would rather have all the space and PRIVACY. (You’d be amazed how many of these corporate executives see prostitutes while they are away from home traveling on business and just don’t want to have to have the girl pass through the lobby…I could tell you TONS of stories).
No doubt you’re right about being vulnerable in economic downturns. That’s why I try to have a healthy mix between tourists and businessmen. That way it’s not too concentrated with just corporate. When the recession started, companies were not sending their executives ANYWHERE…they were doing more conference calling and things slowed down. Same with tourism. So it’s slower but if you’re buying in premium areas you’ll always have some demand.
Well, ROI depends on various properties and also some properties I bought 8 years ago when things were cheaper so on those obviously I make a higher ROI. But averaged out I’m still generating over 10+% returns a year. (Some properties I bought 7/8 years ago have entirely paid for itself with rentals over that time period). Before the recession during the “too good to be true days”….. I actually netted 20% on a property where the occupancy was really high. But those days are over.
Yes, I manage them myself or in some cities I have family that manages them which is a huge relief.
It’s not for everyone being a short-term rental owner. Lots of headaches! But on my properties I probably won’t sell them. They are all paid off and all generating cash flow each month.
What I really love about it is you don’t have the hassles of dead beat long term renters that might stiff you on the rent or pay late. In short-term rentals they pay 100% up front by the time you are handing over your keys.
The dream clients are large corporations. Or in some cities, I strive to work with the USA Embassy or large corporations like Google. It’s a win/win for everyone because it’s a fraction of a 5 star hotel and the employee gets to stay in a luxury pad with all the convenience of home. (Once you get in good with someone like the USA Embassy, or Google…no matter where you buy and own…they will act as a reference for another city).
Of course the USA Embassy and other big corporations can be a pain in the ass too! For example, no matter how much the executive might like it…they have rules so they can’t allow them to rent unless there is 24/7 security, doormen around the clock, above a certain floor in the building, in a defined zone/area, etc. Also, many will demand you have an emergency contact # that is available 24 hours a day/ 7 days a week for emergencies. And unless you are going to do it yourself…you have to pay someone to do it. It’s all interesting.
I put in $1,500+ mattresses, local phone lines with unlimited calling, Cable TV with HBO/Cinemax, Playboy, etc., wi-fi and high speed internet (which businessmen LOVE), full size refrigerator/freezer, washing machine/dryer, VoIP phone, Apple TV and really high end furniture. So it’s a no brainer for executives.
Even if you’re charging $150 to $200 a night….the margins are good with NO risk of deadbeat renters. But again, the trick is to really have a great and honest property manager. Without that you are totally lost!
Even when I travel now, I try to avoid hotels and go for apartment or home rentals. I can spend up to $500 a night in a 5 star hotel and have a tiny room. But I’ve found rentals are really great.
Look at VRBO.com and Homeaway.com See how much it’s grown! That’s why Google Ventures bought part of Homeaway.com Lots of $$$ in that field and it’s growing by leaps and bounds.
Even the hotel chains are starting to buy up apartment hotel type properties.
Again, not an easy business but if you are careful where you are buying and look at things very carefully…the ROI can be VERY good.
Remember it’s very important where you buy. Short-term/corporate rental clientele is MUCH different than long term renter profile. Long term renters you might want to be near a college campus but that is exactly the type of people you want to avoid. I price higher to avoid cheapo types/student/backpackers and use strict maximum capacity limits so things don’t get damaged or people aren’t partying. The idea is to go after the people with $$$$ that will respect the property.
The perfect client is someone that would typically stay in a 4/5 star hotel and can afford it yet they want all the comforts of home.
So anyone looking to buy corporate rental properties have to keep all of this in mind when going into it. Also, if you use a property manager than your returns go WAY down as most good ones charge a minimum of 30% of gross rental amount. Some charge 50%.
You have properties in Vegas that sold for $700k or $800k a few years ago and now they are $135,000 and they STILL don’t make much cash if at all! When you look at it, it’s because the rental rates are so low. Due to the collapse of tourism and the horrible economy some of these places can only charge $100/night. Then some property management companies charge upwards of 50% management fees. Plus another trick is some charge a surcharge for each night stay!
So you really really really have to look at the bottom line and ALL expenses including taxes, property management, insurance, utility, HOA fees, etc.
Also, remember in the short term game.. YOU pay ALL utility bills. So you have to see how expensive utility bills are in any given city. In long term rentals, the tenant pays the utilities..in short term rentals YOU pay all utilities.
Sure you can ask the tenant to only use the AC unit when they are in it but let’s be honest…most keep it blasted even when they are out…lights on no matter what…. Those types of things you can’t control and have to factor in your set expenses so you have to be careful to account for things like that.
Don’t let anyone tell you it’s “easy money” because it’s certainly not. When you manage them yourself you have to look at how much time you are spending on things. When you get larger, you have to hire employees to deal with reservations, maintenance, maid staff, laundry expenses, check-in/check-out, etc.
On long term leases you don’t deal with MANY headache and expenses but if you throw in a free maid service once a week, it adds up! So does the laundry expenses. So you have to think about all of those things too.
Short term rentals are a whole different ballgame vs. long term rentals so you have to weigh the risk/reward ratios. But you’ll find that some owners have this down to a science and they can keep growing. (But again the more you grow…the more headaches you have so it’s a catch 22).
For instance, I got to a point in some cities rather than paying a company to clean, I’d just pay a salary for a maid to clean all the apartments I own as it was more cost effective. So you have to look at all the bottom line type stuff.
You can’t under estimate this stuff and expenses. Even if you’re not throwing in a free maid service….. you still have to clean it and do laundry to get it ready for the next guest. So you can’t forget about that.
Also, you have to think what it makes sense for minimum stays. I use 2 nights as I don’t find anything less than that makes sense. If they want to stay less than 2 nights I charge a surcharge fee that is higher.
