STRA Episode2: The #1 Mistake Real Estate Investors Make When Investing In Short-Term Rentals / Airbnb
Manage episode 336005356 series 3070499
Hey guys. Welcome back to the short term rental authority podcast. We are John and Wendy Williams, your trusted authorities on all things short term rental related to help make you the best operator ever. And today's podcast. The, the title that we came up with, which I think is really good by the way, is the number one.
Mistake that we see real estate investors make when the AR thinking about or have started a short term rental business. Right. And I, I would say that number one mistake is actually alluded to and what you just said. What'd I just say business. Oh, I did say business. Yeah. Cause it's natural for you to call it that it's natural for you to call it a short term [00:01:00] rental business.
Well, that's because that's my perspective. Right. But what they're saying is they're investing in short term rentals. Right. And, and you realize that that's, that's the problem, actually, that the biggest mistake is looking at it through the lens of a real estate. Or from the perspective of real estate investing.
Right. Because it has very little to do with the real estate actually. Right. Which doesn't feel correct at all. Right. That feels like, well, I'm buying the house to turn it into a short term rental, tell me how it's not real what right. right, right, right, right. But that actually ends up creating problems.
If you don't realize. yeah. Lots of problems. Yeah. So if I'm, if I'm thinking well, okay, well, what kind of pop problems does that create? Well, number one, you, [00:02:00] if you, if you have the, the property. Yeah. And you're trying to. Operate a business inside of it. I think a lot of people don't even realize that's what's going on.
They're two separate businesses. Yeah. They really are. Right. So you've got the, the real estate that you are owning or whatever, and, and that has to make money. And then you're also starting another separate business keyword, separate business. Which is the short term rental business, which you are operating inside the real estate.
Yeah. And I, and, and even there, I know there's some people that hear that and they're like, I don't get it. Cuz I've tried to explain this before and just that way. And, and it just didn't work. Yeah, I have to. So I started making analogies. So I describe the, the [00:03:00] short term rental side of it. I'm gonna say business is much more like running a re.
It's much more like I'm gonna open a restaurant and I'm gonna serve people, food, and really what they're coming there for is the food, the atmosphere, the experience. Ooh. Right. I think you just said a key word there. And we were having this discussion earlier and I said, you know, it really has nothing to do with the building that it's.
Unless it's olive garden. And, and then when he says, unless it's olive garden, unless it's olive garden, because she really likes the architecture of an olive garden, she likes the food too. Right? I do. I really like that, but anyway, but, but it's not really the building that attracts you. No, no, it's not.
It's the, it's the whole experience. It's right. And, and you would, and yeah, and that, that's kind of the point, right? It's it's not the real estate, the value that you're getting. The whole reason that it makes more money than doing say a long term [00:04:00] rental is because, well, you're actually running a business in it here.
So here's an, here's a good analogy for you. If I owned, cuz this is easier to see if I owned a, a strip mall. Is that what you call those? Like it's a mm-hmm , you know, it has a whole bunch of different. Yeah. Like there's a parking lot. There's in it. There's a bunch of different stores in it. Right, right.
Yeah. And they all open to the outside type. Well, oftentimes there's a restaurant in there. In fact, there's a joke in North Carolina that every food lion has a Chinese restaurant in the same strip mall. Right. Right. And we've kind of tested that and it seems to be true. Well, at least in narrator, still testing that hypothesis, but it regardless, right.
The, the guy that owns the strip mall isn't necessarily the same guy that runs the Chinese restaurant. Right. Right. Typically the Chinese restaurant is leasing that space inside the. because they're the ones that know how to run a Chinese restaurant. The guy that owns the real estate is in real estate, probably doesn't know how to run a restaurant.
Right. And he would [00:05:00] probably never think to himself, Hey, I could get more rent if I own the Chinese restaurant. Right, right. He would realize that, oh, I'm starting a whole nother business. Yes. I'm gonna run it in my strip mall. But what I'm also forgoing is the rent that I would normally be collecting from the Chinese restaurant.
Cuz now I'm paying the rent, right. Or hopefully my restaurant is profitable enough that it pays the rent. I hope so. And then I have both right. I'm leasing the space out and now I'm running a restaurant and, but I don't know how to run a restaurant. So I've gotta go learn how to run a restaurant and like what all the things I need and who all the people I need to hire.
And all of this kind of thing, but for some reason when it's short term rentals, when you just take that away and say, okay, I have this house, but I'm going to turn it into a short term rental people, miss that. Yeah. That really, [00:06:00] what I'm doing is I'm putting a hospitality business inside of this house.
