Episode 076 - Are You Over-Improving Your STR? Why You Must Know Your ROI
Mar 09, 2020
SHOW NOTES & LESSONS
We are looking at a 2 bedroom/2 bath in Mesa close to everything.
Now, purchase the Airdna Data for your property and let's figure out the ROI for a Short-Term Rental.
Wait... 40% ROI sounds a little too good to be true. What did we miss?
So, the ROI on this property for a Long Term Renter is 22% and a Short Term Renter is 24%. That's a LOT of work for only 2% more on your investment. Figure out if it's worth it!
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[00:01] Over the last two centuries, nearly 90 percent of the world's millionaires have created their wealth through real estate. Here to tell you how you can ride this wave with less risk and less capital while creating greater income, is your host, best selling author and Speaker, Michelle Russell.
[00:21] Hi, this is Michelle, the Master of Money Mindset, and you are listening to the Short Term Rental Revenue Podcast...
and in today's episode,
we're going to be talking about Are you over? Improving your short term rental is a huge subject, really good topic that we need to talk about. Roo I What is our Oh, I It's return on your investment and any investor should know with r R o, I is. But before we get started, today's show is brought to you by Audible. You can get your first audio book for free by going to audible trial dot com forward slash S t r revenue. That's audible trial dot com forward slash str revenue. You'll get your first book free and your first month, 30 days in the audible membership. Now, I don't know if you guys know this, but you'll really get three books for free. You'll get your first audio book and then every single month as an audible member, you get two free downloads, and they usually have about six books to choose from that are free. And the books are usually fictional books, which is kind of, but you also get three books every single month. So even with your one book free, which is your choice, totally, you'll get to choose to other free titles from the audible membership every month. So it's three titles for free the first month and then two titles for free every single month after that, and lots and lots of stuffed pig go through. But I wanted you to know that I didn't know if you did, because I saw how they had worded it on their website and it was like, Dude, what do you mean? Three. And then I read it and I was like, Oh, uh, everybody knows that, but maybe everybody doesn't know that, right? So I thought I would let you know. So you can get your first audio book for free, plus two special downloads by going to audible trial dot com forward slash str revenue. Okay, this topic is near and dear to my heart because as an investor, there's a lot of terms that are flying around out there that some short term rental owners don't know yet. And one of them is our oh, i r o I is return on investment. And whenever you invest in a property, you need to know what your r o I is. That is the money that you get back and that you earn usually the very first year, and each year after that from your investment. You don't want to put a ton of money out there and spend a bunch of money and not get very much money back, and usually you can break it down so that you can have a percentage or an interest rate that you would be getting if your money were just sitting in the bank now. Years ago, when I was a youngster, I worked at a bank and they had certificates of deposits. You've heard your grandma on your mom and older people would get these CDs and you could go to a bank and you could give them your money. They would lock it in a CD, and you couldn't pull it out for a certain period of time. Six months a year, five years, 10 years. And the longer he locked it away, the higher the interest rate. CDs are now so incredibly low, like they don't give you a very big percentage at all, and you can lock it away for a long time. Back in the day, you could get 10 12% interest. I mean, high interest rates and even Maur when I was a youngster working at the bank. Now I know I'm only 55 it seems like a long time ago. But seriously, when we began investing, mortgage rates were at about 10% for investors, and we cash flowed properties at 10%. So, believe it or not, interest rates aren't that important if you use them correctly. If you know that you're going to have a nice amount of cash flow in there, it doesn't really matter what the interest rate is. You can even over pay for a property. If you know you're going to be cash flowing it each and every month for a long time now. Not that you want to do that, obviously, but you can. You can if you wanted Thio. So there's a lot of ways I mean, the ways that that would be beneficial would be if you had an owner who was carrying alone for you, and you paid them a little bit more than it was worth. But they're carrying the loan and you don't have to go to a bank. Hells to the yeah, Fitz Cash flowing. You don't mind paying a little bit more because you don't have to go to a bank and get alone, so it doesn't really matter. But knowing the return on an investment is critical and what I see