Building a W-2 Exit Plan with Short-Term Rentals

0:00I there's some things that I did with your program and I was right to the tea. Some things I I kind of went off the path a little bit just because I had some like for instance the realtor. — I had a really good relationship with a realtor. I've bought and sold several houses with her in the past just because of moving from my job. And so — I stretched her thin. I mean we were looking at I feel like for me with the W2 was a lot because I didn't have a lot of time but we were looking at five six houses a weekend. Mhm. — And so we probably walked through 30 houses and I think I've with you on the deal analyzer on the Monday calls.

0:34I think I I went through and I was excited probably about 10 or 15 deals and you shot I think almost every single one of those down. And so it was one of those No, it's part of it. It it's it's something that I learned kind of early on in my career is because because just my background is project management is don't get emotionally attached to the project. And I think with this business, you kind of have to. I I don't know if it's it's unavoid I don't think it's avoidable. But I've just kind of learned to tone that back a little bit and get invested later, you know, emotionally in it.

1:08And so just taking a different look after going through so many calls with you on what what to look at and you'd always pull my nightly rate down. You'd pull my occupancy rate down just a little bit. I was a little bit too too optimistic. But no, it for me it was a numbers game after that. I I didn't really care. I wanted it to to I knew the area, so I was confident in the area. I was confident in the neighborhoods, and I just wanted it to make sense. So, as soon as the numbers made sense, I went after it. — And I didn't get every house. I I think I put offers in on probably five houses, and so far, I've gotten two.

1:41— So, that's kind of how it worked out. — Yeah. Yeah. Can you can you describe the numbers on those houses and what they're they're like? — Sure. You're Yeah. The first house. And one thing that I kind of did a little bit here just kind of based on some people locally that are in a short-term rental group is there's not very many Airbnbs or short-term rentals in general that are large houses. — I mean, the the market's a little bit saturated on the 21s, 1s, even the 32s. So, I went for the big houses. So, my first house is a 53.

2:14Just about 3,000 square ft and I think it was listed for 325 and I ended up the I ended up offering around 315. I think that's where we ended up. So, it's got a it's got a large backyard put in a fire pit. It's got a nice patio and it's it's really kind of focused on larger groups. I mean, it'll sleep 12. — Mhm. And so the regulations kind of differ between what suburb of Tulsa you're going through or what city within Tulsa you're in. And so I kind of had to navigate that. But that's the first house. And the second house is similar.

2:47It's a 43 about 2500 square foot that had a fantastic backyard with a hot tub. And both of these houses have twocar garages. And that one we landed at right at 275. — Yeah. Yeah. And and they're both I'm going to put the link to both of these in the the show notes so people if you want to see what they look like now and and the listing I mean it just turned out phenomenal. You know you you just followed the the steps of the program.

3:18You did just a great job of designing it and taking professional pictures and it's they're both beautiful and I agree with you. I I always tell people like small multi-units where it's like two, three units together or a large house tend to per outperform the market. And especially in this market, like you said, there's there's the large there's a huge demand for large houses. There's a high occupancy rate in the area. And so looking at these, you know, you paid basically, you know, 315 for for the one and then 275 for the other.

3:54And looking at your deal analyzer here that I've got pulled up, you know, the first one is $2,500 of net cash flow. And the second one's $2,500 of net cash flow. These are projected obviously. You're still, you know, getting it all set up and you haven't experienced a full year yet. But, that's I mean that's an extra $60,000 of annual net income coming in to your family. Now, that lasts into perpetuity. And when you look at the cash on cash return on these, which we can talk about your financing here in a second, but you're looking at 24 to 25% cash on cash return, which, you know, most people buying long-term rentals these days are like, oh, 10% cash on cash return is a home run, you know.

4:40So, it's just that that's that's really I mean five grand of extra income coming in is makes a big difference in most people's finances and these weren't really expensive properties. So, how did you go about financing? — So, I being a W2, I did conventional loans. Interest rates weren't great, but obviously the deal analyzer that we work through kind of uses kind of puts that all into the calculations anyways, but I did a conventional loan, 30-year loan, and was able to do get a little bit lower interest rate there than like a DSCR loan.

5:18But, my process for funding these I I'm not going to recommend this. I mean, do it at your own risk. It might make sense for you, it might not. But for me, I am pulling out of my IRA to invest in these houses. And it kind of makes sense with with my situation, especially with being able to use the losses and doing a cost segregation analysis and everything to offset those taxes I have to pay from getting the pulling that stuff out of my IRA early. — So, that's that's kind of what I'm doing right now.

5:49— Interesting. That's I didn't realize that. So, that that's the down payment is the from your IRA. — Yeah. And then not only that, like down payment and furnishing for a lot of the furnishing. — Yeah. — And was that a Roth IRA or a traditional? — It was a traditional IRA. — Okay. Got it. So — So you Yeah, you do have to pay the taxes on it, but you can pull out your principal that you contributed without any penalty. Correct. — Correct. — Okay. — Correct. So yeah, so that's I mean yeah, everyone's got to do that analysis for themselves, but if it can, you know, the whole point of of the IRA is to provide you financial freedom at some point like way down the road.

