4+ Ways to Fix Negative Cash Flow (and When to Sell Instead) (Rookie Reply)

Summary

Podcast Summary: Real Estate Rookie – Episode: 4+ Ways to Fix Negative Cash Flow (and When to Sell Instead)
Release Date: February 7, 2025
Hosts: Ashley Kehr & Tony J Robinson
Produced by: BiggerPockets

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Introduction

In this episode of the Real Estate Rookie podcast, hosts Ashley Kehr and Tony J Robinson tackle a critical issue faced by many new real estate investors: negative cash flow in short-term rentals like Airbnb. The duo provides actionable strategies to optimize property performance, manage expenses, and decide when it might be time to sell.

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Listener Question 1: House Hacking Strategies and Investment Decisions

Timestamp: [00:41]

A listener reaches out with a complex scenario involving house hacking a property with an ADU (Accessory Dwelling Unit) and deciding between purchasing an out-of-state multifamily property versus another local multifamily property. The concerns revolve around maintaining a favorable interest rate, avoiding mortgage issues, and evaluating landlord-friendly laws.

Key Points Discussed:

• Understanding House Hacking:
  Tony explains house hacking as living in one part of a property while renting out another, utilizing various property types like duplexes, triplexes, or single-family homes with additional units.
  “A house hack is basically you buy a property much like the person who asked this question, and you live in one portion of that property and you rent out another portion.” [01:27]

• Mortgage Considerations:
  Ashley reassures that typically, after a year of living in the property, investors can convert it to a rental without losing the locked-in interest rate or facing mortgage penalties.
  “Usually there's some kind of timeframe that you have to live in the property and be your primary, then you can leave and keep the same financing on the property.” [02:15]

• Out-of-State vs. Local Investments:
  The hosts weigh the pros and cons of investing out-of-state, highlighting benefits like lower capital requirements and landlord-friendly laws versus the challenges of managing properties remotely.
  “The biggest thing that comes down to is like your personal preference. Do you want to keep living where you're living or do you want to get another primary residence?” [03:23]

• Financial Analysis:
  Emphasis is placed on running the numbers for both scenarios, considering factors like down payments, equity growth, cash flow, and operational costs.
  “A great starting point is the capital that you have available... running the numbers on both situations.” [05:00]

• Scaling Through House Hacking:
  Tony advocates for replicating successful house hacks to build a robust portfolio over time with minimal out-of-pocket expenses.
  “My suggestion would be to replicate what you've already done successfully and do it again and then do it again...” [06:36]

Notable Quote:
“House hacking is one of the best ways both from a financial perspective and just from like an ease perspective to get into real estate investing.” – Tony J Robinson [09:14]

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Listener Question 2: Investing in Columbus, Ohio

Timestamp: [13:03]

A listener is considering purchasing a duplex in Columbus, Ohio, as a first-time investor. They seek recommendations for real estate agents and general advice for investing in a new market.

Key Points Discussed:

• Finding Investor-Friendly Agents:
  Tony recommends using BiggerPockets' Agent Finder to connect with realtors experienced in working with investors.
  “The first resource is the BiggerPockets agent finder... they are the quote unquote investor friendly agents.” [13:03]

• Market Analysis for Columbus, Ohio:
  Ashley and Tony delve into Columbus' real estate market, highlighting its median home price ($344,000), rent-to-price ratio (0.54%), income levels, population growth, and major economic developments like Amazon's $10 billion data center and Intel's chip manufacturing plant.
  “Median home price... rent to price ratio is 0.54%... Amazon is spending $10 billion to build a data center.” [15:52]

• Neighborhood Focus:
  Emphasis on analyzing specific neighborhoods within Columbus, such as New Albany, which is attracting tech companies and benefiting from proximity to Ohio State University.
  “Always niche down to your neighborhoods and New Albany is actually the neighborhood where all the tech companies are going.” [16:47]

• Short-Term Rental Potential:
  Tony discusses the potential for short-term rentals in mid-sized markets like Columbus, which may offer better opportunities compared to oversaturated vacation destinations.
  “I've seen some opportunity there... it's not like these big well known vacation destinations.” [20:13]

• Long-Distance Investment Tips:
  Advice includes building relationships with local lenders and agents, utilizing BiggerPockets resources, and conducting thorough market research to ensure informed investment decisions.
  “Your lender, your agent, two people to really focus on building relationships with as you go into that market.” [21:00]

Notable Quote:
“The goal is to find the city that satisfies your investment requirements.” – Tony J Robinson [18:48]

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Listener Question 3: Improving Short-Term Rental Performance

Timestamp: [28:08]

A listener is struggling with negative cash flow in their short-term rental business and seeks advice on bridging an $11,000 annual deficit. They present their financials and ask specific questions aimed at increasing profitability.

Key Points Discussed:

1. Bedroom Counts and Property Listings:

   • Question: Are two-bedroom properties more desirable or do they typically have longer average stays compared to three-bedroom properties?
   • Discussion:
     • Tony suggests that more bedrooms generally perform better but emphasizes the importance of market-specific data.
     • “It’s extremely market dependent... you would want to dig into the data for your specific market.” [31:21]

2. Cleaning Fee Management:

   • Question: Can encouraging longer stays help reduce cleaning fees?
   • Discussion:
     • Emphasizes charging fair and reasonable cleaning fees based on actual costs to avoid absorbing these expenses.
     • “At worst, you should be breaking even on your cleaning fee.” [32:43]
     • Suggests shopping for competitive cleaning services and possibly incorporating cleaning costs into nightly rates strategically.

