Buy ‘n hold investors are beginning to see the advantages of utilizing AirBNB to increase cash flow, supplement “traditional” buy ‘n hold properties and a means to capitalize on one of the biggest hospitality growth industries on the planet. In this episode, Bill shares how his thoughts on AirBNB and a brief recap of his trip to Indianapolis to begin test converting some apartment units to AirBNB rentals.
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As some of our regular listeners know, I recently went to Indianapolis with the sole purpose of fixing up some units for AirBNB and set up systems. (See photos of the unit I upgraded to an AirBNB unit in last week’s show notes: http://olddawgsreinetwork.com/buying-first-rental-property/)
AirBNB is one on those industry/history-shifting companies that started nine years ago, like so many other industry/history shifting businesses, in a college dorm, with a couple of college roommates who were looking for a way to make a few extra bucks to pay their rent and has rocketed into a global marketplace offering over 3 million listings in 65,000 cities in 191 countries. Needless to say, I doubt the founders need to worry any longer about paying their rent. The hotel industry is concerned, like the taxi industry was concerned with Uber and the pay phone industry (and many others) with the smart phone. AirBNB has and will continue to make a big impact on our economy. It’s no surprise that AirBNB and Uber made many people into entrepreneurs at a time when many were out of work. People turned their homes and cars into steady flowing ATM machines.
I first became acquainted with AirBNB when I was in Haiti. Part of what we did with the orphaned, abandoned and at-risk children we served, was to teach them trades and how to run a small business. Because in a country that purportedly had 80% unemployment, education was good but it didn’t guarantee a job. So we set up a vocational training program and business incubator to teach kids skills like baking, sewing, carpentry, silk screening, technology, and the hospitality industry. Then, we taught them how to market and manage their new found skills into business that they could manage, grow and duplicate.
One of those businesses was a guest house that housed visiting teams, families, supporters, and child sponsors visiting their sponsor kids. The kids got training as cooks, housekeepers, groundskeepers, gift shop operators and even concierge.
The guesthouse started as bunch of bunkbeds in a couple extra rooms in our house and grew into a full-fledged guesthouse with full kitchen, gift shop, dining room, and more that could accommodate over 50 guests a night. It also hosted special events like weddings, banquets and other special events.
It was part of our strategy to create a mission that would eventually be self-sustaining and no longer dependent on outside donors. Each business generated funds that were pumped back into the mission to not only pay salaries of the kids and Haitian staff that worked there (around 75 at one time) but it helped fund our school, community medical clinic and feeding program.
The guest house generated over $10,000 per month at its peak for the mission. Much of this happened after the great earthquake in 2010. But as the news stories faded and many people forgot about Haiti it became necessary to reach out and find other guests, other visitors to Haiti and to start competing with area hotels and other guest houses. It was at that time that we developed a marketing plan and got listed on Trip Advisor and another service called AirBNB.
We started learning how to position ourselves and our service to reach this other audience and it did well for us at the time.
So, as I’m dealing with significant turn-over in my 22 Unit, especially with our studio units, and I knew when I bought the place that studios or efficiency units are just by nature more transient, even though more than half of the people in our studio units had been there for over four years.
One of the things I was getting ready to do was to refinance the property, which had significantly increased in equity. Part of the cash out would be used for the 100 unit. But with vacancy rates fluctuating between 5 and 12%, I needed to stabilize to get the best valuation. How was I going to keep the cash flow stable with traditionally unstable units.
I had to think outside the box. A few units out of 22 can significantly impact the vacancy numbers but what if I could boost the cash flow even if the vacancy numbers would fluctuate? If I could increase cash flow significantly higher than I would normally be generated with traditional renters – even with 100% occupancy, I could demonstrate to the lender that the value numbers are real. Because valuation is determined not by vacancy or occupancy numbers but with ROI and CAP rates.
It was when I had a guest on my show, Al Williamson on episode #109, who talked about the challenges he was facing in renting out inner-city properties in Sacramento that it clicked. He shared how he took a little 2bed/1 bath home and quadrupled his cash flow by converting to AirBNB properties. After the show, I continued my discussions with Al, saw his numbers and started working up my own numbers on my 22-unit. I saw that if I converted just one studio to an AirBNB unit, I would easily make double the cash flow from what it would pull as a traditional rental. How about if I had 2 or 3? Even if I had 2-4 studio vacancies, I would still be making more in overall income. So I decided to do a little test.
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