fbpx

How to Make an Investment Using the BRRR Method Profitable

Finding the True Investment Home Values for Motivated Buyers and Sellers.

31 min read

There are a myriad of ways in which you can make purchasing a house a prosperous endeavor for you, but understanding what strategy to employ for specific properties can be a challenge, as you have to not only be aware of all of your options but also be able to apply each option to your situation to extrapolate the best results. In order to assist in this effort, we will start working through the thought process that we have used to analyze properties, and explain in detail how each method can be applied to turn you a profit. The strategy we are going to dive into now is known as the BRRR method, which stands for Buy, Rehab, Rent, Refinance.  

The main purpose of this strategy is to purchase a property where you can add value. Usually, this is done by rehabbing the property, but there are other add value plays, which you can consider.  For example, if you are able to add more living space to the property by adding another bedroom, then you are able to increase the value of the property.  

In our example here, we’ll be updating a condo in Old City, Philadelphia.  

The BRRR strategy provides us with an opportunity to reevaluate the market-place yearly and decide what to do with our property. The flexibility afforded to investors utilizing the BRRR method is one of it’s biggest advantages.  Using the BRRR strategy, we can analyze the market every year and determine if it is a good time to refinance our property in order to utilize the equity that we have built.

Traditionally for the BRRR method, refinancing is done 6-12 months after purchasing a property, but if we want to utilize the strategy in Old City, then we will either need a heck of a deal or a way to make sure that this property has positive cash flow until the appreciation reaches necessary levels.

When looking for properties for the BRRR strategies we recommend analyzing the local market to determine what the average price per square foot is.  Below are the average costs for homes in Old City based on recent sales.

Number of Bedrooms Price Square Footage Price/Sq. Ft.
1 $271,000 938 $290
2 $533,000 1,515 $353
3 $585,000 1,947 $301

This information can be used as a guide as to what you should be looking for.  

In Old City, you can see that people are willing to pay a premium per square foot for 2 bedroom apartments.  The demand for 2 bedroom properties is evidenced by the $/Sq. Ft. for 2 bedroom apartments being $350 when 1 and 3 bedroom apartments are selling for around $300/Sq. Ft.

Armed with this information we know we want to look for 2 bedroom properties in Old City, Philadelphia that are underpriced.  In order to find underpriced properties, we would recommend using a site such as Realtor.com and then sorting properties by $/Sq. Ft.  It is easier to recognize price anomalies this way.

When we took a look at the market, we found 214-218 New Street Unit C and decided to come up with a way to make a profit from this property. 

Inspecting Our Investment

We are going to be discussing a lot here, so while I think it is worthwhile to review the property characteristics and understand the value that this property brings, we have to remember our main goal with this investment. This property needs to be located in a good area, be underpriced for the marketplace, and we have to feel confident that the property will increase in value. 

Therefore, I am only going to briefly discuss the property specifics here before we get into more of the analysis for this property.

214-218 New Street Unit C is a condo that is for sale in Old City with an asking price of $339,000. This condo was built in 1918, and from the looks of the pictures posted online, the property looks to be in pretty stable condition. It is 1,110 square feet and the layout is cleverly spaced out using strategically located storage cubbies mounted on the wall.

The individual unit itself has very well-maintained hardwood floors and tile. The walls look clean with a coat of solid white; however, the unit has plenty of maneuverability if a decision is made to change to a different color. This new paint could potentially increase the overall value of the condo with little effort. Seriously, Zillow did a study in which they concluded the following:

A new analysis by real estate site Zillow.com of more than 32,000 photos of sold homes finds that light shades of powder blue and periwinkle, especially in a bathroom, are correlated to an increase in home value of $5,440, on average…On the other hand, homes with white or off-white bathrooms sold for an average of $4,035 less according to Zillow.

The first noticeably unpleasant physical issue when analyzing the inside of the property is the condition of the ceiling.  The ceiling is composed of wood that looks quite old, but sturdy.  The state of the ceiling should be considered a potential red flag and future repairs on the ceiling must be accounted for when calculating your initial offer on the property.

To be clear, I do NOT think that this is a major red flag, but rather just something to keep in mind as we get closer to making a decision on this property. Personally, I like the look of the exposed wood beams, but some of the images posted show that the wood is a bit dated, which would be expected given the age of the property itself. 

