Furnished Rentals Business Model for those Interested

[Derek]

What about local laws regulating hotels. How do you get around them?

[furnishedowner]

We don't get around local laws.  We are not subject to them.

We are not a hotel.  We rent for 30 DAYS OR MORE.  This keeps us in the same category as any other unfurnished rental.  It's the magic 30-day or more rule--"Rentals of 30 days or more are not subject to gross receipts tax."  That is the state opinion and the city's as well.

Our local municipality has told us we are not subject to hotel tax as well  (currently about 6.75%)  because we rent out long and not short-term.  "Nightly rentals isn't your normal business, is it?" The city official asked us.  We are located in a small city (50,000) and everyone knows everyone else's business.  Of course we have to comply with local tax ordinances.

Better check with YOUR city and state:  "Do we have to pay any special taxes if we rent out FURNISHED homes for 30 days or more?"

We have a business license, annually renewed, from the city. This is because we have an office where tenants can come, although there is little daily foot traffic.  Many tenants we see only on check-in and check-out.  Their rent checks come in the mail, or with FedEx or UPS.

Learning HOW to do business has been hard-won.  There are no manuals on the business aspects of furnished rental homes.

In the beginning I rented to anyone, for as many or few days as they needed.  I only had a few units, so it was no big deal.  As the business grew I tried to figure out local, state and real estate laws.  Laws that I had no idea about.  And how to comply with labor and tax laws.

I just knew in the beginning that I wasn't going to be happy with the paltry rents that I learned were the local norm.  I wanted more after the hard work and cost of renovating that first scrappy, little stucco cottage.

Those early days of renting occasionally to vacationers, hunters, visitors later got us in trouble with the state taxing authorities.  We ended up paying gross receipts (sales) tax for any stays of less than 30 days, even back to the very beginning!  We agreed that we owed some short-term tax, and paid.  That audit is still on-going, however, as we disputed some of their other rulings and hired an attorney to represent us.

As we got bigger, we visited again with the city official that collects hotel tax. "Are we subject to the hotel tax if a tenant checks in for 30 days and then leaves early?" we asked.

"Since your business isn't a hotel, and that is not your usual method of doing business, you are not subject," was the answer.

After I furnished the first unit, and then the first duplex I found that there WAS a market for those furnished units.  The rents were triple market rents for unfurnished.  "This is what I want to do", I thought to myself, "Now HOW are we going to do it?"  I didn't really have a clue.  I just wanted to continue getting more units as long as there was demand.

Business questions then got answered by the onward crush of doing business.

The first customer that HAD to pay with a business credit card forced me to visit local banks to figure out how to do it.

The downtown banker said, "Alright, here's your credit card machine.   Now you need to join the Chamber of Commerce.  That's where you can meet those good ol' boys who might need to put up workers."

So I went to the next chamber meeting, held on the patio of a downtown historic home.  "Not bad," I said to myself, looking around, as I strolled in, all spruced up in clean pants.  "Margaritas!  Little chile rellenos!  Salsa!  This beats scrubbing bathroom tile!"

At that Chamber of Commerce meeting I chatted, margarita in hand, with a young attorney.  "I need to find out if there is any violation of real estate law by renting out furnished houses," I told him.

We had a meeting in that attorney's office a few days later. "I have researched this with the State Department of Real Estate," my new young attorney said.

"You are doing business like any other mom-and-pop owner of rental houses.  The real estate commissioner feels that furnished should be no different than unfurnished.  Of course, you need to use the written lease and rental forms just like for regular rentals."

Now five plus years after starting this business, we carry on with our 30 days or more rule.  No longer do we house visiting dignataries, summer festival visitors, seasonal hunters.  No week-enders, no out-of-town wedding guests, no family reunions.  We only do 30-day or more tenancies.

And life is easier because of this.  We know where we stand.

Furnishedowner

[Derek]

I imagine that a major cost of yours must be vacancy. How quickly do you turn around these units?

[furnishedowner]

A major cost is vacancy.  We started tracking vacancy/occupancy rates this year.

