Raising money from 'passive investors,' funds
plough cash into new asset class, creating opportunity for agents
After real estate broker Iddo Gavish started making a killing by
buying and renting out houses on Airbnb,
some local investors took notice.
“I’ve had many people approach me, and a lot of people are
jealous,” said Gavish, CEO of Las Vegas-based Gavish Real Estate, a brokerage and
property management firm that specializes in distressed sales. “They said, ‘Why
don’t we do it on a bigger scale?”
That’s why he’s employing an increasingly popular real estate
investment strategy: He’s raising cash from investors to buy single-family properties,
lease them out on short-term rental platforms like Airbnb
and then split the profits with those investors.
Ventures
like Gavish’s have been around for some time, but some observers say they’ve
spread like wildfire in the last year. And now some investors are taking what
could be called “short-term rental funds” to a whole new level.
At least one institutional investor is already buying and
renting out properties on short-term
rental sites while
others are circling the market. Spearheaded by tech entrepreneurs,
other funds focused on short-term rentals have raised or are
seeking to raise millions — or tens of millions, industry insiders say.
These
operations are opening up a potentially lucrative asset class to a larger swath
of investors, fueling the growth of short-term rentals in various markets. But
short-term rental funds will have to navigate a wide array of risks, including
choppy regulatory waters that could sour if investments nettle neighbors.
Regardless, the growing appetite among
travelers and investors for short-term rentals points towards lucrative
business opportunities for agents. Like Gavish, agents can use their market
expertise or property-management know-how to win the business of investors
or snap up units to rent out to guests themselves.
Quadrupling rental revenue
Gavish first became acquainted with the short-term rental
business after he found accommodations for a visiting Ultimate Fighting
Championship (UFC) fighter on behalf of a big local
property investor.
The investor runs a
de-facto hotel business with a portfolio of over 100 short-term rentals,
according to Gavish. The real estate agent who managed this investor’s
properties “had dropped the ball” and failed to secure a unit for theathlete, he
said. Gavish had stepped in to save the day.
Soon enough, Gavish found himself managing vacation rentals
for multiple investors. Of the 100 or so short-term listings he now oversees, a
few rent for up to $1,500 a night and are occupied two out of three
nights, while cheaper units in the $150 to $250 range are booked almost
nonstop, he said.
In Las Vegas, properties rented out on a short-term basis can
generate up to four times as much monthly revenue as traditional, long-term
rentals, according to Gavish. He earns a large cut of that
cash under his management model.
If aspiring short-term rental owners hire Gavish, the broker
gives their properties the makeovers they need to wring out the highest nightly
rates possible and comply with local regulations.
That can mean some remodeling and the addition of fire
extinguishers, carbon monoxide detectors and a map of a home’s interior. Gavish
may even throw in some decorative flourishes, such as Frank Sinatra and Elvis
paraphernalia.
Gavish then handles booking, housekeeping, upkeep, expenses and
hospitality services, which can include greeting guests and responding to their
requests — or, occasionally, the complaints of neighbors.
Investors are guaranteed a minimum amount of monthly revenue
after expenses are paid. Gavish then collects half of any earnings generated by
a property on top of that amount.
“One guy was getting $3,000 a month; now, he’s getting $6,000,”
Gavish said. “He gets the first $3,000 after expenses, and then, after that,
it’s split 50-50.” That means Gavish pockets $3,000 a month by managing the
property.
‘Passive investors’ getting in on the action
The business is so lucrative that Gavish began building his own
portfolio of short-term rentals. Now, at the prompting of some investors, he’s
formed a limited liability company (LLC) to pool his money with others to
further milk the market. He says he plans to raise at least $1 million.
Investors that contribute to the fund, including Gavish, are
co-owners of the company and split the profits (or losses) generated by the
properties purchased by the firm.
Because Gavish will operate the company while the other
co-owners sit back and let him put their money to work, he will earn a
management fee or a higher share of the returns than the other co-owners, he
said.
Gavish anticipates that the fund will produce an annual yield of
around 20 percent (after expenses), but he’s not promising that to investors.
Short-term rental operations like Gavish’s that raise capital
from so-called “passive investors” have been around for some time, but they
have recently begun to proliferate, observers say.
They join the types of professional short-term rental landlords
that have been already widely covered by the media: primarily, long-time
landlords that have converted what were once traditional long-term units into
short-term rentals, individuals who have bought short-term rentals without
support from outside investors, and long-established vacation rental firms.
A portrait of the short-term rental investor
Sixty-five percent of the
550,000 short-term rentals listed on Airbnb in December 2015 were home rentals
rather than private rooms in a home or rooms shared by hosts, according
to Airdna, a provider of short-term rental market data. That’s up
from 63 percent the year before, said CEO Scott Shatford.