a lot of out there, especially on the Facebook pages of people who are doing short term rentals. You'll see a lot of host over improving properties. They pick up a property, they buy it, they purchase it and then they do a ton of work on it and turn it into a short term rental. And they're not getting very much return on their investment. They're spending their money in the wrong places. And I just shake my head and think Holy shake, you guys. Do you not know the first rule of investing? Know what your r o I is? So I'm going to kind of explain it here. A really good example of this is when you see somebody purchase of property and then over improving the property. Spending way too much money on furniture, way too much money, fixing the kitchen's way too much money, fixing the bathrooms, way too much money on the mattresses and on the beddings. They're just over spending, and they're only going to get a little money back. So the first thing you have to know when you buy the property is you have to run the numbers on the property itself, and you never, ever run those numbers using short term rental income. You run those numbers using long term rental income. Why? Because you never know when a new law is gonna make your short term rental illegal. You never know when that's going to happen. And believe me, it happens a lot, especially now, warn more regulations pop up and people are screwed and they shoot themselves in the foot if they use the numbers for a short term rental. But if you buy using the numbers for long term rental and that makes sense all the money you make on your short term rental, that's going to be just gravy and you're gonna love it. So let's take some examples, and I'm gonna have these on the Web site in the show notes so you can take a look at them and see them because it's hard when you're doing a podcast. Run numbers. Some people are very visual, especially when it comes to numbers. And I am for sure I have to take a look at the notes that I wrote down here so that I could give you some specific examples of buying a property using long term rental prices as compared to short term rental prices on a property. Okay, so I'm going to use an example that I found on Zillow in Arizona in Tempe. Actually, it's in Mesa, really close to Tempe, but it's close to the university close to the college, close to a hospital, not too far from anything, right, And it could even be close for when the Cubbies come out and do their spring training, which is a huge thing out here. So I'm looking at this property, and it's not too bad of a property in a pretty decent location, and the property is pretty cheap, so I'm looking at cheaper property now that's gonna make a difference. The location is going to make a difference when I do my hair DNA, because when I plug it into their DNA, it's gonna let me know that it's not going to make a CZ much as amore, expensive property closer to downtown Tempe. The numbers will run differently. Okay, so you have to take everything into account. But we're going to use this property that I found, and I think it's going to give you a pretty good idea of what the numbers are. So the property is for sale for about 165,000 but it's worth about 150. So let's say we negotiate it down to 150,000 and it's a two bedroom, two bath in that area. The rent goes for about 14 50 a month for a 22 and it could be more or less, but this is a little bit of a nicer place, so it's not gonna be as cheapest, some of them around 1200 or something. It's gonna be a little bit more expensive because it has more amenities. And because it has more amenities, like a pool and a workout room and stuff. It also has a higher H away. But we're going to go for that. We're gonna use it. So we're gonna pay 100 and 50,000 for this place. And let's just say we put 30,000 down so that we can get a really mortgage on a real mortgage from the bank and we've got a real mortgage. Now the balance on the mortgage will be 100 and 20,000 which at three and 1/2 4% or something, we're going to say like 5 50 a month. Okay, so 5 50 a month for our mortgage taxes. Insurance H A wave. It's gonna bring it up to around 900 or maybe even more, but we'll say 900 just for the case of using rounded numbers. So expenses on the two bedroom two bath will be around $900 a month, and if we're renting it out at 14 50 a month, then we would be cash flowing approximately $550 a month on that property. Times 12 months would make are income for the property our cash flow? 6000 and $600. That's a long term rental, so we're actually making money. We take that $6600 that we would make that year, and we divide it by the amount of money we put down on the property. And like I said, we put 30,000 down, which is 20% so we wouldn't have to pay P M I. I'm just saying so that's a 22% return on your investment. $6600 divided by the $30,000 gives us a 22% return on investment, 22% R A y. And that's pretty darn good, Believe me. Especially if you had money sitting in the bank. What your r a y on money sitting in the bank right now? 12%. It's not very good, right? So you're like, Ooh, this is gonna be a nice property, a good cash flowing property, and