The unit comes with an intercom system and an elevator. Having those components allows for ease of communication and maneuverability for condo owners and their guests. The condo also comes with a dishwasher, dryer, garbage disposal, microwave, oven, refrigerator, and washer. All these appliances, judging from the pictures, look up to date and allow for immediate use upon move in.  

The kitchen and bathrooms are complete with all your essentials. The kitchen looks to have been designed with a multitude of cabinets that allow for optimal usage of the square footage. The countertops are simple in design, but are fairly basic. The bathroom has a long countertop that has two sinks to allow for more space in a crowded bathroom. 

The good news is that, while both the kitchen and the bathroom are nice and do not need to be improved, there is still plenty of room for improvement in both of these areas of the home, which gives us more optionality when deciding how to make this investment profitable.

The bedroom in this unit looks quaint and comfy. The closets in this bedroom consist of more of the cubbies and shelves to help improve storage space. The floor, however, seems ugly and most likely will need to be replaced with new carpet.

Overall, we can conclude that the physical attributes of this property can be considered low risk if we can get the deal at the number we desire.

Analyzing the BRRR Method

Now that we have the basic property review completed, let’s take a look at some of the positive characteristics of this property for the BRRR method.  

 – First, the property is a 2 bedroom condo, which we showed earlier is in higher demand in this area.

 – Second, this property is 1,100 square feet (which is slightly below the area average for 2 bedroom apartments) and priced at $301 per square foot. This leaves us some wiggle room for renovations.  

 – Lastly, the property is located in an area that is expected to increase in value

Increased property values = increased equity

BRRR Method Property Desirable Characteristics:

  1. Property in demand  
    1. You want to be able to rent this property once you rehab it.
  2. Property is underpriced  
    1. Usually we will be looking for distressed properties.
  3. Property is expected to appreciate
    1. Review of the neighborhood and economic factors that might play a role in the growth of your investment.

So, now that we know what we are looking for, let’s take a look at what makes for a good area to purchase a property using the BRRR strategy.  

We will be looking for areas that are expected to have increasing property values as this will automatically lead to increased property values and increased equity.

Is Old City a Good Investment Location?

One of the major factors in determining an area’s expected value appreciation is to look into external factors that will lead to an increase in overall neighborhood economic value. For example, Old City is a growing market in one of the largest cities on the east coast, it is growing in the tech community which has a higher likelihood of sustained growth, and to top it off, they are planning on building a massive park in this area.

Instead of going into too much detail on the history of Old City and why this area of Philadelphia is experiencing a renaissance of sorts, I would much rather provide some high-level overview of the area and instead get into the more exciting growth of a park and discuss how this type of a decision can directly impact the real estate market.

Old City is known throughout Philly as one of the prime locations in the city to move to, as it is home to:

  • Over 80 restaurants
  • Tons of boutique shops
  • High scores for:
    • Walking – Scored a 98
    • Transit – Scored a 97
    • Biking – Scored a 92
  • More cultural assets than Northern Liberties and Rittenhouse Square combined

The job market has grown by close to 40% over the course of the last decade and is expected to continue to grow for the next decade moving forward. In fact, the University City Keystone Innovation Zone (KIZ) was recently expanded to Old City, which provides up to $100,000 in annual tax credits to qualifying Old City tech companies.

Generally speaking, when an area sees an influx of residents along with increased salaries, two aspects directly correlated with giving new businesses in a growing industry tax breaks, the price of real estate and rental market inflates as more demand is put on the market in a centralized location. In addition, the types of residents that are making their way to Old City are of the millennial generation, as 40% of residents are in their 20’s.

However, banking on the growth of a single industry or counting on the government to continue to provide tax incentives for companies can be a risky proposition for an investor, and as we already stated, with investing in an area like Old City, we need to be prepared to buy and hold this property for a bit longer than a typical deal.

Therefore, we need to be absolutely certain, or at least as sure as we can reasonably be, that the market will continue to grow in Old City. Therefore, we need an ace up our sleeve, or to be more accurate, we need a brand new park.

Well, good news. Philadelphia is planning on building Penn’s Landing Park.

This $200 million park is expected to cap off I-95 between Market St. and South/Front St. and the Delaware River and it will include a 6 acre site at Market Street, redevelopment of the 4 acre western and southern edges of the Marina Basin site, and an extension of the South St. pedestrian bridge to Penn’s Landing, to name a few items.