A little under 8 percent of the 250,000 U.S. Airbnb hosts
examined in a recent report listed three or more listings between October 2014
and October 2015.
That means roughly 20,000
U.S. hosts were operating as “professional hosts,” or focused on generating a
significant source of income through Airbnb, according to David
Ordal, the CEO of Everbooked, an
Airbnb market analytics and pricing startup that jointly produced the report with
Airbnb data provider LearnAirbnb.com.
The hosts with three or
more listings fall into four camps, said Ordal:
·
“Aggressive individuals”
·
Property managers
·
“Landlords” (property owners who convert some of the long-term
rentals they own into short-term rentals)
·
Investors (individuals or firms buying properties to lease
out as short-term rentals)
He said his analysis suggests that 2,500 to 5,000 Airbnb
hosts (1 to 2 percent of all hosts) would meet his definition of “investor.” A
subset of those investors would represent short-term rental funds.
About 2 percent of hosts collected more than $100,000 in
annual booked revenue in 2015, which, assuming a net profit margin of 33
percent, would mean only 1 percent of hosts earned $50,000 or more,
according to the report.
Startups fanning the flames
The number of professional short-term rental investors who use
Pillow, a property management service for short-term rentals, has tripled in
the last year, said CEO Sean Conway.
Pillow is among a growing
crop of property management and data providers — which include
Airdna, LearnAirbnb.com and Everbooked, Flatbook, TurnKey, and Guesty — that
are built to optimize returns for investors playing in the single-family
rental market.
Pillow combines services like guest support and housekeeping
with technology, including a tool that adjusts a short-term rental’s pricing
multiple times a day based on estimated demand.
Conway said this maximizes efficiency, resulting in
low operating costs that enable the startup to offer discount
rates. Pillow charges a 15 percent management fee, which is well
under half of what Conway says is the typical rate.
Heavy hitters stepping up
Facilitated by startups like Pillow, short-term rental
funds are opening up the asset class to a much larger swath of investors
searching for high yields in a low-interest rate environment.
Now, some individuals and firms, including at least a few
institutional investors, are adding fuel to the fire, industry insiders
say: They’re minting short-term rental funds worth tens of millions.
These funds are inclined to keep a low profile, largely due to
the tendency for short-term rentals to raise the hackles of communities and
draw scrutiny from regulators, according to industry insiders.
“It’s a really secretive space because it’s set in this
tumultuous legal gray area right now that a lot of people really don’t want to
put the bull’s-eye on their plan, or their fund or their development in fear of
some sort of retribution at the city level,” Shatford said. “Really any press
is not good press for this industry right now.”
The “AirFund” may
be the only short-term rental fund around to take the opposite view. Instead of
shunning the limelight, the fund is publicly seeking around $20 million
from wealthy investors to snap up single and multi-family properties “friendly
to short term rentals” in the U.S., Canada, the Caribbean and Europe. The goal
is to generate a gross yield of 15 to 25 percent for investors.
Reuven Cohen, co-founder of Airvestor, yet another short-term
rental data provider, says his startup is partnering with some managers of
traditional property funds to launch “AirFund.”
AirFund enlisting help of agents
“Our goal is automate the selection of properties using
aggregated data sources with local support to help vet the specific
neighborhoods and properties,” he said.
The AirFund has been talking to real estate agents and may turn
to them for help with finding and purchasing properties. “Agents provide
additional local insights that machines just can’t match,” Cohen said.
The fund appears to be taking advantage of a recent
loosening of securities laws to advertise to the public online, rather than
marketing the fund behind an online registration wall that’s only lifted
for people who self-certify that they are “accredited investors” (people
who earn at least $200,000 a year or are worth more than $1 million).
Cohen didn’t respond by email when asked if AirFund was
leveraging regulatory changes to publicly drum up interest from
investors. Still, even though anyone can review AirFund’s investment pitch,
only accredited investors can contribute to the fund. The minimum investment is
$5,000.
This is a flavor of real estate crowdfunding —
though AirFund is using an all-purpose crowdfunder, AngelList, rather than a
specialized “real estate crowdfunder,” like Fundrise, Realty Mogul or
RealtyShares. Real estate crowdfunders pool
money online to finance real estate projects on behalf of companies, some of
which might have difficulty acquiring funds from other sources. They could
potentially give a boost to short-term rental funds.
Markets primed for short-term
rental investment
The AirFund would target long-time vacation hotspots with
spillover demand for short-term units, such as some areas in Florida, according
to Cohen. It might also focus on markets that aren’t traditionally thought of
as vacation destinations but have depressed property values and receive plenty
of visitors, such as markets in Pennsylvania and Ohio, he said.
Neighborhoods near airports, conference centers and universities
often provide some of the most fertile ground for short-term rentals, in
Cohen’s view.
