6 unit apartment building in the Nob Hill neighborhood of San Francisco

4 units delivered vacant

1 block from the Ritz Carlton

Sold for $850k yesterday Prop 19 could have pushed them to sell due to the property tax increase

California property tax histories never disappoint Why did assessment jump again after last purchase in 2019?

Walked by this house in San Francisco today that was listed for sale for around $10MM.

It’s appraisal value for property taxes is $300,607

I don’t really know anything about the San Francisco luxury real estate market, but kind of seems like a good deal for one of the most spectacular lots in the city?

Buy at $10MM, sell at $30MM when the next wave of IPOs hits?

“Mansion STRs” can be big money, but the money is not free.

A recent BiggerPockets podcast did a good job documenting the issues the hosts faced running their $3MM+ luxury STR in Scottsdale.

The issues were brutal, such as: - Guest pulling gun on house cleaner

- So expensive to fix anything

- Guest asking for $4K refund on $5k booking because of lawn sprinklers

- Shockingly low revenue in offseason

- Many unhappy guests if some aspect of home did not meet their expectations

- Much much more

Financial results from our vacation rental business in 2022:

6 properties, average purchase price was $355K.

Revenue for the year: $594K

Net Operating Income: $355K

Free cashflow after debt service, capex projects: $137K

Long thread below with all the details & commentary. Let’s start with a bit of context.

First, here are the properties and all their purchase prices and mortgages.

Mostly little one bedrooms, mostly (but not all) bought in the last 2 years.

Small ball. Little places at affordable nightly rates.

For what it's worth I mostly agree with Shawn.

You can intelligently manage this risk, but only gets you so far, even in Florida and Arizona.

I think the scaleable version of STRs is licensed and operated more like a hotel (all the properties on one piece of land).

https://twitter.com/shawngorham/status/1617279724400836608

How do you intelligently manage the risk? Well best way is to be licensed as a hotel, but that's pretty rare.

Our way is to say "can I get a permit today and am I likely to be able keep that permit for sufficient number of years that i have options if it goes away."

If folks are up for it, would be interesting to share your STR occupancy numbers for the next 30 and 60 days by location.

Basically as of today, how is your November and December looking if you do nightly rentals?

Here are ours below by property: Notation to use:

Area: 30 day occ, 60 day occ

Random prediction (for fun😀)

If there’s a recession, I think STR rents in vacation areas will dip 10-20%.

And Airbnb hosts will be fine. Not much distress.

Always a hard business, but not terribly hard to breakeven under the following conditions:

(which I believe are common) Self manage (save 30% PM fees plus more fees)

Low mortgage ($500k-$750K house at 3%)

House is a good value for guests

It’s a location people visit historically

Structurally difficult for new supply to come on market (mostly bc of regulation, partly due to cost)

Revenue for our portfolio of six vacation rentals will be way up in 2022 versus 2021.

But cashflow will be about the same amount. Why?

This year we took all the excess earnings and reinvested it in improving the properties. Prior years we would have taken the windfall earnings and used that to fund acquiring new properties.

But that didn't work out this year so far. Had two properties fall out of contract and in Fall 2022 the risk-reward equation seems murkier.

So just reinvested this year so far.

Just finished the books for Aug 2022 for our vacation rental business (6 properties, avg purchase price $355K with 20% down, funded from recycling cash flow and equity from the portfolio).

Going to share the results again: This is the monthly cashflow of the portfolio for the last 92 months.

Aug 2022 generated $31.9K cashflow this month (after all expenses, taxes, capex and full mortgage payments).

Iron rule of short term rentals is that the costs will be much higher than expected.

So really need good margins so you can be buffeted with $500 service calls with equanimity 🧘‍♂️ The nice thing over the last couple of years (as @Aldigity has pointed out) is that the revenue has come in much higher than expected too.

But revenue being higher than expectations isn't an iron law. Costs are 😬

Before you add a feature to your short term rental you have to think very carefully if you’re okay maintaining it, thinking about it, and making sure it’s perfect for every guest stay.

This automatic pool cover is a good example.

A pain to maintain, but I’m fine with that. The best kind of features attract guests and you don’t have to think about maintaining them at all.

Like some big ole rocks in your backyard 😂

Least fun project to pull off (but totally worth it in the end) was putting in a little plunge pool at our vacation rental cottage in Kauai.

So many delays and issues along the way. Here it is in the middle of the process. Used gravel and lava rock pavers around the pool to save on concrete costs (and also for a more natural look).

My little rental car took a beating driving those pavers back and forth from Home Depot!

March 2020 as our vacation rental business was imploding and revenue dropping to near zero, we decided to raise prices.

Our thinking:

Well if you can catch a deadly plague from a touching a doorknob, there’s no discounted price that’s going to impel people to book your home. Was kind of a lucky gambit that paid off.

By June 2020 people were raring to get out of their homes and renting a home they could drive too was a great option.

So the rest of the 2020 had pretty good pricing.

Ever stay at a vacation rental that’s completely dated & filled with musty old furniture?

It’s bc the owners bought a long time ago & have a good thing going making $2K per month profit.

Are they going to take *5 years* profit & put it towards a $100K renovation? Probably not. Plus, you have to take the property offline for a few months during renovation.

So you swing from making $2K profit per month, to maybe losing like $5K per month, plus the $100K in renovation costs.

Hard to swallow the loss.

For vacation rentals, I'm looking for places with some ineffable quality that will delight guests, but the price of the home doesn’t reflect how valuable that feature is in an Airbnb, so you’re getting that “delight” for free.

These are the (unpriced) features in our portfolio: To start with an obvious one, our Earthship cost us way less than a regular house in the market (maybe half), but uhhhh wouldn’t you rather stay here?