The Story of How We Accidentally Got Into Vacation Rental Investing

If there’s anything to know about me, it’s that I like looking at the prices of things. 

Professionally, I’ve started companies around pricing analytics and writing about economics and value. Personally, I always like asking people what they paid for something. Prices give you discovery of somethings value. How often do you get a window into something’s value, simple by knowing one number abut it?

The main way this obsession with prices manifests itself, is my favorite pastime is looking at prices of houses. After  a day of work and taking care of the kids, nothing relaxes me more than firing up a real estate app on my phone and checking out what’s for sale. Each, listing is like a fantasy world where you imagine yourself living in a new place with a new better life. And each property has a price! Briefly, I like to puzzle over whether the property is overvalued or undervalued relative to it’s revenue potential or market.

So, that brings us to one fateful day in 2014 where this adventure got kicked off. We were driving up from our apartment in San Francisco to Sonoma where we had rented a house for my wife’s 35 birthday. I had mentioned to my wife I saw an interesting house for sale in Sonoma and maybe we could check out while we were there. We had never seen a house in the area before, but we’d be getting in to the town a bit before we could check into our weekend rental, so we had some free time to view the place.

A quick phone call to at the listing agent and an hour later me, my wife, and our ten month old daughter met an agent at the property. The home was listed at $485,000 and had been on the market for a couple of months. In San Francisco at the time, that price would not get you even a studio apartment (which is why we continued to rent a place).

In Sonoma, that price would give you a lot more, it came with issues which is why no one had bought it so far (it was originally listed at $550,000 but the price had gradually been lowered).

On the plus side, the place was mostly pretty great. It was 3 bedrooms and 2 baths and almost 1700 square feet with a garage. It was located about 1.5 miles from the Sonoma town square, which is really an awesome place and rental to many of the wineries that made the region famous. The biggest plus of all was it had a swimming pool in the backyard! While it was a bit dated, houses in Sonoma with pools tended to be higher end ones that sold for millions of dollars.

On the negative side, the patio concrete was a mess around the pool. It was all cracked and settled and had lots of tripping hazards. There were literally thousands of leaves in the pool because of some threes that overhung it. The kitchen and bathrooms were all dated and generally the outside of the house looked like there were probably issues. 

We never even toured the side yard, but if we had, we probably would have gotten scared off. Have the siding from the house was torn off and all of the exterior time on most of the windows was torn off an in a pile. People who toured the home more carefully probably noticed that and rightly backed off.

But we didn’t notice that. What we noticed was the the house was in a great location, had plenty of room, and it had a pool. Our “family home” that we owned could be in Sonoma and we could keep our crummy apartment in San Francisco that we rented. We our jobs gave us enough flexibility we could split our time between the two places and buying a home in San Francisco was way out of reach. Having just booked a home in Sonoma, we knew that those homes rented out on Airbnb and Vrbo for a lot of money and were in high demand. So when we weren’t in Sonoma, maybe we could rent it out?

We also had some experience with Airbnb so that was our mind as we considered the house. In 2011, after we moved in together, we started renting out an extra room in our apartment to travelers on Aribnb. We rented out a private room to travelers for a year for about $50 a night. We stopped when we had our first child, and also once the site became larger it became clear that landlords didn’t look kindly on the the practice. The experience gave us a decent level of confidence that we could have a home in Sonoma we could enjoy and then cover most of the mortgage by renting it out when we weren’t using it.

So we toured the house and put it out of our mind for the rest of the weekend has we celebrated with friends. When we returned back to San Francisco on Sunday, we thought about it again. Should we make an offer on the place we toured? 

On one hand, it was a little crazy to make an offer. Additionally, it’s not like we were actively considering buying a house in Sonoma and carefully considering lots of different properties and this was the best one. Heck, we really wanted to buy a house in Tahoe, a place we loved, but every time we ran the numbers it felt Airbnb income wouldn’t cover the costs when we weren’t there. And we couldn’t realistically split time between Tahoe and San Francisco.

On the other hand, the numbers on the Sonoma property seems to work out according to the rudimentary financial model i made. My wife looked at listings on vacation rental sites and they all seemed to be nicely booked at a strong price, especially the ones with pools. We could finally have a home we owned and probably it would pay for itself.

So we decided to make an offer of $460,000. Our agent connected us with a local lender that pre-qualified us for a loan. She also suggested we up our offer a little bit if we wanted to get the place.

We actually indifferent whether we bought the the place or not, which is a privileged position in a negotiation or bidding situation. We weren’t planning on buying a house house and winning the bid was going to be a lot of work and financial stress for us. But the numbers on the house made sense and we’d finally own a place after being renters our whole life. So, we upped our offer to $470K.

Reader, I’m here to tell you we got the house.

The buyer decided to accept our offer at $470K. Apparently there were a few other offers on the table at around the same price, but the buyer thought we were most likely to qualify for the mortgage compared to the other bidders. This was 2014 and apparently all the rich people in San Francisco weren’t yet buying up houses in wine country (which would later kick into high gear). It felt like we were late to the market, but it turns out we were not.

And so that’s how it started. When we our offer accepted, we briefly had some buyers remorse and reconsidered whether we wanted to do this. But above also, I believed that that projected revenue of the property was high relative to the mortgage. Put differently I believed it was a good price.

So we bought it and put down about $100K to cover our 20% downpayment plus closing costs. We invested another $50,000 fix the house up. The bulk of those costs were replacing the roof, redoing all the concrete around the pool, and fixing up all the side and rotted exterior window trim. My wife’s father, a finished carpenter, helped us redo parts of the kitchen (new butcher block counters and which subway tile backsplash) and the master bath (new tile floor, new tile and frameless glass door for the shower stall. We also repainted all the walls and scoured craigslist, IKEA, and TJ Maxx for furniture and kitchen supplies.

All in, we invested $150,000 into the house, which streched us pretty thin. 2014 we mostly just used the home for own use and fixed it up. 2015 we started renting it more and more and it went pretty well. Each year, that house has generated about $30K in profit and appreciated at least $55K each year. So for that initial $150K investment, our annual return has been over 55% every year. This is in a time period where savings arounds pay 1% interested and the stock market returns are around 9%. 

We saved all the profits from the house and 5 years later it funded our downpayment on our second property, a home in Kauai, Hawaii. Then later in 2020 and 2021 we added 4 more properties. As I’ll cover future articles, it hasn’t been all smooth sailing, but it feels like there is a big idea in here somewhere about vacation rentals and Airbnb investments. You can buy a home in an awesome location, get to use with with friends and family, and more than cover your costs. 

That’s if you do it right of course. The vast majority of these kinds of homes are money pits, for reason I’ll spell out in future articles.

So, I decided to start this site to put some thoughts down not only for the benefit of other people who can learn from our experience, but also for my own benefit. I’m convinced there’s a big idea in vacation rental investing and writing about it is way to work through that idea and achieve more clear thinking. My whole adjust life has involved starting companies in some form or another, and this is going to be my next one. I’m just not sure what it is yet.

It wasn’t until 2023 that we could finally buy a home in San Francisco. So glad we started with our weird and unconventional plan first.