Right, right. And that hospitality business better be able to afford. right. They don't realize that it's an actual, separate business in and of itself. Yes. Yes. And, and that's where you see a lot of people and because people don't make that distinction and maybe because they're looking at it, like it, because it looks very similar.
It's like, well, instead of renting it a year at a time, I'm just gonna rent it a day at a time. It does. Yeah. Well, that's a whole different business. It is. Cause it's not about renting the space at all. It's about the food that you serve there, if I'm using the, the customer experience. Yes. It's all about that.
Yeah. And do you know anything about the hospitality business? Right. Right. Like just like, do you know anything about running a Chinese restaurant? That's a good analogy. I like that one and people get caught up because they'll, they'll go set it up. They'll, you know, perhaps, you know, there's all sorts [00:07:00] of YouTube videos and things you can read and.
Of course you can buy, frankly, and things like that, that purport to teach you about how to do that. The problem is a lot of the people teaching those courses are also real estate investors. Right. right. And, and, and that could be a problem that could be an issue, right. So maybe it's better. Okay. Maybe I should study hospitality and decide, Hey, is that really the business?
I wanna run number one. And then two. once you make that realization, then you start approaching things differently. Don't you? Yeah, for sure. For like what you were just saying, not the property first, right? Not the property first, because one of the things that we've noticed in the, all the people that we've coached is if, if you, if you start with the property first, it's almost.
backwards. Maybe I, it, maybe that's not right [00:08:00] the right word to say it, but it's trying to, you're trying to shoe horn your customer into this property. Right? So taking that into consideration is, is the, the first thing that you need to do is. okay, well, who's gonna be staying in my short term rental business.
Right? Which like, what customer are you going to be serving? Yeah. Which is a lot like saying, what kind of restaurant do you want to be? Right. Do you really wanna do be Chinese? Maybe you wanna be Italian like Wendy, right? The, the olive garden thing. And then you have to start thinking, well, okay, I'm Italian, but am I like a high end Italian place?
Is it that kind of experience where people, you know, go on date night or is. more like middle of the road, like olive garden, or is it that place in the mall that sells pizza? Subro subro cause that I would consider that low end Italian. Right, right. There's still a pizza by the slice in the mall. [00:09:00] I would too.
It's disgusting. Right. But you'll notice all three of those places are in different types of real estate, right? Yeah. That's interesting. So the olive garden is an olive garden. Yeah. The subro is renting a space in the mall. And then the, maybe the high end place is in a nicer part of town even.
Right, right, right. Those, yeah. But the whole point is that they've considered their customer first. Yes. And they know who they are because they know who they serve. Yeah. And then they located the restaurant and then they located, well, where does my customer, well, number one, where does my customer wanna be?
Mm-hmm where is my customer at? And what type of property. does my customer want to beat in? Right. And what, what quality of things am I putting in there? Ooh, that's really good too. Right. So, so getting that down first and we always say, you know, start with, start with avatar, start with who you wanna serve, start with what restaurant you want to build.
Mm-hmm right. Cause hopefully you want [00:10:00] just one, you want a whole chain of these things. Mm-hmm and I know we do, and that's another mistake. Ends up happening with real estate investors is because they're going for deals and value. Ooh, this is another really good point. Mm-hmm yes, they are real estate investors tend to, to think about the, what the cash flow that this particular property is going to bring in mm-hmm right.
And, and the tell people what the problem with that. well, I mean, I think you should be considering that. Well, that's fine and dandy. It is, but the, but the problem is a lot of times the deal doesn't always match up with the customer you're trying to serve. Yes. And that's the point that I was trying to make.
Yeah. And you end up with 10 different properties, right? So you can have a, a, two bedroom, one bath house over [00:11:00] here, a duplex over here in a totally separate part of town. And, you know, a four bedroom over here. Right. And then I've got this place in the mountains. It's from beach house, five bedroom, beach house over here.
Right. And you're serving totally different clients in each one of those spaces. Yeah, you're right. And it's kind of like, okay, I've got an Italian restaurant, I've got a Chinese restaurant. I've got a subro. Yes. And I've got a taco bell. right. And, and a Ruth's Chris up in the mountains. Yeah, maybe a Ruth's Ruth.
Chris would be like the high end floor, right? The nice one in the mountains. Okay. I got you. but the, but the problem with that is now, because I didn't consider that the short term rental side of this really is its own separate business. Now my marketing's fractured. Yep. Right. So every guest that comes through the door, well, I'm not really marketing my duplex to somebody that stayed at.
