In this episode, we are going to talk about how not to implode on your short-term rental business.
Video Transcript
00:00:00
In this video, we’re talking about how not to implode on your short-term rental business. So stay tuned.
00:00:17
Hey, welcome back. Host nation to another episode of Vacation Rental Machine I’m Julian Sage with John Bell. And in this episode, we’re talking about a subject that really isn’t ever talked about, which is implosion of your short-term rental business. Now, a lot of people, when they get into this business and they see the high cashflow numbers, they get really excited and they want to scale as quick as possible because they say, Hey, if I can make 1,015 hundred, $2,003,000 on a single unit or a single property, or what if I could just take, you know, a hundred thousand dollars, a million dollars, $10 million, and then just dump it into as many properties as I physically can. That would make sense, right? Because if you could, if you could do it with a thousand dollars or if you could start with a thousand dollars or, or would it be better to start with a hundred thousand or 10,000 or, you know, 10 million.
00:01:14
So people often think that the best way that you can get the highest return is just with volume, but what we often see and really strongly, we S we saw some of the after-effects of that rapid growth is this implosion. Now I know it’s quite contrary. And a lot of what I personally believe the media or, or venture capital venture capitalist tried to produce is this idea that you need, you need rapid growth. Do you need this, this blitz scaling model in order to scale your business in order to succeed? You know, you see it in the Airbnb story, you see it when you see these news articles, and maybe Saunder just raised, you know, $10 million or $50 million with their series, you know, ABC or D or E, or this new company that just started up and they just acquired a hundred units in Miami or 300, whatever it is, or you might see people that are, you know, selling maybe even courses or things like that.
00:02:19
And they’re saying, Hey, you can use everything on a business line of credit, or you could take out credit cards and you can scale your business rapidly with 0% interest. And now you can get all these units. Now, all of that sounds really nice because you could just, just get a bunch of units, you know, get a bunch of properties. But when you don’t have the experience, you’re trading that money really for time. You’re really saying I am trying to grow as quickly as possible, and I’m going to figure things out as I go, rather than the approach of I’m going to figure things out. And then I’m going to feed it with more money to accelerate that growth, which are two very different things. You know, there there’s that opportunity costs, which a lot of people in the venture capital space talk about, which is, you know, the opportunity cost of that, that loss of time.
00:03:08
And in the tech world, when you are trying to accelerate your growth, maybe there’s another person that comes out with a similar software. You’re really trying to compete as far as market share. But when we’re talking about short-term rentals and, and specifically in the rental arbitrage space, there’s a lot of other variations, or there’s a lot of other things that play into your growth, which is what we talked about in the last episode with predictability and scaling. When you have a bunch of money, the problem isn’t the money. You know, the problem is not the money in our case, which, you know, we didn’t have any issues with acquiring money. Well, we did see issues with was scaling with that money and being able to grow predictably. Now, predictable growth is the big thing here. And if you are just starting off and you get a bunch of money thrown into you, how do you know how you’re going to be growing?
00:03:56
And how do you know how the properties are going to be performing? We’ve seen the time and time again. So John, maybe you can share some of your insight as far as you know, when you just started off you, you know, you scaled from zero to 24 properties in 18 months. You know, we, we talk about this story a lot, but you didn’t, you know, how did you grow and why didn’t you start with maybe the traditional way or the way that people might think, which is, you know, lots of credit cards or venture capital backs. What, what was your thought process?
00:04:27
You know, I thought about it like this. I don’t need a large sum of money to kind of get started because I’m not really producing a manufactured product. I don’t have to go out and tool machines and buy bulk orders and things like that. That’s not the type of business that I was looking to get into again, you know, let’s take it all the way back when I first started, I was part-time right. I mean, I just did this for an extra few thousand dollars a month. And what I found was, Hey, I am making a few extra thousand dollars a month, but at the rate that I’m appeal, emulating these profits, I could actually reinvest it into something else. And what I thought of that, that made this whole thing, self-sufficient it really took my one investment into the furniture, which you can also rent, or you can also kind of come up with ways to reduce that overall lump sum.
00:05:23
But that one helped fuel all the other ones that came behind it. So I found that this business, unlike most other businesses, didn’t require a hog of cash upfront just to just get started. Now, could I have gotten to where I got to with a lot more money? Yes. But I still wouldn’t have the lessons that I’ve learned along the way. And that to me is more important than just boom. I got a hundred units. That’s great. Big pat on the back, you got a hundred units, but yet everything is going haywire, right? I mean, you don’t know, or you hire too many people or your overhead is a little too much. And overhead is really the killer of most businesses, right? When you have a large partner that’s sucking away, you know, even 30% of the business that could make you run on fumes.
00:06:22
Even though you have a hundred units, it’s nice to say, but on paper, when it gets to all the way down, if you know that, Hey, you’re still having to dump money into it. You didn’t build a sustainable business. It, it needs to work for you at the same time. Being smart about what you’re doing is more important than starting out with this big bang. I’d rather see somebody go through kind of what we did build up the knowledge built scale on their own. And then, Hey, somebody comes in and says, Hey, here’s, here’s some money. And the reason why that’s important is you’re not going to give away too much. At that point. If you take it on earlier on, you’re going to give up way too much. It’s like going to the shark tank, right. And you don’t have any financial numbers. We all see what they do.