It has to be done semi-manually, as we couldn't find a program for this.  So someone has to physically open the manila property file, say on the "Riverside Ave." house.  Then computer-input that it was occupied last month from the 1st through the 13th, as a tenant's 6-month stay ended.  Then it was vacant (cleaning) on the 14th and 15th.  The new tenant's rental agreement and occupancy began the 16th.  That would be a typical scenario. That would give 93% occupancy for Riverside for that month.

People rarely arrive on the 1st, or check out on the 31st.  They are in and out every single day of the month, similar to a hotel.

Occupancy Rates this year have been:
Jan  91%
Feb  91%
Mar  74%
Apr  92%
May 89%
Jun  85%
July  90%

Overall we have been at 88%.  We fell right off the chart in March 2009. Remember how suddenly bad the economy was then?  People were afraid to move, start anything new, or expand jobs.  It was static.  It was scary. Then by April the nation appeared to get used to the bad news, and moved on. The National economy affected us locally here too.

The usual July slump didn't hit this year.  We prepared for it.  We discounted and pre-booked units.  We massaged tenants.  We will now do this every year since it really mitigated July, the vacation month when normally people leave their furnished rentals and go home to vacation prior to starting new job schedules.

From talking to local hotel owners I believe our furnished occupancy rates are good.  They are rates that would make the hotel owner smile and book his Hawaii vacation.

How quickly do we turn around units?  A studio or 1-bedroom can be cleaned and re-rented in about half a day.  A big house can take as much as 3 days, if everything, including carpet cleaning, needs doing.

Fast turn-around is critical if there is high demand.  We will pull everyone out of the office and post a "Back Soon" sign if a unit needs cleaning and the new tenant is waiting in a hotel.  Hotel check-out times are 11 AM to 1 PM. We try to get that next night's rent, not the hotel.

If you throw in 3-4 fast-working people into a unit, it can get turned around in a couple of hours.  We keep extra linens in stock for quick turn-arounds.  We have a back-up list of available cleaners.  We have people who will clean on Saturdays and Sundays.  The motto is "GIT 'ER DONE!"

All of the cleaners and workers know that No Rent=No Paycheck.  We all are aware in our guts of the vacant units.

There is a lot of variability in how clean units are left.  "The place is totally clean," will say one tenant.  But by that they mean that they took out the trash, and wiped the counter and refrigerator out with a dirty rag.  We ignore what the tenants tell us on cleanliness!

If a unit was rented out for months, it will usually take longer to clean than if it was occupied for only one month.

Considering that a single smaller unit can be rented out several times a year and have multiple times of vacancy, I think our rates are as good as is possible with furnished units.

Try for a vacancy rate of 10%, an occupancy rate of 90%.  But plan for occupancy of only 75%.  Then you will always be able to handle expenses.  Prepare for the worst, but strive for the best.

Furnishedowner   

[Derek]

Do you find that any particular kind of property is most popular?

In my city, there were a lot of condos built near the airport just before the real estate bust. Prices have fallen a lot on them. I wonder, however, if investors have not already bought up a lot of these and used them for exactly this.

What tools do you suggest for finding out if the market on furnished rentals in my city may be saturated?

[Derek]

I'm in a very large city -- a google search reveals that there are a great multitude of furnished rental companies here, which own multiple units in the top luxury condo buildings downtown.

I guess an entrant would have to first focus on smaller companies or lone travelers.

[furnishedowner]

Derek,

Pretend that you are being transferred to your exact city for 3 months training.

Now go to the newspaper and the computer and start looking for temporary housing.  Start calling hotels.  Call those temporary housing offices.  Write down the numbers--rent, deposit, lease terms.

What about your dog, Bowzer?  What is the cost to bring him? Or your cat, Mittens?

I would be very interested to learn the vacancy rates, prices, and amenities of your city.  Once you have all that information, you will be able to make a decision regarding those condos.

Furnishedowner

[ethomson]

Furnished, in what area are your rentals?  Sounds like the Gulf Coast.

Is this type of business model something you could incorporate as a small part of your total business?  (ie Is this something that could be profitable/worth it if you only had a few of these types of rentals?)

I am near Huntsville, TX which has a fairly large university (short term profs, etc), hospital, prison, and many of other potential tenant pools and these posts already have my mind racing!

