Developing short term rentals from the ground up with Andrew Davis

Andrew Davis is the Director of Investor Relations for PassiveInvesting.com, where he has helped raise over $200 million dollars for various assets. He began his career in sales, working for Fortune 500 consumer packaged goods companies, receiving multiple promotions and developing leadership, sales, marketing, and operational experience. Andrew is passionate about real estate investing since his early college years, he began the “side hustle” of investing in single family RE in his 20’s, and raised capital from friends, family, and in some cases complete strangers to acquire his first few deals. After building his single family portfolio to 16 units, he became frustrated with the inefficiency of scaling single family homes and began aggressively looking for opportunities in multifamily real estate. That led him to PassiveInvesting.com and the opportunity to align his skill set, and interests with his day to day, and work with a leader in the space. In late 2008, a little company you may have heard about was introduced: Airbnb. Over the decade to follow, this on-demand hospitality platform has made a quick and steady climb into the international powerhouse that it is today. It is frequently lauded by solo backpackers, families, and business professionals alike, helping link travellers with unique, secure, and enjoyable lodging both local and across the world. In today’s episode Andrew will share about his personal investment where he's developing some raw land and putting some Airbnb cottages on it and how he is working as an ideal Airbnb host. Episode Links: https://www.passiveinvesting.com/andrew-davis/ https://www.linkedin.com/in/andrew-davis-1361b238/ --- Transcript Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.   Michael: Welcome to another episode of the Remote Real Estate Investor. I'm Michael Albaum and joining me again today is Andrew Davis from passiveinvesting.com. But today Andrew is talking to us about his personal investment where he's actually developing some raw land and putting some Airbnb cottages on it. So let's get into it.   Andrew Davis, what's going on, man? Welcome back to the podcast. Happy to have you,   Andrew: Michael, it's so good to be back.   Michael: Yeah, awesome. So before we hit record here, you were just telling me about what it is that you're working on in your personal portfolio and that's really what I want to focus on today. But for those of you that may have not caught your prior episode about passive investing, give us a quick elevator pitch who you are, where you're coming from, and what is it that you're doing real estate?   Andrew: Yeah, absolutely, so let's see. I'm Andrew Davis. I'm the director of Investor Relations for passive investing calm and we are a commercial real estate private equity group, we partner with individual passive investors to acquire really solid multifamily self-storage, carwash assets throughout primarily the Sunbelt markets. And really our goal as a group is to build wealth alongside our investors for the long term and to that end, we are continuing to source just tremendous risk adjusted recession resistant investments and begin to partner with now over 1800 passive investors that are a partner with us and our different assets. So that's my, that's my day job, what I do day to day, and I and I love it. And I came from kind of came from the sales, consumer packaged goods world, which I liked the people aspect and didn't love what I was doing. So truly enjoy what I'm doing and getting to work with investors every day.   Michael: Right on and so that's what you do during the day. So what do you mean by that?   Andrew: So I moonlight as a husband, to my awesome wife, and also a short term rental investor and now developer. So we just closed on a piece of property. We live in Asheville, North Carolina, which is an amazing short term rental market and we just closed on just shy of five acres, about 10 minutes west of downtown with some incredible views and are in the process of subdividing that land to build short term rental Airbnb cottage community.   Michael: Holy smokes and so this is you're doing this all on your own now yeah?   Andrew: Yes, yeah.   Michael: So talk to us about that process, because it's something that I know that I've thought about doing personally as well, I think so far tracked by the short term rental return that's out there, but you are starting from scratch and you're taking raw land, doing the build doing the development doing the ownership and then taking this full lifecycle. So walk us through that man.   Andrew: Yeah, absolutely. So it's really, really for you know, for me, and I don't know that I necessarily recommend this approach for everybody. But I'm very much a figure it out as I go kind of guy and sometimes that's served me very well and other times, that's not served me very well. But I think my key learning in kind of kind of realizing how I operate is really I can be the figure it out as I go guy if I have a really, really good partners and really good advisors and so when we moved up here, we were very fortunate to actually develop a really strong friendship with our, with our developer, our builder and his wife and so he's been a tremendous resource for us in this project. I don't know anything about land. I mean, I didn't I know a ton now after last, after the last four months of going through all the due diligence and learning about topographical maps and surveys and road requirements and subdividing all the different things that go into that and even the financing portion, but very fortunate to to have to have that connection with him and so we looked at several pieces of property, we looked at one that I thought was really cool, and he was like, never he's like, this is a terrible idea, you'll lose so much money and and so really the process has just been learning a ton from him really leaning on he and his wife's experience.   