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Vacation Rentals: How Profitable Are They?

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In the past, vacation rental owners had to perform the necessary maintenance tasks and market the properties to find guests or pay someone in the locality to do so on their behalf.

Bookings were low and the cost of maintaining the vacation homes was high. Thankfully, the firms that manage vacation rentals are using new technologies to eliminate these issues and deliver a comprehensive service on a high level that the vacation rental industry has not seen.

Many travelers are avoiding staying in hotels in favor of vacation rentals.

Why Vacation Rentals?

Some of the benefits of vacation rentals include:

  • Variety – Vacation rentals offer different decor, amenities and views among other things. Travelers select their own vacation rentals and preferences based on their budget and how they want to define their vacation such as close to the beach or a golf course among other locations.
  • Additional space – Vacation rentals are more spacious than hotels and are therefore popular with people traveling with their families.
  • Comforts of home – Vacation rentals provide the comforts of home and some of the things that a typical home does not have. There are multiple bedrooms, comfortable living rooms and adequate space to sprawl out. Vacation rentals are more comfortable than staying in the bedroom of another person like with Airbnb.
  • Privacy – Vacation rentals have private entrances and private balconies. Therefore, patrons do not have to walk through the lobby after returning to their unit.
  • Cost effective – Since vacation rentals are spacious, families often rent them together. This makes the homes more cost effective than hotels.
  • Easy booking and check out – Technology such as online payment platforms enable guests to save time. They do not have to wait in line to check in or out.

Improving Vacation Rental Technology

Technology has played a huge part in making the short-term rental market grow. Online listing firms such as Airbnb make it easier for guests to book the home they want to stay in.

New technology-driven management firms are also making it easier for homeowners to maintain and market their vacation rentals. As a vacation homeowner, you can easily manage your property by using vacation rental management software.

With this software, you can manage rental channels. These include HomeAway, Expedia, and Airbnb using one app or platform to reduce management time and increase profits. This means that you can manage your property without having to enlist the services of a professional management firm.

Are Vacation Rentals Really Profitable?

Investing in vacation rentals is an excellent way to earn passive income.

A survey done by HomeAway, which is a short-term rental marketplace, found something interesting. People who rent out second homes earn more than 33,000 dollars annually in rental revenue. On the other hand, at Airbnb, the average vacation rental owner collects yearly rental revenue of about 11,000 dollars.

Most of the vacation rental owners using the Airbnb platform don’t perform as well. They may only rent out only a single bedroom or rent out their homes irregularly. They do not treat their homes as true vacation rentals.

These figures are an indication that vacation rentals are profitable. They are popular with people renting properties for a short period. They can also outpace long-term rental properties when it comes to potential rental income. To increase your chances of earning higher rental revenue, you should do the following things:

Do the Math

It is not that straightforward to figure out the amount of money your vacation home can bring in. However, online tools can enable you to calculate the potential cash flow to your property.

You can use these tools to calculate the average daily rental rates, revenue, and occupancy rates. By using these projections, you can then subtract items such as interest, PITI, management fees and maintenance expenses. Then you’ll get a cash flow forecast.

Evaluate the Location

The other factor that will determine the amount you will earn as rental revenue is the location. If you buy a vacation home, which is close to a popular destination like a ski resort or beach community, then it is likely that it will bring in a higher rental income. An excellent location close to a major airport or a vacation spot that people visit year round will have the best impact.

Assess the Scene

Apart from the accessibility and popularity of a destination, you also need to consider the setting. For instance, it is more cost effective to invest in a vacation home located in the mountains compared to a beachfront vacation home. However, such a home is not likely to bring in as much income as a beachfront property can.

The peak season for vacation rentals lasts about 12 weeks.

The trick is trying to rent the vacation home during the off-peak periods or when you do not want to live in the house. Try your best to keep your vacation home occupied by advertising it on platforms like HomeAway and Airbnb. You can even seek advice on the best ways to keep a property occupied from a property management firm that manages vacation homes.

Set the Price Right

To maximize occupancy, you should price your vacation home well. You can price your propertyslightly lower than similar properties so that it will be occupied more frequently. Furthermore, you should keep an eye on events like festivals and conventions that occur close to the location of your vacation home. When the demand is high, take advantage of it and adjust your rental charges accordingly so that you will not miss out on revenue.

Vacation homes are unique in that they are both an investment and a lifestyle upgrade. While they perform equally as well as conventional rental properties, they offer the benefit of having a place to stay for your own vacations.