it's gonna work out really great. Those were the numbers that we bought the property from. Okay, We looked in our r o. I looking at long term rentals, the rent being 14 50 those air, the numbers we used. Okay, now that we bought the property and it's ours, right, we decide we're gonna turn it into a short term rental property. So we're going to take a look at our air DNA in that area, and we're going to see what we make a year on that property, like, Okay, we plug in the address, it gives us a little report and says you using this property will probably make 38,000 year, and we divide that number by 12 which means will probably make about $3167 a month on that property, using it as a short term rental, right, or income for rent was only 14 50 as a short term rental, our income is going to be 31 67. So you've got to remember that our expenses are now going to increase, because when we rent it out to somebody. They're going to pay their own electric. They're going to pay their own utilities, right? We might cover the H away taxes and insurance, but that is all will cover, and we'll make them pay their own stuff. But now that we're going to turn it into a short term rental, our expenses are going to go up. And in Arizona, are electric is really high. Him is summertime, right? For air conditioning. And especially if you have a short term rental, people will keep the air going almost all the time. And so even if you put a nesting guys, it's not gonna make that much of a difference. So don't start getting techie. We're just using these numbers for an example. Okay, so don't get techy with me, But basically, our electric is crazy. We're gonna have WiFi. We're gonna have gas. We're gonna have all these expenses, added expenses. So our $900 expenses goes up to probably about $1500. Ah, month in expenses. So now we've got to take a look at our cleaning expenses. That's really important. A lot of people forget this because a lot of times the air Deanna amount includes the cleaning costs, and if it doesn't, it's gravy. But most of the time it does. So what we have to do is find out what our average stay is. And for this place we looked and it was a four night stay. Okay? And then we're gonna look at our occupancy rate and it's 67% for this area. So we'll take 30. Knights will multiply that times our 67% right, So 30 knights times 300.67 which is our occupancy rate is going to give us around 20 nights, and we'll divide the 20 nights by four because the average stay is four nights, and that means we'll probably get five cleanings a month. So five cleanings a month at 100 and $20 a cleaning there is going to give us another $600 in expenses. Okay, so we'll add the 1500 to the $600 cleaning expenses, and now we've got $2100 in expenses. But that's not all. We've got a lot of automation Sze in there, so we're gonna have our smart being be We're gonna have our wheelhouse. We're gonna have a lot of stuff in there. Okay, so let's just for shits and giggles. Just round it off and safe. Another $50 then our total expenses per month will be 2150. So now we'll take our 2150 a month and expenses, and we'll subtract that from our monthly income of 31 67. Right? And that's going to leave us a cash flow of 1000 and $17 a month. So we'll take that. Multiply it by 12 months. And that means during the whole year, we're gonna probably have in our pocket about $12,204. Now we divide that $12,204 by the 30,000 that week put into it and we get a 40% r a. Y. Is that a riel? R o I looks pretty damn good, right? You're like glue. 40% are y No, that's really not it. And that's where people go wrong because they're like, Holy cow, we're making a crap load of money way Mawr R A. Y No, you're not because you didn't think of something else, right? Some of you already got it. You're like, right? The furniture, the betting the kitchen supplies, the art on the walls, painting the walls, getting it ready and cleaned up, right. All those expenses add up, so now you have to think about it. A two bedroom is probably going to cost you even on the conservative side, 10 to at least $15,000 to put furniture in there and get it already and going right and then painting, maybe doing a little flooring. That's another 5 to $10,000. Just getting it ready, so you're probably going to spend between 15 and $25,000 getting your property ready. So let's just meet in the middle and say we spent another 20 grand getting it painted, getting the pictures on the wall, getting the betting, the mattresses, the furniture, the kitchen supplies, blah, blah, blah. Right, so we spent another $20,000. We have to add that 20,000 to the 30,000 we put down. We really invested 50,000 into this property now. So now we're gonna take what we made with the short term rentals that $12,204 we're going to divide it by our total investment of $50,000 we're going to get a 24% R A y. So it wasn't really 40% r A y. It was more like 24% r o I. And what is that really close to? Well, it's pretty darn close to the long term rental R A y because that was about 22% right? So we made a little bit more with a lot more work. Ah, lot of work went into that. A lot of work goes into it each and every month, and we're only making a small percentage of R A Y on it, relatively speaking, comparing the long term rentals to the short term rental, right? So either you have to make a deal where you're putting less money down where you lower payments. Maybe you purchase the property on terms without going through the bank. You have to really look at your our allies on this, Okay, but here's where a lot of you are going to go wrong. A lot of you will go wrong because you start toe over, improve the property you walk into it and you go,