3. Enhancing Property Amenities for Higher ROI:

   • Question: What strategies can increase ROI in the second year?
   • Discussion:
     • Tony shares personal experiences of reinvesting in property amenities, such as adding a pool, to boost revenue.
     • “Add some things... like an in-ground pool... our property has done incredibly well in comparison.” [38:42]
     • Encourages competitive research to identify high-performing amenities specific to the market.

4. Exit Strategy and Long-Term Appreciation:

   • Question: Should the investor absorb the loss or focus on long-term appreciation?
   • Discussion:
     • Suggests evaluating the potential for property appreciation against ongoing losses.
     • Discusses options like 1031 exchanges and tax considerations to mitigate financial impact.
     • “Use this spreadsheet to gauge what's the average across the country.” [45:04]

Notable Quotes:

• “If your cleaner charges you $200, maybe you can charge the guests 225... that extra $25 can help bridge that gap.” – Tony J Robinson [33:00]
• “Don’t be afraid to shop for new cleaners... you’re in a better position now because we found a better long-term partner.” – Tony J Robinson [34:39]

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Strategies to Fix Negative Cash Flow

1. Optimize Bedroom Configuration:
   Tailoring bedroom counts based on market demand can enhance occupancy rates and revenue. Testing different configurations may reveal optimal setups for specific properties.

2. Manage Cleaning Fees Effectively:
   Charging appropriate cleaning fees aligned with actual costs ensures that operational expenses are covered without eating into profits. Utilizing dedicated short-term rental cleaners can maintain high standards and guest satisfaction.

3. Invest in High-ROI Amenities:
   Strategic reinvestment in property amenities, such as pools or modernized interiors, can differentiate listings and justify higher rental rates, thereby increasing overall profitability.

4. Leverage Market-Specific Data:
   Conducting thorough market research using resources like BiggerPockets’ market analysis spreadsheets helps in making informed decisions about property improvements and pricing strategies.

5. Consider Long-Term Appreciation:
   Balancing short-term cash flow challenges with the potential for long-term property value appreciation can guide decisions on whether to hold or sell underperforming assets.

6. Utilize 1031 Exchanges and Tax Benefits:
   Implementing tax strategies can offset losses and enhance overall investment returns, making it viable to hold onto properties that are currently underperforming but have strong appreciation potential.

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Conclusion

Ashley and Tony provide a comprehensive guide to tackling negative cash flow in short-term rentals. By addressing listener questions with practical advice and sharing their own investment experiences, they equip rookie investors with the tools and strategies needed to optimize their real estate portfolios. Whether it's refining house hacking strategies, selecting the right markets, managing operational costs, or enhancing property amenities, the hosts emphasize the importance of informed, data-driven decision-making to achieve financial freedom through real estate investing.

Final Notable Quote:
“Real estate investing is a journey towards financial freedom, and making informed decisions is key to building a successful portfolio.” – Ashley Kehr [47:12]

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Additional Resources Mentioned:

• BiggerPockets Agent Finder: biggerpockets.com/agent-finder
• Market Analysis Spreadsheet: biggerpockets.com/resources
• BPCON 2025: biggerpockets.com/conference

Transcript

[Ashley Kerr]

Today we are going to figure out how to stop your Airbnb from bleeding money.

[Tony J. Robinson]

Now, things don't always go according to plan, but there are tons of ways to optimize pricing, asset management and amenities on your property.

[Ashley Kerr]

So maybe you're spending too much money on operations or maybe you need to find an exit strategy. We'll break this down and more next. I'm Ashley Kerr and this is the Real Estate Rookie Podcast.

[Tony J. Robinson]

And I'm Tony J. Robinson. And welcome to the podcast where every three times a week we bring you the inspiration, motivation and stories you need to hear to kickstart your investing journey.

[Ashley Kerr]

Okay, so Tony, what's our first question today?

[Tony J. Robinson]

So the first question says I'm currently house hacking a property that has an ADU that also generates income. I bought this property intending to leave and then rent the house out that I currently live in, which is a two bedroom, one bath. I have a very good interest rate that I locked in during 2022 that I don't want to lose or maybe have my mortgage called due to not living here. I live here for very cheap because of the income generated from the ADU. I'm getting ready to make my next move in 2025 and I'm contemplating on staying here and buying a multifamily property as an investment out of state, which would be a lot less capital and have a lot more landlord friendly laws. Or buy another multi family property as a primary residence locally and house hack that property. I'm single and I live alone. What are the pros and cons of each situation?

[Ashley Kerr]

Tony? The first thing that comes to mind is how they mention I don't want to lose my good interest rate or have my mortgage called due from leaving here. So the first thing I want to bring up is that they've owned the property, it looks like since 2022. So depending what kind of financing, a lot of times you only have to live there for a year and then after that the bank can't call the mortgage on you. So you would be able to turn that into a rental, not just the adu. So that was something I wanted to address too that like it doesn't mean that you can't keep that mortgage on there and not live there anymore. Usually there's some kind of timeframe that you have to live in the property and be your primary, then you can leave and keep the same financing on the property.