A vacation home can bring in a good return on investment if you can keep it rented out most of the year. If you hold the vacation rental for many years, then you will make a return, which is comparable to or greater than you would have made if you had invested in stocks.

This article originally appeared on IdealREI. Follow them on FacebookInstagram and Twitter.

Real Estate Investing

8 Neighborhoods In America’s Most Expensive Cities Where You Still Can Rent For Cheap (Sort Of…)

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Yes, rent in big cities is “too damn high.”

But if you’re looking to move to one of America’s most expensive cities, you can still find some deals in affordable neighborhoods. Here’s where you need to look, per Inc.:

1. San Francisco

Despite San Francisco being popularly tagged as a pricey city, you can check out relatively inexpensive neighborhoods like Lower Pacific Heights, Japantown, Laurel Heights, and Fillmore District.

2. Irvine

With the city seeing a massive number of tech companies moving in, rentals have shot up. Its business district, however, gives a breather – median rents are still lower by about $1,000 when compared to the rest of the city.

3. Los Angeles

While Los Angeles continues to list some of the most expensive neighborhoods across the nation, the coastal region of San Pedro welcomes residents with median rentals that touch $2,240.

4. San Jose

San Jose continues to be a large tech hub – with its infamous rental costs. In the midst of Silicon Valley’s tech center, median rents can peak to $3,500, and buying a home can set you back by around $1 million. However, East San Jose offers a better deal. You can find median rents hovering around $3,200, which is a tad cheaper than the rest of the city.

5.  Seattle

Despite Seattle housing some of the most expensive neighborhoods, regions like Greenwood offer residents median rents that are around $2,300.

6. New York

With median rents touching $3,000 in the city, the neighborhood of Williamsbridge, in the northern part of Bronx, has rents that are almost half of what the rest of the city offers.

7. Boston

Median rents in Boston are almost twice the national ones, with rents crossing $5,000 dollars. In the neighborhood of West Roxbury, however, you can find homes which offer median rents of around $2,000.

8. San Diego

One of San Diego’s oldest regions, Grantville, enjoys affordable median rents that hover around $1,600 when compared to the rest of the city at $2,695.

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Real Estate Investing

How To Make Real Estate Syndication A Success Without Using Your Money

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Have you ever driven around your city and seen all these apartment complexes, shopping plazas, or even office buildings? I always used to think they were all owned by rich billionaires.

…some of them are, but not all.

The reality is that a lot of these large properties are actually owned by regular people like you and me to generate passive income.

But how?

The answer: with real estate syndication.

It’s what I used to recently close a 192 unit deal in San Antonio with my partners.

But what exactly is real estate syndication?

Syndication is a way which multiple real estate investors pool their funds together in order to purchase a property that is more expensive than any of them could have afforded on their own.

Generally, there are two types of partners in these deals: 1) General Partners (GPs) who accept additional risk, put the deal together, and operate the asset 2) Limited Partners (LPs) who have limited risk and invest more passively.

Real estate syndications are an effective way to spread risk. Since each investor can allocate a smaller sum to each deal, they can effectively spread their risk across multiple property types and diversify by geographic region.

Real Estate Syndication Structure

Syndications in real estate are amazingly diverse in their structure so it’s impossible to cover everything. In general, there are four components:

  • Return of investor capital – Limited partners should always get paid back first, and this ensures they get paid first
  • The preferred return – Not all deals have a preferred return, but when they do this is where it pays out. Investors get the first portion of the deal before the general partners.
  • The catch-up – Many deals don’t have a catch-up tier but this is where the sponsor will get 100% of the profits after the preferred return until the predetermined split is met.
  • Carried interest – profits are split based on the agreed amount (such as 80/20 or 70/30)

Let’s break it down further…

Real Estate Syndication

What Is A Preferred Return In A Real Estate Syndicate?

According to Mark Kenney over at ThinkMultifamily, a preferred return is “a return that investors received BEFORE the general partners receive a return.” In essence, after the investors receive their initial capital back, they received a preferred rate of return before the general partners get any payout at all.

Mark, an investor and real estate coach who owns over 2,000 doors in Tennessee, Georgia, and Texas, says that he doesn’t like to use a preferred return but has in the past on deals that didn’t expect any distributions for 12 or 18 months.

The preferred return would accrue and give incentive for people to invest in the deal.