Palm Springs, Florida; Phoenix; Charleston, South Carolina, and
Nashville, Tennessee, are among the many other markets primed for more
investment in short-term rentals, said Airdna’s Shatford.
Hedge funds wading in
LDJ Capital, a private investment and equity firm, is
buying properties to rent out on short-term rental platforms. Some of LDJ
Capital’s own funds, as well some of the firm’s clients, are executing on this
investment strategy, said LDJ Capital Chairman David Drake, via email.
Drake didn’t respond when asked by email for details, and LDJ
Capital’s New York office didn’t respond to a voicemail. LDJ Capital owns
and manages equities, hedge funds, venture capital and alternative investments that
focus on industries including real estate, hotel and hospitality management.
Shatford said he knows of at least one hedge fund that’s
“dedicated” to short-term rentals and is already active in the space. The two
people he knows who are channeling hedge fund capital into short-term rentals
didn’t want to be named, discussed or contacted, he said.
“A few large funds,” as well as some hedge funds, have also
reached out to LearnAirbnb.com, a short-term rental consultant and information
source, to discuss purchasing the startup’s data, said LearnAirbnb.com
co-founder Jim Breese.
Breese, who emphasized that neither he nor LearnAirbnb.com is
helping operate a short-term rental fund, declined to identify any of these
funds, saying they wouldn’t want to be named or contacted.
Short-term rental funds launched by tech
entrepreneurs?
John Banczak, the founder and chairman of short-term rental
management and listing platform TurnKey Vacation Rentals, is one example of a
tech entrepreneur that’s invested in a short-term rental fund.
While a source had said Banczak was raising millions to buy and
rent out short-term units, Banczak said he wasn’t involved in an operation
of that scale, though he does jointly own a firm that owns a boutique hotel and
“several other small investments.” In addition, Banczak personally owns two
vacation rentals, he said.
TurnKey recently secured $10 million in a Series B funding
round, bringing its total funding to $20 million. The startup counts Zillow
Executive Chairman Rich Barton and Zillow CEO Spencer Rascoff among its
investors
TurnKey CEO T.J. Clark
said that TurnKey manages
properties for two short-term rental funds, both of which he said were
worth less than $10 million.
Another source said that Aneel Ranadive, a tech entrepreneur and
the son of the majority owner of the Sacramento Kings, is among individuals
involved in building short-term rental funds, with the aim of raising $20
million to plough into the asset class. Ranadive also didn’t respond to
requests for comment.
Seeing the writing on the wall
Traditional property
investment funds also smell the bacon. Several real
estate investment trusts (REITs) have been
in discussions with Airbnb about allowing tenants to list their units Airbnb in
exchange for a share of the revenue.
The venture capital arm of Sterling Equities, whose real estate
division owns five real estate investment funds representing thousands of
apartment units, has invested in Pillow with the goal of using the startup to
help convert a fraction of its apartments into short-term rentals, Pillow’s
Conway said.
At least one real estate crowdfunder is also eyeing the
short-term market.
Raising money for short-term rentals funds is “not far off on
the horizon because we’ve considered it at a high level internally before,”
said Nav Athwal, CEO of RealtyShares, which has crowdfunded the purchases
of some properties that have been rented out on Airbnb. “We just
haven’t come across the right opportunity.”
Airbnb and FlipKey, another popular short-term rental site, did
not respond when asked by email about their reaction to the emergence of
short-term rental funds or if they had any policies regarding the use of their
platforms by large short-term rental landlords.
HomeAway, which also owns short-term rental sites VRBO and
VacationRentals.com, “has not seen a significant representation of larger
investment groups entering our marketplace,” said Jeff Hurst, the
firm’s chief strategy officer.
“However, we do see the pooling of resources by families or
groups of friends who invest in a vacation home together, for personal use and
to rent during times of vacancy in order to help pay down the cost of
ownership,” he said.
HomeAway’s total number of listings worldwide jumped by
about 38 percent to 1.23 million from 2013 to 2015. 360,000 of those
listings are in the U.S.
Where is all the demand coming from?
The swell in short-term rental inventory may hit a ceiling at
some point, but there’s still plenty of demand to support short-term rental
funds, observers say.
That demand has been driven, in part, by the emergence of
short-term rentals as an attractive alternative to hotels. That’s thanks to
short-term rental platforms, most notably, Airbnb, that make it easy for
anyone to list and collect payment from guests.
Short-term rentals can provide accommodations that can cost less
than traditional lodging, offer a uniquely immersive experience of destinations
and better suit groups. Airbnb has claimed that 35 percent of people
who travel using Airbnb say they wouldn’t have traveled or stayed as long if
they couldn’t have used Airbnb.
In another sign that the short-term rental market is ripe for
investment, the likelihood that a person prefers traditional hotels is
halved (79 percent to 40 percent) if they’ve stayed in peer-to-peer lodging,
according to Goldman Sachs.
