BiggerPockets Real Estate Podcast - 908: $400,000/Year From One Unique Rental Property w/Amanda and David Fornelli

Starting point is 00:00:00 Welcome to the Bigger Pockets Real Estate podcast. We have one of my favorite kinds of stories for you today, an interview with really impressive numbers and even more impressive guests, and even better. I'm joined for this one by my good friend, Henry Washington. Henry, how you doing, buddy? I am doing fantastic, man. Any day's a good day when I get to do a show with my good buddy Rob of a solo. Hey, I concur. Listen, have you ever thought about this idea of buying a hotel, renovating a hotel? Because it feels a little scary. on the surface. Man, seriously, I had never thought about it until like two weeks ago. And then all of a sudden, I did a podcast with a guy who owns boutique hotels. I heard Tony talking about his boutique hotel. And now my wife's like, we should buy a boutique hotel. So we're considering it. And it all kind of works at well, because today we're talking with investors, David and Amanda Franelli about a recent addition to their portfolio. And spoiler alert, it's a hotel. And that hotel is bringing in a ton of cash flow.

Starting point is 00:01:00 We're also going to talk about their journey as flippers and short-term rental investors and how they're creating operational excellence in all areas of their portfolio. This episode is for anyone who has been challenged with trying to figure out how they can flip or invest in real estate in an expensive market. It's also for people who are interested in short-term rentals or the hospitality industry in general. Well, I'm excited to jump into the numbers on this one, so let's get into it. David and Amanda, welcome to the show. How's everybody doing today? Pretty good. We're doing fantastic. Thanks for having us, Robin Henry. Hello, everyone. Thanks for having us.

Starting point is 00:01:35 Yeah, happy to have you here. So let's jump into this. I'm really curious. I know a little bit about your backstory. And I'm excited for everyone to hear some of the cool things you've done. As I understand it, you started out in real estate by flipping. Can you tell us about why you turned to this business model and chose to leave your jobs at that time? Absolutely. It all started in 2019. I actually spent 10 years working in corporate America. My most recent company, I worked for them for two years. But unfortunately, that summer, I was part of a pretty big layoff. And at that point, I had a decision to make if I wanted to continue working within the corporate America or do something a little bit different.

Starting point is 00:02:14 So at that time, I was working, I was talking with David, my husband, and my brother, Oscar. And that year, we came across an Instagram ad for a real estate education program. And we got reeled in, long story short, we bought into the program. And one of their fundamental strategies is fix and flip. So that's where we first learned that strategy. And we got very, good at it in the beginning. And that's really why we chose that strategy to start. And I think it's been a lot of fun. It is kind of the bread and butter of our business. Yeah. And, you know, funny story, we learned how to flip houses through that program, right? And within three months,

Starting point is 00:02:54 I had made two and a half times my yearly salary as an archaeologist at the time. And so for me, for us, that was really a no-brainer. It was COVID. Real estate was appreciating like crazy. And I thought, you know what? If we ride this wave of appreciation, this could be a really good ride. So I actually quit my job and then we became full-time real estate investors. So I think you said something that you just kind of breezed through that not a lot of people say.

Starting point is 00:03:22 Did you say you quit your? job as an archaeologist? That's correct, Henry. I was a California desert archaeologist. I have my master's degree in archaeology. I was an actual working archaeologist. I taught at the university level for two years. And then I went into the field as a W-2 worker. And I like to say, it used to be my job to find ancient sites. Now it's my job to find screaming deals in real estate. Or you uncover things behind drywall that you might wish you did it. We have uncovered some crazy stuff. You still find ancient sites. You just turn them into beautiful properties for people now. That's correct. That's correct. So there are some transferable skills, definitely. That's super cool. I've done tons of interviews and met all kinds of investors. You are the first archaeologist turn real estate investor that I have met. So congratulations, blazing a trail for the other archaeologists out there who want to get into real estate investing. So what did you decide to shift from flipping? Because you said you got really good at it, right? I assume that meant you did a bunch of deals and made a bunch of money. So what made you pivot from that to?

Starting point is 00:04:24 the short terms. Yeah, that's a great question. So with our very first flip that we did, it was actually in Joshua Tree, California. And we tried, we were running deals for about 11, 12 months before we actually got our very first deal under contract. And so Amanda had this amazing and brilliant idea to send out an email to her entire network, letting people know that we wanted to flip a house. Nobody was taking us really serious. Agents weren't calling us back in the Los Angeles area because real estate was so, you know, competitive at this time. and Amanda's good friend and old co-worker sent her an email back saying, hey, we have a house for sale in Joshua Tree, California.

