STRA Episode7: How to Afford the Initial Investment in Your Short-Term Rental

The Short Term Rental Authority Podcast

Episode7: How to Afford the Initial Investment in Your Short-Term Rental

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[00:00:05] Hey guys, John and Wendy Williams here with the short-term rental authority here to help make you the best operator ever.

[00:00:14] And today we are going to talk about. How to fund your initial investment. Cuz we get asked this question all the time, all the time. Yes. So what we're gonna be talking about is we will talk about exactly what that means. And we will talk about what that cost is. So we'll give you some numbers. We'll talk about what we did and, and how we funded our business in the beginning.

[00:00:41] And then we'll talk about some other, other ways to fund your business that we've learned since then, since we got started operating, and then we'll talk about at the very end What, if you are purchasing the property. Cause a lot of people do that. Yeah. Like if you, if you saw the title of this podcast, you might be thinking, how do I buy the property?

[00:01:03] Right. And that's not what we're actually talking about at the beginning. We're talking about, okay, I have the property now, what, what's the, what's the setup cost for the, the short term rental side of it. And I think that applies whether you bought it or whether you rent it or however you acquire. Right.

[00:01:22] Is the end of the conversation. What we're actually talking about is how do you set it up and what's the cost for that and how do you fund that piece? Mm-hmm right. So, so let's talk about that. What, what are we talking about when, when we say how much does it cost or how did you get started? How did you fund it and, and what does that mean?

[00:01:45] What are you actually funding? Yeah, I say, I wanna say furniture is an obvious. So you've gotta buy furniture in our system that we teach you, you need a security system and, and we encourage you to [00:02:00] buy that equipment, but it, you could finance it, right. It could be an operational expense. It might not be a setup expense.

[00:02:05] You do need, however, you do need those initial supplies. So you, so you're gonna have to do toilet paper. You're gonna have to do bots K cups. You're gonna have to do. Sugar, you have to do, you know what, whatever those consumables are, you know, stockpiling those at least for your first one. It's if you're, if you're renting the place, it's probably security deposit up front.

[00:02:29] So you need to count for that. It's it's all those things that get you to the place where. you can actually list it. It can have, it's a photographer. Mm-hmm it may be a designer. It should be a designer actually. So it, it there's, there's all these costs that you occur before anyone shows up so that it place is rentable.

[00:02:52] as a short term rental. Right? So it's all those things. And, and what we tell people that we, that we coach is to budget at least $25 a square foot. I, I wouldn't say anymore than that. No, that, well, that's a measure. It's really don't go over that amount. Right. So don't go over $25 a square foot because you're you're you should be hiring a.

[00:03:19] And that designer is going to charge you around. You should budget $20 a square foot for the designer. And so the, the other, but that includes the stuff they're buying too. Yes. That includes furniture. It includes the furniture. Yeah. And it should include some designers have, have the, have you purchased the TVs yourself separate from.

[00:03:43] Some designers will purchase the TVs for you, but that should cover. everything as far as furnishings and, and design go, right. But the other $5 a square foot, that's [00:04:00] what you're gonna use for your, your supplies, such as K cups and toilet paper and paper towels and sponges and dishwasher, pods, and dish detergent and, and everything else, because there's not.

[00:04:16] The unit that you have to think about, there's also your supply closet that you have to think about too. Yeah. In your linens. I wanna say we spent a lot on women. Oh my gosh. Linens. Well, cause you need four sets for bed. We've talked about that and everything, but that's linens is a huge expense. I was about to say expensive, but that's where your other $5 goes.

[00:04:36] Yes. Let's let's budget for that. And hopefully you have some, I think you should, if you, if you budget $25 a square foot, you should have some left over, but I would rather you over budget. Yeah. And come under budget for sure than getting a, get in a situation where I, I don't have enough money to complete it.

[00:04:57] Sure. Yeah. For sure. Right. Or I, now I have to cut corner. right. Like not hire a professional photographer because I don't have the $300 to pay that person. Right. Right. Totally. So I, that, that $25 really is a top end. It's a, don't go over that per square foot, rather than a go spend. $25 a square foot. Of course cut costs.