Why is this such an important aspect to consider for our purposes? Well, according to Anne Fadullon, the city’s Director of Planning and Development, Philadelphia is expecting a $1.6 billion economic return for the city along with close to 2,500 jobs in only 25 years.

What this really means for the city’s economics is that this park should lead to a growth of about 1,500 new housing units, 500 hotel rooms, and over 100,000 square feet of retail, dining, and entertainment. In addition, thousands of construction jobs will be generated due to this endeavor.

Currently, the park isn’t scheduled to be started for about 3 more years, but demolition has already begun. Since demolition has already begun, I think it is a good idea to get into the nitty gritty with this park and figure out the specific economic impact that it might have and directly apply that to our housing market study.

The Park’s Economic Impact

The initial cost of this park is estimated to be around $250 million, broken down as such:

  • $125 million – Completing the cap over I-95 and Columbus Blvd. between Chestnut and Walnut Streets.
  • $100 million – Construct tilted park from Columbus Blvd. to the River
  • $10 million – Complete the Delaware River Trail from Washington Ave. to Spring Garden St. along Columbus Blvd.
  • $15 million – Extension of South St. Pedestrian Bridge to Penn’s Landing Marina

Once this is completed, the city is projecting the long-term economic impact to deliver on-going impact of $287 million in economic activity, 2,400 new and permanent jobs, $10.6 million in City tax revenues annually, and $6.5 million in Commonwealth tax revenues annually. These figures are drawn from estimated direct expenditures associated with operations, new household income and spending by new residents, and spending by hotel guests.

If we look at how this increase will impact the property value in the city, we can look at combining the incremental property value impact for existing properties near the project area and the property value impact for the new development on site, the project will produce an estimated property value increase of $532 million.

How Does This Park Impact Our Property?

Why are you reading about a park’s impact on the economic valuation of the city? Well, for starters because I think it is pretty cool.

But as a side benefit, there is historical precedent to support the concept that a large scale park introduced to an area has a direct impact on that area’s valuation.

When Pennypack Park was built in 1975, there was a statistically significant rise in land value that was deemed to be close to the park. This means that there is a direct correlation between proximity of property to a park and the value of that property.

More specifically, there is a 33% increase in land value at 40 feet, 9% increase at 1,000 feet, and 4.2% increase at 2,500 feet. In addition, each acre of parkland is said to generate a value of $2,600 in location rent.

TLDR: Land is more valuable near a park.

In case you want some further support, there was also a study done to look into how protected open space in Southeastern PA impacted the economic value of property. What they found was that homes within a mile of open space, for our case a park, saw a measurable increase in their value as a direct result of this proximity.

This also has a circular impact on the city as well, as increasing the value of homes in a one-mile radius will also increase the amount of property taxes that the owners will pay to the government. Regionally speaking, the property tax revenues will increase by about $228 million. In addition, the increased home values will mean an increase in transfer tax revenues, which get collected when a house is sold, which can be estimated at about $13 million of increase taxes.

While increased taxes might not be the best case scenario for you, the home buyer, it does mean that the neighborhood will continue to grow and develop, which means that you are almost guaranteeing your investment will grow as the market grows.

Sounds too good to be true, right?

Well, there is additional support out there to help calm any reservations that you might have.

For example, Chicago built Millenium Park, which cost about $475 million to build, is 24.5 acres, and according to the New York Times, is responsible for $1.4 billion in residential development and increasing real estate values in the area by $100/sq. Ft.

Still not satisfied?

How about Schuylkill Banks park in Philly, which cost $60 million to build this 1.2 acre park and according to Plan Philly, this park helped increase residential property value by over 150% since 2000.

To put it simply, this is about as safe of a bet as you can make. Not only have experts weighed in on the economic impact, but there is a ton of real life examples to support the growth numbers that the city is claiming.

 

Sales Market in Old City

In order to determine our After Repair Value (ARV), we want to make sure that we have a good idea of where the market is currently.  Because the city is committed to improving the local economic landscape, as evidenced above, we know that this area is likely to continue to experience the growth it has been experiencing recently.

Let’s take a look at the current market.  