[furnishedowner]

ethomson,

I am in SE New Mexico. 

You could definitely use this business model as part of a larger rental operation.  In fact, I am thinking of maybe expanding to regular rentals as well.  We have 3 furnished units, as we bought the properties with tenants in them.  I have raised the rents, but they don't move.  They are low-maintenance tenants, almost no work at all.

A dual business plan would give a whole lot more flexibility--if tenants get unhappy about an area, pull the furniture out, go unfurnished.  If the property is the other half of your home duplex, go furnished.  If demand is there, furnish!  If demand drops, you go unfurnished.

Here are some advantages of furnished that I have learned just from doing it:
1.  No local riff-raff!  Your tenants usually have NO local friends, and thus no visitors.
2.  No junk.  The tenants are temporary, so they don't store big toys, boxes, junk, extra cars outside their rental unit.
3.  They are quiet. We have NEVER yet had a party or noise complaint on our worker-bee tenants.
4.  They are pretty nice folks.  In professional, managerial, government positions.  They are just like you or me.  You can relate to your tenants.
5.  They pay the rent.  Or their employers do.  The UPS and FedEx trucks come by our office with rent checks all the time, we are on their speed runs.  In five years we have had about 3 rent-skips.  Three tenants who left without notice, and owing a couple of weeks of rent.  That's from a list of hundreds of tenants.
6.  They don't cause a lot of wear-and-tear.  They go to work.  The single ones often leave saying, "The stove is clean. I never cooked!"  If there is a family, the wife will be home taking good care of the house.

If you are near those short-term tenant pools--universities, hospitals, and yes, prisons--you should test the market.

Your higher furnished rents may cover some of your unfurnished costs and make your properties more profitable.  And it is not difficult to do...here's how:
1. Turn on all the utilities
2. Put in furniture, dishes, linens
3. Advertise and rent.

Good Luck.
Furnishedowner

[furnishedowner]

An error from the previous post--I was writing about 3 UNfurnished units. Presently there are about 40 furnished.

So how do you make a furnished unit?

First, start by just sitting and looking at your unit.  I am going to presume that this is a studio or small 1-bedroom.  It takes more thought and planning to do a small unit.  You don't have problems with furniture placement in a standard 2-bedroom apartment, you just carry it in the door and drop it.  But the small units are your biggest money-makers!  Don't let a really small unit stop you from moving forward.

My first unit was the "Lea Bunkhouse".  I had just been to the closing of my 3-bedroom, newly purchased home 2 blocks from the school my kids were attending.  The school location had decided this purchase.
The kids could walk home in 5 minutes!

I was not in love with the 1920's-era bungalow, but the location, the seller-carry-back loan, and the free back-yard cottage clinched this real estate purchase for our family.

In the backyard was a boarded-up little wood-and-stucco cottage with 2 porches.  This house was completely FREE, as the sellers and real estate people figured it to have no more value than a dog house.  No one had even bothered to measure it.  It had been used for storage for the previous 30 years.

But for me it was everything.  My heart rate had gone up the moment I saw it. I couldn't wait to get a crowbar and pry the plywood off the windows! To see the inside with light coming in! 

There it was-- a 3-room, really small, cottage, maybe just 400 square feet, with plain wood floors, lath-and-plaster walls, and a nice coved ceiling in the kitchen. Bathroom with a old-fashioned sink and shower like in a 1930's motel. Living/bedroom area with just enough room for a double-bed, a dresser, a desk and a chair. A built-in bookshelf.  A tiny wooden closet in one corner. A kitchen with a defunct water heater and a huge cast iron ceramic sink. 

The sun slanted through the cobwebs in the newly uncovered windows.  It was bright, even through the decades of grime on the window glass.  Dust was inches-thick, and it smelled like an old person's attic.  Charming! I thought.  A ton of potential! I am going to fix this up and rent it out!  I can't wait to start!

I had learned from the Realtor that these little "guest cottages" behind many houses in the Historic District had been built to house World War II officers from the local airbase.  The airbase closed under 1960's cutbacks, and the cottages had languished ever since, many of them boarded up.