needs a whole new kitchen. I'm gonna put new kitchen cabinets where I'm gonna paint the cabinets or I'm gonna put in granite countertops or I'm gonna redo the bathrooms and put a whole new vanity and all new flooring and blah, blah, blah. And so you take that, And not only do you have the investment of the bedding and the furniture and all the kitchen supplies and all the art on the walls and the paint and stuff, not only do you have that $20,000 but you add, like another 30,000 upgrading that property so that 20,000 investment now becomes a $50,000 investment added to the $30,000 that you put down on the property. So now you've got $80,000 cash into this property and how a lot of you don't realize that you're doing that is you start putting shit on credit cards. You're like, wow, and I got a lot of credit card debt because you didn't do it all cash. You did a lot of it in loans or borrowing or somehow doing it in some other way. But you Jerry rigged it, but your investment is still $80,000. So if you take that income, remember the income that we were talking about at $12,204 you divide that by $80,000 that you invested, you suddenly have 15% R A y. That's not nearly as good. That's not nearly as good as the r. A y you had on the long term rental. You would make a lot more money doing a lot less work, just leaving it with a long term rental. And I see you guys doing this all the time and you don't understand what you're doing. You're over improving the property. Yeah, you're going to make more money because you're like Okay, well, it's a nice or property. Now I'll get a little bit more money. How much more money? How much more money? Because when you run the air DNA on that, what do you comparing? Are you comparing the 50th percentile or the 75th percentile or the 90th percentile? What numbers are you using to run that you better know your numbers because if you don't know your numbers, that percentage that R A. Y could go down down, down to your barely making anything, and let me explain something else. If you are borrowing that money right, if you put that money on a credit card and let's say your credit isn't superb and your pain like 18 or 21% on your credit cards, what's going to happen that are a wise going to go down, down, down? It might even go into the negative because right there you're 15%. But if your pain 21% on your credit cards because you borrowed the majority of that money, you're going into the negative, baby, you're not making any money. You're losing money every single year, and then you wonder at the end of this you're so darn tired because you've been working it like a solo preneurs and you're seeing the money come in because there's the income. You're like, Oh, dude, I'm totally making money. But the money is disappearing, and you don't understand why your bank account is going down, down, down and not building up, up, up. And it's because you didn't think about where this money is coming from. What you were using it for or what? Your return on your investment, Waas. You have to think about all this stuff. You have to think like an investor and see most people they don't and it's not their fault because no one ever taught them and they're just looking at the numbers. But at the end of all this time, they're just really far in debt and their underwater and they don't know why. This is why this is why? Because they didn't work those numbers out. So again, I'm gonna put all of these numbers on our website, and that way you can look them up and see the picture that I'm talking about. And you have to be able to know your numbers and play with your numbers to make sure that you return on your investment is really great, because every time you add something, every time you add a brand new refrigerator and that refrigerator cost you two grand or you add a new washer and dryer, and those washers and dryers are the nice ones cost you a couple of grand every time you add that that number now increases the amount you put into your property and it will decrease your r A Y. You're going to start losing money. It's gonna go down, down, down, down. Now I make sure that my r O I is never, ever less than 15%. 