They've done a lot of single family as well as kind of some small community development and so 20 plus years of experience and getting to, you know, benefit from his failures and mistakes made and everything that he's learned. So, yeah, really mean I think in this in this real estate environment, it's because there's such a supply shortage as we know, right, which is driving up home prices and rents and demand for both single family and multifamily assets. I think that there's a lot of value in development because A), you get to build it exactly how you want it. You don't have I mean, there's always issues but the likelihood of having any major issues in a purchase is very, is very, very low, you're gonna have very low capex and then from, from an investment in an appeal to either short term renter or long term renter a new, a new, a nice new property is always going to be more appealing than an older man or an older one. So yeah, it's been a, it's been a, it's been a neat process for us to learn, and then also just kind of in this environment, even though construction costs are high, I'd rather I'd rather have something brand new than in some mold that I have to renovate and maintain.   Michael: Totally and so are you going to self-manage these units once they're done? Are you going to have them with a full service property manager?   Andrew: We are actually building out a management model a management company, so…   Michael: Because of course, why not?   Andrew: Why not, right? Yeah. Yeah, well, there's so much automation, I mean, there's so much that you can do, you can hire a VA to handle all the you know, all the messaging and things like that you can just we have a we have an FAQ that we've developed over running our Airbnb for the last year and as really as which is true in any industry, you're going to get that you're going to get the same 10 questions over and over again, with very little nuance, you'll have little random ones here and there. But for the most part, you get the same questions. So so much of that can be managed virtually and we've been very fortunate to connect with some great cleaners here that go above and beyond and we're actually going to incentivize them on like reviews, and kind of little little, like personal touches, like one of the things that we do is my wife's a designer. So she created this station, this custom stationery, and we write our cleaner writes a little handwritten note, just whatever, whatever the guests name is with a checklist that shows all the cleaning that they had done, just saying, hey, so glad to have you hope you have an amazing time and so we're just building in little processes and automating things like that. So it's a really personalized experience for the guest.   Michael: That's so great. Yeah, I'm curious if you can give us a little bit of insight into like the meat and potatoes and some of the numbers behind this project to give people an idea of like the scale, and if it's something that they if they're interested in doing, you know, how they could go ahead and get involved and do something like this for themselves?   Andrew: Sure. Yeah, absolutely. So I mean, I think it's so it's really, really, I think it's really data so important, right and so, we have some, we have some very subjective data from running our own Airbnb, it's actually in our basement for the last year or so and so we have a very, very good sense of what we can achieve both from an occupancy and a cash flow perspective, and we just go very conservative there, right. I mean, this is, we're not the only people that are doing this, there's a lot of people doing this. So there will be saturation, you will see, you will see rates go down. But, you know, typically, I think what you can expect on a very conservative basis is from a gross revenue perspective of double what you would achieve from doing a long term 12 month lease and having a long term tenant, in an asset we use, we use a pricing tool called wheelhouse, that's great, you've got a lot of levers that you can adjust with that. But it basically automates your pricing on a daily basis based on seasonality and demand and comps and all different kinds of things. So it's constantly adjusting our pricing to maximize both occupancy and revenue and so from and if you and the audience didn't get this already, I'm not a super detailed guy. So I did some, some back of the napkin numbers, but just had a very strong intuitive sense about this and, and know the demand. And so I think I think a very good back of the napkin calculation, if you're in a good short term rental market, is that you can expect at least double gross revenue. So if you've got, if you got a place that'll rent for two grand a month, as a long term rental bear in the middle hill, you should be able if you're running it well, and it's nicely furnished and good photos, I mean, just basic stuff, you should be able to get, you know, four grand minimum per month on average.   