Starting point is 00:05:01 Joshua Tree is two, two and a half hours away from Los Angeles. So it wasn't really on our radar, but we really wanted to take on this deal. We got into it for a total of about $265,000. We sold it for $410,000. So we made $130,000. But we sold it to a short-term rental investor. And that's when we realized, wait a minute, If people are willing to pay this much over the asking price for these newly flipped houses,

Starting point is 00:05:28 there must be something to this short-term rental game. And so really that turned us on to the idea of Airbnb and short-term rentals. And we realized at that time there was so many short-term rental investors flocked into Joshua Tree to launch an Airbnb. And that really opened our eyes to what is this Airbnb stuff and how do we get a, you know, how do we become a part of it? Quick correction. We bought that property for 200. I think he accidentally said 265.

Starting point is 00:05:51 So 200,000. And then that experience is what exposes to burring, the burring strategy, which we ended of doing on a few properties. And that was, you know, it's very hard to execute on a burr. And it was a lot of fun. And we learned so much through that process. Can you explain what a burr is from your point of view for everyone at home that may have never executed on a burr?

Starting point is 00:06:11 Yeah, absolutely. So a burr is taking a property that has a value add component. You're going to buy it. You're going to renovate it. You'll rent it, refinance and repeat. So for us, that applied to the short-term rental space. We always buy distressed properties. We love the value-ad process.

Starting point is 00:06:28 So we would buy a property, buy a fixer. We would renovate it, force the appreciation. We would do a long-term refi, long-term maybe a 30-year fixed, pay off those lenders, and then go into permanent financing and continue to rent and list that property on different online travel agencies, but especially Airbnb. We actually executed on one of our burrs, and we got all of the cash out. So we're $0 in the deal, which is pretty fantastic. It's amazing. Yeah, now that's a cash-flowing Airbnb that gives us around $1,500 a month.

Starting point is 00:07:02 So it's kind of like our little ATM machine, which is pretty cool. Yeah, we call that the Burrster here on Bigger Pockets, a burr into a short-term rental. That's right. That's right. That's right. I'd like to think so. I'm sure. Don't blow his head of.

Starting point is 00:07:16 Air is big enough. I am the co-founder of the Burster term. It's a great term, man. It's a great term because it's taking that Burr method into short-term rentals, which we know pretty well. So I think one of the things the listeners are going to be wanting to know is because everybody says, oh, you can't invest in California. It's too expensive.

Starting point is 00:07:38 And you guys have been doing flips in California. You're doing short-term rentals in California. So how are you financing this deal? How are you getting into them? We have multiple strategies for getting into these deals, by the way, with little to no cash of our own, which is great when you want to do things at scale. We have historically bought all of our distressed properties with hard money combined with private money. Shout out to our mentor and our really good friend, Amy Majuri. She taught us a lot about raising private capital.

Starting point is 00:08:09 I know she's been a guest on this show. So we implement the private money strategy quite a bit to get into more properties. So we're really, we're getting 100% financing so we can do multiple deals at scale and not be restricted by our own cash, our own capital. So that's how we're getting into the properties. If we are going into long-term financing, we typically will do either like a bank statement loan or we, you know, we consider DSCRs as well. Okay.

Starting point is 00:08:36 So first of all, what I'm hearing is you can do deals in California. Not only can you do deals in California, but you can do them with very little of your own money. today in this economy. Yeah, that is correct. I mean, in California, we're talking about really big bucks. We're talking about, you know, $700,000 to $1 million fixers. So that's for the fix and flip, right? So we're looking at some pretty big bucks.

Starting point is 00:09:00 And that's why we need to have really good partners, hard money lenders, private money lenders, who are able to work with you to close on those types of deals because it's no chum change. That's for sure. Yeah, Henry, in addition to the appreciation, the profit on flips in California, can be absolutely insane. So on our maybe 11, 12 flips that we've done in the California area, we've profited around $100,000 to $150,000 on each flip. So it's well worth it, especially when we can get in and get out. Our buy box is typically within that six to 12 month range. We don't like to hold properties for longer than that. We don't like to do it. I wouldn't either at a million dollar price point.

