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Can You Profit From AirBnB Without Even Owning Rentals? Yes!
Superhost Ryan Scott chats with me about how to make money with AirBnB by providing great service and putting enough systems in place to make sure you can scale that service beyond just your own single unit. Then the conversation gets really interesting when we discuss how you can make money as a superhost without even owning any property!
This is a model literally anyone can pursue and start cash flowing immediately- very exciting stuff and something to get any entrepreneur’s juices flowing equally fast.
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Listen right here:
Matt: Alright! Welcome to today’s episode. I’m chatting with Ryan Scott who’s a CapForge client and a long-time real estate investor but he’s got kind a different twist on doing real estate investing. He’s what’s known in the AirBnB lead as a super host. That’s kind of a cool business in it of itself and Ryan’s even got I think some twist on that. So I’m happy to have him on to chat today. Ryan, thanks for taking the time. Why don’t you just kinda jump in and give us a little background on how you got into this? What is your professional background and what are you up to with this AirBnB stuff?
Ryan: Cool, Matt. Thanks for having me. I’m 33. I got out of school and went into IT consulting. I wasn’t doing any real estate investing then. I kinda had a little interest in it when things got really intense around 2005 – 2006. Like everybody, I wanted to be in it. Luckily, I didn’t have any money so I didn’t get in there at the wrong time. After the crash, I was still working in consulting for Accenture. I started to get a little bit more educated and finally started to do a little out of state single family home investing. It’s a good stuff to start learning. We use [inaudible 0:05:35.3] providers that would buy the homes and we have them and we rent them out. At that time, it was a great way to learn but in comparison of what we’re doing now, it’s just, to be honest, it’s not exciting enough, let’s say, but really a good way to start. I got a couple single family homes. I was lucky to be in there. The market was coming back up. I really still had a full-time job and we just kinda take it as we go. Then, around 2012, maybe, let’s say, I was still working in consulting. For us, we were out of town every single week at the client’s site sometimes for 7 weeks. AirBnB came up as just a good option for me to make some extra money. I started renting out my personal apartment. It was actually an apartment that I rented from someone else. I didn’t even own it. We would have guests come who were going in conferences in Downtown San Diego. They were more than happy to pay a couple hundred bucks a night but maybe a little bit less, but certainly less than in hotels. Good people. Never messed up the apartment. I was pretty addicted to be honest. I started to stay out of town longer. It was certainly covering my mortgage and I was interest in it. About that time, I was looking for a place to buy for me and a girlfriend at that time. In the San Diego area, it’s expensive. It’s even more expensive now. We looked for about a year to try and find something that’s – the reality is I wasn’t sure the relationship was gonna work out so I wanted something where I could leave the home and be able to rent it out, maybe sell it, but certainly be able to rent it out and not lose any money. Unfortunately, because of my relationship situation, I stood to that very principle very strongly which I think people probably don’t usually when they buy a personal home. So, we looked and ruled out a lot of stuff – stuff in the $200,000 range, duplexes, and the $400,000 – $500,000 range, all over San Diego area. After a year, surprisingly, I started looking out stuff closer to the beach that had more units and it was larger because even though they were more expensive, the income that I thought I could make, having been successful downtown, renting them out short term was just much larger. Anyway, it turned out that the right investment profile and the only one we could find to work was almost a million dollar property through an FHA Loan. I was super surprised but we were able to put $45,000 down and get a million dollar property at the right time. We lived in the back unit, rented out the front units. We had a property management company take care of them. Long story short, I started renting the units out myself via AirBnB because he wasn’t filling them. Slowly, he was just taking care of the guest when they arrive and I was doing most of the booking. And I tell him, “Why am I paying him 20%?” then, I wasn’t even happy to pay him 10%. And just moved to kind of vertically integrate and take over the property management as well. We let that guy go. Found a different place to live because it was better for me to just rent out the one in the back and started looking for more property. Sold all the other properties that I had for the most part to single family homes in different areas. Rolled them into four property 1031 exchange which maybe most folks wouldn’t know about but on your [inaudible 0:09:31.0] probably would. Got lucky to roll all those profits into another investment property, Mission Beach, without having to pay any of the taxes. Put that one into business. The interesting for what we’re doing is the barrier to entry is relatively low. Although, I rather people use me than do it themselves. You can come on the scene and if you have some good reviews, it really starts to compete with some of the companies that have been renting out homes for 20 years there. That’s what came about over time. I’ve built up a lot of reviews, a lot of guests. I’m probably the largest AirBnB host in the San Diego Area now and that has a lot of scale effects. We’ve expanded to purchase another of couple units and have moved on to starting managing units for other folks as well. So, taking that same AirBnB profile, putting new units up, bringing guests in. my focus really is people that are looking out – they’ve been renting their place out maybe long-term guests for a year, 2 years, maybe 10 years. I just don’t think it is feasible for them to look at the show term rent on market. They certainly don’t want to do the work. So, I’ve gone after some of those clients and they’ve been really happy. They’re making more money. They are certainly not doing anything different than before. Most of them do less work, right? Because we do all the work. So, I think that there’s more opportunities for that and I think there’s a lot of people out there who don’t realize their property is something that could be turned into a short term rent or if you got the right manager with you who knows what he’s doing. We got about 15 units. I’m on some management clients down in San Diego and looking to expand further, bring on more investors and branch out.