15% is my You know, that's the lowest I will go for. I definitely want higher numbers. But if you don't have a return on your investment in mind, then you won't know how or why you're losing money, because you'll just see the 30,000 that you put down. Or maybe you only put 10% down. Maybe you had really good credit, and you were able to put 10% down on it, and you only had 15,000 into it and you'll be thinking in your head why put 15,000 into it? And that may be spent, especially if you're not watching what you spend your like. An end that maybe spend 5000 on the furniture or whatever because you weren't paying attention. Well, your credit cards say you spend 10,000 or 8000 and then you start fixing things up and put it on different credit cards, and they add up here and add up there and you're seeing, you know, 2000 here, 3000 there and you're not adding it up and you're not taking in account all the interest rates. Once you start your business, you're making money, and it seems like everything is going well. But down the road, you start to see less and less. Unless you start to duplicate this process, right? Without thinking about it, I'm gonna get another property. I'll have even Maur more money coming in, but you keep doing it. You keep borrowing more money, raising it up, and your r a y keeps going down, down, down because you're not paying attention to it. And suddenly you're in a lot of trouble down the line. You've created basically a Ponzi scheme for yourself. Generate a Ponzi scheme is that's what you're doing to yourself. You've created your own Ponzi scheme. If you keep buying properties or finding properties or renting properties and you don't know you're our ally, you don't realize that you're borrowing money and paying way more back in interest. Then you possibly could be making. And just because you've got another new source of income, it feels as if you're doing well but you're not. You don't know your numbers. You created a Ponzi scheme for yourself. Do you get it? I hope you get it. I hope you understand what I'm saying. It's not a good thing to go into investing, not knowing your numbers. Now, don't feel bad if you went in there and you've already done this. And now you run your numbers and you think to yourself. Holy shit. Holy shit! I have shot myself in the foot. I don't know what the f I'm doing. How do I fix this? There are definitely ways to fix it. You have to get your costs down. You have to get your costs down. And you have to pay off those credit cards like a sap. You have to bust your ass to do it. D'oh! Because you'll never, ever get out of debt. And two, you can get that r a y up and you need that r a y up enough that you can pay off the debt so it's going to be lowering the expense is doing a lot of things yourself, selling things often maybe even the properties, guys, or maybe going from short term rentals. toe long term rentals. Why? Because you know that that was when you bought that property. You knew that that r a y on the long term rental was 22%. And that's a darn good number, right? It's a darn good number, and you need that. You need less work and darn good are a wise to pay off those debts. Okay, so you have to think about what you're doing. You have to run these numbers and you have to know what they mean, because it just means that the investment that you put in there, you're getting a good percentage of that out of there every single month. And if you don't, then you have to walk away. And why do you think that most real estate investors make the money that they make? It's not because there's a shitload of deals out there. It's not. We send out as investors thousands and thousands of letters, direct mail. We might send postcards. We might have signs out there, but we touch and reach Ah, lot of people, and we get a very small number of people interested in selling tow us, and out of that, it's even smaller. When we can get a deal that's gonna work out where we're going to make money. It's a very small percentage, but you guys seem to think that with no knowledge or experience, you're going to do the same thing. And maybe you got lucky because in some areas the numbers air so damned good. It's hard to screw it up right. But you better know what your numbers are. You better hope and pray that you've got a guardian angel going. This guy doesn't know what that if he's doing, I'm just gonna cover it. Some people do that. I look at some people and they don't know anything about anything and they'll tell me about their numbers. And I think the heck this person fall into it. And I think you know what, Sometimes there's something called sheer dumb luck that's like, and God bless the people who have the sheer dumb luck because sometimes it follows us. You know what? As somebody who's Irish, I can tell you it followed me around when I was young for a long time. I don't know how the heck I made the money I made at the beginning when I didn't know what the heck I was doing. You know, sometimes I would lose money, but a lot more times I would make money. And it took me a long time to learn all these lessons. So don't feel bad. Like I said, if you don't know what you're doing and you fumbled into stuff now our allies can be done this way without purchasing a property, too. So if you're sitting there going well, this pretty much has nothing to do with me because I just do rental arbitrage. That's great. You have to look at what you're putting in there what you are putting into the property so your expenses, instead of a mortgage now are going to be rent right? So you didn't have to put the $30,000 down. But