Starting point is 00:09:38 Not at all right. Right. So we try to get in and get out as fast as we can and you could make some pretty good change in the state of California doing that. Yeah, the one thing about California, too, with these fixers is even when the market was taking a downturn, we were still seeing over 100% list to sales price ratio. So properties were still selling over listing price in multiple, multiple zip codes and hot neighborhoods. So that's where we like to focus our strategy right now. Yep. So list price to sale price ratio for people listening is the percentage of which a property sales ad versus what it was listed at. So if a property's listed at, so if a property's listed for $20,000 and it sells for $200,000, it's 100% list price to sale price ratio.

Starting point is 00:10:17 If it's listed for $100,000 and it sells for $110,000, that means your list price to sale price ratio is going to be above 100%. So if you're wanting to get a good sense for, am I going to get what I'm asking for a property, talk to an agent who is good with the numbers in their market and ask them, what's the average list price to sale price ratio in your market? And that'll help you evaluate your numbers a little better. All right. We're going to take a quick break, but don't go. We're having way too much fun. And when we come back, David and Amanda tell us how they're mitigating risk, how design plays into their strategy, and the super smart way they funded their

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Starting point is 00:13:57 are great in appreciation markets like California. Like, you guys can flip two houses and make what it takes me to flip like five houses and get the same profit here. in Arkansas, but that comes with a little more risk, right? You're taking on larger loans. You're getting 100% financing, which means you're leveraged all the way on those. So how are you mitigating your risk when doing these big ticket flips? You know, one of our mentors describes the inverse relationship between risk and control. And so the way we like to see it is no investment is without risk, obviously, right? But there are certain things that we can control. For example, we can control what we buy it at so that we make sure we don't overpay from the property from the

Starting point is 00:14:37 very beginning. We could control the amount of contractors that we talk to so that we can get enough bids to make sure that those bids come within our budget. We can control how we run our numbers to make sure that we're running our numbers conservatively and we're looking at things like the list to sales price ratio and we're not overshooting and we're not trying to have a crystal ball and be like, well, I know rates are going to come down. I absolutely know it, right? We can control the comps that we run to make sure that the comps that we're looking at are in line with the style of the house, the year of the house, the architecture of the house, the level of the design that we're going to do. So as long as we can control as many factors or at least

Starting point is 00:15:15 attempt to control as many factors as we possibly can, that will mitigate or hopefully mitigate our risk so that we come out on top and that we can actually turn a profit at the end. Just to give you an idea, when people look at our analysis spreadsheet, it makes them a little dizzy because we really analyze almost every possible thing that we can possibly analyze in a fix and flip underwriting process. We even adjust comps one by one as detailed as possible because, like you said, the more control we have, the better outcome that we're going to see. Also, we're very, very, very meticulous in the construction process. Our third partner, shout out to him. He's phenomenal at this. But we're very good at construction.

Starting point is 00:15:59 controlling scope schedule and budget, and we really try not to deviate from those numbers or fall out of our contingency. That helps us stay on track on schedule and within the budget so that we can hit our numbers. Cool. Do you want to come manage some of my construction projects? That would be awesome if you would do that. But I love your answer. You nailed it. The way to mitigate risk is always make sure you buy the property right. You want to buy it at a price point that gives you multiple exits. in this case, your exits are, I can turn around and resell it in the current condition that it's in because I bought such a great deal or I can renovate it and get even more Buku dollars. I mean, you guys are rock stars. Thank you, thank you. Thank you. Thank you. Thank you. Thank you. So let's set the scene a little bit. We have an understanding of your capabilities. Obviously, y'all are very talented. You've talked about the design aspect quite a bit, which we're going to get into here in a second. But before we jump into that, give us an understanding of how many short-term rentals you have. Yeah. So we currently own and operate four short-term rentals. Joshua Tree, California. We have a 10-key boutique hotel in Palm Springs, California. And then we also have a long-term rental that used to be our old primary residence. We ended up keeping four,

Starting point is 00:17:07 but we've built out 11 different short-term rentals in two different states. So for us, it was a combination of fixing them, flipping them to turn a profit, and then putting that money back into our own portfolio. So we ended up keeping a total of four. Right. That makes sense. Okay. So obviously, I'd imagine the design aspect is very different. if you're just looking to fix and flip to someone that might buy it as a primary or as a long-term rental. Tell us a little bit about how design plays into your overall strategy of selling to the end buyer when they're a short-term rental investor. We actually had a really cool discovery process for this because one really important thing to consider about a fix and flip strategy is knowing