Matt: Well, that’s quite a journey. To some extent, it was pre-meditated. But to some extent too, it was sort of luck and circumstance that you just kinda decided on some of the routes that you went down but you obviously found something that works pretty well. Now, you’re just working on the growth portion. Is that fair assessment?
Ryan: It is. Don’t tell my boss, but I’m working on the part where I leave my day job and get through this full-time. I work for IBM and their consulting practice and I do enjoy it. But my passion is in hospitality and customer experience and the financial side, the creative deal structuring side, moving into not just deals for myself but we’re looking for different structures where we can take investor money and expand which is a really exciting new way to approach this. It’s not prevalent in the short term. I’m hoping to get out to the bleeding edge there.
Matt: So, would you characterize yourself as a property manager who also owns some units or would you characterize yourself as a property owner who also does some management on the side? What’s sort of your long-term plan or can you not fit in one of those 2 categories?
Ryan: Good call. I mean, revenue wise, it’s a little bit higher for units that I own. Interest wise and my desire is more to bring more units under my ownership. For me, there’s been significant cash flow from the revenue of the rentals but the main thing when I started was if I can just cover the mortgage, if somebody will finance a million dollar property and I can do something that will cover the mortgage, then I get to sit in the San Diego market while the homes go up in value. They are not gonna go up every year but if it is levered at the way that it is now for this one, 95%, 20 to 1, if the market goes up 2%, you’re looking at 40% on your down payment in return. For me, the view was just to be able to cover the mortgage and be able to have a huge asset that will go up in value. That’s worked out but now the realization is there’s also cash flow to come and that’s an attractive profile for investors as well. Those things, the appreciation, the tax benefits and all of that are exciting intellectually and financially. That’s kinda where I’d like to spend more of my time. It’s also like a real estate agent to invest. They’ve gotta sell homes and make commission to have money coming in and it’s just the natural progression to bring on more clients. But ultimately, I’d rather partner up with folks and do more ownership and bring on clients opportunistically.
Matt: As a business, what is it that you do that’s different than a typical AirBnB? Somebody may have a vacation home and they decide rather than letting it sit, they’re gonna put it on AirBnB and make a few bucks but you obviously taken it to a different level. So, what are some of the factors that differentiate you from as a professional host vs. mass collection of amateurs out there who are just doing it on a here-and-there basis?