00:07:11
It’s like, oh yeah, give me, give me 40%. Or you don’t know what you’re doing. Give me 51%. Now let that person grind it out for a few more months. Maybe a couple more years, get some good numbers going. If they went back to the shark tank, they probably would get, give up less equity. And that’s what we’re talking about here is just being smart and just not necessarily getting in over your head and then having a controlling person telling you, Hey, this is what you gotta do. You gotta go do this. I’m sorry. You can’t sleep today. You, you got to go out and you got to do that. It’s oh, you think this is not a good business anymore. Oh, okay. Well, I’m sorry. You still have to go out and do it because you owe me, you change who you work for.
00:07:54
It’s the same thing. Even with taking a big line of credit or using big credit cards, when you do that, it’s just, you can’t stop. Right. You have to pay it back. So if you don’t have the means to generate that same amount that’s needed for the minimum payment, or just to knock down the debt, you’re stuck in the business and you’re still in the rat race. I found that this business takes anybody out of the rat race. You don’t need to either work. You can build up a nice, sustainable living to get yourself out of the rat race. And you don’t need to kind of recreate it again, just by taking larger sums of finances from either a creditor or somebody else. And you know, we see this, we see this from one, our students, people that kind of come into the VRMs program.
00:08:45
We talk about stuff like this. And it’s some people, of course, like Julian said, hear about fast money. And everybody thinks fast money. They just throw a lot of money and they make more fast money. It’s just like, you know, crypto where like, Hey, we go, I’m going to put $40,000 into this one thing. And then, you know, you may be compound a few days. And then what a rug pull. Like you didn’t have any experience in this space. You didn’t know how to vet it efficiently enough to avoid the risk of doing something. You just heard that, Hey, they’re giving away 8000% over here and that’s what I’m going to do.
00:09:28
No. And one of the big problems that I also see is that when you do start to scale and like what we see in our own business, the, at a certain point, and I would say probably around that 15 to 20 unit mark, it costs a lot more to run the business. It costs more because now you need more people. There’s more oversight. Your margins start to decrease slightly, and you really need to focus more on optimizing what you’ve built at this point. You need to get your time back. You need to get your systems on lock. You need to get your, all your, your, your, your processes with how people clean the properties and inventory the properties and maintain the properties. All those things really need to be on lock and at around the 15, 20 unit mark, anything less than that, it’s a lot more easier to manage as an independent solo, you know, solo manager, if you’re managing your own portfolio.
01:10:19
Yeah. You can do that. You can do that from a very affordable PMs. You can do that with very minimal maintenance and technology and you can get by. But what we often see is people that try to rapidly scale, and they’re going from one to, let’s say, 30 units or 40 or 50 however many units. They don’t have their systems. Well, they, they, they’re very messy. Their reviews start to hurt, or they’re not able to generate enough revenue off the properties because, you know, they’re, they’re just not performing well. And that’s when somebody else maybe goes in and sweeps up those properties and they end up selling their portfolio, or because they don’t have the experience with scale, they don’t feel confident. So they hire a manager. Who’s going to be taking a percentage of that. And now they’ve got to pay the manager and now they have to pay their, their debtors.
01:11:11
And, you know, there’s everybody, that’s taking away a little piece of the pie and then really you’re left making even less money than you did when you had less properties. So it’s not necessarily about more properties is more money. It’s really about, you know, how well are you running your Vacation Rental Machine? How well is, is this optimized? You know, which is what we try to teach in, in, in the VR and formula is that you can avoid a lot of those mistakes at, you know, at the beginning. So that way, when you do scale, you are well more optimized. So one part of implosion that we typically see is getting way too much capital and trying to scale way too quickly, not having the systems to be able to scale effectively and your margins just being very small and people just getting washed out in that regard. But John, there’s also another reason that we see a lot of people implode in the short-term rental business. That w w what’s the second reason,
01:12:06
Second reason is just having too many in one location. So for instance, my personal example, I got up to about 38 in Alexandria, which is my backyard, right? And I went through the winter season and it was like, oh my God, wait, my, my cashflow is, has substantially started to get low. I was able to meet all of the obligations and everything, but it made me realize that if I continue to 60 to a hundred, I’m still going to have this seasonality kind of flow in and kind of siphoned off a lot of my just ongoing month to month revenue. Now I can definitely know that going year to year and just reserve high season profits just to carry me through the low season. But I also wanted to look at it like, how do I create this like a paycheck, right? Where I get the same amount of money every couple of weeks or every month.
01:13:05
So that had me to scale outside of my backyard. I needed to go to a market where my seasonality was a little bit different, where I possibly had a high season where my low season here would be hedged off by what I was earning at the other location. And then how could I marry that up to make them all consistent or make a even flow of cash to just come to me monthly? And I see that there’s a lot of people that just want to go in one location. We talk about some popular destinations for short-term rentals. I know that there’s a lot of people that bring up places like pigeon forge and stuff like that. And there’s a dense area of just vacation rentals right there that could be controlled. Let’s say by one person that one person, if something were to happen to that location would sustain a large loss.