Starting point is 00:17:46 who your end buyer is, know the neighborhood. We talked about being in Joshua Tree where we know there were a ton of investor buyers. So we were at the time going to be building out a lot of lot of properties that are for your standard family, right? So as far as the design process goes, we have to think about that end user. And I always tell people, it's not about what we want. It's about what the comps are demanding. It's about what your end buyer would want in that process. So the design is really going to influence that. One thing that we did a lot with Fix and Flip in the Desert at the time was really understanding what additional value we could bring to a property. So for example, when it was allowed, we were actually a

Starting point is 00:18:26 acquiring the short-term rental permits and then transferring that to a buyer, having it also fully staged, right? So once the buyer closed on the property, they could theoretically be up and running within the first two weeks. So that really helped direct our design decisions and how much money we were putting into the property and where it was going within the property. Yeah, okay. So whenever you were selling the property, when you say you had it staged, are you saying like you had it staged for the photos, they buy it, and now they get an empty house or were you selling it fully furnished as well? The option with fully furnished. Yep. So they could buy, they could buy the current staging as it is or they can choose to leave that out. Got it. Yeah. See,

Starting point is 00:19:07 that's so smart because that's the race that every investor has to play. They close. And depending on when they close, they might have to pay the mortgage on the first of that next month. You have to launch as fast as possible because you have to consider you could have a one or a $2,000 reservation go live the moment you go live. And if you miss out on that, then the two or 300 bucks that you might save here and there on furniture is just, it's not really going to be worth it in the long run. So I think that's such a genius strategy because if you're basically selling a turnkey short-term rental, then all they really have to worry about is creating the listing and launching it. And I imagine, you know, I'm sure you provide some kind of guidance on that end, but that's really how you've set this up

Starting point is 00:19:46 for people, right? The option for it to be fully turned key at closing. Correct. Correct. Correct. And as you know, Rob, one of the most difficult things about a short-term rental, especially the setup portion, is the amount of boxes that you have to deal with. Oh, my goodness. Ordering boxes, supplies, getting everything on time. It's such a huge heavy lift that I think people tend to underestimate. So if it's already done for you and we're essentially selling a business in a box, then people, and we can communicate that value to people, then it was really attractive for some folks. And we hit a couple of big home runs where one of these properties, we turned a $275,000. profit off a home that was less than a thousand square feet by emphasizing on this strategy of,

Starting point is 00:20:27 hey, it's already done for you. We've brought in designers. It's already staged. We put a washer and dryer. We'll even give you the photos so that you can just put them up on your Airbnb listing. We'll help you out with the listing. And then boom, your cash flowing as soon as you go live. I can't tell you how many times I've made the bonehead mistake of like finishing the staging of my short-term rental on like a Saturday or on a Sunday in a different city when everything is close and I've got 200 boxes that I have to get rid of, but the dump is closed and there's really nothing you can do other than tie it to the top of your car or stuff it inside your car or your truck and then like, yeah, just drive with it. So I've been there. So yeah, this sounds like a

Starting point is 00:21:03 service that's super valuable. And obviously you've learned the systems in the short-term rental world, which I think actually transitioned into the hotel side of things really quite nicely. But how did you position this hotel within the Palm Springs market? I know it's a neighboring market from the Joshua Tree side of things, but tell us a little bit about how that even came about. Yeah, definitely. We were doing a walkthrough with our former property managers at the time. So before getting into the short-term rental space, we leverage property management because it's something that we didn't really know of, so I wanted to learn from the pros. I took over the management side. So I was doing a walk-through with the gentleman, and he was complimenting one of

Starting point is 00:21:39 our short-term rentals. This short-term rental happened to be an international award winner for its design. It won a 2022 international vacation home staging design award thanks to our fabulous designer, Yahida Familia. And so the gentleman was like complimenting the architecture and the style of the building and the execution of the project itself. And he said, hey, would you guys be interested in partnering on a boutique hotel in Palm Springs? And I instantly said, yes, right? I said, I'm one of three, but I'm pretty sure my partners are going to be on board with it as well. So we realized that we had a lot of skills within designing a short-term rental, the renovation side of things, project management, being able to execute on all those steps.