Andrew Campbell, the co-founder of Wildhorn Capital, a multifamily operator based in Austin, Texas has a different opinion. He said he likes to have an 8% preferred return for the majority of his 450 door portfolio.

It “gives some certainty to investors about their overall returns. Plus, 8% also happens to beat the historical stock market return of 7%.”

What Is A Waterfall In A Real Estate Syndication?

The waterfall refers to the overall distribution of funds and tiers that were mentioned above, but it is often referred to as how profits are split after the preferred return is met. Andrew Campbell explains it perfectly:

Profits generated above any preferred returns are generally split between investors (Limited Partners) and deal sponsors (General Partners). In our case, above the 8% pref we split profits 70% to Limited Partners and 30% to General Partners.

Some deals and sponsors will have additional “waterfalls” where at 18% IRR (for example) the split would go to 50/50. The general idea is that the higher the returns are to investors, the more the sponsors make, and everyone is happy.

The downside of multiple waterfalls is that sponsors can sometimes be incentivized to return investor capital early (to boost the IRR) and trigger these waterfalls.That can sometimes put unnecessary risk on the asset if they are being to aggressive.”

Kenny Wolfe, the founder of Wolfe Investments who has been involved in over $91M in real estate transactions doesn’t like the complexity of the waterfall structure many syndicators use.

“We have steered clear of preferred returns mostly because those are usually accompanied with up-front fees charged to investors. Our investment structures are tied to the performance of the investment, and not just closing deals like the typical preferred return strategy.”

He continues,

“If we make our investors money, then we’re rewarded. If we don’t then we aren’t rewarded.”

I originally didn’t plan to dive into the fee structure at all, but since Kenny brought up some great points, I think I’ll dive into the fees and how some different structures affect the incentives and performance of deals.

The Fees When Syndicating Real Estate

There are a lot of different types of fees used in syndication. Some are more common than others but all have their pros/cons. Here are the most common ones

Acquisition Fee

I’ve seen this anywhere from 0 to 5 points with 2 being the most common. Acquisition fees in a syndication are really common and most have them, but not all.

Syndicators are running a business and that has costs. Acquisition fees help pay for the operating costs, staff, flights, hotels, diligence, and other costs that are needed to run the business.

On the other hand, acquisition fees can be enormous on large deals and can drive some deal sponsors to be short-sighted and focus on closing deals rather than operating deals profitably.

Think about it, a $10M deal with 2 point acquisition fee is $200,000. That adds up fast! You can see how some sponsors will lose track of buying good deals and focus on just closing deals, regardless of how good they are.

Asset Management Fee

This generally ranges from 1-3% of gross rent revenue. This may or may not go to the deal sponsor and it goes to cover the cost of managing the asset and management team that was hired.

Construction Fee

Since the syndicator only gets paid when the asset is cash flowing, there isn’t much incentive to take on difficult projects. That’s where the construction fee comes in. If there is a major rehab project a fee can be imposed to compensate the project manager while the asset isn’t producing income.

It can vary but is often 1-2% of the construction cost.

Aligning Interests

There are a lot of competing interests in a deal and it’s difficult to align everyone 100% of the time – that’s why trust must be built with anyone that you’re investing with.

But, a few major points to consider are how all the fees and the preferred return and waterfall all fit together.

Deals with high preferred returns and high fees create incentives for the sponsor to find and close deals, but not a lot of incentive to maximize cash flow. As Andrew pointed out, deals with huge benefits to the sponsor at certain levels can cause them to sell early to bump the IRR artificially and trigger that waterfall distribution.

But, deals that compensate the sponsor more will create more incentive to produce high returns.

That’s why there are so many different ways to structure deals! Every sponsor and investor pool is different so they can create deals that work for everyone.

Structuring a Syndication Deal – Example

Similar to how Andrew structures deals, let’s say that in this deal there will be an 8% preferred return, 70/30 split thereafter, and have a 2 point acquisition fee and 2 point asset management fee.

The limited partners will get 70% of the returns after the 8% pref and the sponsor will get the other 30%. The sponsor will get 2 points up front and 2 percent of the gross revenue.

Example 2 – Syndication Structure

Kenny, on the other hand, keeps it simple. He might charge an 80/20 split with no acquisition fee, no waterfall, and no preferred return. The asset management fee is 2% as well in this example.

So, the limited partners get 80% of all the profits and the general partner gets 20%. If it does well everyone does well and if it does poorly everyone does poorly. There are very limited fees except for the asset management fee.

