Diary of Airbnb and Vrbo Cancellations and New Bookings During the Coronavirus Epidemic

Well, we got our first cancellation this morning on March 11, 2020 because of coronavirus. A German couple who were supposed to arrive later this month and stay for 5 nights in Kauai for approximately $1,100. Because of the ban on flights from Europe announced last night, they were unable to come. So we’re out of luck there.

On the positive side, we’ve gotten three bookings this week. So at least for now, some people are still booking new travel.  

March 7, 2020 we got an Airbnb booking for 7 nights in Kauai for May for a couple that will be on their honeymoon (~$1,800).

March 9, 2020 we got an Airbnb booking for 9 nights in Kauai for a family of 4 (~$2,200)

March 12, 2020 (today, the day after the travel ban, when the stock market fell 10% in a single day) we got a Vrbo booking for June in Sonoma (~$1,800).

So 3 bookings and 1 cancellation in a week so far as the crisis is heightening, and the stock market and economy are plummeting. I don’t have any prediction on how it’s going to go, but I thought I’d write this down so I have some record of it down the line.

Additionally, over the last two days we got messages from future guests (for the Sonoma house) checking what our cancellation policy is, just in case. 

And while I’m writing this, San Francisco public schools just announced they’ll be closed for the next three weeks in response to coronavirus. Kids will be home. Coronavirus cases are still low in the US, but escalating very quickly.

Update from 3/20: Well that escalated quickly. Pretty much all bookings from Sonoma and Hawaii got cancelled for the foreseeable future.

What’s the Best Sleeper Sofa for a Vacation Rental?

Ah sleeper sofas. No one ever wants to get stuck on a sleeper sofa when staying at a vacation rental. And yet, they are an integral part of any property on Airbnb or VRBO.

Why? Typically your vacation rental legally can hold 2 people per bedroom plus 2 additional people. So a three bedroom can hold 8 people, for example. And where are those two folks who don’t get a bedroom supposed to sleep? The sleeper couch of course.

Traditionally, sleeper sofas have been extremely uncomfortable and prone to breaking. Our sleeper sofa in our Sonoma property broke a bunch of times after about a year and was the source of guest complaints. After a while, it broke completely. Those regular ole sleeper sofas just aren’t built for regular usage.

So, we bought a Room and Board “Day and Night” Sleeper sofa. It has a heavy duty internal sleeper mechanism built by American Leather. These sleepers are built like tanks and also have a tri-fold memory foam top. It’s still not super comfortable, but it’s much more comfortable then a traditional sleeper. American Leather also sells these sleepers and their sleeper mechanism can be found in some other brands as well. Here it is in the living room of our Kauai place:

Also, Room and Board makes beautiful furniture in general. The downside is that it’s extremely expensive! 

These sleepers cost about $3000. For our place in Hawaii, we had to buy one new from Room and Board and then ship it to Kauai (the delivery fee was a flat $1400 of the entire order so we added a few more things to the shipment). For our place in Sonoma, we found an almost new one on Craigslist for $1300 in San Francisco and then paid the Lugg moving service $200 to take it up to Sonoma. This delivery fee was well worth it because these sleepers are very heavy.

Of course, there are probably other great sleepers out there in the market, but I recommend the Room and Board Day and Night sleepers because they look good and the sleeper mechanism is extremely well built.

What’s the Return on Investment of a Swimming Pool in a Vacation Rental?

In an earlier post, we discussed that it cost us $72,000 to build a plunge pool in our vacation rental in Kauai, Hawaii. And that hefty price tag was for about as small a pool as you can build!

Sure pools are awesome and fun to have, but what’s the financial upside of having a pool? Obviously, your mileage will vary. Some locations pools are very uncommon or can only be used during a short season. In other places (like a city), adding a pool would be impractical.

In our case, we think adding a pool was a wise investment for our vacation rental. Let me walk you through the numbers.

Prior to installing the pool, we charged $189 / night and had approximately 90% occupancy. That means the revenue per month is approximately $5,100 and the revenue per year is approximately $61,200.

After the pool installation, we were able to immediately raise the rates to $249 / night and still maintain 90% occupancy.  That’s $6,700 a month in revenue now and approximately $80,400 in annual revenue. Our annual revenue jumped $19,200.

Having a pool added $200 a month in pool maintenance cost and only about $30 more to our electric bill (despite electricity being expensive in Hawaii, it’s a small pool and very efficient brand new equipment). So our monthly cost went up $230 a month and our annual cost went up $2,800.

So our revenue went up $19,200 and our costs went up $2,800, netting us a profit of $16,400.

