377: How to Make $3 Million a Year on Apartments You Don’t Even Own! – Part 1

SHOW NOTES FOR EPISODE 377: HOW TO MAKE $3 MILLION A YEAR ON APARTMENTS YOU DON’T EVEN OWN  – PART 1

He went from homelessness and living out of his van to motivated entrepreneur to AirBNB tycoon.  In today’s podcast episode, Sean Rakidzich shares how he went from accidental AirBNB host to generating $3 million a year with apartments he doesn’t even own.

What You Will Learn

• How you can turn around any bad situation into a success
• The importance of regularly assessing your life to see where you are doing well and where you are not doing well and using the information to redirect/re-engineer your efforts
• How you can start an AirBNB business with no cash and no experience
• The value of understanding lease law and key documents for any AirBNB business
• How to double your rental income with AirBNB
• Why AirBNB is not a Real Estate Business
• The three ways to get into AirBNB
• What key “first hire” employees are key to scale any AirBNB business
• How to recruit and hire local Realtors to find your AirBNB properties without paying them a cent
• How to negotiate the best AirBNB arbritage deal

Sean Rakidzich

Sean is a serial entrepreneur and accidental AirBNB host.  After discovering the earning power of short term rentals Sean, within three years, built a $3 million per year cash flow real estate business with no debt or financing.  Sean is now the host of the popular YouTube channel AirBNB Automated where he’s taught thousands of people, for free, how to realize their potential and build their own successful AirBNB-based businesses.

More About Sean

• Sean was born into a military family
• Moved around a lot
• At age 6, his family settled into the small farm community of Darien, Wisconsin
• Grew up very poor
• Parents were not the most disciplined regarding finances
• Sean needed to learn how to responsible on his own
• When he graduated high school, took a year off to work in a factory
• Then, went to college to study music
• Got into sales
• Moved to Houston, Texas
• Fought to become a sales manager
• Was later demoted
• He took the demotion very hard
• He took his savings, disappeared and decided to become a business owner

From Entrepreneur to Homeless Guy

• Sean hung out at a local Houston Starbucks for two months to re-generate and read a ton of books
• He read books like Think and Grow Rich, 4-Hour Workweek
• He got motivated to start his own marketing company
• However, he quickly ran out of money
• In 2009, Sean ended up homeless
• Lived out of his van

From Homeless Guy Back to Entrepreneur

• In 2010, Sean decided to start another business focused on sales
• His business built sales teams that hung-out at grocery stores to sell newspaper subscriptions
• This helped him to get back on his feet and turn his life around
• He still runs this business today (along with his AirBNB business)
• Today, his business is focused more on convincing milennials to purchase their news – to pay for quality journalism

Becoming an Accidental AirBNB Host

• As he was trying to build a powerhouse sales team for his new business, he read a book on how to recruit top talent
• In 2014, he hired a top sales manager named Sal who used to sell time pieces (today, FYI: Sal’s the national sales director for Rolex)
• Sean brought Sal in from Detroit to work for him and part of “the package” was a relocation package that included a year-long lease to a furnished high rise apartment in Houston
• Unfortunately, Sal moved out of the apartment two months into the job to move-in with his girlfriend to another apartment in the same building
• Shortly after he moved in with his girlfriend, however, she got homesick for Detroit and they both moved back to Detroit
• Sean agreed to take on the second apartment – so Sean now had to apartments to deal with
• He was making enough money to cover the monthly $4,000 in rents but wasn’t happy with the situation
• Fortunately, Sean lived in the same building
• He started placing ads on Craigslist, trying to find people to sublet
• One day, he was talking with a friend who shared that she had stayed at an AirBNB property recently – It was the first time he heard about AirBNB
• Both places were already furnished, so he decided to just take pictures and list the properties
• In a short period of time, he was net profiting double the rent of each unit.  Rent was $2,000.  He received $4,000 through AirBNB
• He even started renting out his own apartment
• He would occasionally get a cheap place through Priceline for $50 a night and rent his own place out for $150 through AirBNB — to continue making a great profit!

Getting Busted

• One day, the owners of the building where his AirBNB apartments were located called Sean to tell him he was not allowed to have AirBNB in the building
• Sean had to read through his lease to learn how to understand lease law, so he could learn how to defend himself
• He discovered that, by being an LLC, which is how he signed all three the leases, as a company
• He told the landlord that he was leasing the properties initially for his employees
• However, the real reason he signed the lease under an LLC was because he got evicted right before he became homeless and he knew he wouldn’t be approved as a tenant
• The lease had an anti-subletting clause
• He argued that he was not technically subletting because his company was leasing the apartment and the person staying there was under the company, not subletting
• It worked for the remainder of the year but the landlord decided not to renew the lease when it expired