6:27But if you can get that financial freedom today and you start calculating what that cash flow looks like, the appreciation, the tax benefit, — sometimes that return — is is much smarter if you buy the right property — to to invest it today and and get something that you can actually realize those gains as opposed to being locked away until you're 50. — Yeah. — Nine and a half. So — yeah, I mean everybody's got their own philosophy and I I feel like when you talk retirement, it gets pretty deep rooted pretty quick. People are pretty passionate about it, but I I just I've done a lot of research on it and income tax wasn't even a thing until like the 19 I think 1913 — somewhere around there.

7:06Like it's relatively recent as far as like the history of the country is concerned. And then you know IAS, 401ks, they came about from the government in a way to kind of help you offset some of those income taxes. And so for me looking at it, it's like if government created the tax and then they create a vehicle to help you offset the tax, like how much can you trust that vehicle in the end? It's it's it and so I just know that, you know, the whole theory it's never made sense to I've sat in front of a lot of wealth adviserss and and they're saying they're saying, "Yeah, max out your 401k or IAS." And that might make sense for some people, but that's with the assumption that you're going to be in a smaller tax bracket than than you are now.

7:47— Number one. And number two, that the taxes are going to at least be the same then as they are now. — Well, number one, it doesn't make sense. Personally, I don't want to be in the same tax bracket then as I am now. I want to make more money. — Yeah. — so it doesn't make a lot of sense. And then I also don't trust that we'll probably not raise taxes in the next 30 years either. So for me it was kind of a no-brainer, but I know that's a tough subject for a lot of people. — Yeah. No, no, I I agree. Yeah. Some people are like, I'm going to die on the hill for for this strategy that I'm wed to.

8:18To me, the other aspect too is is just that that like I talked about it it the other assumption is that you're going to work your job that you're stuck in until you're at least 59 and a half when you can start drawing on it. A lot of people at 65. — So, you know what? If you want to be financially free today, you know, if you could use those funds to create cash flow in your life every single month as opposed to just hoping that they grow to some large sum that you can live off of, that cash flow exists even in retirement.

8:52So, you get it today and you get it at 65 and till you're dead and then your heirs get it. And so it just made more sense to me to build streams of income as opposed to locking it away into an investment that you're hoping is going to be worth a lot more down the road. So yeah, that's that's I appreciate you sharing that. So yeah, so you could use conventional financing, you know, qualify for it with your W2s, get a great rate. Looks like you had 7.1 on the first one here. And then 7.38 on the next one.

9:25And then since then rates have dropped. So for people looking to, you know, do a conventional loan to finance them, it's 25% down. And now I think it's in the sixes for a a you know, investment loan. But I I'm I'm curious. I want to go through some of the things that you feel like went right or, you know, went really well and then I want to talk about some of the things that were a challenge for you. Because it is there's always challenges and lessons learned along the way. So, what were some of the things that you know stood out as like going really well throughout this process or according to your plan?

10:01— Sure. Yeah. According to my plan is I'll put air quotes on that because some of it some of it's luck. I mean some of it just kind of happened to happen and one of those is my staff. I I had to go through a few different cleaners, through interviews, but also even just hiring and then, just kind of changing gears and going with somebody else until I found somebody that made sense and kind of understood what I'm looking for. Because one thing I like about Tulsa is it's not the destination place. Like, people here are know about short-term rentals, but it's not a a foundation of the community, so to speak, like some of the, you know, Florida locations and stuff like that.

10:40So, when I would be interviewing cleaners, they're like, "Yeah, when I need I need 48 hours noticed from when you tell me the cleaning needs to happen to when the cleaning is going to get done." And I'm like, "Well, that doesn't work for me." — Like, I need the cleaning done the day they leave. And so, it it's kind of I I was able to find a really good cleaner that we had a really good relationship where. Now, I kind of I didn't try to push it everything on them immediately. We're like, "Hey, I want to scale. I want to build.

11:10I want this." I just kind of let it happen organically. And it's really like she's taken control and like now she's stocking. And as we open up the second house, her mom's cleaned for 35 years. So, now she's cleaning that one and she's training her daughter to clean and they have their cousins on board if we ever do a third or a fourth house. And so, that's worked out really well for me. I've always kind of had it in the back of my head, but a lot of that was just kind of luck. Like, it just really worked out with her and she she's wanting more out of it, too. Like, she wants to do the stocking and the managing, and obviously I paid her for that.

11:44So, she's making more money, her family's making more money, and it's just it's just really working out. So, I was very thankful for that part. — Yeah. Yeah. That's great. Yeah. And that's the cleaners, I think, are probably the most integral part of of the process. And we had the same thing. We made mistakes in the beginning kind hiring cleaning companies as opposed to hiring individual like you're describing. And so but I like to your point you mentioned some things were just luck but I think a lot of luck comes from taking action and moving forward.