[Tony J. Robinson]

Great, call out Ash. And you kind of read my mind on that piece. And I think before we really jump in, just to set the table for some of our more rookie rookies who maybe aren't familiar with the term house hacking. But a house hack is basically you buy a property much like the person who asked this question, and you live in one portion of that property and you rent out another portion of the property. It could be a two bedroom, one bath and then an ADU in the back where you rent out the adu. It could be buying a duplex or a triplex or a fourplex. It could be buying a single family home with a basement. It could be just buying a big house and renting out the other bedrooms that you aren't using. So there are different ways to house hack. But I just want to make sure that we set the table for all of our true Rickies that are listening so you understand what a house hack is. So great. First point, Ashley. Hey, you could just potentially move out anyway and not have your loan called so you still get to keep the interest rate and you get the ability to generate some revenue there and then potentially just recycle, you know, the, the primary residence and low down payment, maybe lower interest rate and, and do this all over again. Are, are there any benefits that you see, Ashley, to potentially just buying the next deal as like a true investment property?

[Ashley Kerr]

I guess the only thing I think of is like where they're living now so it says out of state. So would this be like a more 10 or landlord friendly area where it will be easier to manage the tenants? So I'd look at that as the laws and actually it does say in there landlord friendly laws. So that's one huge benefit there. But I think really the biggest thing that it comes down to is like your personal preference. Do you want to keep living where you're living or do you want to get another primary residence? I think that's like a really big decision in this factor. And then the second thing to kind of look at as to when you analyze both situations, at what point do you end up with more money? So for example, if you decide you're going to stay in your current property and you're going to buy an out of state investment, what in five years from now, what will be your equity in the property you're living in as your primary residence? What will be the equity that you have in the out of state investment and what will any cash flow be over those five years that's generated from these investments? And then I would look at it as if you keep your current property and turn it into a rental and then if you go and Purchase another primary residence. What does, you know, the equity look like in those properties? Because the down payment would be very different. If you're investing out of state and you're going to get traditional financing, you're most likely going to have to put 20 to 25% down. But if you're going to buy a second primary residence, then you could possibly put as little as 3 1/2% down or 5% down on the property. So it a great starting point is the capital that you have available, are you going to be able to have enough in reserves, you know, three to six months expenses at least to save for each of the properties that you're purchasing, have the down payment, any startup costs, you need to lease the unit, things like that, you know, hiring property management, if it's going to be out of state and you're going to use property management. So I would start with running the numbers on both situations, but I feel like personal preference does come into play here. Do you want to move into another primary residence and keep this property as a rental? I would suggest not selling the property. I would say keep it as a rental and then move into another property. Not selling it, then moving into another primary. Because as the primary residence to keeping it, whatever one you end up being in. There's so many benefits to having the primary residence like the homeowner exemption for property taxes, better financing terms. So you have to also compare that if you turn your current residence into a rental, you're no longer getting your know, the property tax benefits. Your, you know, there's other things, probably insurance, your insurance is going to change because you're gonna have to change your policy. So looking at those different aspects too are important.

[Tony J. Robinson]

Yeah, you highlighted so many different important things to consider, Ashley. And I think overall I would agree with you as well. Like for me a lot of times it just comes down to what do the numbers say and over the long run, which will actually present itself as a better investment opportunity. Is it putting down 20, 25% on, on a pure investment property or is it continuing to house hack? But you know, and again this is without having all the context of your situation, but you say that you're living pretty cheaply right now. So you've had a somewhat successful house hack already. You are single and you live alone, which is the ideal situation to continue to house hack. So at surface level with what I'm hearing, I feel like my preference would be, or my suggestion would be to replicate what you've already done successfully and do it again and then do it again and then do it again and then do it again. And if you do that every 12 to 36 months, where you're just recycling your capital into another house hack and maybe the next one's a duplex, then maybe you buy a three plex and a four plex and you look up five, seven years from now, now you've got a really solid portfolio where your cash out of pocket was relatively low because they were all primary residences and you can have a decent amount of cash flow coming off every single month. So again, service level, that's what I'm hearing as maybe the best, best path forward.

[Ashley Kerr]

Yeah, and like one thing with comparing the markets of the market you're already in if you bought a new primary and the other market is, you know, the out of state market cheaper and that's why you're thinking of going there to purchase a property. Well, you could get a very low down payment, but you may have to put a very high down payment. And what is the actual difference between those down payments with the percentages that you have to pay for each? Because the primary, the investment property is going to be a lot higher down payment that it might not actually be that big of a difference when you compare it to putting 3 and a half to 5% down for your primary residence, even though it's a more expensive market too. And then the last thing I'll say on this too is how much time do you have to build out another team? So you're going to have to find, you know, if you're not going to self manage, you have to find a property manager, you have to find an agent to help you find the deal. You have to, you know, if you're going to self manage, you need a boots on the ground, you need a handyman or you need vendors. So to, you know, weigh that as an option too. And you know, as always go to biggerpockets.com teams and you know, put in your market and who need a lender, an agent, property manager and you can find them all there, it's definitely gotten easier. So really think about that as if you want to put the time and the energy into building out a new team to support that property too.