[00:05:21] We're all entrepreneurs. We should be cutting costs, but do not cut corner. Oh, those two things are different. So there's things that Wendy mentioned, like hiring a designer, getting a professional photographer you know, those types putting in the security system. Yeah. That's where I see personally people make mistakes because they.

[00:05:41] Try to save money. Mm-hmm on the front end. Yeah. And for us they're non-negotiables and, and really what they're doing is they're cutting corners and not costs. Yeah. And that, that hurts you in the long run. You, you lose way more. Cause I know there's somebody out there saying $20 a square foot. That seems expensive.

[00:05:59] So for [00:06:00] a thousand square foot place, you're telling me I need 20. well, the guy, the guru over on, I'm not gonna mention his name cause, but I saw on his as day, he said it was only five grand to set up a one bedroom apartment. No way. There's no way you can do that and have it still look nice. You're right.

[00:06:24] You're right. But you can do. Oh, yeah, no doubt. There's no, there's no, but it's gonna look like you spent $5,000. It is. Yeah. That's gonna look like it. And if you get, guess what that tells your customers that I, that you don't care that I am a cheap I'm cheap and I don't care. Yep. Mm-hmm right. That's right.

[00:06:44] Your customer. And that's exact customer customer over time. That will cost you money. It will. If I could tell you anything is don't skimp on the front. Do not skimp. Yep. You will lose more money than you are saving. Yeah. It'll feel like you're saving a dollar, but you're gonna lose 10. Yep. And when you get a good photographer in bad design, like stuff you bought off of Craigslist or Facebook marketplace, it's gonna look like it.

[00:07:12] It really is. Everybody can tell, so that that's a nugget for you do not skimp. So believe me when I say, if you're doing this right. And you're following the system that we teach. It sounds it, you should be spending somewhere around $20 a square foot and you should be budgeting for 25. Cause I want you to have that buffer.

[00:07:31] So then when it comes out to be 22, you're not scrambling. Right. And you can thank us later. yes, yes. And if you're, if you're that person that says, well, I didn't that's that money for five. Great. Go for. We'll beat you every time. Yep. we'll beat you every, on the long, in the long term, we'll beat you every time.

[00:07:49] And I want my students to be set up for success. Yes. Amen. Right? Not to say, Hey, here's the cheapest way you can do it. No, that's not worry about, that's worry about here's the no, and I'm all for [00:08:00] again. I'm all for cutting costs. I'm not for cutting corner. and that's what that ends up being. Yep. Cause you're cutting corners.

[00:08:06] That's right. So I'll get off my soapbox in that one. Okay. So so let's talk about how we funded our business. Yeah. So now we're said, okay, it's a thousand square foot, cuz that was actually our first one. It was a, it's a two, it was a two, two house. Yeah. Smaller house was our first one. Obviously it's only a thousand square feet or it was 1100 square feet actually.

[00:08:26] Just about the first one. Yeah. Almost. Yeah. And, and what we did, we. Good credit. So we got an American express card. Remember we went to Lowe's hardware. We did. Yeah. Yeah. We went to Lowe's hardware and got a, a Lowe's American express card. right, but it wasn't in our personal name. No, it was in our business name.

[00:08:47] It was, it was in our business name. Yeah, actually, you know what I did was you probably don't even know this. What I did was I went on nerd, wallet.com. Okay. And I searched for the top five business credit card. and all I did was start at the top and I applied for the first one. And then I waited to see if we would get approved for that.

[00:09:15] And then I moved on to the next one. Interesting. That's what I did. Okay. Yep. I went to nerd wallet, right. So, but that's something you may not realize if you're in the, in the, in the, if you're looking at this as real estate, kind of beating that drum again, like you might not realize that, oh, there's actually business credit out.

[00:09:34] So if I had my LLC, if I had my Corp, even if it's new, yes. You're going, and, and you alluded to that, cause you said that we had good credit. They're gonna qualify you based on your individual credit score, but they're gonna put the credit in your business name and it's gonna report to your business credit, which you should do from the very beginning.

