Analyzing Potential Between a Long-Term and Short-Term Rental
So you own or are looking to invest in a property. Knowing how to best utilize its full potential will allow you to make the best decisions how to best put it to work for you. We can run your property through our Long-term vs. Vacation-rental analytical tool to give you a solid answer in just a few short minutes. The analysis tool takes what may be many hours or even days of data research and provides relevant and useful information in a matter of minutes including forecasts, valuations and pro forma reporting.
Best of all, after we perform an analysis of your property, if we believe your long term rental would work as a vacation rental, we'll give you a RISK FEE TRIAL to test the waters. This works by us paying you the long term market rent rate for either 1, 3, 6 or 12 months. We then manage and operate it as a vacation rental (short-term rental) and collect the vacation rental revenues to pay you the agreed long term rental amount. If the vacation rental underperforms the long term market rate, we absorb the shortfall. If it over performs, we can then switch it to you to receive the increased revenues generated by operating it as a vacation rental. This is a great way for you to get the actual information of which option will perform best for you without having to take the risk for yourself.
Running a Long-Term and Short-Term Hybrid
This program runs like a hybrid of a long term rental and a short term rental by allowing the tenant to operate any extra space or a bedroom in their unit as an AirBnB. There are three distinct advantages to this program. 1) It allows you to collect revenue above the long term market rate, 2) It is a powerful tenant retention tool, and 3) It brings out in the open what many tenants are doing in secret in the first place.
You collect extra revenue by entering into an agreement that if you allow the tenant to use their extra space as an AirBnB, they will share a portion of the AirBnB revenues with you. Since the tenant is allowed to supplement their monthly rent payment with revenue from the AirBnB, their housing becomes much more affordable to them. They are not very likely to ever willingly leave your rental for another unit that will not allow them to supplement their rent. Remember, if there are times when subletting is inconvenient for them or they need all their space, they simply won't sublet at those times. This is a powerful tenant retention benefit that drastically reduces vacancy and increases your revenue.
Lastly, the tenant is still fully responsible to keep and maintain the property in a safe and clean manner as per the lease agreement. They are the only ones operating the AirBnB including bookings, collecting and paying occupancy taxes, cleaning and such, although Catalyst Property Management will obtain the proper license to operate a short term rental and ensure it is legal and compliant with local ordinances.
Vacancy and Occupancy
Vacancy is likely the biggest expense in operating a rental business. Once time has passed without collecting rent, that revenue is lost forever. Worst of all, vacancy can be easily disguised as an insignificant factor in a profit & loss statement. To fully understand vacancy, you need to understand that vacancy can be caused by several factors beyond just the normal market vacancy rate such as time taken between tenants for turnovers, poor advertising and marketing and excess turnover due to unhappy tenants, etc. Companies that are poor at handling these factors beyond the market rate vacancy, will almost by default blame market rate vacancy for their deficiencies in management. Unfortunately, comparing vacancy rates between companies is abstract at best. However, over time, most property owners will get a sense if their vacancies are too high as a result of poor property management but not usually before going down a long and expensive path.
Here are a few things to consider when evaluating a company for vacancy. Ask what a company's vacancy rate is. If they are unable to give you a number or are vague in their response, it's likely they do not know what their vacancy rate is themselves. If a company charges you management fees regardless of whether the unit is vacant or occupied, you'll want to steer clear from these as they have little incentive to keep vacancy rates low. On the other hand, companies that charge management fees based solely on the collected rents have much more incentive to keep your units occupied.
Although no company is likely to be perfect in all aspects of their operations, Catalyst Property Management understands that the best client retention tool is by keeping a rental profitable. Even though transparency of the vacancy rate is hard to identify, we understand that this is one of the biggest keys to running a successful rental business and, as such, we have designed much of our system around this concept.
Tenants Caused Property Damage
So you likely have Landlord's Insurance, which is good, but you probably also have a deductible with that policy. If tenants cause damage to your rental and don't have the financial ability to make the repairs, that means you will probably be left with the burden. We eliminate this insurance gap by requiring all tenants in our managed units to purchase renter's insurance or enroll in our damage protection plan. This plan has a $50 deductible and as such covers everything after the first $50 (which most tenants can afford) up to $10,000. Since this coverage pays before your policy will, it's likely you will seldom need to file a Landlord's policy claim, thus keeping your insurance rates low and avoiding you having to pay the uncovered deductible gap. This program is great for keeping cash flow steady even when unexpected damages arise.
This is mostly applicable to larger multi-family properties and can be another significant revenue generator. Surveys show that approximately 95% of all tenants have access to the Internet in their rental dwelling despite their socio-economic situation. Since almost all tenants have Internet, we can require them to enroll with our contracted Internet Service Provider. Because we contract for all the units to receive Internet access from one company, they provide a significant discount to the property owner. This usually works great for both the tenant and property owner alike as the tenants can usually get the Internet service at a discount and the property owner makes a profit between the retail price the tenant pays what the wholesale price the owner pays to the Provider.
Repositioning is the process of making both physical and financial improvements to a property's (usually multi-family) Net Operating Income to best benefit from a long term hold or to maximize the resale value of the property in preparation of a sale. For more information on repositioning see our multi-family page.
When to Rehab a Rental Unit?
Keeping your rental in top condition is the best way to get the maximum rent. But making over improvements can be just as costly as neglecting your property. How do you know when to pay or invest in making improvements or upgrades? As a simple rule of thumb, you should be able to recuperate your improvement investment by the increased rent amount you will receive for making the improvement in three years or less. Generally, most cosmetic improvements will have an useful shelf life of about seven years. Therefore, if you break even on those improvements at year three, that will leave you with four years of increased profits.
Some property owners become too ambitious in making improvements to their properties by over improving and making unnecessary improvements. As an example, you may be tempted up upgrade the kitchen and bath with expensive granite counter tops, but if your property is a Class C property in an older neighborhood marketing to a lower demographic with limited income, although the granite counter tops are very nice, they may not command any more rent than a less expensive alternative. Conversely, if you plan on owning the property for the next 40 years this may be a very wise investment. The key here is to try and balance the cost of the improvement with the benefit for making the improvement.
Just like the hardship described in the Rent Protection Program, missed rents can also escalate to even more financial duress if the tenant does not voluntarily give up their occupancy of the rental. If this happens, this may also require you to fund the cost of an eviction, in addition to the loss of rent, to regain control of your rental unit. Sometimes the one-two punch is more that some property owners can bear as they risk losing their once promising investment. To mitigate this risk you can enroll in our Eviction Protection Plan at a cost of $15 per month. Although this is a small added operating expense, it may well be worth the cost as it will pay for any related eviction expenses including the cost of filing, legal fees and court expenses up to two thousand dollars. Most evictions fall slightly under the two thousand dollar threshold except in legitimately contested cases where a property owner has shown gross negligence or willful misconduct.
Additionally, when our attorneys go to court on your behalf, their success rate in removing the tenant and receiving a monetary judgment in your favor is extremely high. They services include getting a judgment and when necessary, skip tracing the tenant, filing garnishment paperwork with employers and collect the fees to be sent to you. Although, recuperating your losses is helpful to your finances, this benefit usually comes way down the road after a default in rent payments. To protect and smooth out your immediate cash flow needs, this benefit may still be essential. Landlords that are able to maintain larger cash reserves may not find this benefit completely necessary.