Mountain house with five rooms. Right. Cause that's not what they're, that's totally different [00:12:00] customer. Right? Right. So now if I really want to get into like taking direct bookings and having an email list and I, I, all of a sudden have this fractured customer base. Right. And if I want to reach those different types of people, now I have to, if I had a hundred dollars to market with, I gotta, well, put 10 on the beach house and 10 on the, instead of spending the whole hundred mm-hmm and saying, Hey, here, come stay at any of these places.
Right. And not to mention they're geographically separated. Yeah. Right. A lot of the times, by a lot, sometimes I got one at the beach and one in the mountains. Right. And it's like, cool. And I got one in Charlotte. right. And right. It's instead of having three in one location that served the type, the same type of customer.
Right. Right. Well, you know, another dang, I just had. So another, I just thought of another, really another problem with that was even if, if you let's say somebody stayed at your, your beach house [00:13:00] and had a really great experience, mm-hmm for example, they, and they, and they want to come back then. And, but the, the time that they wanna come back, your, your beach house is, is rented or even worse.
What if the, the, the bathroom breaks and you only have one bathroom at one of your places, you don't have anywhere to move them to yeah. Cuz your other place, even if you're saying, oh, well I just do beach houses. Well, do they all serve the same type of client? Yeah. And if they do that's awesome. Right?
Because now I can say, well, you know that one's not available because the pipes burst, but mm-hmm we have this one over here. That's just like it. Yes, exactly. It's the same experience. It's gonna be the same type of place. It's gonna be the same level of service and all those kind of things that you would've gotten over here or that you previously experienced, even like you were talking about the person returning.
Yep. Right when they return, they're not really. I wanna [00:14:00] be here in this place, in this house, right in this house. They're really saying I enjoyed that experience. I enjoyed that experience. Yep. Mm-hmm that's exactly right. And you know, this happened to us not too long ago, the, we we're in Charlotte, North Carolina, and as hot as Hades here in the town.
Oh yeah. The, so the air conditioner went out in one of our places and the, we serve families with children. And pets and pets. And this family had like a, a, a small baby. I wanna say the baby was it wasn't walking. Like it was a baby baby, like six months maybe. And you can't keep a six month old baby in a house in the middle of the summer, in the south with no air cont.
I don't know how our ancestors made it through. Well, I probably got climate. I really don't. Well, people. Especially in the winter, like, same thing. Like if the heat goes out in the winter, you're gonna freeze to death. Right. So you [00:15:00] get, you need to place to either, either correct the problem by having portable space heaters or something, portable air.
Well, those are the operational things that we've learned. Right? Yeah. But having some, having a place to move them to is an, also an option. Yes, yes it is. Right. And it, and it better be something that's really similar. Yes, exactly. Right. Cause that's what they're paying for. Yep. So it's hard to take somebody that you know is staying at your.
Like Hilton uptown and say, well, your room's not available, but we can move you to the red roof. right. Even if it's across the street. Right, right. Cause it's just not the same place. It's not, it's not the same experience and they, they're not gonna be happy with that. Yeah. Right. So that, that's a really good point.
Yeah. Yeah. So those were the, the, a couple of things that I, that I thought about, you know, were, were problems with that perspective. Could you think of anything. yeah, I, I, part of it is, here's another big thing that I see. People will get into the short term rental space that come into it from either the real estate investing world or just that [00:16:00] perspective on it.
And because they're thinking of it as, okay, my insurance is this right. And then I'm gonna make it a short term rental. So now I've gotta pay for utilities. You know, I gotta put some furniture in there. Right. But I didn't really think about who my customer was. So I bought furniture on the marketplace.
Facebook marketplace. Oh God. Or battery or worse? LA LA LA worse yet. LA LA baby. We really need a new couch and we could take this old one and put it shortterm rental. We'll get ourselves a new couch. Oh, no, stop. you're killing me smalls. Cause I don't care who stays there really I'll take. oh, right. Mm-hmm
And the problem with that then becomes, okay. You've just made that place a commodity and you're only competing on price. Mm-hmm you're only competing on price. So when things happen, like, I don't know COVID or whatever, [00:17:00] you're now competing with people that are lowering their price. So now, now you're a commodity and now you're just competing on price mm-hmm yes, that's huge. Yep. Well. I like the, the way that the way that we've done it is at well, the, the way that we coach a lot of people to, to do is to think about what you're, who you're serving, what customers gonna be there and then put what, what they want inside the unit.