[00:09:55] Yes. We learned that as well, too. Yep. You want to be building business credit all the [00:10:00] time. , but that's how we funded it. Like it's 20 grand. How do we come up with 20 grand? I think it was two credit cards. Yeah, because we, the first one gave us like 10, 10, and the other one gave us like 15 or something.

[00:10:16] Right. Something like that. Yeah. Yeah. And so that's how we, yep. That's how we did it. Came up with the funds. to buy the furniture and buy the security system. And mm-hmm, all those other things. Yep. And there are advanced things we could, you're like, there's certain things you can't buy in credit cards.

[00:10:31] Yeah. You can you, you certainly can. for a lot of you. You're probably thinking, well, credit card debt's bad though, right? Oh, debt is a four letter word. Why would well, especially credit card debt, especially credit card debt, but that's a, because it's high interest. That's an interesting mindset shift. It is, but, but is important when you, when you sign up with these cards, initially, the, the, you can get these introductory rates where there's 0% for.

[00:11:02] 12 or 18 months, 12 to 18 months. I wanna say that's what happened. And that's the cheapest money you can get, man. 0%. Yeah. And this business generates enough cash flow to pay off that card before you incur interest, if you really want to, I don't know why you would, but okay. Well, you can sure. What could just save the interest.

[00:11:20] That's why you would do it. Sure. I understand that. You're gonna go from zero to 25 mm-hmm but Wendy, Wendy knows that that's not actually important is what she's saying. . But it may be in the mind to somebody that heard credit card debt. So I'm trying to help them. Okay. Right. I'm trying to encourage them.

[00:11:36] Well, I'm trying to say that debt is not necessarily a four letter word. Right. And especially credit card debt because, well, there's, well, you always want the cheapest interest rate. Well, that obviously that's a no brainer, but what I'm saying is there's most people can qualify for some kind of credit card.

[00:11:55] Yeah. Now, if you can't and your credit challeng. [00:12:00] Credit challenge. Well, that's what it's called. I know. It's just funny. If you're, if you're credit challenged, what would you say? If you have bad credit Uhhuh okay. Maybe I'm using a PC word. I don't know, but if you're credit challenged or you have bad credit, if you wanna say it that way and you're like, Hey, I can't qualify for that.

[00:12:21] Then another way to fund it is have cash. like, if you have cash in the bank now, you know that, Hey, I only need 20 grand. I know that. I said only to a lie to you, but there, there you, that is an option. You can sell fund cash and then you don't have the interest payment. Yep. Even better. Right. True enough.

[00:12:42] Yeah. And then if that doesn't work, there's there's also the, the private money route. So that is a skillset, I will say, that's it is indeed. That's harder obviously than indeed applying for a credit card. Yes. Or going down to the bank and applying for line of credit or here's another idea for you.

[00:13:02] If you have a personal residence already that has equity in it, which it should, because as, as of this recording, real estate prices are in a bubble, I believe, but they're high. So if you bought. Sometime ago you probably have equity. You probably could get a line of credit or something on your, your personal residence.

[00:13:24] That is a way to go. That's cheaper money. But if you have to go the private money route, which means friends, family, acquaintances, that kind of thing. That's a whole other discussion. It can be done. It's a skill set though. It's not a I know how to write and fill out application right. So I don't wanna kind of get into that, but I just wanna say that is a source of funds.

[00:13:45] It is. And we've had quite a few students that were, that were able to. To raise private, private money from private money limits. Yes, they were, it was either friends, family, or somebody they attracted to their idea or, or whatever. Right. And then [00:14:00] the, you know, you have to have the right conversations and know how to structure those things.

[00:14:04] Right. You know, it's that kind. That's why I didn't want to get into it. Right. Exactly. But it is, it is something that students have had success with as well. Yeah. Yeah. It is a, it's a whole nother podcast long. Yes. So long lengthy podcast by itself. Separate maybe a four part series, right. yes. So, so now that we've covered all that and you know how we funded our business and you there's some, are there any other.