Keeping it Going

• When his lease expired, he found another building, moved his furniture and just did the same thing but with a better understanding with the landlord going into the leases
• This is how he pitched it to the new building owners:
  • First, he represented himself as a corporate housing company (a lot of apartment buildings will work with corporate housing companies)
  • He calls it “selling by analogy”
  • Corporate housing companies generally approach an apartment owner/landlord and say, for example, “We they need 5 apartments for 10 employees of Shell Oil Company who we’re trying to place. We’ll be staying her for 4 months.”  The company comes in, rents furniture, uses the apartments for 4 months and then moves out.  The company/corporation, like an LLC, signs the leases.
  • AirBNB or Short-Term Rentals may also get employees who are in an area for a limited time (you can also have the option of under 30 days).
  • He starts the conversation as a “corporate housing” company
  • But once he is in front of them and they are doing the walk-through, trying to sell him the property
  • At that point, Sean starts to highlight the nuances of “his business model” one “digestible fact at a time”
  • This allows them to ask questions and “ease into” the fact that “this is the new thing”
  • Corporate housing companies are doing this
  • So, in approaching them first as a company and they slowly introducing the short-term rental aspect they are more easily accepting of the idea
  • You are trying to avoid them saying, “Oh, I’ve heard the horror stories about AirBNB!”
  • It’s all in the approach to overcome the “AirBNB brand hurdle” because there are some scary AirBNB stories out there
  • Getting the connection:
    • First, get them to get to trust first as a business that uses AirBNB ALONG WITH other available booking outlets
    • Focus on your executive presence
    • Introduce the things that they don’t understand yet, with the willingness to have a good steady conversation about it
    • Try to not make it just “a sale”
      • Don’t “ask for permission”

Why AirBNB is not a Real Estate Play

• Sean doesn’t see AirBNB as a real estate play
• He has more than 100 doors
• It’s a business
• You are using real estate and leveraging technology as part of your business
• You can own the property, rent it, or get it for free and just split the profit
• AirBNB is a technology
• Real estate investors should see it as a tool in their real estate portfolio
• Sean doesn’t own any of his AirBNBs

Three Ways to Operate an AirBNB Business

• Buy a property to use for AirBNB
• Rent the property from someone else
• Revenue-Share – Partner with someone where you don’t buy or rent the property and just split the profit with the owner while you handle all the operations

AirBNB Automated for Passive Income

• Most businesses have employees or contractors that do most of the day-to-day activities
• Like any business, Sean hires contractors and employees to oversee and implement key aspects of the business
• In order to automate an AirBNB portfolio, you need to give key job positions enough work each week to make a full-time, livable income – be proud of their work and make enough money
• When Sean first had his 3 AirBNB apartments, it wasn’t enough to “automate”
• When the Superbowl hit Houston in 2017, he saw a great opportunity
• He only had 3 AirBNB units but wanted to get to 10 by the time of the Superbowl
• He did it and ended up making more than $15,000 for that weekend
• He saw the opportunity with AirBNB and knew he had to scale, which meant he had to hire employees

Hiring Staff

• He used to hire an outside cleaning company at $55 per door to clean units between guests
• He decided to hire an “in-house” housekeeper at $12 per hour
• Next, when he reached 15 doors, he hired a property manager who:
  • Manages the housekeeping staff, schedules them, handles logistics
  • Deals with customer/guest relationships
• At 25 doors, you can hire assistants for the property manager
• Sales, other Customer Service and Pricing Strategy was being handled by Sean
  • He also maintains regular communication with his Territory Managers
• As you grow you can hire:
  • Housekeeping Manager
  • Sales Manager
  • Operations Manager
• In Dallas, Sean has 40 apartments in 5 separate building.  His staff consists of
  • A Territory Manager
    • Manages other employees
    • Buys all supplies (toilet paper, shampoo, etc.)
    • Handles payroll
  • 2 Assistants (Customer Service)
  • 10 Housekeepers
    • Clean units
    • Check for stolen or damaged items – tells Territory Manager

Recruiting Realtors to Bring You New Deals

• Sean finds “Apartment Locating” Realtors who do leases in key markets
• He doesn’t tell them his business model because they will create competition for you
• He asks them to “Hi.  I have a corporate housing company.  I need to find complexes that are “corporate housing friendly.”  Can you get me a list?  Here are the specs: I will pay $_____ for rent, they need to have a pool and a gym. I like these neighborhoods in this city.”
• When he gets the list, he does the negotiation with the building.
• This approach works especially well in markets that are being saturated with new multifamily housing starts (i.e. Dallas, Philadelphia).
  • Dallas is going to have 14% apartments and existing owners, as well as new development owners are concerned
  • Sean is presenting a solution that boosts occupancy rates and get guaranteed rental income as well
• It can be marketed to owners as “a way to meet your occupancy and income goals”
• He has a few realtors trying to find these owners
• Realtor gets paid a commission from the landlord, per door – Sean pays nothing!
• One of his realtors in Dallas made $250,000 on leases his first year
• He has a Realtor friend in Houston that makes $30,000 per month just doing leases

