The Best Property Types and Amenities for Short-Term Rentals

Ashley:
Okay, you guys, it’s that time of the week. Let’s get your questions answered. I’m Ashley Care and I’m here with Tony Jay Robinson,

Tony:
And welcome to the podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Now, today we’re diving back into the BiggerPockets forum to get your questions answered. Now guys, the forms are the absolute best place for you to quickly get all of your real estate investing questions answered by tons of experts and other rookies alike. So today we’re going to discuss short-term rental property types, amenities to have, and what kind of properties might be pass on, how to pull equity out of your property, and then some best practices for funding your first duplex.

Ashley:
Okay, so let’s dive into the BiggerPockets forums. If you have a question that needs to be answered or you actually want to go in and answer some questions for other rookies, head over to the BiggerPockets forums. Okay, so this first question I found here, it says, hi. I have a company that builds unique European style cabins. We are thinking about building a property for a short-term rental in the Catskills, New York region on a quiet, secluded seven acre plot, but have been wavering between three types of builts. So here’s options. Number one, maxed out bedrooms and amenities for a lot of money. Five bedroom, three bath with game room theater and indoor pool. Second option is a small one, 1000 square feet or so, two bedroom for less money, maximize the uniqueness and design value. Third choice is medium sized, a three bed, two bath. That is the most suitable to sell as a single family rental. If it doesn’t go as well as we planned, any thoughts or advice on the matter would be appreciated. So Tony, as the short-term rental expert, what is the first thing that you would do to make this decision?

Tony:
Honestly, I think the first thing I’m asking myself isn’t even necessarily specific to short-term rentals, but just like in general when you’re thinking about real estate is you don’t want to overbuild or over rehab for that market, right? If I go into a neighborhood where the majority of the folks living in that neighborhood are living below the poverty line, then I’m probably not going to put in super high-end finishes because no matter how nice that property is, that specific neighborhood can only support a certain rent amount. So you can over rehab a property, it could be beautiful, but just won’t get the return. So I think the first thing that I would look at is for this little area of the Catskills region that you’re looking in, are there any five bedrooms, right, that are doing well? Because maybe there’s not just a lot of big groups that are traveling, and maybe that’s why the majority of those units out there are one and two bedroom cabins. So I think that’s the first thing that I would look at is can this area support the different types of that I’m thinking about building

Ashley:
And some resources to use to do that. Market analysis is neighborhood scout.com. There’s also Bright investor.com, there’s Air DNA, Tony, are there any other platforms that you’re using specifically for market research on? What about Price Labs maybe? I think they have a dashboard.

Tony:
Those are probably the two biggest ones that I use. Air DNA and Price Labs. You have to have the, I dunno, the medium subscription. It’s like a small, medium and large subscription for aird a, I think you need the medium version to get all the good juicy data, but Aird A is great Price Labs is great as well, but I’d say that’s the first thing. The second thing I would probably look at Ash, and again, this is just not short term rental specific, but just real estate investing is what are the limitations around what you can build, right? You’re looking at this, I think you said it, you said that it was seven acres, right? So you got the seven acres, but how was that land zoned, right? What are the usage restrictions for that area? Can you even put a short term rental there, right? Maybe what’s the maximum occupancy that you can have? Because maybe you build, I think you said a five bedroom cabin, but what if your city, county, whatever has limited max occupancy to eight people, which we’ve seen in some places. So it’s like you’re going to have five bedrooms for eight people. Maybe that’s too much space for that group of folks. So I would really dive deep into both the building and building code regulations and these short-term rental regulations for that market.

Ashley:
And another great point to add onto that is actually the land. So is the land literally a slope where maybe you don’t have enough actual land to build on it? Because some of the land isn’t usable land too. So I am sure as a builder you’ve already done your research and know that you can build all these options, but for anyone else who may be going into this for the first time, is there wetlands? Is some of you the land not even good enough to actually put a sound property on or it’s going to cost more because it’s clay underneath the ground and you need to have some different type of foundation, different things like that. So really understanding the actual land too of before actually going on and building it too. That’s where you can get an architect and an engineer to come in and actually pull soil samples to see how good the land is to actually build on and how much of it you have available to build on.