12:15And so then things — you know nothing just like shows up when you're sitting on the couch and doing nothing. So these opportunities and things that go right — happen as a result of just like taking steps that are sometimes unknown but moving forward with it. So I love that. — how about on the flip side? What what stands out as more challenging than you initially assumed? — Oh man, neighbors. Neighbors are I just I don't think I even I just it wasn't in my mind that they were they could be an issue.

12:48And as as far as like it it might be more locationational for me because with Broken Arrow specifically to get your short-term rental license, you have to send a letter to every abuing neighbor telling them your plans for the property. — And man, especially in these I I I get it to a point, but especially in these quiet older neighborhoods, they do not like the idea of it and there's a stigma — with it. And so, man, we had one neighbor who put up signs in their front yard saying no STRs here.

13:23It's just it's just part and and we we went and met with the neighbors, which was which was difficult. We've brought them flowers. We've sent them letters and my wife helps out a lot with that cuz she's more of the face of the business than me, luckily. But man, it just some of that I think that's the most stress from all of this that I've had was because of the neighbors. — Interesting. Yeah, they've called the city. We've had to go meet with the city. In the end, it's fine. I mean, as far as where we're at, — it doesn't go to city council.

13:54So, I can't lose my license unless I'm breaking the law. — But they can make your life kind of difficult. — Yeah. — And so, and so we're trying to work through that. And I think over time, it kind of just the initial emotion of it all. Oh, I'm going to have an Airbnb next to me. It's going to be parties all the time. — Well, specifically with the houses that I'm have that I have, they're larger houses. We're framing them more for like either groups of workers or families and also with a higher nightly rate and I do a twoight minimum. It really discourages that kind of party group and we haven't had any thus far and so I think they're starting to realize but man that initial surge is just pretty tough to get through.

14:34— Yeah. Do you do you screen for previous reviews for from your guests as well? Yeah. — Yes. We have not turned on instabook for either of ours for that reason. — Okay. — Yeah. We we we might, but I'm still trying to fill things out. I'm six months in on the first one and about a month in on the second one right now. — Yeah. So, the status of the neighbors right now is pretty I mean, it's it's okay. Like, it's acceptable. Like, you know, your guests are able to stay there without having problems or anything like that. — Yeah. Yeah, it's okay.

15:05We've had two issues come up where they've called the cops on us twice on our first one. And it was for because both of them were groups of motorcycle groups. — they have a motorcycle rally in Tulsa and I mean things book up fast, which is fantastic. And they're like some of the nicest people I've ever dealt with. — Mhm. — U, one of them parked their trailer kind of almost in front of one of the driveways, so they called the cops down there. And another one is an older lady called the cops because she didn't like how they were parking their bikes on the street, which is perfectly legal.

15:36And you know, I called them and apologized and like, "Hey, we get this everywhere. It's not a big deal." So, luckily, we still got a five-star review, luckily. But, yeah, that's the only kind of issues we've had thus far. — Yeah, that's interesting. That that whole policy I it's rare that you run into that where a city requires you to mail all the neighbors and let them know — the plan. And, and I think the challenge is that you can't educate someone with a letter. And so — their education comes from CNN stories of some house being rockstarred by a big party.

16:12And so that's what they envision when they see, oh, there's going to be a short-term rental next door. — so I can imagine how — how difficult that becomes then because now it's like on their radar is this is on their agenda and they have nothing better to do than try to sour this this short-term rental. Not having had to do that myself in the past, I can tell you like neighbors generally, I I've never had an issue with the neighbors. We have one in Florida actually where the pool butts up to a rental, long-term rental, and that renter — is a difficult person to say the least.

16:50And so they will I think they're just angry that we have a pool that people are enjoying and they don't have a pool maybe. But — so we get we get messages from her, but other than that, in the 39 that we have, because we're not having to reach out to the neighbors, it's just like they wouldn't even know it's a short-term rental. It's just a really well-maintained home. — and but but we we'll talk to the neighbors and and tell them, — you know, that this is going to be either a short-term or midterm rental. You know, generally we we don't say like Airbnb.

17:22We say, you know, we're going to be renting to work groups or or traveling nurses and stuff like that just to kind of — make people feel a little more confident with it and not like think it's going to be a party. But, that's yeah, that's really interesting. — yeah, — that's been the the only tough one. I think the one that I knew was going to happen as far as like the difficult part of it is managing this kind of it's almost like two different lives where I have my W2 life and then I have this pseudo business you know two Airbnbs we're trying to manage and I'm you know I'm just a normal guy I'm not a genius by any means or you know can work 100 hours a week and still be you know super nice to my family.

18:03So trying to trying to manage both of those at the same time, that's been that's been tough. And I think that what I'm starting to realize, especially with the first one, is once you get it off the ground, once you get it up and running, once we get the few the first 15 to 20 reviews under our belt, like it's it things kind of settle down. — Yeah. — And that's what happened. That's when I got the itch to get the second one. And then I'm in the grinder again for the two and a half, three months. And so, trying to manage all that while still being good at my job, that's been that's been interesting.