[Tony J. Robinson]

Yeah, just last thing I'll add, like I really do believe that house hacking is one of the best ways both from a financial perspective and just from like an ease perspective to get into real estate investing. Because you're killing two birds with one stone. You're getting your own primary residence that you can live in. You know everyone's going to need a place to stay. But then you're also giving yourself the ability to build equity, build cash flow and do it at a really, really reasonable cost. So I would have done it just where I live in California. There aren't, there's not a lot of small multi family. It's just not what they build out here. But sounds like he's in a he or she's in a great position to do that.

[Ashley Kerr]

Tony, you're about to add a new roommate to your house hack. You are doing it and she will.

[Tony J. Robinson]

Be paying rent on day one, you know, so we're gonna, we're gonna find a way. My, our oldest, he just turned 17 and you know, I told him, I was like dude, you got, you got 365 days until you got to start paying rent. So we'll, that's the plan. We're having more kids so that when they turn 18 they can start, started turning into tenants for us.

[Ashley Kerr]

Okay, so before we take our next break, I gotta ask you guys a question. If you are a rookie investor and craving some accountability, then you guys needed to check out the BiggerPockets Momentum Virtual Summit. You can go to biggerpockets.com summit25. You are going to get eight virtual sessions to attend that cover different real estate investing topics that are actually really relevant to investing in today's market. The most important part though is that you will get to be involved in an accountability group with like minded individuals. So go to biggerpockets.com summit25. Stay tuned after this short break because we are going to analyze a market for you.

[C]

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[Ashley Kerr]

Okay, welcome back, Tony. What's our next question today?

[Tony J. Robinson]

All right, second question says, I'm trying to buy a duplex as a first time investor in Columbus, Ohio. Any real estate agents that you would recommend or just any suggestions and advice for a real estate rookie? Boy, do we have a lot for you. I think the first resource is the BiggerPockets agent finder. So if you guys head over to biggerpockets.com agent finder, you'll get connected with a lot of BP approved realtors who work with investors. You know, they're the quote unquote investor friendly agents. And honestly a lot of the folks you get connected with are investors themselves, right? So they know the market really, really well. So I think that should be your absolute first stop, is going over to the agent finder. But Ashley, what do you think? Any, any other advice for someone going into a new market? We don't know where they're at, like where they're based out of. I don't know if Columbus is home for them or if this is long distance. I'm assuming it's long distance. Otherwise I wouldn't be maybe asking for some of these resources. So if you're going long distance real estate investing, what, what's some advice you could have for for Ricky?

[Ashley Kerr]

Well, first I got to say, Tony, I'm really disappointed you didn't throw out a Tommy Boy quotes for all our OG listeners that used to love the Niners and knows that to me Tony had never seen Tommy Boy. You're probably thinking the same thing when you hear Columbus, not Columbus, Ohio.

[Tony J. Robinson]

I actually don't remember. I don't remember that line for the movie. It's been like five years. So I guess I got to go, I got to go back and freshen myself up on some, on some Tommy Boy.

[Ashley Kerr]

It's been a long time since we talked about Tommy Boy on the podcast too, so I need to start bringing it up more to refresh your memory. So Tony and I did a ton of research on Columbus, Ohio for you guys and some of this research we actually grabbed from biggerpockets.com/resources. So Austin, who we've had on the podcast before, he actually put together top markets for 2025. So you can go there and you can see his whole spreadsheet. You can search your markets that you're looking to invest in. But we pulled the information for Columbus, Ohio. So it has a median price of 344,000. And I think the median home price like across the country is like over 400,000. So that's good that it's cheaper than most of the US the rent to price ratio is 0.54%. And there's always the 1% rule which is very hard to find. You can find it in some states where you know the, the rent is 1% of the purchase price. But usually there's some other caveats. For example, in my market, high property taxes. So you know, that kind of wipes out what your expected cash flow is if you're going for the 1% rule. Tony, what's some other information that we pulled off that chart there?

[Tony J. Robinson]

Median income for, for this area is just under $60,000 per year. Five year population growth just under 5%. Vacancy rates about 6 and a half percent in unemployment rate at just over 3%. So some strong kind of data points for the city. And then Ashley also did some some additional research above and beyond what Austin gave us and found that Amazon is spending 10 billion billion with a B $10 billion to build a data center and a 32 story mixed use skyscraper. That should be done at some point next year. So talk about big employers coming into a space. And you know, it's not, it's not like it's an Amazon warehouse, right. We're talking about a data center where typically you're getting more white collar professionals that you know, salary's going to be a little bit higher. So some good signs for Columbus. Ash, where else did you go to maybe get some more cool insights about Columbus?

[Ashley Kerr]

Yeah, I actually went into the BiggerPockets forums and I just searched Columbus, Ohio and I, you know, kind of filtered it to the most relevant, the most recent post. And you know, intel is also doing a big chip manufacturing plant in Columbus. I did notice someone had posted about stores having headquarters in Columbus and that was Bath and Body Works, Victoria's Secret and Big Lots. I would take this with a grain of salt because I know all the big lot stores in New York at least are all closing. So maybe those aren't the best companies to have headquarters that you want to search for. But also Ohio State is opening a brand new hospital that's going to open in 2026 so that could be something big right there too. And somebody had posted that the actual neighborhood because I love it when you go into a city and you niche down to a neighborhood instead of looking at the city as a whole because each neighborhood can change so much. Like you can see growth in this, the city dropping, but you could see like in all the suburbs around it flourishing and growth. So always niche down to your neighborhoods and New Albany is actually the neighborhood where all the tech companies are going. Then you know, of course you have Ohio State University there, you have college students, you have parents coming to visit the college students. And then also Columbus in a sense is central to major cities as it's in driving distance to you know, Pittsburgh to New York City to Chicago. So kind of central to that. And then it's also landlord friendly laws too, which we all love. Then kind of the last data piece Tony and I pulled from bright investor.com there's other ones called Neighborhood Scout that you can find all this stuff on. Tony, what were some of the things that we saw in there?