Number of Bedrooms Price Square Footage Price/Sq. Ft.
1 $271,000 938 $290
2 $533,000 1,515 $353
3 $585,000 1,947 $301

In order to estimate our ARV for this property, we will utilize the $/Sq. Ft. method.  

In order to do this, we will assume that after we rehab the property, the $/Sq. Ft. will increase from $305 ($339,000/1,110 = $305/Sq. Ft.) to about the average for 2 bedroom apartments, which is $353. Then we want to figure out how much this property is going to be worth.

$353 X 1,110 = $391,830.  

We would expect this property value to increase to about $391,830 after it has been rehabbed. Again, we will want to find A LOT of comparables before we purchase this property to make sure that we really believe the banks will appraise this property for that much money.  

At the very least, in order to get our money back out through a refinance, we need to make sure that the following equation holds true.

(ARV * 0.7) – Rehab Costs = Maximum Purchase Cost

For this property, that gives us:

(391,830 * 0.7) – 20,000 = $254,281.  

Let’s backtrack and talk about where we came up with the numbers for this rehab.  

Estimating rehab costs is a difficult task that definitely trips up a lot of new investors.  Based on our research, we will give you some of the estimations that we have seen so that you can get an idea of what to expect when purchasing a home that needs some work.  

Rehab Costs

Based on the photos of the property, we decided that the following rehabs could be made in order to improve the value of the property.  We know that this place needs to have a rehab to an A-Level property – that means that we need to make this property top of the line as we will be competing in Old City.  

Therefore, we will be updating:

  • Flooring:
    • We decided to upgrade to solid hardwood in the bedroom and kitchen.  Also, we will be upgrading the bathroom to a tile floor.  
      • Kitchen
      • Bathroom
      • Bedroom
  • Kitchen Countertops
  • Kitchen Appliances
  • Bathroom Tub
  • Bathroom Vanity

Based on our research, here is the price breakdown.  We went ahead and doubled that budget just to be safe.

Need to UpdateCost per Sq. Ft.Sq. FootageTotal Cost
Total Cost$14,764
Flooring: Kitchen$8.00166.5$1,332
Flooring: Bathroom$12.00111$1,332
Flooring: Bedroom$8.00300$2,400
Countertops: Kitchen$40.0030$1,200
Appliances: Kitchen$4,000
Tub: Bathroom$1,100
Vanity: Bathroom$1,800
General Carpentry$20/hr.80 hours$1,600

Hopefully, we can use this information to negotiate a discount on the property, as the property needs a few upgrades in order to be competitive in the rental market.

Therefore, if we purchase this property at an asking price of $339,000, we are really going to have to adjust our strategy here. If we wanted to BRRR 214-218 New Street Unit C at asking price then let’s look at how much the ARV must be in order to refinance.

ARV * 0.7 = $339,000 + $28,000

In order for this equation to work, and therefore for this property to be BRRR-able, then we must gain some significant equity via market growth.  The ARV, in order to refinance out our initial investments would have to be $524,000.  

Old City has been experiencing rapid growth and most 2 bedroom properties in this area are close to the $500,000 range, but seeing as our property is over 400 square feet smaller than the average 2 bedroom property it is easy to see why our property values may be lagging behind.

In order for this investment to make sense we will need to look at the cash flow, while we wait for some appreciation.  

Waiting for appreciation can be difficult, but given the amount of time we are anticipating holding on to this property, this does present us with a unique opportunity to delve deeper into our research on loan refinance options.

Well, the first step would be to gain a more thorough understanding of the loan that we utilized in order to acquire our mortgage. Given the length of this article, I will go into some of these options in another piece, but once you feel like you have a good understanding of the basics of your loan, researching refinance programs based on the mortgage loan is just a simple Google search. You can navigate refinancing options for whatever mortgage loan that currently shapes your situation.

It is important to understand that when searching for refinancing options that you will be dealing with lenders. Therefore, negotiation skills will be key!  Try to channel your inner Chris Voss, and utilize his methods from his book Never Split the Difference. This monumental resource tool will give you all the confidence you need in dealing with lenders.  

Just remember, lenders can set their own interest rates. Keeping this in mind, it is important to search around for quite a few options before really negotiating new options.

However, as we stated, refinancing is something that we will have to tackle much later for this property, so instead, let’s analyze this property as a rental first.  