[00:14:30] I can't think of any other options besides the ones that you've said, not if you, if you're just starting out. So if you have none, if you're at zero, those are kind of your options. However, if you've been operating for a while, that's true. Yeah. Your business, hopefully you have it. One like an structure, like an LLC, an S Corp or corporation or something.

[00:14:54] Your business has revenue. and because your business has revenue, now you start qualifying for other things that have nothing to do with your personal credit at all. They have to do with your business makes five to 10 grand a month, right? That in fact, as you, as you have more units, you have way more cash flow, cuz it's a very cash flow, heavy business.

[00:15:21] And remember, they're not looking at typically your. After expense number, they're looking at your pipeline revenue number, right? Right. So if your payout for the month was 20 grand from Airbnb, let's say, so you that's the only place you list. If you got paid 20 grand on Airbnb this month, they're now qualifying you on, oh, your business makes 20 grand a month.

[00:15:45] Right. And now you qualify for those type of product. So once you get started, once you get past the, okay, the only thing I have is a credit card, realize that if you have the, the mindset that, Hey, this is a [00:16:00] business and it's not really about the real estate, which we've talked about a lot, then now you start applying.

[00:16:05] You start not well, you applying of course, but qualifying for business, business, credit, credit, and business lines of credit that are really based on what the business. How does the business reform, and it has nothing to do with your personal credit at all at some point. And so we've been able to fund ourselves that way as well.

[00:16:28] Right. You know, our personal, but that's after you've gotten started and yeah. And you've gotten some, some bookings and you're starting to make money. Yeah. You know, what else? You know, what else? That I was just thinking about was, you know, if you pass your, your what, if you are purchasing the property, right. And you already talked about that a little bit, but there's really no difference. What do you mean when you say there's really no difference? Well, in my mind, because it does cost more, right. If I buy it, I have to pay more. Yeah. But you're still you're setting at that point.

[00:17:08] If you are purchasing the property, that's a whole separate business. It is the, and the short term rental business is a whole separate business. Those are two separate businesses. They really are. So what you're really saying is if you buy the property, do a good real estate deal mm-hmm and take the short term rental out of your mind, take that revenue outta your mind.

[00:17:32] Make sure that the real estate deal that you were doing is a good real estate deal, own its own. And that it's profitable own its. And then consider putting your short term rental business in there and then make sure the short term rental business own its own paying fair market rent to your real estate business is profitable, own its own.[00:18:00]

[00:18:01] And that's how you actually protect yourself. That's how you protect yourself from doing a bad real estate deal because you thought if I just did the short term real. Right. But the problem is a lot of times, oh, we see this so often that doesn't, it goes away or, or it doesn't become the thing. And now you're stuck with this bad real estate deal that you, you have to scramble to get out of.

[00:18:23] Yep. Like you don't want that. Or you have this bad real estate deal that only works because you have this short term rental business over here, that subs is subsidizing. right. And, and you lie to, and, and it, and that's actually lying to yourself because it's, it's, it's, it's forcing you to hold this bad real estate deal because you think you're making all this money over here where really half of that's going to subsidize the real estate.

[00:18:55] And now this actually becomes a unprofitable short-term rental business. Cuz if you actually charge true market rent to this. then it wouldn't survive. Right. So if you, so that's a rule of thumb. If you're, if you're a short term rental business, even if you own the property, if it could not afford to pay market rent on the property, then it's in, then it's not really a profitable business, cuz it's not about how much you make.

[00:19:26] Right. It's about how much more did you make? And it's about making good decisions on each side of that equation. Right? So here's something I, I may have mentioned this before in a different episode, but here's something I, I heard cuz we're in different Facebook, real estate groups and somebody was actually just, you know, be moaning the fact that one of their favorite restaurants was closing down.

[00:19:49] Oh, we did talk about this. We did. Yeah. Cuz we talked about olive garden. No, no that it wasn't, it wasn't about olive garden at all. Okay. That was a whole different conversation we talking about. Oh it was okay. Yeah. This one was. [00:20:00] I don't remember this one, then this one was their, it was that their favorite restaurant was closing down.

