The Science of Flipping - Airbnb vs. Long Term Rental

Starting point is 00:00:00 Yo, yo, welcome back to the Science of Flipping podcast. I am your host, Justin Colby. If you have never listened to this podcast before, This is all about teaching you the systems, tools, strategies, implementation for you to become an expert real estate investor. Not just wholesaler, but expert real estate investor. I myself have done over 1,800 deals. I'm actually creeping on 2,000 over the last 14 years. And I'm actively doing deals in 12 different states. And so hopefully you can get a lot from this podcast. If you're listening to this on iTunes, please give me a five-star review. And if you are one of the fortunate ones that has listened to me

Starting point is 00:00:56 and gone over to YouTube and actually subscribed to my channel, then you are likely watching this episode. YouTube.com forward slash Justin Colby. Go subscribe and start watching these podcast episodes because then you get to see me. And sometimes I do some funny stuff. So this is an important episode for those that are looking to buy rentals. Now, everyone should be looking to buy rentals because that's what you are in real estate for, right? You're in real estate to actually generate wealth. As much as ATM is considered like an ATM to me, right? It spits out a bunch of cash. Really, why I got into real estate investing and why I am now buying a bunch of rentals is because I not only

Starting point is 00:01:45 want the cash, I want the wealth. I want the wealth accumulation from buying rentals. And we're actually virtually buying rentals right now in Oklahoma, both in Tulsa and Oklahoma City. And just yesterday, I wanted to buy a home in Fayetteville, North Carolina, but got beat out by another investor, unfortunately. And so I'm also wholesaling virtually, but also buying rentals virtually. And so this subject will be about when do you Airbnb a rental and when do you keep them as a long-term rental? And so there's a couple pieces of advice I want to start out with is if you are considering a home that you're looking to buy, whether you're negotiating the deal yourself, you're buying it from a wholesaler or the MLS, the first place I

Starting point is 00:02:29 would look if you're considering it to be an Airbnb is what is on Airbnb in the general area. And I would probably go out within a mile or two, but you really want to make sure that there's even Airbnb interest in that area. Right. And then so once you do that, and I probably wouldn't go out much more than two miles. Right. Once you do that, I would try to get as close to the actual house as possible. Then you want to start looking at how much are they renting for and then look at the pictures, obviously, to see what type of remodel or, you know, some properties become like bachelor Airbnb type things or bachelorette Airbnb type things and when I say type things what I'm really saying is like in Scottsdale if you go to

Starting point is 00:03:16 Airbnb you will quite literally see like a home that was remodeled painted pink has Barbie rooms has selfie rooms I, it just screams bachelorette style rental, right? Like guys would likely not rent that. And so I bring all that to light to say, you need to also look at the pictures and what styles that these Airbnbs in, by the way, some might not be remodeled at all. They just might be in a good location that people want to stay in for vacation, right? And I bring all this up because I'm looking at buying a condo in Scottsdale. And I'm debating whether you do a remodel or not because it's quite literally in Old Town Scottsdale.

Starting point is 00:03:57 This is where everyone wants to be because of the bars, the restaurants, the nightlife, etc., right? The shopping. And so do you really need to go in there and spend a bunch of money making an Airbnb or could it just be in the right location? And those are the things that you need to be looking at when starting to consider, am I going to use this property as an Airbnb? So again, first of all, go to Airbnb, go no more than two miles out, start looking at how much these properties are renting for do like kind. And what I mean by that is like, if you have a three bedroom, two house, you know, two, three bedroom, two bathroom house, 1800 square feet, then look for something similar to that. Don't go look for a five bedroom with a pool. Like

Starting point is 00:04:43 don't compare something that is not like kind, right? And then start looking at pictures, start understanding, you know, this home's getting $500 a night because they did a full blown remodel. They made it really look cool. They have a pool table. They have this, they have that. This home's getting $300 a night because it's oak cabinets just in a good location, right? So feel that out.

Starting point is 00:05:03 And then what you would want to do is potentially even contact Airbnb to talk to them about, you know, how active these are. And then you can look at the calendar schedule and see how booked out they are, right? Which is the other, the point number three, if you have to have this in three points of what to do with Airbnb, how booked out are these houses? Are they super readily available? You know, and when, right? So again, old town Scottsdale, like spring is hot, hot, hot, hot. You can charge super top dollar, like unreasonable amount of money because spring training is here, right? So a lot of people, like a ton of people for the month of April and part of May and, um, um, March. So half of March, all of April and half of May, that is, I mean, you can charge a ton, like 3X right here in Scottsdale, Arizona, primarily because of spring

Starting point is 00:05:55 and spring training. And so you want to also know the seasonality of these places, right? That is a big seasonality, right? Having the fact that we're in Arizona and snowbirds come here a lot. So obviously the winter is really seasonal. Summers aren't great. And so lastly, the point number four would be math out the average cost. And be conservative. If you see someone renting their Airbnb for $500 a night, maybe you put $400. Maybe you put $350.