A $16,400 annual profit on an investment of $72,000 is an annual return on investment of 22.8%, by all accounts a very excellent return.

But wait, there is more. My suspicion is that over time as we get more reviews and rank better on the listing sites, we can actually charge $299 a night as opposed to $249 like we do today. In that scenario our annual revenue would be $96,900 and our new profit from the pool would be $32,900 (assuming same added expenses).

A $32,900 profit on an investment of $72,000 is a 45.7% annual return on investment. To be clear, we’re not there yet, but I think we can get there.

So, when people say that building a pool is waste of money and you’ll never recoup your investment, that isn’t necessarily the case with vacation rentals.  Not only do you improve the value of your home some amount (increasing your equity value), but you also get an annual cash return if you’re in a similar market to us. It all comes down to answering this simple question -- how much more could you charge if your vacation rental had a pool?

How Much Does it Cost to Build a Plunge Pool?

Our plunge pool in Kauai.

In our place in Hawaii, we built a 8 foot by 14 foot plunge pool. In the shallow end it’s 3 feet deep. In the “deep” end it’s 4 feet deep.

Building the pool was the only major project we did to the house that involved external contractors and a significant cost. Because of the weather and availability of some contractors, there were significant delays and it was extremely stressful to manage when guests were supposed to check in and there was a giant muddy hole in the side of the house. But I digress!

How much did it cost to build the plunge pool? The pool construction cost was approximately $50,300. The total cost of the project (including the fencing, deck work, CMU block wall, gravel around the pool, pavers) ended up being around $72,000 all in.

The pool company was great to work with and stuck very close to budget. This is the original budget ($46,596). It increased slightly when we decided to make the pool 14ft long instead of 12ft and when we upgraded the plaster finish to “hydrazzo” and few minor incidentals. From our contact, this was how the payment brokedown by milestone:

05% upon acceptance 

05% upon permit approval 

10% upon commencement

20% upon form and steel installation

15% upon Gunite placement

10% upon coping installation

10% upon tile installation

10% upon equipment installation

10% upon plastering

5% upon start-up

This ended up being about $50,000 in total. If it could do it again, I probably would have made the pool 16ft by 10ft, but that would have increased the cost about $4K more and I was on a budget.

The rest of the project cost about $22,000 and was significantly more complicated to manage. Part of the reason was it was hard to find contractors in Kauai that had any availability so you were at their mercy as to when they could show up. And it would rain a lot and prevent work from being done. Because of these delays, we also had to pause construction when guests were checking in and restart when there were gaps in the schedule.

For the carpentry contractor, we spent $18,400. That included deconstructing the old deck and turning it into stairs. Creating an concrete block base around the pool (two feet high), putting down the gravel around the pool, and installing the douglas fir slat fence.

We spent about $2,000 on the gravel to surround the pool and the lava rock pavers. The gravel was put down by the carpentry contractors. It was likely much cheaper than installing concrete or decking around the pool and also gave the pool a more natural look.

Lastly we spent $1,500 on a contractor that was supposed to install the concrete block base for the fence and then did a bad job and disappeared with the money. The carpentry contractors had to dig up the concrete footings he had poured because they were not deep or wide enough. Oh well, $1,500 down the drain but it could have been worse.

So all in about $72,000 to build the pool. Keep in mind this was 1) About as small a pool as you can possibly make 2) We only fenced around the pool area to keep the costs down, so not around the whole house 3) We have gravel and pavers around the pool, other options will be much more expensive. 4) I went with a “slat” fence that gave a more distinctive look, but came with expensive materials and labor costs.

Lastly, this is Hawaii so things are more expensive. However, I imagine things would cost about the same here in California or in other high cost of living areas.

Homeowners Insurance for Vacation Rentals and Airbnb Short Term Rentals

When you buy a home of course you need homeowners insurance. Not only is it a good idea to insure an extremely valuable asset against calamity, but you can’t get a mortgage without proof of insurance. Your bank doesn’t want to see your home get damaged and then you walk away from paying them back because you can’t afford to fix it up.

However, like many things about vacation rentals, homeowners insurance for short term rentals is a little tricky. Most run-of-the-mill homeowners insurance policies aren’t geared towards short term rentals and may not cover you if you a guest has an issue that results in the destruction of your home.

Traditionally, there were two kinds of homeowners insurance. Insurance for your primary residence, or insurance for landlords with long term tenants. Neither of those options cover you if you have a short term guest who accidentally burns down your home. Airbnb and Vrbo do have host guarantees to help compensate you for any issues from their guests, but it’s not really an insurance policy and not a substitute for one. Please be advised that this is not insurance or legal advice and you should contact a profession for help navigating this property.