01:14:06
And I thought that, Hey, yeah, something could happen in this DC market and could slow down vacation rentals fully. One of the biggest things that we all have to deal with is regulations. If regulations instantly in the area where I was dominant said, Hey, we’re not going to allow short-term rentals anymore. My entire business at that point would be dead. So it’s important to when scaling to start look elsewhere, just to make sure you’re hedging off a bunch of other risks. There are always risks in the business in any type of business. So you just got to know it and just try to plan against it. One of those best ways was for me to
01:14:45
Bred out by John. And he brought a briefly, which I think is a really good point is far as timing of the market and the seasonality that you’re in. So the third way that we often see people implode in their business is coming into the market and not the right time and not understanding that they should have some type of reserves or being well-prepared for when that slow season hits. So if you just get in, let’s say the beginning of slow season. So maybe if you’re in the DC area and you get in during the September timeframe, now that’s going to be the start of your slow season. And you’re going to have around six months where you’re not going to be having super high nightly rates and your occupancy is going to be a lot lower. So you have to account for that, or, you know, are you able to go break even, are you able to take a little bit of a loss?
01:15:33
Do you even know how to be able to modify your pricing that way you are able to keep your place occupied and not just lose your entire property and having to pay extremely high rents? You know, if you are prepared for that, if you are prepared for that slow season, it could be a great time because you could maybe get in some longer-term tenants, you could get a feel for how to operate, and you might be able to get some more reviews that way when the high season comes, you can be better prepared for that, that take off. But if you come in and you’re not prepared, and you just think that you’re going to get a bunch of properties during the slow season, and now you don’t have any cash reserves and you just expect that things are going to go magically well, without even knowing how to be able to optimize your pricing or how to be able to fill your properties.
01:16:20
You know, we often see people implode on their short-term rental business because of timing of their properties. So just to kind of recap, the three different ways that we see people implode on their short-term rental businesses is one is getting way too much capital and trying to scale way too rapidly without learning how to be able to optimize and operate the business, as well as having to give up too much of their profits and having slim margins. The second way that we see people implode is through not being able to diversify their portfolio enough. So they’re too focused on one particular market on one particular type of property or asset class, or one particular type of seasonality. Being able to spread out, being able to have properties in different seasons, different locations, different counties, all of these things can play a factor because if regulations change, if the season changes or if you know your HOA or your condo, or that particular county, whatever it is, rules change, you want to be able to have multiple streams of income coming in through your properties.
01:17:26
And then the third that we talked about was timing of your short-term rentals. And when you are acquiring how much you’re requiring, and really it comes down to a capital allocation standpoint, how are you allocating your capital? And do you have the strategies to be able to mitigate that slow season, keep your places occupied, use that dynamic pricing and know how to be able to operate the business to, and being prepared for, for what is the common, which is the slow, slow months, slow season. So with those three things, if you can learn them, understand them before getting into this business. And before you go out and try to raise a bunch of money, don’t be the person that gets venture capital goes into one market in one building, and then all during right before slow season, that is a recipe for quick implosion, very quick implosion.
01:18:20
So if you want to avoid that, do the opposite of all three, you know, grow, maybe grow a little bit slower, try it yourself, get a feel for this business and use the revenue that you’re making to really dictate how you’re going to scale diversify, try operating a property in a new location, or, you know, once you get to a certain point, you know, start looking elsewhere, what are some other ways that you can start to grow your business? Where do you want to operate in some different locations? And then the third is also timing. Don’t just come in, jumped in really excited that you’re going to be getting into this business and making a bunch of money and throw it all into the wrong time. Really again, use your user capital as a more of a lever and, and understand that it’s really more of a capital allocation at this point, once you’re in the business.
01:19:11
And those are the three ways that we recommend, and that’s how we’re still here today. That’s how we continue to be here in the future. And if you want to be able to know our game plan or our strategy for how we plan on growing our business in 2022, then watch the video, our last video, where we talked about our power play strategy of how we are going to be growing our short-term rental business, moving forward in the future. We hope to be able to see you along there. Like I always say, keep on hosting and talk to you all in the next episode.
01:19:40
And just a bonus. This one does happen. It definitely is a way to implode, but we were talking about really catastrophic ways to implode, but this one still probably needs an honorable mention. And that is trying to do everything yourself. That means cleaning. That means the accounting. That means setting up for taxes. That means, you know, you’re just running around everywhere. You’re wearing yourself out and you are almost guaranteed to implode. At some point, we like to sit right here at our homes behind our cameras, run our businesses and enjoy the Vacation Rental life. And we want to make sure that you’re trying to do that exact same thing and not just running around with your head cut off because that, that can definitely lead you to failure real quick
02:20:34
Burnout. Yeah, people, people get a lot, a lot of burnout in this business. If they try to do everything themselves, we don’t want you to be one of them.
02:20:42
Hey, host station, would you like to work directly with Julian and I to help you start and scale your short-term rental business, go to Short Term Sage dot com forward slash coaching to attend our step-by-step training and learn how we can work together. Looking forward to talking to you soon.