Right, right. Yeah. So for example, if you are serving families with children and pets, what are you gonna put inside the unit? You're gonna put a pack and play a stroller. Yeah, we do the high chair. High chair. Yeah. Dog bowls. Mm-hmm we're gonna put [00:18:00] those pet covers over the top. Right, right. And pray that people, and we're gonna have a place that doesn't have.
And we're gonna have a place that doesn't have carpet. Right. But what was my point? But, well, those people raise their hand and say, I wanna stay there. That that's right. That's what I was gonna say. And it's not because, oh, you're $75 and that person's a hundred, right? They're that's less part of it, right?
Yes. It's it's not so much. How much is it now? Mm-hmm it's. Does that place have everything that I need, because if I'm I'm a, a, a woman and I'm a wife and I've got two small children and I am coming to Tim buck to, to visit my elderly parents mm-hmm and I've got to cart all this. I don't know how these little babies come with so much crap [00:19:00] they do, but they do don't they don't talk to baby contraptions.
Oh my goodness. And nowadays the baby contraptions, I mean, our kids are a little bit older. Some of the baby contraptions nowadays are pretty ingenious and I'm like, man, I wish we had had those days when, when our kids were little. Right. But anyway, the, I don't want to have to cart that. Stroller and that pack and play through the airport.
Mm-hmm or pack it in the car. Oh, Hey look, this place already has one. Right. They've already thought about me and my needs. Mm-hmm so the customer feels really considered. Right. And, and so now they they're, they're thinking, well, you know, I could pay. You know, a little bit more for this great space that has everything that I need already.
Right. And those people have obviously thought of me. Yes. When they put it together. Yes. Because the, because we [00:20:00] are speaking to that particular customer. And why are we speaking to that particular, particular customer? Because that's who we picked because that's who we picked and that's who we know who we are.
Yeah. And we coach people know who you are and who you're serving and who do you like to serve even. Yeah. Right. And because when you know, how do you ch we'll talk about. All of that, right? Yeah. We were how to, how to choose that. And I believe that's on, on a, another episode here coming up pretty soon.
Yeah. But that's a mistake. I see all the time. It's, it's a, Hey, I didn't consider you. Yes. Right. Because I, and people can tell, I don't really care who comes is what that says. Yes. As long as they're paying. Yes. And that works to a degree mm-hmm until, well, this is why you hear people say it's things that.
Think we're kind of silly, but they'll say, well, the market's so saturated. Right? and the truth is the market is saturated in generic. Yep. Places with [00:21:00] far marketplace furniture and cell phone pictures. And will everybody knows to put a cure egg in there now. Right. Right. And everything's cookie cutter and kind of looks the same.
Bland gray, gray, boring, not designed. Mm-hmm it'll because as a real estate investor, you're, you're kind of looking at it in, in very, I'm gonna put this much money in and then I can get this much rent and the less I put in the more my return. Right. Right. And that's not really the, always the case. Oh, that's interesting.
Right. Cause if you actually consider who your customer type is, it may cost you more upfront, but you'll actually make more in the long run. Mm. Cause you will consistently attract that customer. Ooh, that's good. And, and that's the key to getting 'em to comeback direct too, by the way, which is dang. I was just about to say that.
Yeah. Yeah. I was just about to say that, which is even more profitable. Yes. Right. Cause you don't really want to be, you're not building an Airbnb business. [00:22:00] Right. Right. The, the, the whole idea is I'm building a, well, at least for us in our avatar, we're building a business that serve. provides temporary housing, short term rentals for families, with children and pets.
Right. And we want those people to raise their hand and say, I wanna stay there. And by the way, I wanna stay there again. Yes. The next time we come. Yes. And by the way, our friends who are just like us, we're gonna refer that to them. Right. Because we had such a good experience. Yep. Right. Yep. That's what it's all about.
Right. There is building your brand and, and building that database. Customers that you can market back to. Right. And that's, that's how you start solving problems of quote, saturation. Yeah. And quote well, other things, you know, pricing and all these other kind of things that people tend to get tripped up on because frankly they came into it as real estate investors.
Yep. Right. Yep. Or, or saw it as a real estate investment. [00:23:00] right. Even if you didn't start out as a real estate investor, a lot of times what you learned about this business came from someone who actually had that perspective as well. Mm. I hadn't, I hadn't considered that. Mm-hmm yeah. That's interesting. Yeah. Huh. I see what you're saying.