Example 3 – Hybrid Structure

Mark kind of does it a third way. He said he generally does the 80/20 split, but he does charge an acquisition fee and asset management fee but rarely does a preferred return.

The acquisition fee is more similar to Andrew but his split is more similar to Kenny.

It’s interesting to see how 3 different real estate syndicators have three entirely different ways to structure their deals.

How To Find Real Estate Deals to Syndicate?

These are large deals and you don’t typically see them on the MLS, so how exactly do you find deals for a syndication?

Well, three different deal sponsors had three different answers:

“Now that we’re established as a solid buyer we get off-market deals across the US.  We look at the on-market deals as well. These days the off-market deals have been much more attractive.”– Kenny Wolfe

Andrew Campbell appears to have a more holistic view for finding deals.

“It’s a full-time job, and it all comes back to relationships. Meeting and networking with brokers, talking to owners, title agents, insurance providers, property managers. Leads can come from anywhere, and in this market, you want to make sure you can see as many properties as possible, and the earlier and more off-market/limited market they are the better.”

Mark Kenney has seemed to be extremely successful working directly with commercial real estate brokers.

“We generally work through brokers to finds deals.”

What About LoopNet for Commercial Real Estate Syndication?

I’ve known about LoopNet for a while, so I was curious about it. Kenney put it simply though:

“Loopnet is where deals go to die.”

But, David Eldridge of NAI Glickman Kovago & Jacobs, a commercial brokerage firm in Worcester, Massachusetts, said,

“Loopnet is far from dead. We do a ton of volume on it and use it almost exclusively for smaller listings.”

How Do You Find Commercial Brokers and Get Them to Take You Seriously?

Commercial brokers are dealing with a lot of big players in the market, and it can be difficult to get them to take you seriously if you are a new player.

Mark pointed out that “a market generally only has a few major names. The top 2 or 3 people have access to virtually all the deals, so you just need to identify them.”

He continued, “it’s not hard to get yourself onto their email list, but it can be more difficult to get people to take your offers seriously. It’s important to have some experience in the field and if you don’t, then partner up with someone who does have the experience.”

In the end, money talks and the highest offer usually wins. So, you can make up for experience with higher offers.

The Cost To Syndicate A Real Estate Deal

Now that we’ve got past the “what is a syndication in real estate” and the “how to syndicate in real estate” part of the article, we can get into the costs and money aspect.

The first logical question is about the cost of a syndication.

There are several major fixed cost items that every syndication requires, including – SEC attorney, earnest money deposit, diligence, private placement memorandum, loan application fees, and more.

So, let’s break them down. As some fees are percentage based, I’m going to create a hypothetical $2,000,000 deal.

  • Attorney for Contract – $3,000
  • SEC Attorney for PPM – $12,000
  • EMD – 1% – $40,000
  • Diligence – $25-$50 per door – $2,000
  • Loan Application – 1% – $20,000
  • Other Financing Costs – 0.5% – 1% – $20,000

Total Costs – $97,000 to get the deal done, of which $40,000 goes toward the purchase.

So the total fixed costs are $57,000 or 2.85% of the total deal price. As you can see, this is not cheap!

The syndicator has to front all the money and if the deal doesn’t close most of that money can be lost. So, you can see one reason why syndicators are compensated pretty well.

How Big Do Syndication Deals Need To Be?

We are talking some pretty big numbers here overall. Realistically though, how big or small does the syndication deal need to be in order for it to make sense?

Universally, all of the deal sponsors wanted to do larger rather than smaller deals. Both Mark and Kenny said they want deals over 80 units which allows for full-time on-site property management. Andrew prefers to look at it as a dollar figure and prefers to do deals over $8 million to keep the fixed costs as a small percent of the total costs.

How Do You Find Investors?

Most people reading this are probably wondering how you can find people to invest so much money. Most people can save up $50-100k, but you are talking about raising hundreds of thousands, or even millions of dollars for a deal. How?

Andrew says it’s a “second full-time job” which comes back to relationships and marketing. He does at least 5 sit-down meetings a week to grow those relationships.

Kenny is so well established that most of his new investors come from referrals though he also does a meetup, podcasts, and general outreach.

Example Syndication Deal

You might be wondering how much a syndicator can actually earn from one of these deals. So, I put together this example based on the knowledge I gained.

Let’s assume we found a property somewhere in Texas with a 6.5% capitalization rate. It’s about 70 units and is selling for $60,000 per unit. That’s $4.2M total.