Tony:
I think the other thing that I consider Ashley, and again I keep repeating myself, but this is even just short-term rentals, but just real estate investing in general is going back to the numbers to see what actually gives you the best return. What is the difference in build cost between the five bed, the two bed with the super unique design or the kind of standard three bedroom? What’s the build cost between those different options and how much revenue and profitability will you actually generate between all three of those options? Maybe the five bedroom costs 50% more to build, but what if you only generate 10% more revenue? Is it actually worth it to build the five bedroom? Or maybe the price difference between the small property and the three bed is only 10%, but you’re going to get 50% more revenue if you do the three bed. So I think running those numbers and kind of seeing where that sweet spot is what I would lean back into as well.

Ashley:
Yeah, I love that concept of running the numbers and I think that will be a great starting point. So what your, why do you want to build one and what can you get out of it? But I really liked how you did take into account for option three of having an exit strategy and being able to sell it as a single family home. So look at the other two options too. And worst case scenario, it’s not performing. What other options do you have for those properties to kind of reduce your risk too? So say all of them kind of give out a similar return and you aren’t making your decision based on that because it’s all very similar, then I would go with the one that has less risk because you have the opportunity to sell it as a single family.

Tony:
I don’t know if you’ve been following Airbnb much lately, Ashley, but they’ve been doing these icon series where they’re building all these really cool,

Ashley:
I’ve seen the one from the movie up where you can stay in the house with, yeah,

Tony:
They did up exactly

Ashley:
Polly Pocket. You could stay in a Polly Pocket.

Tony:
That’s the one I was going to talk about. You can say in the Polly Pocket house. But here’s the thing, if you build the Pollock House, the only thing you’re going to be able to do with that is rented as a short-term rental. You’re not going to get long-term tenants moving into Polly Pockets little popup house. So I think there is a certain level of risk tolerance you have to be comfortable with, where if you are going to go super cool, super unique, you’re really kind of limiting yourself to just a short-term mental strategy. So you’ve got to have a lot of confidence in your numbers before you kind of cut off all the other exit strategies there.

Ashley:
Well, the Pollock House too, isn’t that where you actually sleep in a tent? You’re staying in a little tiny shed where you actually sleep, and then the Pollock house is just all open. So you have to hope for good weather because there’s no cover over the Pollock actual house.

Tony:
I didn’t get that part either. Yeah, it’s wide open, but it’s an experience.

Ashley:
Okay, so we’re going to take a short break, but when we come back, we’re going to find out how to pull equity off of a property that’s already been paid off. Okay. Welcome back into the episode. Thank you guys so much for taking the time to check out our show sponsor. So Tony, you got another question for us?

Tony:
I do. So this one’s also coming from the forum. So this one says we have a single family home that we’re currently renting as two one bedroom units. The property has zero debt on it. Congratulations, and most recently appraised for $187,000. We attempted to do A-D-S-C-R loan on this property, which is a debt service coverage ratio loan. So A-D-S-C-R loan on this property to pull the equity out. But we’re told by the lender and two other lenders that DSCR would not be possible, given that the home is not appropriately zoned for how we are renting it. Is there any other way for us to pull equity out of this property without reselling it?

Ashley:
Well, I wonder too as to how it’s not zoned. It must be zoned at a single family, but because they have two units rented that it’s not zoned as that. So that must be the conflict there. So the first thing you could do is you could go and request to get it rezoned, which I’ve never done that process. So I would think that what you have to do is go in front of the planning board and just present and ask that you want to have this turned into, I don’t know, as far as vacant land, that’s kind of the process of what it is to get it rezoned before you actually go and build. But when you already have the property and you’ve already done, I don’t know what that’s going to entail as far as the code enforcement officer, the building inspector coming in and saying, ah, well, we need you to open up the walls to make sure the electric was done correctly when it was turned into two units.

Tony:
You’ve got to input a new fire sprinkler system or something.

Ashley:
So I feel like that might open a can of worms. So the question is, is there any other way for us to pull out equity of this property without selling it? If you can’t do the DSCR loan

Tony:
And there’s got to be, right? I mean, because I think the challenge here actually is like, and we’ve talked about this before, where sometimes investors, they get fixated on a loan product as opposed to being fixated on solving the problem. So if I’m this person, I’m not going to the lenders and saying, Hey, can I please get A-D-S-C-R loan? I’m saying, Hey, I’ve got a property with no debt appraised at almost $200,000. What’s the best way for me to tap into that equity and then put the ball in their court to tell me, Hey, here’s the array of options that you have at your disposal. But sometimes if you go to them with what you’re looking for, they’re only going to give you a yes or a no.

