Jake H. on building an Airbnb rental businessInterview with Experts
Jake and his business partners own and operate an impressive portfolio of short term, Airbnb luxury vacation rentals throughout the south. We first met at our “day job” company, and before too long we were talking to each other on a daily basis about our real estate investments, and helping each other come up with new ideas to grow. We co-run a real estate investment interest group with monthly meetups, and continue to help each other reach our investment goals.
On how he got involved in real estate and Airbnb
I was interested in real estate probably starting in high school. I attribute most of that to my dad and other family members that have either made a career out of it, or have made personal investments. With my dad, I saw what it was like to act from an investor’s perspective – which is what I wanted to do first versus actively taking on a project myself.
My dad was a part-time investor, and I saw that some of his deals produced really good returns (while others did not). From his perspective, by being a passive “money guy,” you can make some solid returns with very little work. So while it’s a risk (just like investing in the stock market), if you have a good strategy and understand the deals you are getting into, there’s a lot of money to be made.
On his first deal
I started saying OK, long term I think there will be good opportunities in real estate, and I think a good way to get my feet wet is to invest in someone else’s deal and see what the returns look like. I connected with one of my friends who was starting a real estate company that invests in luxury vacation rentals. He started showing me some of the returns that he was seeing, and I decided to finance a deal.
The downfalls to this model are that (for the deals I was investing in), it required much more upfront cash than normally – mostly because of the furnishing costs associated with doing a luxury airbnb. Other than that, there are decisions you need to make upfront, similar to a “normal” rental property. For example, deciding if you’re going to do a gut reno where you can add a lot of equity, but will take a few months before you can get any renters in, versus doing something more turnkey where you can get going in much less time, but are paying a premium for the quality.
So when we were going through our first deal we decided to do something not quite turnkey, but close, just to keep things simple and rehab variables lower. Based on our forecasts, we thought we could clear 20-30% returns, if not higher. Compared to traditional rentals, the returns were a bit higher, but so was the risk. You have a lot more upfront cash required and you have to worry about regulations / policy, and also reliance on a third party website to drive all of your revenue. And if anything happens with that, what do you do next?
There’s a lot of unknowns in the airbnb model versus, for example, buying an apartment building, where you have long term renters in there and it’s relatively safe, and you have steady income for a 12 month period of time unless something catastrophic happens. With airbnb, you just don’t know what it’s going to be. It’s not predicted every month, we can forecast and we can plan, but you have to worry about weather patterns and people canceling and all these different things that are tough to plan for. So risk is higher, but there’s a lot of money to be made if you have that tolerance.
On how he and his partner structure their deals
Every deal is different in terms of equity splits and capital contributions. For the first deal, I came in with the down payment and all the set up costs. I was basically the bank. I was getting the benefit of the model and all the work, operations, communication framework and organization etc.. and they were getting the benefit of my capital.
On avoiding disastrous visitors
We have clear guidelines on what type of visitors we look for at our place, and have a sense of what will turn into a big bachelor party or something like that, which we try to avoid.There are red flags we look out for.
For example, you can look to see where someone’s hometown location is. If their home base is Boston and they’re looking to rent a four bedroom home in Boston for one single evening, you can infer that they may be looking to throw a party.
On creating an efficient operations machine
You have to consider the costs of managing resources, whether onshore or offshore, and the time it takes to coordinate and manage them.
If you’re worried about stress and time, this is not the model for you if you’re comparing against long term traditional rentals.
You either have a lot of time committed to do the ongoing operations and management, or you’re paying someone to do it. And even when you’re paying people, it still takes time to manage and coordinate everything. Every time a guest leaves, which is typically a 2-3 night stay, we have inspections, supply and inventory restock, cleaning, guest reservations and communications and correspondence etc.. There’s a huge checklist that has to be worked through every single time we have a unit turned over.
At this point because the company has expanded so much, day to day operational tasks and anything related to the property management is either outsourced or done by an employee of the company.
This is important from an ongoing maintenance and turnover perspective, but also when we’re doing the rehab and getting the property set up and furnished.
We compete with luxury brand hotels, and are looking for visitors to say “okay we have a four bedroom luxury home that’s decorated just like it would be if you stayed at the Ritz or the Four Seasons, but we can get this home on a Saturday night for $1,400 vs. $2,600 for four rooms at the Ritz or 4 Seasons.”
So it’s a win-win for everyone. With our house, you have a kitchen and living room and you can all be connected in the same property, versus four rooms scattered throughout a huge tower in New Orleans.
By competing with the luxury hotels, we can’t necessarily just go to IKEA and put random crap together. People want to see 50 inch plasma mounted on the wall with no cords hanging out. They want to see a nice glass table, high end cutlery and cooking utensils, and on the walls they want to see nice looking paintings and artwork. We’ve tried to do this the most economical way possible, but need to maintain a certain luxury appeal.
On having great pictures
It really makes a difference – and it’s not even just about the reviews afterward. It’s about getting people on the listing because of the pictures, so of course the pictures have to be professionally done. We’ve tried to do the pictures ourselves and it doesn’t really work.
[Editor’s note: for some insight into how important pictures really are to an airbnb success, listen to the “How I Built This” podcast episode with AirBnB founder Joe Gebbia]
On cleaning in between stays
We go with a cleaning agency.
Because of the volume we do – sometimes we need seven cleanings done on the same day – it’s not really possible for one person or even one team.
These homes can take three hours for a single person to clean. We
pay a premium versus hiring people independently, but we’re guaranteed that there is a body there to do it.
On the downside, the risk with that is you don’t always have consistency.