157 – Will Airbnb Businesses Survive The COVID-19 Crisis with J Martin

Synopsis

J does Airbnb rental arbitrage or subleasing. He has around 20 units and owns some properties in the San Francisco Bay Area. Every year, he hosts a real estate conference. In this episode, J shares how COVID-19 has affected his business, his plans for riding out the pandemic, and how he’s preparing for what the future brings.

Key points

Shifting Strategies Due To COVID-19

Typically, J rents his furnished apartments for long-term or over 30 days. With COVID-19, he got a lot of vacancies and cancellations. Between employees and rent, he needed $40,000 to cover everything.

Immediately, he lowered their pricing to increase bookings. He suggests having more frequent reporting on cash flow projections, current reservations, and deposits to be able to adapt quickly.

Weaknesses In The Airbnb Strategy

At this time, a lower monthly overload and higher gross margins are necessary. He’s thinking of having a property management type model where he partners with the seller or owner to rent the property out on Airbnb. This way he’ll have lower overhead costs.

Because of the operational needs of having a rental arbitrage business, he’s thinking of scaling down his business and growing another business instead.

Even when they lowered their prices to improve their occupancy, they still ended up losing money in April.

Rental arbitrage is similar to running a hospitality business. It does not have the ownership aspect that you get when buying property.

The business model is purely cash flow, and it did really well for 5-6 years. But as they are winding down, he’s getting rid of the less profitable units.

Liquidity Is Necessary

In the last two months, J has raised a lot of money because he believes it’s better to have the cash in case he needs it.

He raised money from a variety of different sources such as taking an 18 month, 4% interest loan through his credit card, borrowing from his connections, and taking a second lien on a property he owns.

The money could be used for when bad times come or when there are opportunities.

It’s important to hold on to cash now and save it.

The Importance of Networking

With everything that’s happening, it has become important to have a network of people in the same industry. By connecting with them, you can get an update about what others are doing.

Some people doing rental arbitrage have been able to get longer-term bookings, some have released less profitable units, and some are scaling down their business.

The Future of Business

With 70% of Americans not having $1,000 set aside in savings, J thinks it will take years for unemployment to go down to the levels we had before and for the tourism industry to recover.

A lot of businesses like restaurants have permanently closed. Next, businesses that are still operating will scale back.

Because of social distancing in place, any business where customers are in close contact would have to implement a 6-feet distance between each customer.

Working from home may continue in the longer term.

Even with the $2 trillion pumped in by the government, people are still not buying things because they’re afraid they won’t have a job in the future, and they don’t have savings.

People also don’t seem to have pent up demand and with lack of business investments, a recession is going to happen.

Dealing With Contracts and Costs

J believes in fulfilling his obligations on the contract he signed, so he hasn’t renegotiated his contracts with the owners. He might negotiate when the lease is up, but might otherwise exit a lot of them in the end.

Also, he is looking at finding more affordable cleaners because they used a more expensive one when business was doing well.

Airbnb Bookings During COVID-19

The people who book his Airbnbs are a different mix. Some are nurses, but there are also people who are looking for a short-term apartment. There are also those who didn’t want to risk exposing their family to the virus, so they chose to live in an Airbnb.

J offers a lot of flexibility in terms of their leases. It could be short-term or long-term, furnished, or unfurnished. As much as possible, he just wants to bring stability to his business.

He noticed that they get a lot shorter reservations. People who used to book 20 days to a month ahead of their move-in are now booking 7 days ahead.

Their prices have dropped by 40% during COVID-19. In the summer, they usually have zero vacancies, but this time he expects a 40-50% drop in prices as well. Overall, they’ve had a 40% drop in revenue in a business that does not have 40% net margins.

Learning From Experience

J always goes back to what someone said to him that if it’s a problem that can be solved with money then it’s not really a problem.

Whenever there’s a crisis, he thinks everyone should remember that it’s just money. It’s important to take actions today to improve things from where they are today.

People have made a ton of money, lost them, and then made 10 times more later. So there’s no need to sweat it.

Preparing For the Next Big Boom

Now is the time to prepare and learn new things. J is planning on launching a new business with low overhead and high revenue.

He thinks the time to start it is now so that it’ll be ready in the next year or two when the economy gets out of recession.

It’s also a great time to learn something new or to hone into your business more.

J learned a trick from his networking group to put up signs outside a property with a phone number on it.

With the current environment, people want to be closer to family, so the signs lead to inquiries from people who had families living near the property.

Last Tips

Focus on your reporting, do some networking, and go out and test things.

To help your business survive, refine some things, do some marketing, and lower your expenses.

The Real Mistake He Made

J worked with mostly his friends and took units that were easy to get. So he didn’t hone in on what was best for him and take the less friction route. Another Airbnb host focused on getting under market leases and is able to hold up profitwise.

Reputation Is Important

J likes to fulfill his obligations. This is why he didn’t want to scale his rental arbitrage business to 100 units despite encouragement from people before. He wanted to make sure he could always pay for his overhead.

Reputation matters a lot, and he knows he’ll be able to rely on the relationships he has built for his next business.

References

More from our guest

• You can reach out to J at https://www.realestatenomad.com/