[Tony J. Robinson]

Yep, mostly that you know this, this might be true for a lot of the, the major kind of metros is that some of the submarkets are surrounding areas around Columbus have better appreciation growth and then you see shorter days on market than what you see like in the, in the, in the city center. So overall Feels like Columbus has a lot of things going for it right now. And honestly I've just heard Columbus is like a place that a lot of other investors have been talking about in the kind of bigger pockets, ecosystem or, or kind of neighborhood just in general. So I'm not super surprised to see someone else looking into it. But, but I, I, I think even with all of that and this for all of the rookies that are listening, guys, there, there are, you know, again, 20,000 plus cities in the United States. So the chances that there's only one city that makes sense for you to invest into it, it's just not going to happen. There are hundreds, maybe thousands of cities that you could potentially invest into that still make sense. So as you're going through your market selection journey, the goal isn't to find the Goldilocks city that checks every single box in every right way. The goal is to find the city that satisfies your investment requirements. And if Columbus has done that for you, then you have no reason not to move forward to start analyzing deals, start submitting offers. So I just want to really, really frame that up for all the people that are listening. It could be Columbus, it could be Buffalo, it could be Los Angeles, could be whatever city, as long as it checks the boxes. That's really all you need to move forward with something.

[Ashley Kerr]

And we do have a market analysis, a spreadsheet that you can go through and this has like every metric listed that you should be looking at when analyzing a market. You can find [e-mail] ricky resource so Tony, I have one follow up question for you based on this before we go to our second ad break. But have you heard of Columbus, Ohio for a short term rental market at all? Is there any buzz around that at all?

[Tony J. Robinson]

You know, I'm trying to think. I can think of maybe a couple of people who have purchased in the Columbus area, but a lot of it were folks that were just like in that area already that I know personally. But I really do believe that the shift in the short term rental industry, and I've said this on other episodes, is that you've got to start identifying some of these markets that aren't like these big well known vacation destinations because those are the markets where we've seen a tremendous increase in purchase price over the last several years. Some of these markets have seen revenues decline during that same period, but it's these markets that are maybe more mid size, right where there's a little bit more opportunity. So I haven't dug into the data for Columbus specifically. But just hearing what I'm hearing feels like there might be some opportunity there. And I guess one last question for you Ashley, because we talked a lot about like Columbus as a city, but just in general someone's looking to invest long distance. Some things that I think they should be focusing on to begin with if you've never gone to that city. I think the first step of finding a good agent definitely the most important step. Right. So biggerpocks.com agent finder I think trying to connect with a good lender who really understands that local market as well. Super big again. My first investment I ever purchased it was several thousand miles away in Louisiana. And part of the reason why I was confident to go into that market was because I found a really good local lending partner to work with and they kind of unlocked other doors and other opportunities for me. So your lender, your agent, two people to really focus on building relationships with as you go into that market. Ashley, anything else that you think a new rookie might consider as they're doing long distance for the first time?

[Ashley Kerr]

Well, one thing is Austin spreadsheet that we mentioned that you can find that biggerpockets.com/resources. If you don't understand like if a metric is good or bad when you're, you know, analyzing an out of state investment, then use this spreadsheet as a resource so you can go through and look at what the unemployment rate is for every single property. And you can gauge like okay, 2% that's a great, great unemployment rate, 8% that is not like maybe I don't want to invest in that area but you can use that spreadsheet to kind of gauge what's the average across the country. So that's another unique reason to take a look at that spreadsheet if you do need help analyzing those out of state markets. Okay, we have to take one more final ad break, but we'll be right back with more after this to discuss. Discuss maximizing revenue in your short term rental listeners.

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[Ashley Kerr]

All right, let's jump back in. Tony, what is our last question today?

[Tony J. Robinson]

All right, so the last question says I'm looking for some guidance on improving the performance of our short term rental and I'd really appreciate your insights. Here's a quick breakdown of our financials. So operating expenses excluding our mortgage was $33,000. And all these numbers are for 2024, so for the entire year. So $33,000 in operational expenses. Annual mortgage payments were at $58,000, so their total need to break even is about 91,000. And their income earned was 80,000. So they're short about 11,000 bucks just to even break even. They go on to say, clearly we need to bridge that gap of about $11,000 just to cover our expenses. And I'm exploring options to increase profitability specifically, I'm curious about the following. They go on to list a few questions. So, Ash, I think maybe let's, let's break it down. There's about five questions here. Let's read each question that they have and we can, we can kind of pause and discuss. So question number one says two, two properties versus three two properties. Are there significant advantages to offering a two two. For instance, does a two two typically have longer average days or are they more desirable? So it sounds like they're saying like two bedrooms versus three bedrooms. They didn't tell us how many bedrooms their property was. I'm assuming Maybe it's a 3:2 and they're thinking about maybe listing as a 2:2. But general question is like, do bedroom sizes and bedroom counts matter in the short term rental industry?