Starting point is 00:22:22 At the time, they had a portfolio of 26 properties that they managed, so they were really strong with management. So it was already in the works of becoming a really good team and a really good project. And so we essentially had a couple of conversations, and that was the birth of Yara Hotel. Very cool. And what kind of clientele were you looking to attract with this particular type of hotel? We knew that, you know, the Palm Springs market is very pink flamingo and palm and, you know, palm trees with zebra print everywhere, which it's great. It works amazing for that market. We wanted something a little bit different. We really liked the way that a lot of these Bolognesean-style hotels were coming on Instagram. They were very Instagram worthy. They were very beautiful. They're very white. And so we wanted to execute on that Bolognesean, Mediterranean, Mediterranean, So we wanted to bring in customers from Europe, a bit of an elevated clientele, folks that knew the type of experience they wanted to have that would be a very beautiful and relaxing experience.

Starting point is 00:23:20 Yes, that's a, it's very different there. So you're saying typically the Palm Springs market, very bright, pops of color, lots of pinks, yellows, and teals. And the Polynesian is a little bit more, just a different look in general, completely different interior design. And your goal was to come in here and do something. that gave people the option to not go with the typical Palm Spring style. Is that what I'm hearing?

Starting point is 00:23:43 Yep, that's correct. And that actually posts some challenges because when we were looking for local designers in Palm Springs, everyone wanted to do the same thing, the color, the pop, the contrast, right? And we were trying to find the right partner to do the design for us and say, look, this is great, but we want to take a risk here and do something a little bit different. and we think if it's executed well, it could totally crush. And we are so happy that we stuck with that vision because we're really happy with the product and we feel like all of our guests love it.

Starting point is 00:24:17 First of all, I want to see this place. Second of all, you're making big transitions in your business, right? You go from flipping, then to you're doing short-term rentals. You're doing some close to where you are, some a little further away, right? And now you jump into this 10-key. It's great hearing about it because people love that transition, but like all of this requires money. We know how you were funding your fix and flips.

Starting point is 00:24:39 Like, this is a bigger deal. Like, how did you get this deal funded? And what were some of the risks associated with jumping into a project this size? Yeah, it was a bit scary. I won't lie, going from, you know, buying a Joshua Tree to then going into something like Palm Springs and our first commercial property, it was a little bit scary. But we knew that with what we had learned and the skills we had learned within the private money space, So we knew we could take this down.

Starting point is 00:25:06 At the time when we acquired the property, we were actually considering an SBA loan, but the process was just going to take way too long. So we set that aside and we went with a bridge loan and it covered about 71% of the deal. And we actually had our partner bring in some cash and we also raised some of it through private money to cover the construction costs. So we had full control of the construction fund after we closed. we brought in private capital from a few different investors in the form of debt. So we were able to close what we needed. We got what we needed to close on the deal and then have full control over that construction budget so we could just hit the ground running.

Starting point is 00:25:48 We raised about $1.2 million in private money for construction, holding, and closing costs. Yeah, let's go back a little bit because you mentioned that you got an SBA loan on this. And I've heard of this strategy. So many people use it. And it seems like, you know, almost too good to be true. oftentimes. Explain what that is. Like, how did you use it in your particular deal? And what's the process of obtaining financing in that in that world? Well, when we first acquired the property, we got that with a bridge loan. But once we actually just closed on the refinance through an SBA

Starting point is 00:26:19 504 process last month. Nice. Congrats. Which took, thank you, six months of underwriting, a very, very arduous process, tons of documentation. But an SBA loan is very, is very exciting. because it's effectively a government-backed loan. They work with a bank to fund a project, and that's typically for small businesses and that helps stimulate the economy by providing backing to these entrepreneurs. SBA loans are really awesome for hotels or deals where you don't have operating history. We bought this property when it was in the middle of construction and there was no operating history. So that's one of the advantages of going SBA is you don't need that operating history, you can go off of projections. The other benefits of working with SBA is they have higher leverage.