There are a number of insurance companies that have filled this void and provide homeowners insurance for short term rentals. These companies also typically will insure you for lost income if you’re unable to rent out your place because of damage. In addition to insuring against property damage, they also provide liability coverage. We’ve used two of the three below and their rates are rather reasonable.

CBIZ Vacation Rental Insurance. We use them for our property in Sonoma. As far as I know they’re the original company that has provided short term rental homeowners insurance.

Proper Insurance. We use them for our property in Hawaii. They’re supposed backed by Lloyd’s of London.

Foremost insurance. We’ve never used them, but they are the third company that people mention as providing insurance for vacation rentals.

In addition to our homeowners insurance, we also have a umbrella insurance policy from GEICO to cover additional liability claims beyond the homeowners insurance.

How Will Coronavirus Impact Vacation Rentals and Airbnb?

When deciding to invest in vacation rentals, I knew it was risky because when the economy goes south people take fewer vacations. Or, they substitute vacations that involve flying with ones they can drive to. 

When evaluating our Hawaii vacation rental investment property, I looked at how much tourism declined in Kauai during the Great Recession. It declined of course, but maybe about 10% (if I remember correctly). Our vacation rental in Hawaii could weather a financial downturn where occupancy declined 10-20% and things would still be fine.

But I didn’t really consider the scenario of a pandemic where people stopped traveling by airplane entirely. 

If a case like that happened, visits to Hawaii would drop by 100%, which would be cataclysmic for the vacation rental industry on the Islands. A pandemic like the Coronavirus (COVID-19) could wipe out the vacation rental industry in any market where most of the visitors take an airplane if it were no longer safe to take airplanes. That’s a situation I never thought about when considering the downsides risks of the investment.

Our other property in Sonoma has a mix of visitors that fly there or drive there from the Bay Area. Hopefully that makes the market more resilient to a decline because of the Coronavirus, but we will see. Markets like China have supposedly seen an 80% decline in Airbnb bookings this year compared to last year. If the Coronavirus hits a location, people will stop going there, even by car.

Luckily, our properties are mostly fully booked out the next few months and we haven’t had any cancellations yet. Hopefully that will be enough for the disease to be contained and people to start traveling and planning trips again. 

But if things get worse, things get worse. Mortgages, property taxes, and gardeners still need to be paid. The question is will the revenue from travelers be there?

How to Finance a Vacation Rental Investment Property

There are a lot of different mortgages out there. Unfortunately, not many of them are geared towards vacation rental investing. In this article, let’s review possible ways to finance a vacation rental or Airbnb by getting a mortgage. Please note this is not legal advice and you should consult with a lawyer and/or tax professional. Mortgage fraud is serious business and you shouldn’t dabble in it!

For residential properties, there are 3 major types of “conforming” loans. Primary mortgages, for your primary residence where you live. Investment loans, when you plan to rent out the property (traditionally to a long term tenant), or a second home loan for your vacation property.

These loans are “conforming” in the sense that it’s easy for the mortgage company to sell the loan afterwards to Fannie Mae or Freddie Mac as long as the loan confirms to a strict set of guidelines. Then the mortgage company gets their money back (plus some profit) and they can re-lend it again without bearing the risk of the default on your loan.

So how can you finance a vacation rental investment? First off, you can’t get a primary mortgage if you intend to use it as an investment property. You have to intend to live in it  for at least a year, otherwise you’re committing mortgage fraud potentially.

You could get an investment loan. The interest rate will be a bit higher, but the bigger issue is that the bank might not count the expected income from a short term rental against your “debt to income ratio” (DTI).  Most lenders live in a world where rental income means a 12-month lease from a tenant.

What most people do is get a second home loan. While in the past some lenders would not allow you to rent out your second home, Fannie and Freddie have made it clear that getting short term rental income from vacation properties is fine, with some qualifications.

However, many lenders won’t count that expected short term rental income to help you quality for the loan. That’s the key thing to understand because it has implications.

So based on your income, you have to be able to afford the property as if the income from the property was zero. As you can imagine, you can typically only qualify for a mortgage on one or two properties (if any) before your debt to income ratio looks really high. I’ve heard that some lenders will count short-term rental income towards your DTI, but the one we’ve used in the past doesn’t. Additionally you are limited on the number of second home loans you’re able to take. For example you can’t have two in the same area.