They were sometimes rented out to young singles, or seniors for $300-$400 a month.  But many stood derelict, just junk repositories.

Inside the cottage were old cardboard suitcases, broken lamps, and a couple of vintage 1940's cowboy framed prints of paintings.

There was the picture of the rider letting his horse drink in a lake, in roseate sepia tones. There was the cowboy roping the wayward calf, while the distraught cow mother bawled in the distance behind the fence. The pictured cowboys were in the high-waisted jeans and neck bandanas of the Gene Autry  and Roy Rogers era. They were wonderful and collectible pictures.

And just like that, those paintings ended up as the "theme" for that cottage.  That rustic cabin. With old faux-grain wavy wall-board, 5-panelled wood doors, front and back porches.  The cabin became the "bunkhouse".  It evolved into what it should become.

So if you have an old cottage, let it tell you what to do.  Don't make a silk purse out of a sow's ear!  Don't put modern furniture and decor into a vintage place.  It doesn't go. It will look wrong and be wrong, even if no one can tell you why. It won't feel right.

Would you put a mini-skirt and lipstick on an 85-year-old lady?  Heck, no!  Would that same lady look good in a garden full of flowers, wearing a dark dress with a lace collar?  Absolutely.

That bunkhouse cottage now has a Ranch Oak desk and rocker.  The TV sits on top of the vintage wood dresser.  The walls are covered with--of course--genuine old-time cowboy pictures.  There is a pair of deer horns mounted over the door.  A black cowboy hat hangs up there.  There is an Indian blanket for a bedspread.  Leather rugs on the floor.

The new water heater was moved outside in its own little wooden house.  A new stacking washer/dryer unit was put in that corner. A new 24" gas stove.  A new faucet on that monster porcelain sink.  A new refrigerator squeezed in. A hand-painted Mexican table with 2 rustic chairs.  A wall plate rack maximized storage and looks great filled with old and usable Western crockery. Amber-colored lampshades cast warm glows.

Curtains were sewn from striped vintage-reproduction Wal-Mart shower curtains. They were put on black iron rings so they open easily.

Most importantly, the fence around the yard was finished and dog-proofed.  There are trees, bushes, yard furniture and a barbeque grill.  There is charm and privacy.

The reaction is either, "It's so small! But it's so cute! I'll take it!" or "It's charming, I like it!  But it's too small for me."

But I didn't rebuild it. Didn't add rooms.  Just tried to maximize what there was. Spent the money on the "had to's".  Like the new sewer piping, electrical upgrade, water heater closet, washer/dryer, frig., stove, TV.

It's amazing how much you can save on rehab, if you DON'T tear it out. Clean it, wash it, wax it, caulk it, refinish it. Then spend time on care on decorating YOUR old lady of a unit. Try to put a picture in your mind of what you want. Decorate for your own taste and comfort.  Rip out magazine pictures that appeal to you in your gut. Trust yourself.

If I can do it, anyone can. Before that cottage, I never knew that I had a single decorating gene. Now I have learned to go with what feels good to me.

That simple cottage is rented out today for $1200/ month.  I have gotten as little as $900 and as much as $2100 a month for it.  The $2100 was high, but it included dog-feeding for that particular tenant. That cottage has paid for itself many times over. It has financed the purchase of other units.

There can be a lot of rent in a small package. And it can be an amazingly fun journey getting to that first rent check.

Furnishedowner

[furnishedowner]

Here is a preliminary financial analysis of a possible duplex purchase to use as two fully-furnished rentals.  I am going to analyze this similar to the purchase of an unfurnished duplex, using the 50% rule.  Let's see if this would be a good idea.  It is already furnished, and located next to 4 of my rental units, so the location is ideal.

Purchase Price=$70,000
Rents= $1350 ($45/day) for 1-bedroom
             $1200 ($40/day) for studio
Total Rents=$2550/month

It will need an additional $5,000 to do landscaping, fence, patios and bring it up to our standards.  So the total price financed is $75,000. I hope this will be @7% for 15 years, so $674/month principal and interest.

