Rental Property Q&A
I recently shared that we are under contract on our third rental property (that will actually be our “forever” cabin down the road!) If you missed it, you can check out the IG highlight here.
I was getting inundated with these types of questions about acquiring rentals and the logistics of Airbnb-ing them, so I posted a question box and I’m answering the most popular questions here.
Before we start, here are some commonly requested links about our Airbnbs:
Shop Devonshire house
Book Devonshire house
Some important things to consider that weren’t asked:
- Do not get into this if you couldn’t afford the mortgage payment if your house is vacant. This is not something that should be the bulk of your income unless you have like 50+ properties and do this full-time. This should be just something that is “above and beyond.” Obviously having your house vacant is a worse-case scenario, but this is a good barometer to make sure that you stay financially sound.
- Danny’s role vs my role: If you’re doing this with a partner, it’s important to set expectations. Who is going to handle what? For us, Danny handles the fixing things and coordinating repairmen. I handle keeping the stock levels and buying/ordering things, scheduling cleaners, and managing the listing and pricing. As for communication with renters, I do about 75% of the communication and Danny does 25% – usually just when I’m not around, or if it’s about him running over there to fix something or drop something off.
Now for the questions!
Q: Did you start by first getting a full time renter on the condo, or go straight to Airbnb?
We did start with a full-time renter at our condo. I had always thought having Airbnbs would be fun, but was really nervous about doing it because I had no idea what to expect. Danny had actually always dreamed of having lots of full-time rental properties as his retirement plan, so we decided to rent out our condo first to test the waters.
I will say, full-time renters are much lower maintenance. There are soo many moving parts with a vacation rental and so many things can go wrong…on top of just having more people coming in and out, fixing damages, and managing inventory on things.
Q: Guidelines for choosing a property?
It depends on what “niche” you want to serve in the rental market. My biggest advice for this is to just think of the vacation rental market in the area you’re looking in. Then think of who will be renting this and what they will be using it for, for how long, what times of the year, etc. Create your “ideal” renter and decide what features that person would want in a vacation rental.
For example:
- Want a luxury couples getaway? Pick a high-rise condo with awesome amenities like a pool, spa and gym. Include things like robes, a wine decanter and champagne glasses, and suggestions for nice dinners in your guide book.
- Want a family-friendly house? Pick something with an extra fun living space for the kids to hang out, and stock it up with games and toys. And make sure to have a well-stocked kitchen!
- A party house for large groups? Make sure to have lots of rooms and bathrooms, as well as a large living space and kitchen with enough seating for everyone. Have enough dishes and glasses for twice as many as your home sleeps, and provide extra pillows and linens.
For us, this was our ideal renter + what we were looking for with ours:
- Old Town Scottsdale house: for large groups including girls/guys trips or a large family. We have a 4/2 and a fun backyard with a fire pit and yard games.
- Cubs Stadium Townhouse: for couples traveling for Spring Training, or a fun family stay. We have a 2/2 townhouse with a triple bunk bed and game room for the kids. The complex has a pool onsite.
- Pinetop Cabin: For a luxury secluded and serene getaway for couples with small kids or two families with kids traveling together. We have a large master suite with an en-suite office, two triple bunk beds plus a fun loft for kids, an additional family game + TV room, an extra large kitchen with 2 fridges and 2 ovens, a relaxing sitting room with a fireplace, and a large deck + fire pit area on the creek.
Q: When would you decide to Airbnb vs having a long term renter?
It depends on how involved you want to be, and what your long-term goals are. Long-term rentals are safer and less work, but you will likely make less money. Vacation rentals more risky and more work, but you have the potential to make much more.
For vacation rentals, it is MUCH more involved and a lot more work. There is also the stress of communicating with the renters, not meeting their expectations, fixing things when they’re broken, keeping the house stocked with supplies, and coordinating cleaning and repairs.
If you just want an easy way to hold onto your property while it increases in value so you can cash out in 20 years…long term rentals is the way to go. But if you’re willing to put in the work for vacation rentals, you can get much higher return for it.
Q: What % do you recommend putting down on rentals?
Every loan program will be different. There are some where you can put 15% down, but most require 20% down for an investment property. You can also use estimated rental income (called a “rent schedule” on an appraisal) to help qualify.
Obviously, the more you put down, the lower your payment will be and the higher the monthly income you’ll have! You can also get breaks in rates if you put a certain % down.
Every scenario is unique, so definitely talk to your mortgage broker about your options.
Q: How much was it to furnish each home?
We’ve done four now of all different sizes:
- 4/2 single family – 1,750 sf
- 2/2 townhome – 1,000 sf
- 4/4 log cabin – 4,100 sf
- 3/2 single family – 1,400 sf
I can safely say that they have all been around $10/sq ft to furnish. I don’t see going under around $8-10k for any size home unless it’s a tiny studio, because you’ll need certain fixed costs such as linens, kitchen supplies, TV’s, eating area furniture, living room furniture, etc.
$10/sf was me bargain shopping. Most of everything was new from Wayfair, Target and Amazon and there was some thrifting involved. But I also went above and beyond on decor and some amenities. You can see what I bought for each house at the links above.
Q: Did you do a cash out refinance to help with the down payments for each property?
