How Smart Design Creates Big Short-Term Rental Returns

0:00I'm sure you're constantly analyzing deals and you know and people I'm sure are asking like okay what's my minimum cap rate that I should get? What should be my cash on cash return? What cash flow should I be looking for? And what's so interesting, I think during the underwriting process that a lot of people forget is again when you're creating that buy box, and I'm sure you do this all the time, and it's something we do with our clients, is not everybody fits in the same box. And so I think for your listeners, I really challenge you if this is your first time investing to get so clear on what your goals are.

0:41And and I'll give you kind of a perfect example of three kind of current clients that that I'm that I'm working with. And one their goals high W2 earners want to take advantage of the short-term rental tax, you know, benefits, all of that good stuff. But really the goal is they have young children and they want these properties to be basically their trusts, right?

1:11They want these to be equity growing properties that they're probably going to hold on to for the next 10 to 12 years. Now, the way I approach a property like that from a design standpoint is very, very different than a property that I approach from a cash flow standpoint. And what do I mean by that? I mean, when we're talking about what investments to make, when we put together an investment schedule, right?

1:44If anybody's done a cost seg, you know, there's depreciation in, you know, furniture and and and your water heater and your roof and and all these different things. And so when we put together a plan and I know that they're planning on at least for the time being holding on to that property for at least 10 years, our renovation schedule might look very different. You know, we we might not invest in as much in renovations day one because what's going to be trendy in sales in 10 years is going to look very different.

2:20And so, you know, again, making sure that we're thinking about are we going to spend $40,000 on renovations upfront and then have to do another $40,000 in renovations to sell this place in, you know, 10 years? Okay. What's the smart play there, right? Like what do we need to cash flow today, but also really look at what are the things that are important? And so for a client like that, cash flow might actually not be as important, right, in the underwriting.

2:54And so when we look at properties and we look at numbers, we go, okay, cash flow might not be great, but this area is equity potential huge. And I know you're holding on to this property for a good while. And if you want to do a heliloc, if you want to do even in 5 years, you want to do an exchange, you're going to be able to pull out more money in that property than you are in one that's cash flowing. Now, flash forward to another client that I'm working with, and they very different goals.

3:34There's their their goal is to replace their W2 within the next one to three years with short-term rentals. And so for them, cash flow, cash flow, cash flow. — Yeah. — And Right. And so we look at, okay, how much money do we have now? Yes, we need there to be an equity upside in case they need to pull out money to acquire another property in a year, right? If they're doing this over the next few years, we kind of again need to look at at everything as a whole and you say, I have this amount in cash, what should I do?

4:09Should I buy a property that, you know, is turnkey and that we know is cash flowing and just do a design refresh on it? And we know that we can kind of grow that, you know, by doing a design refresh on average, we can revenue 22% year-over-year, right? Like those are our figures and our numbers. And so again, when when we look at things like that, we go, okay, well, a turnkey property might be better for you with doing a design refresh because it's going to require less upfront cash.

4:42You can save more cash for another property down the road. Again, equity, maybe there's an equity play there depending on the area. But you can see how both of those conversations are so incredibly different. And even our approach to design is different because again it goes back to if cash flow is king for you. I am doing a data deep dive into like comparable properties.

5:17Who's the best performing? Why are they the best performing? Not just looking at the top end numbers and you know looking at data on your DNA and being like they have a hot tub. Check. We can have a hot tub. — Yeah. — No, it's like who's traveling there? What's your guest avatar? Like literally making it as like niche as possible so that we can go like we know exactly who's booking this house and anytime anybody who meets that kind of guest avatar is looking, they're booking ours, right?

5:48And so again, like it goes back and forth where I I think this kind of idea of like onesizefits-all in short-term rentals is such a farce. Like it's just not it's not true. And and if you have somebody that you're working with or a contractor you're working with, whether it's on management, whether it's on design, again, anybody that you're working with, you want them to understand that. And I think that's something that's really important as you're going out into the world and and hoping to build this business and thinking about acquisitions.