Rental Market in Old City

After we rehab this unit, we will want to rent it out.  If we were to rent this property, then we could safely assume a rent of about $2,200.  The current rental market is described below.

Number of Bedrooms Average Cost Average Number of Bathrooms Average Sq. Ft. Average Internal Score
1 $1,555 1.2 666 4
2 $2,259 1.4 879 4.5
3 $3,228 2.4 2,460 4.9

We could probably rent our newly upgraded apartment for more money since it is larger and will be updated, but we like to use safe and conservative estimates when we provide numbers.

Also of note, we can see that most of the properties for rent in this area are exceptional on the inside, so we want to make sure that when we are planning our rehab that we are meeting the market expectations (i.e. we better make this really quite nice). Using these numbers and our personal rental calculators, we get the following cash flow data.  

Yearly Cash Flow 1 2 3 4 5
Before Tax Cash Flow (BTCF) -$4,076 -$3,823 -$3,565 -$3,302 -$3,034
After Tax Cash Flow (ATCF) -$641 $505 $603 $702 $800

Since we are already discussing the accounting side of this property, it is also important for us to delve into the tax benefits that this property could afford us. Tax benefits are a key component when analyzing properties. 

Therefore, let’s talk about tax baby.

Basic Tax Advantages

There are some obvious advantages that can be claimed on your tax return after buying a property. The first points we will consider relate to the basic Schedule A deductions that most homeowners are aware of, which are your mortgage interest and property tax deductions.

Before we get into that though, you might be wondering why we are discussing basic tax concepts here, which is a completely valid consideration. However, Congress just passed a new piece of tax legislation that was signed into law on December 22, 2017. In this new piece of legislation, everything you thought you knew about tax laws changed.

EVERYTHING…

Ok, not really everything, but a number of benefits that you thought you knew about did change. Some have only changed slightly while others have disappeared altogether. Therefore, I thought it was important that we focus on the basics to ensure we are still capturing the most value for our investments.

As most investors and home-buyers are aware, you can currently claim a deduction for interest on a mortgage of up to $1 million on your Schedule A (assuming you itemize your taxes). This can immediately lead to thousands of dollars of savings, as the first year of owning a home generally results in tens of thousands of dollars being paid on the mortgage interest.

However, thanks to the new tax bill, any mortgage in effect prior to December 15, 2017 will be unaffected. Unfortunately, since we are looking to buy our property, this does not include us. Therefore, the new tax law states that the cap for deducting interest is now $750,000, and this is a combined amount for ALL of your homes.

If this purchase is your first home, we shouldn’t run into any issues with taking this deduction, but if this is one of your investments, then we might have an issue with how much of a deduction we can claim.

The other fairly well known tax break is the deduction for property taxes paid. According to the US Census Bureau, the average household property tax is $2,127. However, just as with our mortgage interest deduction, there are changes coming to the property tax deduction thanks to the new tax legislation.

Specifically, property tax will no longer be its own deduction but instead, it will be wrapped up with state and local sales and income taxes, with a cap of $10,000 for married filing joint taxpayers.

Additionally, there are two other tax benefits that I want to discuss while we are looking into it. The two most beneficial and applicable tax advantages to owning a home, and specifically for our property itself, are the PMI and Energy Efficiency deductions.

What is PMI Deduction?

PMI, or Private Mortgage Insurance, occurs when a homebuyer puts down less than 20% of the total cost of the property. This results in the homebuyer paying PMI, which generally costs 0.3% to 1.15% of the home loan in every mortgage payment. This is one of the few cases in which the new tax bill has provided a positive benefit for our purposes, as this deduction had expired but the new tax bill retroactively made the deduction available for the 2017 tax year.

It isn’t all rosey though, as you can only claim this deduction if you are itemizing your taxes, and given the fact that the new tax bill has doubled the standard deduction, most taxpayers will not be able to see this benefit. However, most taxpayers are not us, so we can work to stack the deck in our favor.

What this entails is strategically calculating and planning your spending throughout the year to better position yourself for Schedule A – meaning that you want to increase your charitable contributions, increase your unreimbursed job expenses, or maybe hire an accountant to take a deduction for their fees.

What is the Residential Energy Efficient Property Credit?

One available tax benefit that does not require itemizing your taxes is the Residential Energy Efficient Property Credit, which is a tax incentive for installing alternative energy in your house.