Michael: Right on and what about from an expense ratio perspective? Because I think so many of us are comfortable, we know what a traditional single family rental expense ratio might look like, based on the nature and the weather and the vintage of the home. How do you figure that kind of stuff out for short term rental?   Andrew: No, interestingly enough, so I've run I've had a bunch of long term rentals over my over my long career as a real estate investor and interestingly enough, what we found is that the short term tenants actually treat the property much better and I think that part of the reason for that is because we review them and so the mutually assured destruction… but I mean, it's a real thing right? When you have a guest if you if somebody if you have an Airbnb and somebody requests to book you can look at their reviews, and I'm always skeptical somebody doesn't have any reviews or if somebody has some bad reviews we're gonna think twice about that and so what I've found and from a, from an expense perspective, is that a lot of the expenses are baked in, so you have your cleaning, but you can charge a cleaning fee. So they the cleaning fee is actually a a small profit center for us, I think we charge our guests a $75 cleaning fee and I think our, our cleaning, our cleaning lady charges us 65 bucks to clean. So we make a little, a little bit there.   But that's really the primary expense, you'll have to the furniture is going to get a lot more wear and tear if you're in 90% occupied, or whatever it is. So you've got to build that in. But I think that your expense ratios from like a maintenance perspective are going to be very similar to a long term rental. And that's actually one of the reasons that we like buying newer is that you can achieve higher revenues, and you don't have because everything's new, you're just not going to realize or see a lot of those maintenance or capital expenditures for a long period of time and so I would say from a maintenance perspective, you're gonna, you're, again, if you're running it, well, if you're if you if you're catering to the right to the right clientele, you're going to have pretty similar costs, they're really, I think the biggest the biggest expense is going to be whether you self-manage, or you outsource to a vacation rental management company and they'll charge you anywhere, it's the typical property management fees for single family rental is going to be around 10%, some higher, some a little bit lower. But that seems to be pretty industry standard. Vacation Rentals can be anywhere from like 15 to 30 and with a variety of different services and options being totally hands off being more hands on, there's a lot of companies out there that are doing it. But for us, we've just again, been able to get some virtual help, and then find really good cleaning, cleaning help that we incentivize them, not just on the cleaning, but on kind of the overall guest experience and they've been willing to go above and beyond. So for us that saved us. 20% Plus… Michael: Yeah, that's awesome and so you mentioned that you're going to be developing this whole property management arm of your business, or in the head of business itself. So you can be taking on other clients and or is this really developed out of necessity for your own personal needs?   Andrew: I think developed out of necessity and we Isabel and I both have this like just crazy hospitality background, I worked in restaurants for years, we both come from just like very, very hospitable families and so we're huge on experiences and creating just amazing experiences and we want to build, we want to we want to automate that and we want to make that just, we just want to make it automatic, we want to build a company and a team that that is incentivized to, to create those kinds of experiences and so I just I don't, I don't know, the answer is I don't know, I don't foresee us taking on. You know, third party clients are managing other people's properties, because we're so particular about our spaces, and the kinds of furnishings that we have. And you know, how quickly we respond to requests, like we've had a couple issues arise, right we've had. Now the AC didn't work the other day, and there was only like, for six hours, something like that we had somebody out there right away to get it fixed. But we just refunded them, because it was like, We want you to have the most amazing experience, we want you to come back and so I think for us if we don't have that full net full kind of vertical integration, control re on the property, and we can control the experience from top to bottom and for VCs do now.   Michael: Yeah, that makes total sense. Yeah and so maybe you could talk to our listeners a little bit about what goes into that management side of things, if someone is considering self-managing.   