So a good way to start vacation rental investing  is to qualify for a mortgage as a second home. To do that, you need a relatively high income. If you want to continue to purchase properties, you’d need to find a lender that will “count” short-term rental income. We haven’t really looked into finding that kind of lender, but that would be our next step if we further expanded our portfolio.

That’s a rough overview of the “conforming” loans category. But you can also get a non-conforming “portfolio” loan where the lender doesn’t intend to resell it to Fannie or Freddie and instead hold on to it (or maybe sell it to another lender). In this case the lender can make whatever rules and guidelines they want.

In this world, there are some lenders that will give mortgages for vacation rentals. They may even underwrite it based on the expected income from the property, not your income. That how commercial lenders for large projects and apartment buildings look at the world  One of those lenders that I have heard of is Host Financial, but there seem to be others out there. However, note that their interest rate will likely be 2-3% higher than for a conventional loan and you may have to put down 25%. Another one I’ve heard of is RNC Capital.

So in short, to get a mortgage for a vacation rental or an Airbnb the most likely option is qualifying as a second home. If you can find a lender that will count the vacation rental income towards your DTI even better. If you’re willing and able to pay “commercial” terms on your mortgage, there are probably lenders out there that can be of service, for a price.

How Much Do Vacation Rental Property Managers Charge in Fees?

Vacation rental property managers charge about 35% of revenue as their fees for managing your property.

Yes, you read that right. Some may charge a little bit more or less, but 35% is a good rule of thumb. If you give away 35% of your revenue right of that bat, I can tell you there is no way you’re going to turn a profit on a vacation rental. Whats more is your property manager is getting a risk fee 35% commission without having fronted any of the capital for the purchase or bearing any risk.

Historically, second-home owners have used property managers to rent out and manage their vacation homes. After all, before the internet (or sites like Airbnb or Vrbo), how was the average homeowner supposed to get any customers for their rental? A property manager would do the hard work of building up a customer demand and make sure your place actually was rented. Now anyone can post a listing on Airbnb or Vrbo or Booking.com and get bookings. You don’t need a property manager to get customers, so there’s really no need to continue to pay such exorbitant customer acquisition fees unless you don’t want to deal with managing an Airbnb account.

The other thing property managers do (that’s still valuable) is actually manage your property. Make sure the cleaners come, that property maintenance takes place, and respond to issues that arise with guests that requires a personal presence. You may be able to find someone who can do that at substantially less than a 35% commission.

Increasingly, lots of homeowners self manage their vacation rental using the listing sites for demands and a network of contractors and local property managers that are compensated based on their time, not based on the revenues. That’s what we do and why we can turn a profit. In a future post, I’ll lay out the playbook for self-managing your vacation rental.

My Criteria for a Vacation Rental Investments and Airbnb

Everyone wants a second home in a sweet paradise, so I get a lot of emails from friends that go something like this. “Hey i’m thinking about buying a house in [vacation rental market], how do I know if it’s a good investment.”

Generally when people ask for real estate investment questions, the answer is “it’s complicated.” However, I hate it when people give that as a response because the person asking typically has no knowledge and you have at least a little bit to share. That said, here’s a legal disclaimer that nothing on this site is investment advice and please just use it as information, yada yada yada and consult professionals.

But it’s not that complicated. Here’s how I think through what would make a great vacation rental or Airbnb investment. Below i’m going to list out the criteria is roughly their order of importance.

1. Legality. Is it legal to do short term rentals in the location you are considering.

For our home in Sonoma, it’s in the unincorporated part of Sonoma so we were able to get a vacation rental permit. If it were a few blocks closer to to the town of Sonoma, it would be zoned in the town where short term vacation rentals are no permitted. For our home in Kauai, we bought the place primarily because it had a grandfathered in permit for short term rentals that transferred over from the prior owner.

So that’s the most important point you need to understand. If you want to make money from short term rentals, you need to make sure short term rentals are legal. That may seem obvious, but i”d say most people who ask for advice haven’t considered this point and most of the homes they are considering aren’t going to but legally suitable for vacation rentals.

I’d go so far as to suggest you invest in locations only where there is a clear and fair framework for getting a permit and the city has already put it’s rules in place. If you’re in a location where the town hasn’t made its rules yet, it’s likely that when they do make their rules, it put your property out of business.

As related point, that’s why I like vacation rentals in vacation areas, as opposed to short term rentals in cities. Cities generally don’t want apartment buildings turned into hotels, so you’re skating on thin ice. Vacation areas generally do want vacationers there, though they don’t always want vacation rentals.