6:23asking yourself those hard questions upfront are going to set you up for such success down the road because I've seen people get into properties maybe we connected kind of later in the process and I'm sure — by your nodding of the head you've probably had some similar experiences — where they're telling me cash flow cash flow cash flow and I'm looking at the numbers going Right. — We can try like we can try but and and again and it's it's not just interest rates and it's not just how much did you put down and how much are we putting into it.

7:05It's it's again having that strategy really sused out day one because we can help you take a look at a property and I can give you red flags if you're working on the acquisitions front and you know somebody says I don't know I think it's going to be I can furnish that for $20,000 and I can look at a property and go well that's in the Poconos's and there's no central air and So, every single room is going to need a mini split and you just added $70,000 to your budget.

7:42So, maybe that's not what we want to do, right? So yeah, like I said, it's it's such a fun it's such a fun industry, but again, I kind of challenge anybody listening to like if you're in that space right now thinking of acquisitions, you know, ask yourself those questions like what is important to you? And then work with professionals to be able to help you sus out again what that underwriting looks like and what that process can look like for you so you can be the most successful in a way that means success to you and not to everybody else.

8:20— Yes. Yes, man. You are so speaking my language here and I've had so many of those conversations with people who have already purchased — and and it was based off of where did Google tell me the most popular short-term rental destinations are — that must mean that that's the best place to buy so I'm going to buy a cabin in the Smokies because I heard of you know 10 other people doing that so — and and then they're like well why is it not cash flowing the same way and I'm like well yeah it's it like it's probably never going too at this point.

8:53So — but — I think I mean to your point like I think it's so smart to look at that first, be clear on the goal and then buy based on that. But I think most of my audience probably falls in the latter category that you're talking about. You know, obviously living off rentals kind of implies like cash flow and — being able to live off your rental. So, if that's the case, I know before we hopped on you, you were saying like you'll get the question of what's the best market to invest in, but, if you know, if someone's shooting for cash flow, what do you feel like are some of the things that you would recommend looking at?

9:31Is maybe there's specific markets, maybe there's specific types of properties, or what's what's the direction you would start to point someone in? — Yeah. I that's such a good question and as you know such a loaded question. So so what I what I will say first and foremost that that is probably been one of the most shocking things about now being in this industry exclusively for the past six years is so part of our business we so we have kind of three legs of our business.

10:04So Coho House started as a co-hosting firm. So when I when I left Airbnb when it was COVID and the pandemic and things were wild, it was like the wild wild west. Nobody knew what was going on, how travel was going to rebound, all of that good stuff. Being in Southern California, there were a lot of owners that kind of left, you know, the area and needed help with their rentals. And that was where kind of co I wanted to understand the host side of things.

10:37I had been on the design side. I'd been on the consulting side. I' I'd been on the Airbnb side and I didn't fully understand the world of hosting. And so Coho House, you know, thus the name kind of started from co-hosting. And we very quickly grew that from, you know, from five properties to 12 kind of in our first year that that we were co-hosting. And as we started doing design and I started consulting with other design people in the industry, we realized that there are a lot of people in this world that want to expand their short-term rental business.

11:19And nobody everybody I feel like it's funny to share now. Most of our clients will set up their first Airbnb, their first short-term rental, and then they will go, "I'm never doing that again. How do I never build another bunk bed in my life? I almost got divorced. Like I again I've heard it all that they were just like it was awful." Yeah.

11:51— And you know, and and so we laughed and my husband at the time was was getting out of a a business that he had run for a long time. And I literally had a design client who was like, "Oh, I never plan on going to this property. This is an investment property. I I'm busy. I I never plan on stepping foot in this property." And we had never had that conversation about who was going to go and set up this this property. And so my hus I said I literally was like we're kind of in panic mode.

12:24Can you take our tools? My husband's very handy and we're both from kind of contractor, you know, backgrounds. And and I said, "Can you fly to Florida and go build a bunch of furniture?" And this was four years ago now. And he now has traveled and set up over a hundred short-term rentals across the country. He has it down to a science. It is like insanely impressive and I want nothing to do with it.