Andrew: Yeah, I mean, the biggest thing is if you're you know, depends on which platform you're using the most people use an Airbnb, the biggest thing is beyond just furnishing your property well, and having nice. Just, I mean, use your brain for five minutes, you know…   Michael: It's easier said than done for a lot of people, so…   Andrew: You would think, you know, like, what do you what do you need in your house, like toilet paper and towels and, you know, filter water and coffee, and I mean, you know, decent linens and extra pillows, and I don't know, it's just stuff that that comes very, very natural to us. But just think about what you would like the old golden rule and then do that for your guests. But really, the biggest piece is communication, right and so Airbnb has a, an algorithm or they basically rate you on how quickly you respond to requests and how quickly you respond to messages. So that's a, that's a big piece of it, I think the biggest one of the biggest, really what's made this so hands off for us is having an amazing cleaning person. So, you know, I would just say rather than trying to you know, lowball or go for the lowest Costco for somebody that's going to this is going to take some ownership and responsibility and I would say incentivize them right? When you get a good review, kick them, I don't know, give them five bucks, right? If somebody mentions the cleanliness or something like that, make sure you let them know and make sure that they're, they're incentivized and align with align with what you're trying to accomplish because you're just you can't you can't build anything without having an amazing, amazing people and it's the it's the details like the cleanliness and the organization and having somebody walk into a space that feels very well put together and I mean, even we go down to like, you know, have this certain light on and blanket folded this way and I mean, it's a little things, but it's it all, you walk into a space, and we all know this, right? You walk into a space and you go, this is nice, or you walk into a space and you go, oh, I don't know. It just feels it just feels janky in here, I don't like it. So we want, obviously want everybody to have the former experience.   Michael: Absolutely absolutely. That makes so much sense. So, Andrew, talk to me a little bit about how or even if you would be open to doing this type of investment and this, you know, development investment remotely or is so much of this able to be done, because you're local, you and your wife are local?   Andrew: Yeah, that's a good question. No, I would it would just and it just again, it goes back to the people and you just got it, you have to find really, really good people to do that remotely and if you can find good people in a market that you can trust on the development and construction side of things, as well as the management side of things and, you know, I think that's, I mean, that's the beautiful thing about this digital world that we live in is you can, you can have, there's tons of there's apps out there now where you can have a cleaning checklist. And every time somebody goes through and cleans, they take pictures of all the different things, you know, and you can you can see from wherever you are in the world, hey, these, these things are being accomplished and you can communicate with your guests from wherever. And there's so many things that you can build on. So even if you're not physically present, I mean, our goal would be that we could be anywhere in the world and that our guests would be having the same amazing experience, whether we're there or not. So I think it's certainly doable, but you just gotta find the right people and I think you especially in this in this crazy, labor inflationary environment that we're in, you got to be willing to pay maybe more than you think that you should pay.   Michael: That makes so much sense, that makes so much sense. Andrew and now, I'm curious, you said that you're, you're subdividing these, the land, and you're putting up this community. So just curiosity, why are you subdividing? Is it so that you have the ability to sell one offs down the road?   Andrew: Correct, yeah. So we're actually also going to live on this property and so, our goal, our dream has been to have some land and like having a little farm community and sort of have that integrated with our, our cottages or whatever and so we're subdividing it, partially just yes to make, make an exit down the road, easy if we want to go that route. But then also, because it's very challenging to get like a hybrid loan, if you're going to have a single family home that you're going to occupy and then you're also going to have investment property and so basically, we're subdividing it, we're going to put commercial construction debt on the Airbnb cottage community, and then we're gonna, we're gonna do a residential construction loan for our portion of the property.   Michael: Awesome and for those of our listeners that might not be familiar with what either of those products are, can you talk to us a little bit about how they work and why you went that route, as opposed to going with a different type of product?   Andrew: In terms of a debt product?   Michael: Hmm…   Andrew: Yeah, yeah. So yes, so with commercial construction debt, it's you have different you have different, like different LTV, loan to value, for example and so they're generally depends on what lender we've connected with a great local lender, but they're generally not going to lend you more unlike all in 80, maybe 85% loan to cost. So if you have say paid, I don't know, say 100 grand for the land and construction is going to be 500 grand, then they're not going to lend you more than…   Michael: 80% of 600 grant.   Andrew: Yeah, but again, not not a detail. So they're generally not going to lend you more than that. But if you're owner occupying, you get much better terms and so we only have to put down 10%, or they'll lend us up to 90% of the land to construction costs on that side of things. So we did it that way and then also from just a protection and a growth perspective, the cottages and the dwellings will be in our LLC, and our home or single family home there will be owner occupied will be probably being a trust, or a personal names. So that's the reason for that and that's why you have two different two different debt products. Most lenders are not going to do one loan that's going to encompass business and personal just because there's legal liability implications there and if you do find somebody that's going to do that, they're probably going to charge you crazy interest rate.   