Starting point is 00:27:09 We got 80% LTV on it. And you also have much better rates. And it's going to be a combined rate between the SBA portion and the bank that you're working with. There are a lot of challenges with it. It's an extremely arduous process, a ton of paperwork and documentation. But if you can be patient and give everything that you need to go through the proper underwriting, it's going to be totally worth it from the perspective LTV and your rate. It's just going to be so much better compared to anything else out there, especially because you can't probably qualify for a conventional loan without any history. That's where organization is key, really. She's so super organized, super detail-oriented. Our partner, Oscar, who handled all of the construction,

Starting point is 00:27:53 is super-organized, super detail-oriented. So when SBA was asking for all these documents, as you guys know, time is money, speed is money. So the quicker we're able to provide them what they need, the quicker that we're able to actually go to the closing table. So that's something to keep in mind if folks are interested in an SBA loan is definitely the more organized you can be, the more buttoned up everything you'll have, the faster you'll be able to close. Okay. So I want to make a few points of clarification for people because what you just described in terms of financing is actually pretty complicated and very smart. So what, if I'm hearing you correctly, what you did was you were able to use,

Starting point is 00:28:34 um, but short term lending like a rich loan or hard money. And then you couple that with private money to cover what would be this, the money you would have to take out of your pockets and put down into the deal. And what makes that super smart is, uh, a lot of local banks don't really love financing hotels. And so it can be very challenging to get, uh,

Starting point is 00:28:57 banks to want to find. to finance hotel deals. But if you do something like short-term lending to get into the deal and then refinance with the long-term SBA loan where they're in favor of helping small business owners, it really kind of gets you the best of both worlds because you're able to get your deal done, get it closed, get into it quickly, and then turn around and refinance it on that longer-term financing. That's a little more of a tedious process, but more beneficial. in the long run because if I'd imagine if you're trying to use the SBA loan on the front side, it'll delay the process so long that you might not, that your seller might walk on you, right?

Starting point is 00:29:37 Is that one of them? That's correct. They were not willing to wait those six months for us. They wanted to close in like six weeks. And you touch on something important. We learned this the hard way, but conventional lenders for a hotel, they want usually two to three years of minimum operating history. And they still might barely do 50% LTV.

Starting point is 00:29:58 So just to give you an idea, it's very, very hard to get funding for a hotel. So SBA is great in so many ways, but of course it comes with its challenges. And the clarification there, guys. If a bank is going to lend you 50% loan to value, that means these guys have to come up with 50% of the purchase price to put down just to get into the deal. Because small banks see hotels as risky. And so they want you, the buyer, to have a whole lot more skin in the game. So this is a super, super smart and creative way to get this deal done and keep your money out of it, but still get the optimal financing at the end.

Starting point is 00:30:34 Great job. Okay, we have to take one more short break, but then David and Amanda break down how much money this hotel has already netted in its first year and how that compares to the profits from their short-term rental portfolio. Plus, the one must-do trick for anyone figuring out how to boost revenue from a hotel. So stick with us. There are two kinds of real estate investors. those who have reviewed their insurance and those who think that they have.

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Starting point is 00:34:03 what was the interest rate that you got on the SBA loan one month ago when you closed? So there are two portions of the rate. One is from the bank that you're working with. They do about 50% of the LTV. And then the SBA. B, A, CDC comes in with about 30%, and they have a separate rate. And they're typically tied to like the five-year treasury. But right now we have a blended rate of about 7.28. It's great. We thought we were going to be much better when we first underwrote this property, but it's still pretty awesome compared to what else is out there right now.

Starting point is 00:34:37 Yeah, I was going to say, it doesn't seem that bad. And I did want to ask, like, did you have a plan B? because obviously, you know, you all handled it meticulously and beautifully, but let's say the SBA had not panned out. Did you calculate how this project would have turned out had you had to go the conventional lending route and what the rates would have been in any other scenario? Or were you just kind of going all in hoping that the SBA thing worked out? We had been shopping for a new loan for, gosh, maybe six, seven months before we actually pulled the trigger. We talked to every single lender or broker.

Starting point is 00:35:13 we could possibly get in front of who was doing hotels. And obviously, you know, the interest rate market for commercial was a little bit interesting in the past year. So there were some hard conversations and not everyone wanted to take on a hotel. But we were entertaining some additional, you know, pretty much going into another hard money loan with a little bit of a better rate just to buy us another couple of years until we could do something more long term. That would have been, I guess, the backup plan and just try to get the best rate possible.

Starting point is 00:35:42 again, just to buy us more time, get us more operating history. And then when the time is right, we could strike with either the SBA or a better conventional loan. Yeah. Yeah. The last exit strategy, and obviously is this something that we didn't want to do, but there was always the option to flip the hotel as well because we had taken an asset that needed a bunch of renovation. We did all the renovations to it, furnished it, very similar to what we did with the short-term rental route. So there was always that option to sell it, but obviously we wanted to keep it in our portfolio. and run it as a beautiful boutique hotel that it is.