The options available to you are credits to claim if you have installed solar electric options in your home or if you have installed solar water heating equipment, both of which are available through end of year 2021.

Any equipment installed between Jan. 1, 2017 and Dec. 31, 2019 will allow for 30% of expenditure to be eligible for the credit. This fits in nicely with our timeframe, as we would be closing in the next few months and any improvements we would make to the home would be incurred well before the end of 2019.

Additional Hidden Financial Benefits

Outside of tax breaks, there are also numerous advantages to purchasing a house from a wealth and personal liquidity perspective.

As for wealth benefits, the most important aspect to consider is the 80/20 rule, in which you should be living off of 80% of your income and saving or investing the rest of your income.  This will ensure that you are hitting your primary goal from a wealth building perspective, which is to locate yourself in a neighborhood that has lower average incomes than your home generates.

For our property, we will definitely be in the upper tier of the neighborhood from an income perspective, given the prices of the neighboring properties and the total salary of each of our investors.

Regarding liquidity benefits, this is actually one of those topics that seems to go against the standard line of thinking.

In order to buy a new home, you need to invest your money and put large sums down up front in order to complete the purchase, which would go to imply that your personal liquidity will be depleted.

That is 100% true. No dispute from me.

However, having a mortgage provides you with 2 pretty large benefits that you might not be fully aware of or have simply just not checked out in too much detail.

One of the determinants in your credit score and a way in which you can improve your score is through getting your mortgage, as the FICO formula does take into consideration what types of credit you have, and when you diversify this credit, your score will positively reflect this vast array. Between increasing the variance in the types of credit you have personally taken on and the consistency of paying off your mortgage on a monthly basis, your credit score will improve.

Now armed with an improved credit score, equity in a home, and significant signs of wealth accumulation, you will have all the firepower needed to go an get a personal line of credit. These LoC’s are instrumental in helping smooth over rough months from a financial perspective in order to provide consistency and certainty in your day to day lifestyle.

Can you get a personal line of credit without a home? Of course, but taking the steps outlined above greatly increase your odds.

Property Outlook

Including tax benefits it looks like this property will about break even using conservative estimates as a rental. The cash flow will not lead to overnight prosperity, but the investment in an appreciable asset will help create wealth. Investing in this property is equatable to investing in a stable blue chip stock that has expected continued positive growth.

We estimate that it would take this investment 16 years to deliver positive cash flow. Not exactly what most investors have in mind. Normally we would not recommend investing in a negative cash flow property, but it will be nearly impossible to find a positive cash flow property without lead generators – which we will be discussing in the near future so check back soon!

If we get creative though, we may be able to turn this property into a positive cash flow earlier than we calculated.  Let’s check out what would be involved in utilizing this property as an Airbnb rental.

AirBnB – The Revenue Stream Needed

Let’s start with the question that everyone always asks first. Is it legal for you to Airbnb your condo?  From Airbnb.com itself:

In July 2015, an amendment to the Philadelphia Code went into effect permitting short-term rentals in any dwelling unit provided that the operator of the short-term rental complies with certain conditions. These conditions include obtaining a permit if the listing is rented for more than 90 days a year.

So yes, Airbnb is legal in Philadelphia, which means that we can use this as a strategy to increase our Net Operating Income ( All of our Revenue – All of our Expenses).  Even though it is legal in Philadelphia, it may not be allowed by your HOA. Definitely something that you want to check before you make the purchase if that is part of your investment plan.

In order to Airbnb your property there will be some costs that we will have to budget for.

First off, we will have to budget for furnishing the property.  

Based on our estimates from research, we found that furnishing this apartment should cost us between $10,000 and $15,000.  

We will estimate:

  • $1,800 per bedroom set
  • $4,000 for the living room
  • $1,000 for the kitchen
  • $1,000 for the miscellaneous items and decorations around the house.  

This brings us to a total of $7,800, which means we have to update our necessary ARV using this strategy to refinance this property when the time is right.  We will want to make sure that we budget for costs per visit such as supplies, but we will include that in our analysis below.  For now, let’s just focus on the necessary ARV if we purchased this property then rehabbed it and now had to furnish it to rent it using Airbnb.