Michael: So yeah, okay, cool. Yeah and so on when I did a development, I'm actually still in the midst of it. I got my construction loan, which was interest only for a good chunk of time, and then it converted to a fixed product for X number of years at whatever amortization in the drop the interest rate down a little bit is that similar type of product to what you're using?   Andrew: Exactly. Yep. Yep, very, very similar. So yeah, it's got a it's got basically while you're in the construction process, you're kind of a one set terms and then once that's completed and you get that SEO, then it converts into a fixed long term principle.   Michael: Okay and how easy was that to get being that this is your first? I guess I just say it's that back, is this your first development true development project?   Andrew: This is our first development project and the answer is TBD. So far, so good. We just closed on the land last week. So we're still subdividing it and I've had really good conversations with lenders, I think, because of what I do workwise and my experience, their connections, income, all that I think, I think we'll be good and we haven't run into any snow yet, but yeah, exactly. But I'm confident that it'll that it should be okay but don't know for sure.   Michael: Okay well, I what I'm thinking about is all the folks out there that are intrigued by your story, or excited about doing this type of work and if they don't have a track record behind them, how easy is it for them to going to be to go to a lender and say, hey, this is my plan, this is my project. Can you give me lending for it and are they gonna hit a wall and say, well, you haven't done anything, you don't have a track record, you don't have a resume yet… Go do that first. But it sounds like for you, that was not the case.   Andrew: Yeah, it wasn't, that wasn't the case for me and I think it's because I have done a bunch of while I haven't done ground up construction, I have done a bunch of renovations I've been owning and operating single family rentals, flips for the last eight years, I work in commercial real estate day in and day out. But the other thing I would say too, is you can you could get some bridge debt, some higher interest bridge debt from like a kind of a hard money lender, just to acquire the land to get your project developed and then you could refinance that into longer term debt once you have once you have a proof of concept and the other thing, too, is I think that, you know, in chatting with different lenders, there, I've talked to some people that oh, no, no, don't we don't do short term, you got to have to because it's a business and so you have to have two years of business income, but then there's this is this is there's going to be more and more debt products for this type of this type of thing now that the development piece certainly does add nuance to it, but I would say you know, either be willing to get some shorter term bridge, maybe higher interest debt to, to acquire the land and develop and or just buy an existing property and get a build a track record, you know, go buy, go buy a home as a as a long term rental, put 20% down or whatever it is, and then create a track record and then down the road, you can develop you. In fact, if somebody's doing this for the first time, I don't know that I'd recommend development, I was very fortunate because of the connections I have and because of the experience I have that it was it was it's highly unlikely that I would screw it up but because I'm completely removed from the process, but if there's somebody first foray into this, I don't know that I would try to develop raw land into vacation rental property for my first endeavor.   Michael: I'm right there with you. My development project is converting existing shell in Commercial to Residential and so that's been a whole world and there's no way that I would have done this. If it was my first my first foray and the fact that it is my first I mean, I made so many mistakes and so many headaches and so much brain damage from doing it. Definitely would recommend going the traditional route to get your teeth cut a little bit.   Andrew: The same the same. Yeah.   Michael: Awesome, well, Andrew, I can't wait to hear how this all works out for you. We'll definitely have to have you back on to talk about it. Any final thoughts for folks love to before I let you out of here?   Andrew: No, let's see. I think I think that's it thanks so much for having me on. You can you can find me on LinkedIn, Andrewpassiveinvesting.com. If you want to if you want to connect and I'd be happy to happy to assist in any way I can. But always enjoyed talking to you, Michael, thank you so much for having me.   Michael: My pleasure. Looking forward doing it again soon. Take care, man.   Andrew: Alright, take care.   Michael: Alright, everyone, well that was our episode, a big thank you to Andrew for coming on and sharing what he's going through right now. Very, very, very excited to hear how it all pans out for him, and we'll check in with him later down the road. Do you enjoy the episode as always, feel free to leave us a rating or review as they're very helpful for us and we look forward to seeing on the next one. Happy investing…