Starting point is 00:36:15 Of course. And I mean, selling it, I'd imagine, also be kind of hard simply because whoever's buying it would also probably have the same lending issues or lending difficulty that y'all would have faced. So honestly, it's amazing that you were able to pull off the SBA, 7.28%. Congratulations.

Starting point is 00:36:31 You get through this deal. Were you able to pay off your investors? Yeah, absolutely. So we brought in that $1.2 million of private money, like we said. So when we did the refi, we paid off our bridge loan. We paid off our private money lenders. And we had already been operating for a few months. So we had enough like working capital to keep us afloat. So yeah, we exited that loan, those loans pretty well. And everyone made some money along the way, which is pretty cool.

Starting point is 00:36:58 That's amazing. Okay. So give us the scope today where we're at today. What's the top line revenue and bottom line revenues so far for this deal? So we've been open since May of 23. So in just under a year. and I think our top line revenue is just above 800,000, which has been pretty awesome. We had a very, very good start. We actually started in the low season in Palm Springs, which was the summer, but we still did very well considering the summer. And we are, I think, at about a $400,000 NOI at this point. Wow.

Starting point is 00:37:32 Yeah, our goal is to hit between like 5 and 550 for the valuation that we're shooting for. So we feel good about it because we're getting. into the peak months of Palm Springs. So March, April, and May look really, really good for us. All right. So let's math that out. If you get to $5.50 at a 10 cap, that'd be a $5.5 million, a hotel. At a five cap, you'd be at $11 million. So you'd probably slide somewhere right in between there at 7.7.5. So this hotel now worth $7.8 million if you get to that $5,000 N-OI number? So Palm Springs hotels traded about a 7.5 to an 8.5 cap rate. So if you took like an 8% cap rate conservatively, we would probably be around a $6.25 million

Starting point is 00:38:16 valuation at about $500,000 in NOI. Hey, that's not bad. And what is your total all in on that property? Our total all in on that property is, I would say, about $4 million. Good. Nice. Okay. So just a couple seven figure, you know, numbers there added to everyone's net worth cumulatively.

Starting point is 00:38:36 No big deal. Yeah. So tell us, I mean, obviously, I think. I think that's amazing, $800,000 top line for 10 units for a hotel. I mean, that's really, really good. I mean, just to put into perspective for some of the people, some of the smaller investors out there, how does your hotel compare to your STR in terms of cash flow and time and effort? Is it 10 times more work running a 10-door hotel than running just a single family residence as an Airbnb? Oh, yeah. It's definitely a lot more involved. And so originally, Rob, we wanted to go with the staffless model. And that's kind of what we planned to do at first.

Starting point is 00:39:12 We thought, hey, we're strong in Airbnb space. Our partners manage over 26. We can totally do this. But we quickly learned right away that we'd be a lot more profitable if we operate it as a true hotel. So the difference being is we have staff on site. We have two amazing, amazing incredible hotel managers. Shout out to Michael and Katrina. They're absolutely wonderful.

Starting point is 00:39:32 They have a hospitality and a food and beverage background. So they're there full time. We have an assistant hotel manager that's there. We have two cleaners on. staff with a third that comes in rotating and then we have a handyman on site as well. So there's a full staff that's very, very involved. With Airbnb's, a guest checks in. They stay for a couple days and they check out. As we all know, with a hotel, we have to provide the option to have a room turned over each and every day. So right off the bat, the staffing, the operational costs are

Starting point is 00:40:00 much more expensive. It's actually pretty incredible because our short-term mental portfolio does pretty well generally, but right now the hotel is, it's around a $289 ADR, and then we're occupied around 81% year-round, which is pretty spectacular for a hotel. Wow. Yeah, it's really good. Yeah, the average hotel in the United States is around 60% occupied, where ours is, you know, around 81%. It's a relatively new hotel.

Starting point is 00:40:28 So it's pretty good compared to, you know, our short-term rental portfolio. We're able to do more with less, essentially, but it definitely comes with more operational challenges, of course. Man, you guys, you guys are so, you kind of embody the spirit of true real estate investing and being an entrepreneur because you guys take smart calculated risks. You pivot into business ventures that are smart, that play on your strengths, and you run into challenges. And instead of folding the cards, you're always looking for, all right, well, how can I get

Starting point is 00:41:06 past these challenges. And then hearing you talk about it, you just make it sound so I don't want to say easy because it doesn't sound easy, but you just, you guys, the way that you approach things is is so smart. And so as you operated this boutique hotel for a year, what have you learned from operating? Because you just like, yeah, we just decided to staff it and you heard all these great people. And right, like that just doesn't come easy. So what did you learn throughout this process and and how have you made changes to the business? We are coming up on our first year in May of operation. Gosh, we've learned so much.