This gets us the newest equation:

ARV * 0.7 = $339,000 + $28,000 + $15,000

So, in order to refinance the property, if we decided to utilize the Airbnb method, then we would have to wait until the property was worth approximately $546,000. We will be waiting a while for this to happen. Later on, we will see if we will be making any money in the meantime.  

If you’re going to be managing an Airbnb, let’s do a quick recap to make sure you know what you’ll have to do in order to be competitive.  

Managing an Airbnb

In order to have a successful Airbnb rental, it is absolutely necessary that you establish a good reputation. The best way to do this is to provide excellent service to your guests. This can be as simple as providing basic amenities, but we want to wow our guests because we want our property to have great reviews, not good reviews.  

You should definitely create a custom Guidebook to the City that you can provide for your visitors to ensure that they are able to get the most out of their trip no matter how short their stay. You will also want to provide answers to common questions that your renters may have – such as how to change the temperature or what the wifi password is – so that their experience is flawless.  The little things will be important when you are trying to please your renters, so pay attention to detail and execute a structured plan.

The key to getting renters is to get those first few reviews that prove to the world that you are not some crazy person.  

In order to do this, you will want to go to Airbnb and basically charge WAY less than the nearby asking prices to ensure that people will be interested in giving you a try even though they can’t read any reviews about you.  

Current estimates in Old City would place a 2 bedroom apartment at about $215 per night, so we will want to start out charging around $100 per night until we develop a reputation as a great host.  

Marketing will be super important when you are running an Airbnb, so the first thing for you to do is to make sure you have great photos of your place so that the guests can easily see what they will be renting.  Nobody wants to rent the mystery house with one blurry photo.

Exposure will be super important.  Also, be sure to post the listing on multiple rental sites.  We would definitely recommend Tripadvisor.

Increased Exposure ⇒  Increased Rentals ⇒ Decreased Vacancy Costs

You want to make sure that you are at the top of the list for Airbnb rentals so here are a few tips we’ve seen used.

Tips to Grow your Airbnb Business:

  • – Fill out all of the information that Airbnb asks for.
  • – Make sure you have at least 20 photos that are professionally done.
  • – Make sure you have a rapid response time to customer questions.
  • – Offer Instant Booking.
  • – Do something different.  
    • – We’d recommend using social media to market your condo.
      •  – For example, let guests send you pictures during their visit to post to your properties social media page. This will create a unique story for guests to follow and enjoy.

Managing the rental will also be a part of the plan that you will need to execute. You will need to decide if you will be managing this yourself or if you will utilize a company in the area that specializes in Short Term Vacation Rentals.  

Admittedly, we haven’t worked with any of these companies so we cannot give you a recommendation here, but be sure to ask around and send us a note regarding any that you use!

Lastly, let’s look at the revenue generated by this property as an Airbnb so that we can decide if the BRRR method will be plausible.  

Eliotandme.com is able to provide a “rent estimate is based on billions of pricing data points using AI to accurately predict short-term rental prices, trends and price surge events.” We utilize this tool as a way to estimate rental incomes in local areas and have found it to be relatively accurate when talking to investors using this strategy.

Here are our assumptions about this property utilizing the Airbnb strategy.

We conservatively estimated that in order to keep a high demand for our Airbnb rental we would try to be below the market rents of $215.  Hopefully, our nice apartment combined with cheaper rents keep down our biggest cost – Vacancy.

Eliotandme.com estimated a vacancy rate of about 14% in Old City Airbnb rentals – or about 1 night a week.  We tripled this to be safe and assumed 3 nights a week we won’t be able to rent the apartment.

This gives us an extra $700 in rental income a month when utilizing conservative numbers for the Airbnb strategy. Our cash flow for the property utilizing this method is listed below.

Yearly Cash Flow 1 2 3 4 5
Before Tax Cash Flow (BTCF) $1,380 $1,742 $2,111 $2,487 $2,872
After Tax Cash Flow (ATCF) $2,905 $4,122 $4,293 $4,465 $4,639

This really changes our ability to utilize the BRRR method in properties where we will be waiting for appreciation over the long term in order to refinance out money. Granted, Old City may have an uptick in the market as there continues to be a positive economic trend in the area, but we want to make sure that we pick the strategy that generates cash flow today while hoping for appreciation tomorrow.

 

Leave a Reply

Your email address will not be published. Required fields are marked *

Scroll Up