Negotiating Deals With Owners

• He has one realtor that found a building in Philadelphia
• Sean sat down with a developer that has agreed to let Sean take 21 apartments for AirBNB arbitrage
  • Talked about pros and cons, benefits, risks, etc
  • Made an agreement to get:
    • Rent (different than the advertised rate)
    • First 4 to 6 weeks of rent free
    • 3-year long leases
    • Quick turnaround
    • With the possibility to get 40 more units in other building
• When an owner takes on a bank loan to build a new apartment building, the bank has a deadline to reach a certain occupancy or they will default on their debt
• Owners get scared, especially in questionable economic times
  • In Houston, in 2015, Shell was firing lots of people
  • Apartment buildings were giving away 2-3 months of free rent to anyone who rented from them
  • And they were giving realtors 200% of what the rent is

AirBNB Accessibility-Friendly Homes

• Sean was looking for a building that would be good for AirBNB
• He talked with a builder about a building he was building where Sean wanted the first floor because it would be good for disabled accessibility
• AirBNB has a 4-to-1 search to demand ratio in accessibility-friendly homes – for example:
  • Wheelchair can come in the front door
  • Handrails in the bathroom
  • Never say “handicapped” in your AirBNB profile.  Use “disabled-friendly” or something like that because handicapped is a bad word for AirBNB
• Accessibility has a 400% demand in demand-for-supply as compared to a usual supply and demand curve for AirBNB
• In AirBNB’s best cities, if you have an accessibility-friendly home, you will make tons of money
• He went to the owner of this 28-unit building that had four apartments on the first floor (10% of the building’s inventory)
  • The owner went to his lender and said, “I’ve got this building where this LLC company wants to lease out 4 units.”
  • The bank says, “You can give them 3 because it keeps you at ‘under 10% corporate’ because, if you have 10% or more, it changes the way your debt looks
  • The owner, if he agrees to less than 10%, can cash-out for a profit and tell the bank his cost is $6.5 million, instead of $5 million to build, and he can pocket $1.5 million when the loan closes
  • The owner asked Sean if he would lease the whole building, because the owners main concern is whether non-AirBNB tenants would not like the fact that there are AirBNB tenants.  If Sean leases the entire building, he solves that problem.
  • The bank would finance the deal if they saw that Sean could prove he could meet their primary needs – Are rents going to get paid?  Are leases going to renew?

Biggest Mistakes

• When he first started out in 2014, he just listed a few apartment units on AirBNB
• He did not see AirBNB as an opportunity early on
• He was enthralled with his media company at that time and how they were going to change journalism
  • He hadn’t learn to program yet
  • He was learning to program – PHP, Javascript – so he could write software that could change the way journalism is selling
• When he launched the AirBNBs
  • He hired a local housekeeper
  • He remote managed the properties from Jackson, MS at the time
  • He was more wrapped up in his other business
  • Hadn’t looked at the AirBNB metrics, ROI
  • He wasn’t thinking he would build his AirBNB business
  • He couldn’t the profitability – even though he was doubling his rent every month for almost no money in
  • He was still putting money in the stock market, learning to program – blind to the AirBNB opportunity
• His big problem was that he was not doing a full assessment of his entire life in what was working for him and what wasn’t
• He was so committed to what he had already invested a lot of time, he had blinders on to other opportunities
• He really ignored AirBNB, even though it  saved his newspaper business at one point, when he overextended himself.  His AirBNB cash flow saved him
• If he would have moved sooner, he could have had 400-500 doors now instead of 100

Another Mistake

• Large rental arbitrage companies are moving in to Sean’s space
• Institutional investors are getting behind companies like Saunder
• AirBNB just invested $160 million into Lyric, a rental arbitrage company
• Environment is getting more competitive
• Sean picked up a building in Dallas – 8 apartments
• He was negotiating with one person at the property who told him they were “good to go” on the deal
• That person left the company before he got their leases
• He had spoken to other people but they had lost their “internal champion” – you want to have your inside person who speaks favorably on your behalf
• Management had changed hands but they still got their 8 leases
• However, Lyric, the AirBNB arbitrage company that AirBNB invested in, already had leases there and they had a no-compete clause in their agreement
• The management was getting pressure to not work with Sean
• It became a contentious environment
• One of the leasing agents picked a fight with one of Sean’s tenants – a fist fight in the elevator of a high-rise
• Leasing agent went to management to try to get Sean out
• They aggressively tried to recoup their leases from Sean and asked “How quickly can you move out of this building?”
• He lost the units and had to move out immediately
• Found another building about 2 miles away that was less quality but larger floorplans
  • Executed 6 new leases, agreements
  • Moved all their furniture in the new building in 5 days
  • Problem was that the furniture was not fit for these larger apartments
  • Design style didn’t work
  • They weren’t performing well
  • Didn’t look good in photos
  • His big mistake there was trying to patch a problem, without thinking it through
  • It cost him a lot in his reviews and reviews matter
  • It was a management headache
  • Weren’t making enough money

THIS CONCLUDES PART-ONE OF OUR PODCAST SERIES ENTITLED “HOW TO MAKE $3 MILLION A YEAR ON APARTMENTS YOU DON’T EVEN OWN.”  STAY TUNED FOR THE EXCITING CONCLUSION ON MONDAY, JANUARY 13.

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DISCLAIMER:  Many of the above strategies take knowledge and have a higher degree of risk.  You need to do your research and/or work with someone who is experienced to reduce your risk.