We did this for our first one on our Arcadia condo to cover half of our down payment, which worked out perfectly because we were refinancing anyway and we actually lowered our monthly payment even with the higher loan principal because we got a better interest rate.
Everyone’s situation is different, but I prefer to play it safer and stay under-leveraged to protect ourselves from a potentially sticky situation down the road. If you can’t afford the mortgage on your rental without getting any income from it, I would highly discourage you from doing vacation rentals. It’s not the type of thing that you should depend on the income for because it is a higher risk. Our fallback plan if something does happen to the vacation rental market is to rent them out full time. Again, I’m not a financial advisor…this is just our personal preference!
Q: Property Manager Pros/Cons?
We used a property manager for a year on our full-time rental, but we felt like it was a waste of money and ended up doing it ourselves after that.
For full-time rentals, their main job is to collect and disburse the payments, and be the legal liaison between the renter and landlord. What we found was that we could just as easily collect the payments ourselves without the delay of having it change hands, and we still had to coordinate repairs ourselves anyway with or without a property manager.
We have looked into property management for our vacation rentals as well. Their job is a little bit different, as they will manage your supplies, photos, listing, schedule cleanings, and often times provide even more insurance than the platform (Airbnb or VRBO) does.
Some property management companies will even communicate with the renter so you don’t have to. That has pros and cons in itself because while it would be nice to alleviate the stress of messaging back and forth… I like to control the communication and how we are responding to things, what discounts we are giving, etc. If we got a negative review I would always wonder if there was something that I could have done differently if I was in control of the communication.
They do cost a lot more though – from 10%-60% of your gross, depending on how much you want them to be involved. This can be worth it for a property that you just want to be completely hands-off with, or if it is far away from where you live. Otherwise, I suggest trying it for yourself for a few months and if it’s too stressful you can always hire one later.
Q: Best way to keep track of expenses/handle taxes?
Disclaimer: I am not a CPA so I would suggest to talk to a CPA and/or attorney if you’re thinking about this, but this is just what we do….
- We have a bank account and credit card that is completely separate from our personal ones. This makes it easier to track income and expenses.
- Before we hired a bookkeeper, we tracked every single transaction we made in a Google Sheet by year and categorized it – we had one tab per property. Danny and I both have the Sheets app on our phones, so if we are out and about we could record it real quick. We also have a tab for each property in the sheet that records our monthly expenses like mortgage, insurances, HOA, landscaping, pest control, etc.
- For tax records, we print out the year-end credit card and bank account statement and also save it into a Google Drive (your bank only holds this info for 3-5 ish years, depending on the bank/card…but you can get audited up to 7 years later, so if you don’t have documentation, you’re screwed). If it was cash or another method of payment, we keep the receipt and keep it in our Southwest Stays folder for that year to store away after we file taxes.
- We keep a separate profit and loss statement for every property so we can see where all expenses and income is happening and which property is most profitable. This is on the same Google sheet, in separate tabs. Yes, this Google sheet has like 20 tabs!
- We also have a separate LLC for every property. This is important because if all your homes are under one LLC and someone gets injured at one of your properties, they have the potential to sue the LLC as a whole, and thus have access to all of your properties. This was a recommendation from our attorney.
- We have one over-arching LLC that owns all the LLC’s under it, so that we can file one big tax return at the end of the year and file the income as a K-1 on our 1040 personal tax returns. This was a recommendation from our CPA.
There are also other things that you can do if you need to get creative such as pay yourselves rent or income from the business. We are talking to our CPA about this.
Q: What sort of info do you put in your binder for guests?
This is a fun one! I will share the links to our welcome books below:
Q: How do you handle/prevent bad renters?
Preventing: Check their profile when they book or request to book. I never like to judge based on profile picture…I’ve gotten some classy-looking people that were absolutely horrible! But check the reviews, the amount of people they’re bringing, and what they say in the booking request. If you don’t feel comfortable renting to them or feel off about it, you can cancel without penalty if you choose the option on the app that you are not comfortable renting to this person.
Handling: This is a tough one. We have gotten some pretty bad ones that have left some really bad damages. There really is no way around it or to prevent it. You just can’t care about anything in the house or have anything so expensive that you would be beside yourself about if it got destroyed. But at the end of their stay if a renter leaves damages, have your cleaning team send you photos of everything so that you can file a claim and leave a bad review for them. If the renter denies the claim (yes, they can do this)… you can escalate it to Airbnb. That’s really all you can do.
Q: How stressful is it?
With Danny and I combined, we probably spend an average of 5 hours per week on all of our rentals. Sometimes it’s 3 hours and sometimes it’s 10 if it’s a fiasco week.
This includes communicating with the renters and their expectations, fixing/ordering things when they’re broken, coordinating cleanings and repairs, checking up on the house from time to time, shopping for/ordering more supplies and dropping them off, and managing the pricing and listing.
There are some people that just can’t be pleased, and I’m trying to deal with this better. Danny has been taking over more communication lately because I tend to take things more personal (it’s hard not to when you devoted so much time and effort into making these homes a great place to stay!).
It does take a big chunk out of your day when you have to deal with a big issue and physically go to the house.
Q: Thoughts on owning vacation rentals out of state?
Start in-state first and see how you feel. There are definitely cons to having a rental that is far away. If something breaks or the renters need help, you are at the liberty of third party contractors and their prices/timelines. You also have less control overall.