[Ashley Kerr]

Tony? I would think that it would be the opposite. I would feel like more bedrooms would be better.

[Tony J. Robinson]

Typically, yeah, in most markets. However, I will say, and this isn't true for every market, but I will say that sometimes you can see a market where the overall revenue in that sea, like if you just look at all the, you know, the aggregate Airbnbs in that market, revenue is down for the entire market. But as you start to split it out by bedroom count, sometimes you do see different trends at different bedroom counts. So for example, in a lot of markets, five bedrooms and six plus bedrooms, even if the overall market is down, you might still see revenue gains with the bigger properties. And some markets, the inverse is true, where maybe there's a lot of saturation at the four and the five bedrooms, but just the people looking for a nice, you know, one bedroom for a couple that's traveling, you're still seeing revenue growth there. So I think to answer this question, you would really want to dig into the data for your specific market and try and understand if you just break it out by bedroom count, how were three bedrooms performing in comparison to two bedrooms? I do know someone, his name's Felipe and he, he actually invests in Pittsburgh, but he has a big property. I think it's like a five bedroom or something like that, a really big property. But what he's found is that he can actually keep his calendar more, more full by listing it both as a five bedroom and then he has a totally separate listing where I think he listed as like a three bedroom room. And he has the ability to like lock off, I think at the top of the bottom or something like that. So he can list it both ways. And he found that by offering it in both configurations, he's actually able to generate more revenue. So if you've got a property, maybe you can do both. Right? Listed as a three bedroom, see what happens and also list it as a two bedroom and see what happens there.

[Ashley Kerr]

Okay. It's kind of a follow up question for you, Tony, on this. Does the market depend on this? Like, is this market specific where like, you know, if you're in or Orlando where it's all families and stuff, is maybe more bedrooms better. But maybe you're in Joshua Tree where it's more, you know, maybe couples going for, you know, a weekend or something like that. How market dependent is this?

[Tony J. Robinson]

Extremely market dependent. Exceptionally market dependent. And that's why I think really digging into the data for their specific city is going to give them the best answer. Because we can talk about national data, but when you want to talk about tactical things to actually do to improve your performance, you always have to go based off of what is your specific market doing.

[Ashley Kerr]

Okay, so their next question is the cleaning fee impact. So on average we spend 2500 per month on cleaning fees this year. Would encouraging longer stays realistically help reduce this, especially for a medium sized cabin? So Tony, is there any difference you see in this by increasing the minimum stay? Because isn't. Well, I guess this depends on listing too, but from my perspective this is charged to the guests anyways, so it's not part of revenue. But I guess maybe if you're not charging the cleaning fee and you're just incorporating it into your nightly rate, that it doesn't matter.

[Tony J. Robinson]

Yeah, you read my mind on that one. Actually, it's like most hosts in the United States right now charge a cleaning fee. And the reason we do that is because it is somewhat difficult to make sure that you're pricing your property appropriately to account for the cleaning fees if you try to just bake it into your average daily rate. So for me, and you know, kind of what I encourage most people to do is to charge your guest a cleaning fee. Now make it fair and reasonable with other properties that are in your market. But at at worst, you should be breaking even on your cleaning fee. So if your cleaner charges you $200 to clean your mid, you know, your, your, your medium sized cabin every single time, then you should be charging your guests at least $200 to clean that cabin every single time. And in some situations you might be able to be able to charge even more. Right. If your cleaner is charging you $200, maybe you can charge the guests 225 and that extra 25 bucks per turn can either go towards your reserves, it can go towards your operating expenses, it can help bridge that gap of that 11k that you're missing. But it sounds like you're maybe just eating that twenty five hundred dollars cost. And I don't know if that's, if that's the best approach. The second thing that I'd add to that is don't be afraid to shop for new cleaners. If you do have a cleaner and you feel like their prices are above and beyond what's reasonable for that market, then go shop for another cleaner who can be more appropriately priced. We actually just had to let go of the very first cleaner that we ever hired. She was, you know, the first Airbnb that we bought. She was our first cleaner. She taught us a lot about the industry and cleaning best practices and whatever it may be. But as our business evolves, she wasn't evolving with us. And we had to make the hard decision, you know, last year to let her go and replace her with someone else. And while it was difficult, it was also the right business move. And we're in a better position now because we found a better long term partner. So you always want to be evaluating those costs to see, like, hey, does this still align and are we getting the value that we're hoping for in paying this money out every month?

[Ashley Kerr]

Yeah, we've had a similar circumstance where we ended up giving our cleaner a lot of jobs, like even some of the commercial buildings, cleaning, the common areas, things like that. And it got more to the point that we felt like an inconvenience to her than. And I just got to the point where I was like, I want to be a customer. I want to, you know, like somebody who's gonna come and clean and is like, thankful for the job and wants to give me a great experience as a customer and be happy about it. So, like, I don't know if the person got like comfortable or complacent or what, but it just like it was kind of the same thing. Like we needed to grow and scale.