Ryan: There’s a lot of folks out there who are doing it may be like me when I started. I would say the vast majority of the folks at AirBnB in certainly their public phase is the owner who just basically rents out their home. In most cases, they’re very good at it because you don’t have to have a bunch of systems. You don’t need to have a bunch of tools. Because you’re there meeting the guests and its certainly not difficult to coordinate having a box of goodies for the guests or something special for the guest because it’s one guest and you’ve been talking to them already, you take a lot of pride in your home. They do very well. Right? Actually being a super host and having non-stop 5 star review is far more feasible as an owner working with just one unit than even being a professional having multiple units. The reason is there’s just so much complexity. It’s not incremental complexity when you get to maybe 3 or 4 units. Once you get above 5, it just becomes exponential and that nothing can really be done just by keeping it all in your head and kinda taking care of each guest. You got to have systems because there’s just too much going on. We’ll have cleanings every day. Sometimes all of the units need to get cleaned. Sometimes just one guest wants to check in early. They want to check out late. Being able to drive some consistency there, you can’t do it yourself. Right? If I would always put the air mattress in the same place just because I know where it goes but if I hire a different cleaning crew, if I don’t have a system for where they’ve got to put that, there’s no way its gonna get put in the same spot. That’s maybe okay. But on scale when you want to limit the amount of questions the guest have, you want to be able to tell them “The air mattress is in the closet and the top drawer.” If you can’t do that, things will become more difficult. So, what I would say is, working hard to keep the same sort of customer experience despite moving up in scale. I invested in software for that. We use apps for the phones that help the house cleaners know where they were supposed to go, for us to know what they’re doing, for them to submit issues, and I also use a startup company that helps me manage the actual inquiries and guest interaction on the account. They are very good. The name is Guesty. I’m probably one of the bigger customers that have been with them for a long time. They are like a living organism. They learn about the properties. They learn about my rules, about the system. They may become an extension of yourself and they are 24 hours a day, 7 days a week and so the customers are also happy to have someone be getting back to them. That’s really how I’ve been able, it touches to do a good job, but to have a life. Before I had them I was having a hard time balancing my personal and my work life because guests are asking stuff all the time as well they should. We just need to put some structure in place. The other difference is I just maybe more risk-prone. When one property worked, I was very inclined to get another. Because I really enjoy talking about it, I was able to bring on partners and investors because they got excited about it too. So, it takes work to go from renting out your home to doing some more. That’s something I’m trying to consistently keep pushing forward.
Matt: Is this something that – San Diego, for those who haven’t been here, is an amazing place. It has pretty much great weather year round. It’s a vacation destination year round. Is this something that works well in other areas? I mean, can you scale beyond San Diego? I know, I’ve got another client who’s got a property in the Palm Springs area. They have a very busy 3 and a half months but then, its crickets the rest of the year. That’s their challenge. Are there lots of other areas comparable to here or is it really not about San Diego? Is it about something else that you’re doing differently or you’re focusing in on that allows you to have enough cash flow to make it work all the way around?
Ryan: The short answer is that it’s not limited to San Diego by any means. San Diego makes it easier as does any destination where people are coming for Tourism. You can put it in different buckets of “Is it a sure thing or is it maybe where you have to do some effort?” people are coming and visiting and they are already used to coming and renting homes certainly the AirBnB is just the extension of BRBO and Home Away and a logical extension but it’s just more for millennials and it’s a better experience. That’s a whole discussion in its own right. So, it’s not a new concept to rent out a home by the beach in San Diego. It was easy for me to start there and I probably didn’t need to be perfect to be successful. The more interesting part where we are trying to expand and certainly my view is to expand and take the same model, to get 10 or 12 units in another city, and 10 or 12 in another city, not to compete with yourself but to have some critical scale so that you can get some efficiencies. Anywhere now that people are visiting, that’s a much larger bracket. Anywhere that people are visiting is a very right market for this. People that were traditionally just looking for hotels are starting to look at AirBnB as well. And I don’t think that that’s even hit the tipping point yet. There’s still people I talk to that don’t know about it which is amazing to me. But certainly, I think, it will become the norm that you look at maybe hotels.com you look booking.com and you look at AirBnB because the consistency, the reviews, the types of properties, people feel very confident about what they’re gonna get. So in a lot of cases, it’s cheaper and a lot of cases, it’s just the same price as a hotel but you get more. So, that’s a totally advantageous thing. I mean, I stayed in them in Bali, in Indonesia, in Hong Kong, I was just in Paris last week and people have been traveling for weeks before they came and met up with us and they stayed in AirBnBs anywhere they were. So, I think it’s a totally cool thing for any area. You’ll see most areas where you’d think “I wonder if this is something that would work there.” The reality is probably more than its saturated. You need to work harder to say “Could I differentiate here?” rather than “Is there enough demand here?” because the barrier or the entry is so low. I mean, nobody can just rent their place out when they go away for the weekend.
Matt: Have you already run into or do you anticipate issues with regulation and taxes and that kind of red tape kind of headache? I know there’s been various articles, various complaints, neighbors getting mad because the next-door guy turned his house into an AirBnB. That kinda in and out constant change over guest. Is that something that you sort of figured that its gonna play out over time and you’ll have time to deal with it or it hasn’t hit yet or its already started hitting and it turned out to be a whole lot of nothing? What’s your take on that issue?