Starting point is 00:06:23 Because it's probably averaging out over the year, you'd probably end up closer to 350 than 500. Make sense? So you really want to just look at comps the same way you would as if you were flipping a home. What is comparable on Airbnb? How much does it cost a month? You know, how occupied is it? What does the calendar look like? Not how much does it cost a month, how much does it cost a night? Sorry, I'm all over the board here. How much does it cost a night? What's the seasonality? How occupied is it? And then what are the other ones around there? What's the condition of the actual remodel if there was a remodel? Now, then you do the simple math. So for example, if you are looking at buying a home for, you know, I'll use the Scottsdale Airbnb idea is I'm buying it for $350. It doesn't need a single dollar. Like maybe I'll put

Starting point is 00:07:11 new carpet in there. So let's call it, I'm in there for $360. Can I make this a 2x multiple? Can I get a 2 or 3x multiple in terms of return, right? Can I make to ten thousand dollars a month making this an airbnb because that would be way more than i could for a long-term rental now let's talk about that let's transition into why you'd maybe make this a long-term rental well first of all um the consistent income right you have a lease for a year you don't have to really worry about seasonality maybe you have a two-year lease you't have to worry about spring or winter or summer. Summer here is very difficult sometimes for Airbnb. Not a lot of people love the summer here. It's hot. You have that consistent income, but it's much lower. As I mentioned, let's just say I buy this for $350. I put some carpet into it. I'm into it

Starting point is 00:08:01 for $360. Let's just make the argument it's going to rent for $2,800 a month, three grand a month. Now that's a good little rental, right? I got the 1% rule, right? I want to be all in and roughly get 1% of all in costs back monthly. So if I'm all in for 360 grand, I want to make sure that I'm making roughly $36,000 a year gross. Okay. That's gross. So if I can do that, it's a good long-term rental. So that's point number one. The point number two will be consistency. Now, Airbnb might get me a 2x multiple, right? I might make $72,000 a year on that same property with Airbnb, but I might have some inconsistency in how I make it. Summer months might be really, really slow.

Starting point is 00:08:47 So I have to cover those summer months mortgages and costs, things of that nature. I might not make 72,000. Maybe I only make 50,000. Was that really worth the headache and issue that comes with having a short-term rental, right? Because you also need property management on the short-term rental because you got to turn that home over every couple days

Starting point is 00:09:04 when new tenants are coming in. So you need to really look at the gross and then net numbers. And then you want to look at what kind of business model you're looking to run. Airbnb is a much more active, passive model, right? Now, yes, Airbnb as a company handles a good portion of it, but you still need to manage whether the housekeepers are doing the things that they need, whether the Airbnb property manager is doing the things that they need to be doing. There's cost to all that. And so a lot of times it's sexier to think, oh, I'm going to buy this as an Airbnb, but people aren't doing their due diligence to make sure it's really that much more valuable, right? That it really does actually make sense to do this. Now, we could go down a deep rabbit hole and talk about the taxes and what type of tax implications the Airbnb is versus a long-term

Starting point is 00:09:57 rental. And I think there's a lot of confusion about usability of an Airbnb, right? So if I bought an Airbnb in Orlando, Florida, because my kid likes to go to Disney World, how often am I able to use that? And the rules essentially are, I believe they're 10% of booked time. Meaning if you have booked, you know, 300 days a year, you're able to use it 30 days a year, right? Which is great. And that keeps it in a business model where you can get maximum tax write-off. But instead of, you know,

Starting point is 00:10:33 telling you all the things that my accountant has told me, I would tell you to talk to your accountant, which would be the last decision-making effort on whether you keep something as a long-term or an Airbnb. Let's just use the example. Airbnb is 2x gross revenue from a long-term rental. You like this idea, but you're also going to be looking to get maximum tax write-offs. You want to talk to your accountant about what's going to help you more in the long run, not the short one year run, but the long run, having this as a long term rental or this is an Airbnb and weigh the pros and cons about the tax write-offs, whether it's depreciation, whether it's the usability of the actual home you're buying. I know a lot of people that kind of work the system and essentially buy homes that they essentially want to live in. Not live in,

Starting point is 00:11:25 but visit a lot, right? Like in Pinetop or in Sedona or whatnot. And they kind of work the system, meaning they might be a little bit breaking the rules in terms of the IRS. And listen, it is up to them to make those decisions. But I tell you, when making this decision about long term rental versus short-term last point would be talk to your accountant about what are the tax liabilities issues and the best option for yourself going into buying that deal so hopefully this helped i know there's a lot hopefully uh you can take some of this and in at very least the minimum i would hope is for you to call your accountant to know the pros and cons of both. And then for you to be able to buy some more rentals because I'm all about wholesaling your way to wealth.

Starting point is 00:12:09 And that includes buying rentals. If you're not yet subscribed to YouTube, go to youtube.com forward slash Justin Colby and watch these episodes live. Not live, but watch them on YouTube. I look forward to seeing you guys on the next podcast. Peace.

The Science of Flipping - Airbnb vs. Long Term Rental

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