Ashley:
Okay, so let’s first define DSER loan. So that’s debt service coverage ratio. And this is a loan product where they will look at the property, so the value of the property, they’re doing an appraisal. They’ll also look at the income on the property. So they will take into account that the income coming in from the property can cover the expenses, including this new mortgage you would have on the property instead of where a lot of other Rome products. Look at your debt to income and make sure that you personally can afford to take on this debt. So it’s great for real estate investors who take on all of these properties, but you may not need to actually do a debt service coverage loan, the DSCR loan. You could, like Tony said, go to the bank and say, here’s what I have. What options do you have available? And you could probably just do a standard investment loan because they still will take into account the actual income coming in from the property, but they’ll also look more into your income and your personal finances too. One thing you could do is look at the commercial side of lending too, instead of residential,

Tony:
And you hit the nail on the head As for what I was going to lead into, but it’s like, this is me kind of putting my coaching hat on, but to the person that asked this question, you’ve only talked to three lenders, which is not a very large number of potential lenders. And I think a lot of rookies don’t understand that the lending industry is a product industry, just like any other industry that exists out there. And different lenders carry different products. There’s always some overlap. But if we think about, I dunno, target and Walmart, they all carry a lot of the same items. I can go to Walmart and buy cereal. I can go to Target and buy cereal. I can go to Walmart and buy, I don’t know, an air mattress, the same thing at Target, but they’re going to be different brands, different prices, and different experiences.
It’s very much the same thing when you’re shopping for loans. Every lender might have a similar type of product, but they’ll all vary slightly. So the more people you can talk to, the more options you give yourself. So I would go talk to, I would open up Google Maps, I would type in bank or credit union. You’re going to find 50, 60, a hundred little banks and credit unions in your area. Call every single one and ask the same question. I’ve got $200,000 in equity, what’s the best way for me to tap into it? But hey, here’s a little bit of an issue with the zoning. I just want you to know that given that what’s my best choice, and put the ball in their court.

Ashley:
And you can go to biggerpockets.com/lender finder too, where BiggerPockets already can connect you with lenders that are real estate investor friendly. So they may have already come up with this issue with someone else before too. So you can also try finding a lender through there. So the last thing I kind of want to add to this as a little personal story of this. One time I went up to Rochester, New York and I toured a couple properties. I never actually ended up buying in that market, but one of the properties, I can’t remember exactly, but I think it was zoned as a two unit, but they actually made a little part of the back house, a third unit. So when I toured the property, the agent said, just so you know, this is a two unit, but there is a third unit generating income coming in the back.
So in this area of Rochester, there was some kind of long-term rental inspection that was done every two years I think it was. And so the code enforcement officer would go in and actually do the inspection. And the real estate agent said to me, don’t worry, the tenants just say that they’re together, that the upstairs one and the one in the back, that they’re on the same lease, that it’s just one unit. They just have these separate areas and don’t say that it’s three separate units. And I was just like, yeah, that’s not really something I want to rely on. So let’s just say we didn’t buy that house. But can you imagine every time you rent the unit, you have to like, okay, I need you guys to lie though and say this.

Tony:
I guess one last thing before we move on from this question, Ashley, just a few other options outside of the DSCR, you could potentially go with just a standard investor loan, right? We’ve closed on things where it’s not DSCR, it’s not conventional, but there are loans built specifically for investors. Maybe you can’t get all the equity, but you can get a good chunk of it. You could go, like Ashley said, with a commercial loan, you could potentially pull a line of credit, right? Maybe not a heloc, it doesn’t sound like a primary home, but you could get a line of credit where you’re pledging the equity in that property as collateral, right? For some kind of commercial loan, you could get a business line of credit if you have an LLC and use that as collateral for the business line of credit. So there are so many different ways to tap into the equity there. Look, here’s another option. You could go find a private money lender pledge that same equity you have in your home as collateral. Write up the same promissory note and mortgage security document, take that to the county, get it filed, and now you’ve got whatever, 10 year note with the private money lender, and they’re leveraging that equity in your home to give you access to that equity. So there are a million different ways to set that up.

Ashley:
So we have to take one final break, but after this we’re going to discuss how to fund your first deal.