Ryan: It’s an important issue. For me, it helps me understand what you see in the news where they say companies aren’t investing because they are not seeing consistent regulations from the government and they want to clear stands. That’s kind of a vague concept. But now you apply it to this, it would make perfect sense when I go to an investor and say “We want to buy a home in this area.” And they’ll say “Well, but aren’t they talking about changing the regulation?” well, they are. If they don’t change the regulation and everything is able to run as it is now, it’s a hugely profitable thing. On the other hand, if they clamp down like they have in some cities like Santa Monica, from a legal perspective, it could erase the opportunity completely. Right? So, that’s spectrum is there. It’s certainly alive and well in San Diego. Maybe it’s a year off or more when they decide. My view is that they’ll come to some sort of compromise that won’t get rid of it completely. Certainly, there’ll be more rules that you need to follow but those are rules we are following anyway. Right? So, in a lot of ways, if they are gonna regulate how many people you could have in a unit, they are gonna put people in a lot of trouble if they make a noise complaint. Absolutely! Bring it on. Right? We’re running a professional show so that would benefit us and maybe limit some of the fringe players that are there. I think, they’ve done a good job to, for example, a place where it really does play in is HOAs in downtown cities are pretty strict about not letting anyone rent out for less than 30 days. It’s a very lucrative market if you could do it before anybody catches you but they are doing a good job to make examples of folks to put, to clamp down, and I think that market is staying underground and won’t become a reality. It affects investing decisions. We are not choosing to get condos or anywhere that has an HOA. Were also not looking to buy anything that would be unable to perform or unable to cover the mortgage or whatever it is that’s your KPI, it’s the AirBnB concept was completely eliminated. Right? So, if there’s somewhere at a long term rental basis you could only get $2000 but if you’re doing AirBnB you could get $4000. The mortgage is $3000. That’s a very risky play if you think that there’s any possibility that the regulation is gonna put the [inaudible 0:26:55.1] on it. Those are the instances we would try and stay away. But in a long term rental, we could get $2800 or either $2900. So, it would just come out even. We have to sit there for appreciation or maybe sell it. That’s more palatable. Unfortunately, it does affect the decisions and not allow us to just purely say “Okay. Based on current situation, how are we doing?” We have to think about “Well, what’s the fallback?” On that point, the regulations around loans and financing still are like that. They don’t take into account any of the revenue I get from short term rentals. That’s just how the underlining is set up. They can [inaudible 0:27:42.0] keep you honest and say “Well, sure. But I’m not gonna qualify based on whatever short term revenue you get. They even don’t give me credit for it on my other properties to help with the ratios.” So, they kinda keep it honest and that’s probably good. Right? If you gave out a bunch of loans based on a business model that may not stick around, you’re gonna have some of the issues we had 5 or 6 years ago.
Matt: Yeah. That was a good movie called The Big Show. I highly recommend it.
Ryan: It was wonderful, right?
Matt: Well, that maybe answers my next question. But I’ll throw it out there anyway just for some feedback on your side. But it seems to me, one way that you could possibly rapidly not only enter the market but expand would be rather than being the owner, and would be to find properties you could rent at a long term rate and then turn around and sublet them on the AirBnB rate. You’re making the split. You’re doing the arbitraries at that point and because you don’t have to fund the money to make the purchase, you could get into a lot more units a lot faster. Obviously, it’s not gonna work if the person renting to you forbids you to sublet or you’ve got some of those properties where the profile doesn’t work. Is that a possibility? Is it something that can happen? Or why not?
Ryan: Yeah. I mean I’ll take it one step further. That’s actually my preferred strategy in obtaining new clients. I have 4 units under that exact strategy. Nobody has ever brought it up to me. I thought I was the only who thought of this. So, you spot on. It’s the way that I prefer to take on new clients rather than “I’ll manage your property and I’ll take a percentage. Then, you take lion share. I’ll rent it from you.” Normally, what I say is “I’ll rent it for you at an above market rate.” You’re getting more money than you would get anyway. You have the consistency. So, even if we have a bad month or there’s a tornado, whatever happens. In San Diego, we have bad weathers. Nobody wants to come. Maybe there’s a flood. I take that risk. They get consistent money every month. But then, I get to take a much larger upside if we have a great month. And you’re right, the upfront investment is much lower. You don’t get to play into any of the appreciation. You don’t get the depreciation tax benefits. You do have to furnish the units and you’ve got to convince the owner that this is the right way to do it and have some insurance complexity too. But, you’re spot on and that’s actually my preferred approach too. Because there’s a lot of owners out there who would say “We can make more money if we do this as a short term rental.” But there’s also more risk in doing that. Right? There’s more work and more risk. This removes the risk because they have guaranteed rent every month and it removes the work because somebody else is doing it. So, it could be an attractive play for an owner. Yeah. You’re spot on.