A 6.5 cap rate means the property has a net operating income of about $273,000 per year before finance costs.

With about $875,000 as a down payment, that’s about $190,000/year in finance costs (I’m rounding).

So the cash flow is about $83,000/year.

Of course some of that goes toward principal, and eventually, the deal will be sold and that will get distributed back to the investors. For now, though, let’s just focus on cash flow and not the entire return.

What The General And Limited Partners Earn In A Syndication

I’m going to keep the numbers super simple so I can do it all in my head. Let’s take the 1% asset management fee out of the gross rents. We don’t have a number for gross rent (only NOI). Let’s say it’s $8,000. If you were the asset manager, great you get to pocket that. If not, someone else does.

The rental income is now $75,000.

Of that cash flow, let’s say the syndicator is doing a 90/10 split and will earn 10%.

And let’s say he also put in about $100,000 into the deal, they would have a total equity of 21.4% and would get about $16,050 in cash flow. That’s about a 16% cash on cash return for the principal (excluding the asset management fee). Don’t forget, they earn the same returns as other LPs on the cash they invest, and then get their split just for doing the deal.

Realistically, this example doesn’t include any growth in value and is a very simple example.

Now You Know The Basics

…and it’s time to download your deal calculator to help you start analyzing your next deal.

This article originally appeared on IdealREI. Follow them on FacebookInstagram and Twitter.

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Real Estate Investing

​4 Tips For Managing Your Airbnb

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I’ve been talking a lot about vacation rentals lately.

No, I haven’t gone out and bought one…yet. But, I want to!

And interesting factoid… Nearly 45 percent of all real estate purchases in the United States are made by people in search of profit. Investing in a short-term rental property is a great way to generate a steady income stream.

With the use of websites like AirBnB, just about anyone can turn a condo or house into a short term rental property. This is a great source of income for many families, and can be for you too!

But, most investors think that managing a short-term rental property is just too much work. The reality is, it’s not easier or harder than any other rental, you just need the right management in place.

There are a lot of options out there, but I’ve recently stumbled upon some software such as Rentbelly, which helps you manage property like this and makes it a lot easier.

The biggest hurdle that you will have to overcome as a short-term rental property owner is keeping enough bookings. This hurdle can be overcome with the development of a comprehensive marketing strategy.

Here are some essential tips for properly managing your short-term rental property.

1. Get A Feel Of What’s Happening In Your Local Area

Renting out your property in the off season can be a bit difficult. The only way to combat the lull that occurs during this low season is by staying up to speed on the events happening in your city. Knowing what events are coming up in your area can help you market your rental to the right audience.

Running targeted Facebook ads is a great way to connect with prospective customers. These ads allow you to target Facebook used based on things like their occupation, location and age. Once you know what type of event is happening in your area, you can make decisions regarding what type of people may attend this event. With this information, you can fine tune your Facebook ads and get more bookings.

2. Set The Right Minimum Stay Requirements

Setting the right minimum stay limit is crucial when trying to make money with your short-term rental. Ideally, you will want a higher minimum stay limit. While this may initially deter certain consumers, it will allow you to make more money in the long run.

Accepting a one night booking in the middle of a week can make you miss out on a one week booking later on. Realizing that short-term rental success is a numbers game is your first step to achieving your financial goals. Setting a minimum stay of three to four nights will guarantee that each booking will have a higher value overall.

3. Focus On Keeping Your Property Well-Maintained

In the world of short-term rentals, only the most pristine properties get consistent bookings. This is why you will need to devote time and money into keeping your rental property in good shape. If you are like most property owners, you simply don’t have the time to do this work on your own.

Instead of letting your short-term rental fall into a state of disrepair, you need to hire professionals to perform essential maintenance. With a minimal investment, you can avoid extensive repairs and keep your property booked solid.

4. It’s All About Great Customer Service

If your short-term rental is located in a larger city, chances are there is a lot of competition. Finding a way to set your property apart from competitors is something you need to view as a priority. One of the best ways to do this is by going above and beyond for your guests on a consistent basis.

Anytime a guest calls you with a problem, you need to address it in a timely manner. By providing guests with this type of service, you will be able to get great reviews from them. These reviews are like gold when it comes to attracting new bookings for your property.

If you are unsure about how to properly market your short-term rental, working with professionals is a great idea. They will be able to develop and carry out marketing campaigns on your behalf for a reasonable fee.
This article originally appeared on idealrei.com. Read the full article here.

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