How to Start an Income Property
One privilege I have is to travel the world speaking and meeting new people who are interested in things I don’t know much about.
It gives me an opportunity to learn more, one of rich dad’s most important lessons…
“Growing your wealth requires growing your knowledge,” as he’d often say.
I’ve had more and more people ask me about investing in real estate and starting a short-term income property.
Short-term income properties have grown in popularity, and I’ve discovered that if you do it right, it can be very lucrative.
As always, my advice is to start with one property. Even with all of the success we’ve had, we still make mistakes with everything we do.
So, start small, this is the time to start preparing for when those opportunities come up…
Why Short-Term Rentals Are Lucrative
Companies like Airbnb and VRBO have created a solution for travelers around the world to find comfortable accommodations that are local, authentic, diverse, inclusive, and sustainable.
Travelers are no longer content with renting a room in a multi-unit hotel. They want a more authentic experience while on their journeys, both personal and professional.
Airbnb, for example, has leveraged technology to allow over 6 million people around the world to enjoy intimate housing while on their travels. Airbnb has connected the world so everyday people like you can monetize your space, passions, and talents to become hospitality hosts.
You can make 3, 4, even 5 times more by renting short-term versus having your tenants sign lengthy annual leases, but it requires different knowledge to be successful. Here are a few things to consider…
#1 You’re in the hospitality business
Traditional real estate investors are called landlords. In short-term rentals, you are called a host. This means you are in the hospitality business. Your success is not just based on providing a nice place to stay. It is also based on your ability to provide a great experience.
#2 You’re in the pricing business
As a real estate investor, you rent your properties over long periods. This means that you focus on a price in terms of months or years. With short-term rentals, you must focus on price continually to optimize your profit because you are renting out in nights, not months and years.
#3 You’ve got higher liability
As a real estate investor, your liability exists, but it’s focused on tenants and your physical property. With short-term rentals, you have increased liability. People may take the things you’ve furnished your unit with. Your neighbors might complain. There are different laws and regulations to consider. You can be in danger of squatters. And so much more. You have to know your liability and take steps to minimize it.
#4 You’re a marketer
As a real estate investor, you can find a good renter without having to be a great marketer. With short-term rentals, if you don’t know how to position your property within the first few months to be as enticing as possible, you’ll have a very hard time being successful. The platform is very competitive, so you need to grow your skills as a marketer and salesperson.
The Value of Time
The reason full-time short-term rental owners focus on the potential profit-per-hour is that, if you’re not careful, operating a short-term rental can be extremely time-consuming. If you don’t know how to maximize your time value, you’ll effectively make very little per hour. Here are a few reasons why short-term rental is time-consuming.
- Pricing. I already mentioned this one, but it is worth repeating. You have to optimize your pricing on short-term rentals daily. This requires research and adjusting your models constantly.
- Frequent turns and maintenance. Because people stay in your unit for a matter of days, not months or years, the amount of time you spend cleaning and turning goes up a lot. And because you furnish the unit completely, there is more that breaks and needs replacing.
- Communication. Between check-ins and check-outs, answering questions from guests, and writing and responding to reviews, there is a lot of communication that happens, and that takes a lot of time.
The most successful operators know how to maximize their time by minimizing the burden of these tasks.
How to Start an Income Property
Whether you have a property already, or you’re looking to purchase one specifically for short-term rental, the last thing you want to do is jump into it without the right preparation.
First things first, if you haven’t spent much time staying in short-term rental properties, you need to start now. Find properties similar to ones you own or are looking to buy, and take a massive amount of notes.
In traditional real estate investing, location plays a big part in your success. For instance, if you have a nice house in a bad neighborhood, you’ll pay a lot and make little.
With a short-term rental, location is also important. People are traveling and looking to be entertained, and they are looking for an experience. So, you have to play up the strengths of your location to match the experiences potential guests are looking for.
People look for various kinds of experiences. Perhaps they want an urban experience with lots of nightlife and dining. Or maybe they want a quiet getaway in the mountains or countryside. Or maybe they’re looking for a clean affordable place to stay while on business.
Your location will have the qualities someone is looking for. Your job is to maximize the strengths of your location and highlight them for the right guest to find irresistible.
Scaling Your Rental Business
My rich dad would use the following diagram to explain the differences between how business owners and investors spend their time compared to employees and sole-proprietors or small business owners.
People on the left side of the CASHFLOW® Quadrant make money by exchanging their time for money. Employees (E) agree to do tasks for a certain amount of time (X) in exchange for an agreed-upon amount of money (Y) resulting in their paycheck (Z).
Because you can make a lot of revenue through short-term income properties, many people get fixated on their income while forgetting to consider the most important thing—the value of their time.
Here’s an example of the importance of scaling your business:
A woman had two units and made $4,165 a month in income after expenses. She did everything right as a host, except one thing. She didn’t scale.
After keeping track of her time spent on her Airbnb business, she realized she was spending 147 hours per month. That meant she was making only $28.33 an hour. That’s not the recipe for getting rich.
After realizing this, she learned to automate a lot of her processes. This included hiring a cleaning service, installing digital locks, using a management service, and using a pricing service. The cost was an additional ~$1,500 to $2,000 a month, BUT she saved 125 hours a month. Her effective hourly rate was now $107.31.
Why is this important? Because if you want to grow rich with your short-term income property, you need to be able to scale. This means that you can’t get overloaded with working in your property business. You need to work on it.
Remember, to be an entrepreneur, you need to have a multi-unit goal and intend to do this full-time to replace your income with the income from your business. This means you need time to find the right properties to grow your business, not waste your time on managing your business’ every detail.
While the woman was making less overall money, the time she gained allowed her to expand her portfolio, making her more and more money each month.
Play it smart,
Editor, Rich Dad Poor Dad Daily