Matt: Is that something that you kinda have to have that conversation one owner at a time? What’s the close ratio when you come up to somebody and you say “I love to rent your place so I could turn it around and rent it to other people and make more money. But you get the consistency and you get the above market rate.”? How many people are open to that and how many people object or shut you down or just won’t entertain the concept?
Ryan: Yeah. So, it’s less than half who are positive about it. We submit. We do a follow-up show because I’m just trying to kick off a campaign to bring some more owners on and we’re going far with this pitch. The one that I’ve done it with, he has been very happy and we expanded from 1 unit to 4. But other owners that I called about it, they just not there yet. So, we got some work. We got some who want to do the normal arrangement where it’s just the percentage basis. But ask me again maybe in the couple of months and we’ll see how it goes.
Matt: Well, yeah. It just seems that from a scaling perspective like you could, you could grow a lot faster under that model. Because it is new and you’re kind of forging the path way, presumably you could make it fairly beneficial to yourself in a way that you scoped out the term. Certainly the owners are gonna get what they get but rather than maybe locking yourself into a traditional 12 month lease or something, you think of something where there’s some kind of performance basis. You can get out of something that’s just not working for whatever reason and you have a lot longer lock in than a normal 12 month lease if it’s working. There’s all kinds of – anytime something is – you’re basically drawing up the template yourself. You can sit down and think about all kinds of creative ways that you may be able to make it put even more icing on your own cake.
Ryan: Yeah. I like the way you’re thinking about that. Absolutely. Because there’s certainly an investment upfront to get the units going rather than if you just have to shut it down after a year. That’s not the right answer. Yeah. I totally agree. I like it.
Matt: Well, I used to, years ago, I was doing some business brokering and that was the kind of thing where every single point is up for negotiation, debate or creative thinking. There’s nothing is wrong if both sides agreed to it. Its fine. Just because nobody has ever done it before, nobody thought of it until that particular deal. If both sides are happy, then do it. I mean, I would put some thought into it along those lines. How can you structure those kind of deals to give you an exit if an exit is needed? I [inaudible 0:34:09.6] to sit on something for 12 months that really isn’t panning out. And if you get that great corner location, that is a gold mine. Lock yourself in for as long as possible or maybe even option to purchase or who knows down the road if you find that A+ property, you don’t want to be down at home or they see it at “Wow! This guy’s making 3x of what we are making. As soon as this contract is up, were gonna kick him out and do it yourself.” Anyway, awesome! Awesome information. I appreciate you taking the time. I want to give you the chance to kinda spread the word for people who are looking either for a place to stay in San Diego or to just kinda check out what you’re doing, get some information, or maybe connect with you on a different level, as an investor or whatnot. How do they best get in touch with you?
Ryan: Yeah, I know. I appreciate it. The company is surfcombervacationrentals.com or you could just email me at email@example.com as well. Yeah, happy to chat with anyone. It’s kinda leading edge stuff and it’s my hobby. So, if I could find somebody who actually wants to talk about it rather than everyone else who has to listen to me anyway. It’s always welcome.
Matt: What’s the exit day for work? That’s the other important question. What are you planning here?
Ryan: Yeah. You’re so right. I [inaudible 0:35:42.9] many of them stayed that now it’s tough. Right when I’m getting close, I get a promotion where I’m stuck. I would think the end of this year. We are actually looking at opening up a rete and taking on investors. I think that would be a key stepping stone to see that there’s light at the other side.
Matt: Yeah. At that point, it’s probably worth your full-time effort and attention. I would guess. Well, you’re investors may demand that.
Ryan: Well said.
Matt: Alright! Well, I appreciate your taking the time, Ryan. Thanks a lot.
Ryan: Anytime, Matt! Thanks.