Tony:
Alright guys, welcome back. We’re jumping into our last question for today’s rookie reply and another one from the forum. This one says, Hey guys, I’m excited about buying my first home as I pursue a duplex here in Houston to launch my real estate journey. I’m exploring different funding options and would love advice on using other people’s money OPM, leveraging business credit or possibly borrowing against my 401k to keep more of my liquid cash. What strategies have worked for you? What should I watch out for? Thanks in advance for your insights. Alright, so we’re talking about OPM, other people’s money to help fund the acquisition of real estate. Now, Ash and I have both leveraged OPM and varying capacities. And honestly, we actually wrote a book about partnering with people. So if you head over to biggerpockets.com/partnerships or partnership, you’ll be able to pick up a copy of that book. But I think Ashley, let’s maybe first just break down the different ways that you can use OPM and I’ll kind of lead in, but we’ve got the equity type partnership where someone’s helping fund the down payment, closing costs, whatever it may be. And you guys are both sharing ownership in that deal. And then you have the debt partnerships where someone’s just giving you a loan for you then to go deploy in your own deals and you’re making payments back to them. So those are kind of the two big categories for OPM.

Ashley:
So then we can go into the leveraging business credit. So business credit is where they’re actually looking at your business as a whole. So specifically if you have an LLC or company that you created, even if it is in your personal name, you could get a business line of credit. Most often this is going to be a higher interest rate. So it could work two ways where you have no collateral on it at all. So it’s kind of like if you see those signs at the bank where it says you want to go on vacation, take a personal loan from us where you’re not putting up any collateral, but it’s like a 12% interest rate. I honestly, I don’t even know what it is, but it’s would be along the lines of that where there’s no collateral or it could have some of your equipment or fixtures if you actually run a business that has those things, those could be put up collateral or it could be your investment property that is used as the collateral for that too.
And it works just like a line of credit where you have a certain amount available to you, you can pull off of it, you’ll pay the interest on it and pay it back. There’s also, instead of a business line of credit going and actually getting a line of credit on your primary residence if you already have a primary residence, so we’re talking about the first property, your first investment property. So you may not have that available, but it would work along the same lines of doing that. And then the next one, I actually love Tony. It’s the borrowing against the 401k, but also borrowing against your brokerage account too.

Tony:
And both of those are options. And we’ve interviewed folks, I think Ash and I both leveraged the funds in the stock market in varying capacities to help fund real estate deals as well. But taking a loan out against your 401k, I know folks who just completely liquidated their 401k to go all in, but there’s different strategies to do in that. But I guess let’s assume we kind of break each one of these down just so you can think about, I guess, what to think about as you’re using each one of these strategies. So OPM, I think the first thing is that you’ve got to identify the value that you are bringing to someone when it comes to leveraging capital from someone else, right? Because if they have all the resources, they have, the time, they have the desire, they have the ability to do it themselves.
And what exactly do they need you for? So you’ve got to identify what skillset, what value you are going to bring to that partnership to ensure that them just writing the check for six figures, whatever it may be, is worthwhile to you or to ’em. So for us, a lot of times in our equity partnerships, we do a lot of the legwork, right? We’re the sweat equity in those deals. We found the deals we’re doing all the day-to-day management, we do all the setup. It’s very easy for our partners on those deals because they don’t have to worry about responding to guests or managing pricing or building furniture. And then on our debt partnerships, usually those are for our flips. It’s even easier for those folks because they’re literally just signing one document at closing. Then six months later they get back all of their principal plus interest and they didn’t have to lift a finger aside from signing a few documents. So the value that we bring to them is a better return on their investment than it would get just sitting in their savings account. And it’s still backed by the real estate that we’re working on as well.

Ashley:
So for the business credit or any kind of line of credit that you’re doing, some pros and cons are what is going to be used for the money? Is it going to be for the full purchase? Is it going to be for just the down payment? So understanding how much of money you need, because a line of credit can be limited. So if you are going to get a business line of credit, and you know what? One thing we didn’t talk about as far as that too is credit cards. Tony is actually using credit cards. We have had guests on the show that have actually taken cash advances from credit cards for their down payment for a property, and it’s worked well for them. I’ve also used 0% credit cards to fund the rehab, but never for an actual purchase. What about you, Tony?