[Tony J. Robinson]

And you gotta find the right person. I think the only last point that I'd add to that, Ashley, is also make sure that whoever you've hired is someone who actually specializes in cleaning short term rentals. Because someone who cleans an office building or someone who cleans just someone's primary residence is going to have a slightly different standard than someone who's cleaning an Airbnb. Airbnb guests are ruthless when it comes to cleaning scores. And it takes a high Degree of professionalism and perfectionism to satisfy the guest needs when it comes to cleaning. So just make sure that whoever you're hiring has the experience, has the expertise in that field specifically.

[Ashley Kerr]

Let me. Maybe I'll take your feedback on this real quick. Is that so? She does an amazing job. She cleans very well. But we have this one property that has two lofts, and we only list one lost in the loft in the listing. And we only have one ladder, but the ladder is transferable, where you can move the ladder and hook it onto the other loft. Well, we've had a couple guests recently that have taken it to move the ladder, climb up in the other loft. They put a rave review because it's like a kid's loft and like all this stuff up there, whatever, and they love it. So we're like, okay, this is cool. Like a little hidden experience, whatever. But our cleaner has. She said she's not. She's not cleaning it and said it's not in her scope of work, everything, which is true. It's not. And we just kind of took it as approach, like, instead of just like, being. I'm not doing it and being mad, instead of saying, like, I'm gonna charge another $25. Just want you to let you know that they use the law, blah, blah, blah, and stuff like that. So it's a lot of, like, we need someone with, you know, that will take initiative. And like, yes, we understand it's an additional fee, but, you know, to not, you know, take it that way and to complain about it, I guess. But.

[Tony J. Robinson]

And that was. That was kind of what we ran into with. With the cleaner that. That we had to let go of as well is like, there was just a disconnect in terms of, okay, what are our expectations, the people that we're working with. And we want someone who. Who's flexible. We want someone who can kind of take initiative. We want someone who feels like a partner to us with this portfolio. And, you know, I think that cleaner we. I think there were six cabins that we had that. That, you know, her. Her cleaning for. So weren't necessarily a small client either, for, you know. So, yeah, I think a lot of it is like, hey, flexibility and initiative is kind of what we're looking for.

[Ashley Kerr]

And also, Tony, that's on us too, is we should put that into our job description and be more open about that too, when we are hiring people. So.

[Tony J. Robinson]

So, yeah, But I think that's also why, like, for a lot of our properties, we build out these cleaning checklists and there are some hosts who are like anti. Checklists are like, hey, I'm not going to, you know, I'm not going to babysit my cleaner. And we don't look at it that way. But when you build out a checklist, there's absolute clarity on what the cleaner should be doing at every single turn. It really alleviates any sort of misconceptions around what are your expectations as the owner and what are their responsibilities as the cleaner. So for us, we onboard a new property, one of the first things we do is build out that checklist so we know what needs to be done at every single turn for this property.

[Ashley Kerr]

And what's the software you use again?

[Tony J. Robinson]

Yeah, Breezeway is the software that we.

[Ashley Kerr]

Use well enough about cleaning, but the cleaners are such an essential part of your reviews and your property's performance. So I think that was something we definitely needed to touch on there. Okay, and then the next question is year two turnaround. What strategies could we implement to project a higher ROI in our second year? So return on investment investment in our second year.

[Tony J. Robinson]

And this is true for any form of like, you know, buy and hold real estate investing. So long term, medium term, short term, whatever it may be. But sometimes when you got to. And this happens us. Right. I'll give you guys a real life example. Right. The point I want to make is that sometimes you buy a property doesn't meet your expectations and you have to do the somewhat counterintuitive thing of reinvesting back into that property if you feel like the return might potentially be there. And this happened to us, Sarah, my wife and I, we bought a house. We were expecting to fly flip. The market kind of shifted, the resale market shifted. We weren't going to be able to get what we wanted out of it. So we had this decision of either we cut a check and we sell the property we don't hold anymore, or we cut, you know, we cut a check and we get to keep the property for our own portfolio. Either way, we're cutting the check. Like what. What makes the most sense. So we decided to keep the property. And because it was initially meant to be a flip, there were certain things that, that we wanted to add. Right. That we didn't add because we were looking to get it in and out of it quickly. But since we knew we're going to be holding it for a long time, long term, we wanted to add some things. So the first kind of big investment that we made was adding an in ground pool. And that was a Big investment. It was like, I don't know, I think the pool costs like $100,000 to add this in ground pool. And that is a hard pill to swallow after already having to write a check because it was a flip that went bad to write another check to say, okay, well, let's try and make sure that we can really get the most out of it. But that property has done, you know, incredibly well in comparison to some of our other properties that are in the same area that don't have the pool. So we know that we made the right decision by doing that. So kind of just going back to the, to the point here, I think as you're thinking about improving performance, there's a few things you want to do. First. I would look at the other three bedrooms in your market that are performing well and try and identify what are the three things, amenities, design, etc. That those properties have that yours doesn't. And you'll start to see some consistent themes, I'm sure, across those top properties. And then ask yourself, what is the potential revenue difference between where I'm at, you said 90, you said what they were they at 80,000 and where the other properties are at. And if you notice that by adding a pool, an EV charger, a hot tub and a game room will get you from 80,000 to $150,000 and you see that consistently across multiple three bedrooms when I've got a pretty solid case to maybe make that investment to get that additional revenue. But if you do that your research and maybe 80,000 is just as good as it's going to get for a three bedroom in your market. No one's doing more than 80,000. So it's hard to then justify investing any additional capital into that property if no one in that market has achieved the kind of revenue that you need to get to. So that's the approach. Do some competitive research and let your comps tell you what approach you should take.

