In late February Mrs. C. and I closed on a 6 unit apartment building. This building had 1 2 bedroom unit, 2 1 bedroom units and 3 studios. This building had good bones and most of the units were rented out. It’s located next to the regional airport and on the same block as the police station. We paid $171,000 for this property and have a 5 year commercial loan on a 15 year amortization, which we had to put 30% down on.
Combating Poor Operation:
The biggest problem with the building was how it was operated. When we bought it 5 of the 6 units were rented to long term tenants. The owner repeatedly remarked that “everyone loves it here! No one ever leaves!” Well, the reason they never left is because they had deals that were too good to be true. All utilities were included in these units and the rents ranged from $340/month to $750 / month. Far bellow market rate for the apartments. Market rate for a studio with utilities included would be around $700 to $750, for a 1 bedroom $800 to $850 and a 2 bedroom $900 to $950.
Although the building had 3 separate electric meters, all the meters go to different parts of the house and were not separated by unit. The owner kept the gas turned down to save money on the heating bill (the furnace was also a 1970s/1980s model furnace). The result was that tenants were cold, and cold tenants plug in inefficient electric heaters, which caused sky high electric bills. Fuses were also blown often because the constant use of several space heaters overloaded circuits.
Turning Into Short Term Rentals:
All but 1 of the tenants were on a month to month lease. We sent letters to all tenants offering a buyout and a full return of their security deposit based on when they moved out. We gave a total of 60 days notice, but the sooner they moved out, the more money they would receive. We offered a similar deal to the tenant with 10 months remaining on his lease, but of course with the note that we were not trying to break the lease and we would honor his lease if he chose to stay.
We eventually got all of the original tenants out, with us only needing to go to court for one of them. We spent just shy of $4,000 on buyouts, not including returned security deposits.
Every unit needed a minimum of new paint, including ceilings and new flooring. Most of the units have required more than this with us patching walls, fixing wiring, swapping out lighting fixtures, refinishing cabinets, and other rehab tasks. We replaced the sinks in 2 units and the shower in 1 unit.
Every unit also needed a fridge, a stove, beds, bedding, a couch and other furniture, towels, etc.
The building as a whole needed a lot of investment as well. We added a laundry area on the enclosed front porch, which has cost us around $3,500. We installed 2 stacked washer/dryers and a large counter to fold on. There was previously no plumbing or electrical ran to this area, so this was a big change. We also added 2 gravel parking spaces.
We replaced the 1980s furnace with a new high efficiency furnace/central air unit, and replaced the 40 gallon hot water heater with an on demand hot water heater.
Between setting up the individual units and upgrading the building we have spent over $50,000 since we purchased the building.
What I Learned Running Short Term Rentals:
- The money you can make, especially in the summer is amazing! In July we only had 2 units ready for rent as short term rentals. With just these 2 units we grossed over $7,000 in July. With 4 units as long term rentals next summer I’m sure we can hit somewhere between $10,000 and $14,000, plus the $1,250 base we have coming in from 2 long term rentals.
- Advertise the negatives! Short term rentals are all about expectations. We initially tried to “sell” the property, and highlighted all the positives, while down playing the negatives in our ad copy. We have since adjusted this and highlighted the negatives first.
- A 4 star review is terrible. I have a visceral hatred for skewed ratings. Airbnb follows a skewed rating system, which I didn’t realize until they suspended our listings. In a true rating system using a 5 star method a 1 should be terrible, a 3 would be acceptable, a 4 would be very good, and a 5 would be excellent. This is not how Airbnb operates. A 4 is seen as terrible, but they don’t tell Airbnb guests this. Rating someone a 4 means you want them to be delisted. With an average rating at 4.3 we were delisted. Airbnb expects hosts to maintain a 4.7 out of 5 rating. This is frustrating because you often get 4 star reviews with nothing but positive comments. This is especially frustrating because 2 of the metrics you have little control over as a host; location and price. The building is where it is and people can see its location prior to booking. The price is also based on supply and demand factors and we use Airbnb smart pricing.
- Get That 5 stars! With Airbnb you MUST go above and beyond to get 5 star ratings, while setting low expectations because anything under a 5 is terrible. I tightened up our pricing range to prevent issues on both the low and high end. Someone renting a unit for $60 a night is more likely to cause issues and complain/leave a bad review, while someone paying $300 a night is more likely to question the value.
- Noise is tough: With a 6 unit building there are likely to be other guests. We initially allowed a local tenant to stay on a month to month in one of the studios who was not used to apartment living. This local tenant who was paying $750/mo cost us several bad reviews. He was “comfortable” in the space, and garnered several noise complaints. Sticking with the whole building being STRs is better than having 1 or 2 LTRs in the building. We will eventually transition to having 5 of the 6 units as STRs.
- Insurance is extremely expensive for multifamily properties…shop around. We originally were paying just shy of $500 a month for insurance on the property, Mrs. C. shopped around and got our insurance reduced to around $280 per month.
- The payment is FAST!: Airbnb collects money up front and distributes to the host 24 hours after check in. I have someone about to stay for 45 days and I will get the whole check on their 2nd day.
- Owner storage: We have an owner closet in most units to store cleaning supplies. In the shared laundry area we have a large closet for all the extra bedding, towels, and other supplies. This is really important. We have a large garage on the property as well and I plan to store extra appliances in it. We had a fridge complaint and I ended up buying a fridge (not on sale). I want to buy my appliances on sale and having them already in storage at the property will make it easy to swap if needed.
- Offer large discounts for long stays in the off season: In the summer we were mainly booked with 1 to 4 night stays and were booked solid for most of the summer. When summer was over our bookings dropped like a rock. We had a couple opportunities to get long stays that fell through because we didn’t give enough of a discount. For example, we had someone wanting to stay in our 1 bedroom for 30 days, but wouldn’t budge off a $35/day desired price point. We didn’t want to go that low and missed the deal. For the month in question we ended up booking 2 nights at around $100 each. We took in $200 rather than $1,050. We also didn’t drop our overall prices fast enough for the off season.
- Details matter: Have a checklist for cleaning / flipping the units. It is very easy to miss something and the guests will notice and allow that one thing to be the difference between a 5 star and a 4 star rating. Following a checklist mitigates this.
- It’s easier to work on an empty building: Construction causes noise and you don’t know the sleeping habits of guests. I would typically only work on the building from 0900 to 1500, and attempt to keep the noise level down, but I still garnered some complaints. The most difficult fixes were plumbing related. It was difficult to find windows to shut off the water for upgrades. Doing any majore renovations is best left to the off season. I was trying to get the units running in the summer so I had to do the renovations while people were staying in the building. The final unit is about 75% complete and I will finish it during the winter.
Overall I’m very happy with how this building has turned out. We have spent far more money than I expected on this property, however we have added a ton of value and for 2023 the property should generate us roughly $40,000 in positive cash flow, while paying down over $5,000 on the mortgage. We have also increased the value of the property from the $171,000 we paid for it to closer to $300,000 and will do a cash out refi if rates go back down. We are still learning and have a lot more to learn about operating short term rentals. We plan to get at least 1 single family home as a short term rental over the next year.
Do you have any short term rentals? What have you learned operating them?