12:55But it is where the third kind of leg of our business started was out of this necessity of of setting up short-term rentals. And I I tell you all of that to say the places I have sent my husband in this country never would have guessed in a million years. And a lot of times it's other designers. He works with other designers. He works with individual owners. He works on our projects. He's not just, you know, just doing our stuff. And so he'll get, you know, individuals that, hey, we bought all this stuff and now we're realizing, oh my gosh, it's all in a warehouse and it's now I have to build furniture for a five- bedroomedroom house and like I have a full-time job or I manage properties

13:44And I don't have time to go and do this. And I say again, I say that because the places that he has gone have always surprised me and sometimes it's markets I'm familiar with and I'm like, "Oh yeah, I've heard, you know, Hawking Hills is really hot right now and Logan, Ohio is blowing up and you know, that's great." And then there are some places where I go, "Really? That's where you're going?" And we will check in with our clients, you know, a year later, 6 months later, and they are cash flowing and they're extremely successful.

14:27And it's really really interesting because to the long and the short of your your question, I think, is like where's the next hot market, but also where does cash flow come into play? Now cash flow again for me very important to understand again how much money you're putting down, how much money you're going to have to put into it, and at what point are you breaking even with a property, right?

15:01You're going to see a lot of these like big time investors that are putting hundreds of thousands of dollars into properties and their length of time to become cash flow positive. They have a longer runway, right? Because their funds, they're again investment companies for the everyday individual. We really when you look at a business, any other business, right? Any other business in the world. If you started it, you would be so stoked if you were cash flow positive after a year.

15:38— Like that would it's unheard of. Any other industry, you're like you're going to lose money for the first two to three years of your business, hands down, right? Like this just how business works a lot of the time. And so that runway though for short-term rentals, I I think we kind of are a little like mean to ourselves sometimes to say like we have to be cash flow positive, including recouping my down payment and recouping my furniture cost and recouping all of this like within a year. Amazing.

16:09If that's your goal, we're it's it's going to be it's going to be, but we can get there through again kind of strategic strategic investment. And so I I think you would probably say the same thing and correct me if I'm wrong, but really you're looking for places where you can get in on a property at a lower cash value, right? And so looking at properties that are in the $300 to $500,000 range like I think is again if you can find something in that range you know there tends to be some play right there tends to be some play with equity usually there's usually room for improvements there's usually room for renovations

16:58Again kind of getting that like immediate equity if you're doing like a refinance right like year one or two. So that's really important. So, you know, and if you don't have a stomach for renovations, then again, you're probably going to be at the top end of that, number. And, you know, again, I I don't want people to get so hung up on like, is this exact location sexy?

17:30Is it like on the top list? Is it in the top like upandcoming market? I'll give you an example. My husband went out worked with another designer. My whole family is from West Virginia originally. West Virginia is beautiful. Do I think of West Virginia as like the top destination of where I'm traveling? No. Not Not normally. Do I love going to West Virginia? Absolutely.

18:02And he went to a small town right outside of like Fagetsville, West Virginia, and it was a gorgeous house. Again, you know, I I was like, "Oh, like you get to go in the fall and it's a beautiful that time of year." And he's a California boy, so he was like stoked. He gets to see all the colors and, you know, all that stuff. And I had asked him, I said, you know, I kind of know the area. My family's from about an hour away. What's there? Like what why this is like a beautifully designed house.

18:36What's going on in this area? And I started asking around and I actually reached out to my family cuz I said, "Hey, you know, my family, they're big WVU fans and so they're up there all the time." And so I was like, "Hey, like what's going on?" And my uncle actually goes, "Oh, they just designated the area in New River Gorge as a national park. M — and it's whitewater rafting and it's outdoors and and there's hiking trails and the and you know Fagatville area is you know really investing in the downtown and there's some up and cominging like restaurants and this that and the other and again mind you this is somebody who like has family that live there and I had never I didn't know any of this and

19:25You know as we started looking I was like oh this is actually a really interesting market and because of the national park designation, they're getting an increase of like something crazy like 30% year-over-year of like new travelers. — Everyone that wants to visit all the national parks has to go there now. — Has to go there now cuz it's the newest national park. — That's right.