[Ashley Kerr]

So that kind of leads to their last question here, the exit strategy considerations. If that's not working or they don't want to invest the money to add those amenities, is it actually worth absorbing some of the costs by them losing 11,000amonth or 11,000 a year and focusing on long term appreciation?

[Tony J. Robinson]

I mean, it felt like a varies investor to investor. Right. You know, it's like, what was your goal when you bought this? Like, Ashton, I know you've talked about like you've bought properties kind of specifically for the appreciation play before, right?

[Ashley Kerr]

Yeah, I mean, I've definitely Never lost, you know, a little under a thousand dollars a month. So for me, I probably wouldn't do that deal if I was having to put in, you know, 900 or so dollars every single month towards a property. But there is one property that we break even on and it is in area that is seeing appreciation, gentrification. And we, you know, our plan is to sell it in the next three, four years and we're, you know, cash flow even, you know, we're break even on it. So. But I would, if there was, if I saw potential in a property, I would lose some money. Probably not that much on a property, but I would lose some. But I'll take it another way. Like there's a duplex that I haven't rented in the last three months because of the previous tenant that was in there. And I'm waiting till like the dust settles and everything is done with them because we're still going to court even though they don't live in the property. And so like, I am willing to not take that money right now and rent it out until this like settles just for like ease of mind or like that something else could potentially happen. So I am, I will take losses in other ways, definitely in the business. But I would say for this circumstance I would try to increase the revenue. But also you have to look at what your appreciation is like. If you're going to be making a lot more than, you know, what you're going to lose over the years, then maybe that is a good investment for you too.

[Tony J. Robinson]

Yeah. And I think it's hard without knowing the exact market and being able to kind of look at the data. But what we've seen, and again I mentioned this earlier, but what we've seen in a lot of the super popular Airbnb destinations is that supply increased dramatically. There are a lot of people fighting to get into those markets. The increase in like buyer demand drove up prices, the increase in people buying drove up supply in those markets. And that increase in short term rental supply then starts to pull down on the revenues in that market. And then as the revenue start to get pulled down, you get some investors start freaking out, they start trying to offload some of these properties. So there's this weird thing where in some of these markets you've seen prices go up, now they're starting to come back down, but because rates are so high and this, that and the other, that revenues and purchase prices have started to fall. So I think looking at your position, I think just asking yourself, well, are you still seeing Appreciation in this market. Right. Is, is the revenue a sign of the revenues in that market coming down or maybe you just not managing the property correctly or, or is that $80,000 in revenue as signed with the market being pulled down? And if that's the case, you got to ask yourself, okay, well, what does that mean for appreciation now? Most deals that you buy, you know, you look up 20 years from now, it's probably going to be a good deal. I think the question is, does it make sense for you to hold on that long or could you potentially redeploy that capital elsewhere where things are maybe moving on the upswing and not on the kind of flatter or the downswing?

[Ashley Kerr]

Yeah. So like you could do a 1031 exchange and move into a different property that maybe was cash flowing but also like along with taking that loss, what are you, do you have any tax advantages to this property that maybe you're actually saving more money in taxes, that if you did sell the property you wouldn't have those tax benefits anyways and you'd be paying more than $11,000 a year in taxes. So at least that 11,000 is going towards your mortgage pay down, hopefully and your property. So. And not to taxes. So that's another benefit to try to look at too as to what's the actual tax advantage you're getting every year from the property and is it worth it to have that loss?

[Tony J. Robinson]

I think the, the only other thing that I'd add to this point, actually, just to kind of clarify what I said earlier, I, you know, I said we talked, we spent a hundred thousand dollars on a pool. I'm not saying that the only way that you can improve your revenue is by spending six figures on like an in ground pool. It's not what I'm saying. What I'm saying is there are probably some amenities in your market. Some could be big like an in ground pool. Some could potentially be smaller, maybe painting a mural. Right. And just sprucing up your outdoor space.

[Ashley Kerr]

An Instagrammable background.

[Tony J. Robinson]

Instagrammable moment. Right. Maybe it's something as small as, you know, making sure your review scores are solid. We didn't talk about how well the listing's actually doing, but if you've got like a 4.5 star rating on Airbnb, well, fix that. Right. That's super low hanging fruit that you can go after. So the goal is to do the research and just see in general amenities, experience design wise, what are the top performing listings offering and how much of that can you implement back into your own Airbnb.

[Ashley Kerr]

Well, thank you guys so much for joining us for this Rookie Reply. I have one special announcement. It is time for BPCON 2025 to start thinking about it because pre sale is happening on February 3rd and you can get discounted tickets. So make sure you go to biggerpockets.com/conference and you can find out all the information. Tony, where is BPCON this year?

[Tony J. Robinson]

BPCON is in Sin City. It's in Las Vegas.

[Ashley Kerr]

Yes, it is in fabulous Las Vegas. And little fun fact, the first time I ever went to a Las Vegas pool party, that was with Tony and his wife, Sarah. So maybe Tony will host another one again, but you won't know unless you're there. So biggerpockets.com conference. Thanks you guys for listening to this episode of Rookie Reply. I'm Ashley and he's Tony. And we'll see you guys on the next episode.