you probably did have to put the 20,000 in there for your furniture and your supplies, and you're betting, do you see? And you wouldn't want to ever put in the other 20 or 30,000 to fix up the kitchen and fix up the bathrooms. If you don't own it, you never improve somebody else's property for them. Ever, ever, ever ever. Unless you have some kind of ownership in it, you can make it as pretty as you can make it. But unless you're are a wise going to be, like, outrageously out the door and maybe you've got a property right across the street from the beach, then you're like, OK, Even if I put 5000 or 10,000 of my own money into this person's property, I'm still gonna have a freakin phenomenal ara. Why? Because it's across the street from the beach and it's gonna raise my income because I'm gonna make this much more so maybe you could make those numbers work. But you better know your numbers because sometimes you're just making more work for yourself. Sometimes you're doing yourself a disservice. And a lot of times that comes when you're multiplying it from one property to two properties to three properties that is going down because you're spending more money, and a lot of times you don't know where that money is coming from because you're using credit cards or something else. You have to know your numbers. You have to run things out. And if you don't know how to do it, then get yourself a bookkeeper who does or get yourself a friend who knows those numbers and can walk you through and say, Well, this looks good But here's where it kind of gets shaking and they'll tell you why it doesn't work. OK, so again, I'm gonna have all the numbers for this on our website. You'll be able to take a look at it and download it on the show notes and kind of walk through yourself on how to figure out your return on your investment, your R o I. And how to know what you can put down for something or how much you have in I'll try to To do one for somebody who's doing rental arbitrage and maybe even co hosting co hosting is gonna be easy, because you're gonna just get basically part of the proceeds, and you won't have nearly the expenses. But remember, when you're doing co hosting, you're gonna be taxed at a much higher rate than if you are an investor. If you're an investor and you're buying that property, all those expenses can be written off on your taxes. So there's a big difference between getting a paycheck either a W two or 10 99 and doing your taxes for your business as a real estate professional and being able to write all those other things off. There's a big difference in your taxation, and you'll need to talk to somebody because obviously I'm not an accountant. I'm not an attorney. I'm not a bookkeeper. But I do know how to run my numbers. And I hope you take the time to learn how to run your numbers, too, because I don't want you shooting yourself in the foot, and I certainly don't want you going into debt. I really don't want you going into debt because it's hard to get yourself out of debt. Takes a long, long time. And I'm one of those people, you know. I like using other people's money, so I'm not a Dave Ramsey die hard. But I'm definitely Dave Ramsey die hard in terms of going into debt. I do not like to go into debt. I don't think it's a good idea. I have used my credit cards. Like I said when I knew I would be closing on a property really quick and I had to do it and I paid myself back quickly. But, you know, that's when I run into trouble and I kind of look at it and go, Okay, how am I going to do this? And there's a few times where I had to do that. And I don't want you to go into debt. So I want you to know what your roo iess. Okay, I also wanted to ask you if you could if you would would you please go to iTunes and leave me a five star review? I would love to get some more. I would totally appreciate it. And if you have any suggestions or comments or questions that you would like to leave, look for the orange and black. Speak pike and you'll see a little message from me. You can click on that message, and when you want to reply, you can reply with your own voice and I'll get to hear it. And if you don't want to be on this show, go ahead and say, Hey, please don't have me on the show. But I'd like to know about X. Could you talk about that or answer that question? Or maybe you've got a comment. And if you would like to be on the show, say yes. You have my permission to put my voice on the show and I would love to have that. So please go and leave me a message on speak pipe. And that is about halfway through our home page. You can't miss it. Remember, there's a lot of great free tools on our website to that you can go to, especially our messaging. People are loving that, and they're loving the best insurance companies that we have for short term rentals on there, too cleaning cos there's a lot of free stuff, guys. So go on there, get that free information for yourself and help yourself out again. I want to thank you for listening. I appreciate everything and all the love that I get from you guys and all the love is going right back out there too. You have a great day. God bless you. Go and grow.