Why short-term rental funds don’t want
attention
The primary reason many short-term rental investors,
particularly those constructing or operating funds built from scratch, might
seek to avoid publicity is the tendency for short-term rentals to cause stir
controversy and land on the radar of local regulators, many of
whom haven’t yet enacted rules that clearly govern short-term
rentals.
The spread of short-term rentals has raised the hackles of some
residents and housing groups. Some say they have watched short-term units turn
their communities into party zones teeming with raucous strangers.
The possibility that short-term rentals are chipping away
at housing affordability by removing units from the long-term rental
supply and driving up prices has also frequently been cited as a concern by
critics.
The pushback has led some local governments to impose severe
restrictions or bans on short-term rentals, particularly the type that would be
operated by funds: properties that aren’t owner-occupied.
Pulling the rug out
Santa Monica, California and Austin, Texas are
among cities that have recently moved to effectively ban the types of units
that would be operated by short-term rental funds, demonstrating the potential
for local governments to pull the rug out from investors.
Isabel Affinito, an Austin-based agent with JB Goodwin Realtors,
says she’s seen for-sale listings in the local multiple listing service noting
that they are being leased as short-term rentals.
Estimating potential
short-term rental revenue had become part of how investors were evaluating properties
and could serve as a holding strategy forhome
flippers in the event of a downturn, Affinito said.
While Austin’s ban was designed to stem a flood of short-term
rental investors, it could deter some of Affinitos’ clients in other parts of
the country from buying in Austin, even though all they want is a winter home,
she said.
“They fall into the investor category, and they can’t do short-term
rentals, which makes it much harder for them to justify buying something in
Texas,” she said.
According to a
report released by R Street, a conservative think
tank, other cities that have similar bans on non-owner-occupied short-term
rentals, but not necessarily home-sharing (when a host occupies
a home with a guest), include:
·
Fort Worth, Texas
·
Jacksonville, Florida
·
Kansas City, Missouri
·
Los Angeles
·
New Orleans
·
Oklahoma City
·
Santa Barbara, California
·
Atlanta, Georgia
·
Denver
·
Fresno, California
Local governments in ‘wait-and-see mode’
Short-term rental funds would likely steer clear of these
markets, along with others that impose certain restrictions, like tight caps on
the number of days a property may be rented without the owner present.
The trick will be to pinpoint places that not only generously
accommodate short-term rentals at the moment, but are likely to do so long into
the future.
That’s not so easy. Most governments are in a “wait-and-see
mode” when it comes to regulating short-term rentals, Airdna’s Shatford said.
Only 21 out of 59 cities analyzed by the R Street Institute were
deemed to have a “tailored legal framework” for short-term rentals, with just
four of those markets receiving an A rating for their friendliness to
short-term rentals.
Taxes vary
Local taxes and business license requirements will also factor
into the calculus of investors seeking to get into the short-term rental game.
These can include hotel taxes, sales, Value Added Tax (VAT), Goods and Services
Tax (GST) and income tax. Taxes may be levied at the city, “Special District,”
county and state level.
The combined tax rates on short-term rentals can range from over
20 percent to well under 10, according to Cohen, the founder of the AirFund.
Markets with the highest combined rates include St. Louis,
Missouri (21.97 percent) and Salt Lake City (19.2 percent), while Lancaster,
California (7 percent) and Fontana and Moreno Valley, California (8 percent)
rank among those with the lowest rates, he said. (Cohen said the tax rates
he provided were “for informational purposes only.”)
Cohen also offered the combined tax rates on short-term rentals
in Las Vegas (11.5 percent), Los Angeles (15.5 percent) and San Francisco (15.5
percent).
And as if all of that isn’t enough, short-term rental funds
will also have to navigate zoning laws that may prohibit short-term rentals in
residential neighborhoods, and, like Gavish, ensure they are compliant with
safety and health regulations.
In addition, they would
be well-advised to stay away from properties governed by homeowners
associations (HOAs) or co-op boards that prohibit or severely restrict
short-term rental hosting.
“I don’t recommend you put an Airbnb there,” Gavish said of
listing property part of an HOA as a short-term rental. In most associations,
that “flies against the rules,” he said.
While all of these factors and pitfalls may make
short-term rental funds sound like more trouble than they’re worth, the
people behind efforts like AirFund say they have data analytics
tools that can help them fly the hazards and find the green.
The spread of short-term
rental funds might exacerbate affordability
issues in some markets and set the stage for some conflicts
between investors and community stakeholders.
But sooner or later, the industry will settle on a “happy medium”
that balances the interests of investors with neighbors, and provides a legal
framework within which short-term rental funds can operate with minimal risk,
according to Pillow’s Conway.
That’s when the institutional investors will really move in, he
said.
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