50% of gross rent for operating expenses=$1275/month.
This will cover utilities @ $486/month.  This number:  $243/month/unit is a very exact expense calculated from 6 months on the units next door.  The largest part of that is TV/internet.
Taxes & Insurance=$76/month.  Cleaning=$120/month (8 hours x $15/Hr.). Replacement of furnishings/supplies $100, repairs $100, yard $50.  This now totals $932. This leaves $343 for vacancy which is running 10% or a possible $255/month, and also for office overhead.

$88/month is not really enough for office overhead. But the other overhead expenses of vacancy, cleaning, repair, replacement, yards is already expensed. So $1086/year for office expenses on these 2 units at the minimal rent is probably okay.

The remaining 50% of gross rent is $1275.
Mortgage payment= $674 Principal and interest for 15 years @ 7% fixed.
Profit=1/2 gross monthly rents minus mortgage payment.
Profit=$1275 - 674= $601/month.

Do I want to do all the work involved for $300/month/unit?  Yes, that feels right.  I sure wouldn't want to do all those check-ins and check-outs for $100/month.  Field all those phone calls, negotiate with all those agencies.

The market rent here for a nice enough unfurnished 1-bedroom is at least $500/month.  I may be able to get $1500 later when that unit is improved with a better yard and some interior decorating upgrades.
$400 is market here for an unfurnished studio, and all our other furnished studios rent for $1200/month.

So a potential higher rental value makes this attractive.  Also mortgage principal will be paid down at a pretty fast rate. It may even be doable if the bank will only go 10 years.

Would the numbers look good if it had to go unfurnished? No, repairs and maintenance would probably put these units into the negative.  You do get the maximum amount of rent possible by furnishing your units.

Furnishedowner

[furnishedowner]

It's time for another post on a subject important to a rental owner, furnished or unfurnished.

You must consider the tenant's PRIVACY when you want to get maximum rent dollars.  This is true for ANY rental.

Always mentally put yourself in that unit.  Are the windows bare?  Put up miniblinds!  They are inexpensive, only a few dollars each.

When I was a beginning renter, a prospective rental house with no curtains scared me.  I didn't know how to do curtains!  I was not a shopper!  Those early houses got sheets, newspapers or tinfoil for window privacy.  It looked bad, but what was an ignorant young tenant to do?  For heaven's sake, don't let your bare windows scare off a good tenant.

Privacy can be created by MAKING A YARD.  Where you never thought there could be one.  If you lived in your rental unit and wanted to drink your morning coffee outside in your bathrobe could you do it?  A yard can be tiny.  The main thing is privacy. 

Six foot tall wooden fences are relatively cheap, and easy to get bids on.  I just had a 20 foot section fenced last week;  it cost $250.  The prospective tenant had told me, "I like the house, and the yard is great for my dogs.  But they are going to jump over that front picket fence."

I had just had that white picket fence repaired the day before!  Never mind, he was right, the cute picket fence was a deal-breaker.  "No problem", I said.  "I'll call the contractor in the morning and replace that piece of fence with 6 foot tall fenceposts.  Your dogs will be secure, and you will have way more privacy."

If your rental unit has a SIDE YARD or SIDE SETBACK don't ignore it.  Your ignored, weedy setback dead space can be money in your pocket.  Instead, have French doors, sliding French doors, or a regular door put into  that setback wall.  Just remove an old window that is on the setback wall.  Put in the door.  Put in pavers or a concrete sidewalk.  Pretend you are in Manhattan--such valuable real estate would not be ignored. 

A 5-foot wide setback yard is enough for a small table and chairs--the morning coffee, remember?  Put a cheap, homemade stick trellis on the property-line fence and plant some nice, green, invasive local vines.  They thrive better.  Provide a faucet and hose.  Hang a bird feeder.  That small, secluded sideyard is now your tenant's private little oasis:  "It's so small!  What a cute yard!  I'll take it!"

If you give your tenants privacy they will love their homes.  They will stay.  Tenant privacy also means:  Landlord, stay away! Leave your tenants alone unless you MUST go on the property for maintenance.  If you do, be sure to give them 24 hours telephone or written notice.  How would YOU like it if the owner of your home was always snooping around?

I wouldn't  like it because I would be out in my private side setback yard, sipping  latte in my bathrobe.

Furnishedowner