Starting point is 00:41:42 I think you touched on something really important. It didn't come without his challenges. We may make it look easy. It was not easy, but we're really big on problem solving and doing it as quickly as possible. But what we realized, and it was a little foolish of us in the beginning

Starting point is 00:41:57 to think, oh, yeah, it's just one big Airbnb. Apply the same systems, right? Absolutely not. Some things carry over. yes, but a lot of challenges came up with a commercial zoning. Commercial is great because you have more flexibility on the use of the property, but the insurance requirements are different. Your property tax bill is crazy. You know, you have to think about the other types of business model. TOT tax for hotels is very, very different, right? There are so many other things to consider that we just didn't

Starting point is 00:42:28 know what we didn't know at the time. We just figured it out as we went along and just did the best that we could just to reposition the property and continuously optimize it. I think we're still learning, again, getting into our first year completion in May, we're still learning a lot about how to optimize the property. But we think that we have done a pretty good job so far and we're very, very happy with the product. Even though we were used to working in the desert, Joshua Tree is the high desert of California, whereas Palm Springs is the low desert. So Joshua Tree doesn't get that hot for being the desert, Palm Springs can get like 125 degrees. So even though we put in brilliant landscaping that was all desert plants, within the very first summer, all of our plants fried. So we had to

Starting point is 00:43:12 nearly redo the entire landscaping despite getting desert plants. So just the uniqueness is of learning a different market, really, and what guests like in that unique individual market was a big, big challenge for us. But, you know, we've been working through it. We're so blessed in the end that we ended up launching a beautiful boutique hotel with staff because one thing that we've learned in Palm Springs is that market is a luxury market. And so people expect to get catered to in Palm Springs. So there's a couple of competitors of ours that are absolutely beautiful. They're stunning as well, but they're staffless. And they don't necessarily do so well because, again, people don't want to go to Palm Springs, pay a premium and clean their own pool and have to clean their own rooms every

Starting point is 00:43:57 week, they like, or every day, I'm sorry, they like to have a staff come in and do that for them. And so that was a, you know, a big benefit of operating it like a true hotel and not this staffless, keyless model, which does work, but in different markets. The last thing that I'll throw in is for those of you who are considering a boutique hotel, some people don't really think about this, but it's a really great way to add revenue is through a liquor license. We learned this process and applied for a liquor license. we were building out the property, it was approved.

Starting point is 00:44:29 So that helps us bring an additional revenue, not just through, you know, making cocktails on site, but there's actually specific, again, speaking in California, but specific liquor licenses that allow like mini bars, right? So ask yourself how you can bring in additional revenue by like leveraging that market and the needs of those customers. Liquor licenses are really, really great way to add a revenue. Highly recommend it. And the process was not as painful as we expected.

Starting point is 00:44:56 Yeah, that's the gold nugget right there. Give us a, let's know, before we close out today, what is the name of your hotel so people can go and look this up? It's Yara Palm Springs, Y-A-R-A, and then we're also on Instagram at Yara Palm Springs. We tend to do very, very well on Instagram. So give us a follow there. Well, that's amazing. Okay, so we'll leave your contact information.

Starting point is 00:45:15 If anyone wants to connect with David and Amanda directly, we'll put a link to their hotel down in the show notes. Same thing. Me and Henry's information will be down there if you all want to connect after the show. Thank you, David Amanda, for coming on. And absolutely amazing show, very inspiring. I wish that my hotel ownership journey was as beautiful as yours, but we just finished the renovation on ours.

Starting point is 00:45:36 So I see the light at the end of the tunnel. And I'm excited to hopefully be able to share that story with a story half as good as yours to the listeners at home. So thank you guys so much for joining. And we will catch everybody on the next episode of Bigger Pockets. Thanks for having us. Thank you so much. Thank you all for listening to the Bigger Pockets Real Estate podcast.

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BiggerPockets Real Estate Podcast - 908: $400,000/Year From One Unique Rental Property w/Amanda and David Fornelli

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