Tony:
We’ve used it. I mean, a lot of times when we use credit cards on flips, we’re using, we already have all the cash in the bank, but I just use the credit cards to get all the points. So that’s usually how we do it. But one of my friends on Instagram actually just posted about this, that he’ll open up a 0% interest credit card for whatever, 18 months. And instead of doing the cash advance, which is usually they charge you a higher interest rate when you do a cash advance, he’ll have someone send him an invoice for whatever amount he needs to pull out. That person will pay the invoice. So it’s just like a regular credit card transaction. And then they’ll get the cash from that invoice and give it to him as in actual cash that he can go out and use. So you’re getting the cash from the credit card without actually paying the cash advance fees. Now this is literally something I saw on Instagram, so go do your own due diligence and no one can beat me up in the comments if there’s something wrong with this. I just saw it yesterday, wanted to share with you guys, but it’s a way to get access to that cash without paying the additional fees, the cash advance.

Ashley:
Yeah. So the fee you would be paying is just whatever percentage the credit card company charges, whether it’s three, but still 3% you’d be paying, I don’t know exactly what it is, but I think it’s around something like that when every time a credit card is swiped, that’s what the business is paying. So that would be you paying to get access to that cash, which 3% of that is could be a lot lower than doing a hard money loan with someone where there may be three points. So 3% on it and plus it’s 12% interest rates. So maybe that actually could be a good strategy to use. Let’s talk about the 401k and borrowing against your brokerage account. So these are two different, they work different ways. So borrowing against your 401k is you’re actually pulling money out of your 401k. And I don’t know if this is a nationwide thing or whatever, but at least when I had a 401k at a W2 job, it was a max of 50,000.
You could draw it out as a time to take your loan. So it wasn’t a huge amount or 50% of whatever you had. So if you only had 40,000 in there, you could only take 20,000 out. And then each paycheck you were paying back into your 401k plus interest. So good news, you’re paying interest to yourself into your 401k. Bad news is that 50,000 is no longer invested into the stock market, which that doesn’t have to be a bad thing. You could be making more of a return using that money to buy a rental property than it was actually making you in the stock market. So with the brokerage account, this has to be a non-retirement brokerage account. You need to have something like a hundred thousand dollars invested into your brokerage account, and you can go to a bank and ask for line of credit and have your brokerage account as the collateral.
So with this is, okay, first of all, bank isn’t in the business of foreclosing on homes. So when you put a property up as your collateral, the bank has to foreclose on you. They have to go and resell your home. It’s a huge deal. So when you’re just putting up your brokerage account as collateral, that’s a lot easier for a bank to come in and say, okay, we’re taking these funds and then they’ve redeemed their collateral rather than having to sell your house. So usually you can get a way better interest rate than if you had a property as collateral because it is so much more liquid for the bank to actually tap into those funds. So that’s a huge plus. And your money that’s invested in the stock market gets to stay in the stock market. You’re not pulling it out, you’re just using it as leverage and going in using that line of credit.

Tony:
Yeah, we’ve used, my brokerage account was, I think with Morgan Stanley or E-Trade. I think they’re together now. But yeah, it was a very similar process. They would see how much you have access to, and there was a percentage I think you could access up to 50 or 60% of what your actual value is. You have to stay above a certain minimum. But yeah, it was a very quick and easy way. And at the time the interest rates were super low, obviously, because the time that we were borrowing was when rates were super low. But it’s quick, it’s easy, it’s painless, and if you have that money just sitting there, it makes sense to deploy that capital and get double the return almost. Yeah,

Ashley:
Because it’s not like if you’re not pulling that money out, that money stays invested and then you get to tap into other money to continue to invest too. Do you guys have any questions? Or if you just want to be more involved in the community, like all these real estate investors, go to ww.biggerpockets.com/forums. Thank you guys so much for taking the time to submit your questions. We love to hear your questions and love to take the time to respond and give you advice. So make sure to submit your questions and you know what The BiggerPockets forums is filled with rookie experience, all types of investors that actually can help you work through any problem you have. So make sure you’re LinkedIn and you can also join the BiggerPockets Pro community by going to biggerpockets.com/pro where you get access to a lot of these things that we talk about on the podcast. Thank you guys so much for listening. If you’re watching on YouTube, make sure to like and to subscribe so you get notified when new videos come out. I’m Ashley. And he’s Tony. Thank you so much for listening to this week’s rookie reply.