Mm-hmm , it's interesting. Yeah. But yeah, that that's, that was kind of the discussion we were having. Yeah. And you know, some, some of the pitfalls you run. And it, and it comes down to kind of what you said last time. I think on the first podcast you said, or the first, you know, we're back podcast for short term, rental authority, you, you made mention of, you know, the, the thing that's lacking in the industry isn't, you know, properties or Nope.
Mm-hmm you know, money there's there's money everywhere, floating around, believe it or not. What's really lacking is. How to operate yeah. How to operate and how to operate competently. Yes. Competent operators and efficiently. Yes. And, and what are you [00:24:00] actually operating? Yes. Yes. What are you actually doing here?
Right. Well, that's right. That's that is the number one thing. Mistake that we say we see people make all the time. Mm-hmm, not realizing that the, the short, the Airbnb that you just opened is a business and of itself in and of itself. And it's separate from the real estate that you're operating your business in.
Yeah. And I here's, here's proof of that because the hotels figured out a long time ago. I was watching it was something on YouTube. I can't remember exactly which video it was, but they were discussing, you know, are the hotels afraid of Airbnb? Like, are, is Airbnb a threat to the hotels? Oh yeah. What I learned it, it, that was the subject.
But the, the thing I got actually got outta that video is that for example, IHG, which is international hotel group, there's only a certain number of big hotels. Like there's the [00:25:00] Marriotts there's IHG Hilton Hilton. Some, some of 'em like that, and then they have their subbrands like IHG is your holiday Inn and like your, oh, so IHG traveling holiday and your days in.
Gotcha. You know, Marriott has, you know, like a courtyard by Marriott. They've got home. No Hilton is home to suites, but they've got these sub brands mm-hmm like under that. Right. But they don't own many of them at all. Like they don't own the real estate. Correct. They're not in the real estate business. That blows my mind in particular IG.
And I'd have to go independently verify this, but according to the, the video I was watching, they sold their last two that they actually owned some time ago. So they don't even own the real estate. Yeah. So when you go to a holiday Inn, it's not owned by holiday Inn, it's franchised by holiday Inn.
That's what it is. And somebody else bought the real estate. And bought frankly, the, the business that's [00:26:00] what a franchise is, right. That's what a F the value in holiday Inn is the systems. Yeah. It's the experience. It's the, and the name, it's the name? Yeah, the brand, the brand and the marketing Uhhuh and all of those things.
Yeah. You get to take advantage all those things, and they realize that a long time ago. Yeah. So holiday Inn as a brand or a, I guess international hotel group, actually as a brand, cuz they're an. isn't in the real estate business. That's crazy. Yes. They, they, they don't even own the building. No. And they don't even, you would think they, they would even manage them, but they don't.
They do, they offer it as a service. Right. But I think only I forget which group it was, but only 2% of them. Did they even, did people even take them up on the offer to manage it? They were simply buying the name. The, the brand awareness or the computer software. Yeah. Like how do you run a hotel? Oh, like here's the owner's manual.
Yeah. Yeah. That's what a franchise is. Right. Essentially. Right. And you know, all of that [00:27:00] stuff and, and that's really the value. So when you, when you're thinking about, Hey, I'm going to turn this into a.
Or air Airbnb or short term rental or whatever, realize that the value is in the systems and the processes and the operations mm-hmm and the customer experience. And it's based off of reviews and that's really, what's creating the extra value and the real estate itself is something entirely separate.
Yep. Wow. Yep. And that was the main point that I, I personally wanted to convey to people. Yeah. In, in the podcast. Have you got anything else you wanna say about that? I don't think so. No. I mean, I'm sure I'll come up with something. I'll be like, man, I should have missed no. But good thing. We've got more episodes coming cause John thinks of something later.
He can write it down and say it on the next one. That's right. that's right. All you gotta do is remember to write it down. Well I'll cause you know, I'm not gonna remember. I will say Wendy, write this down cuz Wendy's the note taker. Yeah, because here's the secret. If I write it down, you won't be able to read it.
I won't be able to read it later. [00:28:00] even though it's my handwriting, I can't read your handwriting and you can't read your own handwriting. If that's bad. I think about third grade, I was like, okay, I can make letters. good enough to pass. And I just never practiced after that. Yeah. It's really bad. It's well, we hope that you found some value in the discuss.
On the podcast today, if so, be sure to click that like and subscribe button. So you get notified of the next podcast that are coming out, cuz we have loads more great conversations and great topics coming for you at the, from the short term rental authority with John and Wendy Williams, your trusted authority for all things, short term rental related to help make you best short-term rental operator ever.