[00:20:05] And I believe it was in Nodi area, which is the arts district of Charlotte. Right. Cuz it's a local real estate group. And what they were saying was and they posted like the news article to it. And the, the news article was all about this restaurant had to close down because their landlord raised their rent and they couldn't afford to be.

[00:20:27] anymore. So they just decided to close the restaurant down, cuz they weren't gonna be able to be profitable with the rent increase. And as a point of, you know, fact, somebody else commented on it in that thread. Who's another real estate investor in the area that I respect. And he said, well, you know, actually the rent increases is in line with current market rent.

[00:20:52] You know what they were paying before. From 10 years ago and they've just never been raised. And that's actually what the piece of real estate's worth. So it's not like they're gouging them. They're just bringing it up to what it's, what actual market rent is current market rent. Yeah. And then a little bit, you know, there are other comments and a little bit later another person that I'm a, you know, acquaintance with in the real estate investing world.

[00:21:17] But she happens to be a licensed realtor. She chimed in and. This is why I always encourage my business owners, like a restaurant business owner to actually buy the property that they're operating their restaurant in. Interesting. So that, that can't happen. well, she, she needs to listen to the podcast.

[00:21:42] Right. But that does make logical sense. Like it's not a, if you saw that comment, Normally, like, I didn't see anybody else protest what she said. Right. But they don't understand that there's two separate businesses. Yes. It, it, so that's the whole point. Like the, the restaurant actually isn't [00:22:00] profitable.

[00:22:01] That's actually the point, right? If they own the real estate, they should be charging. They're gonna be charging market rent, regardless of who's rent. Not my point. What I'm saying is what she was saying was if that restaurant has bought that building, then they would still be in operation today. Mm-hmm

[00:22:21] Yeah, but that restaurant would be, actually be a lie. Yes. Because they're not considering because, because what they, what they could have been making, like not considering what they could be renting that space for. Yes. In, right. And when you consider that and realize that that's actually an opportunity.

[00:22:43] oh, of running the restaurant in that building. Mm-hmm your foregoing market rent. Mm-hmm and it can suck you into thinking, oh, I actually have a profitable, profitable business. Right, right. When you don't. Right. And what you, a, what you actually do is have a profitable business at the expense of a bad real estate.

[00:23:07] Ooh. So where you're making it over here, you're losing it over here. Mm-hmm and you don't do the math in your head to say, oh, that's actually a, a negative situation. Right. But how would you know that if they weren't separate, that's why we advocate separating. Right. And, and it is very obvious when you're in the rental arbitrage model, because you're only on one side the equation mm-hmm

[00:23:30] So it's very clear to us whether. queen city suites is profitable. Right? Sure. But even if we own the building, it would be very clear to us is queen city suites profitable because, because queen city suites doesn't own any real estate. Right. But even if we own the underlying real estate, that's the whole point.

[00:23:49] Right. There's another separate business that actually owns the real estate. Yeah. And actually it in the places that we're in today, I, I did the math. It would not make sense for us to buy them. Yeah. That's interest. Yeah, [00:24:00] it wouldn't because the, the rent that we pay is, would not support the purchase price.

[00:24:06] Right. $1,500 in rent a month does not support a $350 thousand dollars purchase price. Well, that is the market right now, so, right. So you gotta consider that. So it would actually be to our detriment to purchase the property, to purchase the property. Even if the mortgage payment was less than. And that's hard.

[00:24:26] That's hard to wrap your mind around, is it not? Yeah, for sure. Because, but it's because you're only looking at it as a monolith, this single thing. Yeah. Instead of realizing that, oh, it's actually a real estate deal and it's actually a business separate from that. And that's why I like using the restaurant thing because that it, for some reason in our heads that makes it clearer to understand that, Hey, maybe I don't need to own the building that my restaurant's.

[00:24:56] in fact, most restaurants don't right. Sure. So, okay. That, that's what I have to say about the real estate side. Okay. Do you have anything you wanted to add to that or? No? Mm-hmm okay. Well, we hope we have, you found some value in this episode, if so, click that like and subscribe button and we will see you next time onto the next on to the next.

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