2. Rental Demand. Target places with strong year round demand and high overall occupancy.

It’s tough to cover your costs if people only want to visit your place in the summer. Its tough if people only want to stay at your place during the weekends. It’s not tough to cover your costs or even turn a profit if people want to stay year round and even during the weekdays. That’s why I like Hawaii, it’s amazing year round and people aren’t coming from just a weekend so it’s easy to fill weekday spots.

As a general rule of thumb, I like for places that have high season of at least 6 months, and where you still cover your costs on the off season.

In Sonoma, we’re generally booked from May till October pretty much non-stop. The off reason is still pretty good in November (because of Thanksgiving and the tail end of October’s harvest season. December is pretty good because of Christmas and New Years break. Sometimes randomly March will be completely full, especially after we’ve gotten more reviews on all the sites. January and February are generally pretty slow, but even still the weekends get booked up by people coming up to wine country from San Francisco. Or we’ll use the house then.

In Hawaii, the person we bought our home from had it booked at about 95% occupancy rate. He’d been running it for 21 years so had a built up clientele and high search rankings on Vrbo, so it will be though for us to replicate that in the short term, but in the long run, high occupancy is the goal. There is no offseason in Hawaii.

In San Francisco, the most popular market for second homes is Tahoe. We love Tahoe. We got married in Tahoe. Tahoe is amazing place to ski in the winter and a gorges place to go in the summer.

But it’s a very tough market to turn a profit in. Even people who love Tahoe don’t go up there in the Spring or Fall. You’ll literally have zero bookings for April, May, September, October. You’ll mostly be unbooked in November  and things will be spotty in June and sometimes even March. And during snow season, people mostly just want to rent the house on the weekend, and that’s when you might want to use it. And in the summer, unless you’re really near the lake, it’s hard to get bookings.

The other issue with Tahoe is there is a huge supply homes, that are mostly unbooked most of the year. As a result, in Tahoe it’s also very hard to stand out in the sea of homes, which brings me to my next point.

3. Differentiated Property. How does your property standout and not be a commodity?

A lot of people buy condos in vacation areas. I’m not 100% averse to condos per say, but if there are a hundred other units in a building that are identical to you, how are you supposed to standout? Your condo is essentially easily substitutable for any other condo in the building and that makes it a commodity. 

In general, the vacation rental market and Airbnb has gotten a lot more competitive. Your house needs to deliver some unique experience as well as standout in it’s pictures and reviews.

You know what’s not a commodity, spending the night in a water tower in Mendocino that’s been converted into a designer Airbnb. A decade ago, our friends Rob and Elsa moved to woods of Mendocino county. On their property was an old water tower, which they converted into the most stylish and unique Airbnb you will ever see. They have over 500 reviews of the place and just added a second cabin to their property. 

I’d go so far as to say they’ve created an amazing property out of thin air. It’s not even necessarily in a location that’s historically popular (Mendocino the town is popular tourist location, but this isn’t there it’s much more remote).

An emerging thesis of mine is that with insanely great design and guest experience, you can create the demand for a rental anywhere, even the middle of no where. I haven’t necessarily tested this (nor do I have world class design skills), but my thesis if you make someplace cool, people will come, even if it’s not a high demand tourist area. 

A related point to this, is perhaps think how will the pictures of your home play on Instagram? While I don’t necessarily think it would be easily to use Instagram to promote your property, I think the kinds of places that would be popular on Instagram (and Pinterest) would likely be popular on Airbnb. No image of IKEA furniture in a regular condo is going to go viral on Instagram, but water tower house sure will.

4. Do the numbers work? There needs to need to be a “margin of safety” in the financial model.

The fourth critical criteria i look at are if the financial numbers work. If it’s legal to to do short term rentals, if the market is high demand, and if the property is unique then I build a simple financial model.

I”ll share that model in a future posts, but the three components are revenue, ongoing costs, and initial costs.

Revenue is a projection of price times occupancy for each month. I look at the exiting calendars of Airbnb hosts to make a best guess of their occupancy by month and typically nightly price in each season. I’ve also used Airdna analytics service to get this, though can’t yet vouch for it’s accuracy either way. I ignore revenue you take in for the cleaning fees and taxes and assume that gets netted out as a cost.

On going costs are mortgage, utilities, service providers costs. I don’t put big expenses like replacing the HVAC system here (though you could), but rather i look to see if i’m going to be creating enough profit to cover these expenses. Other people may explicitely reserve for those costs.

For the course of the year, I added up the profit and that’s the “ cash return.” I compare that to my initial “cash investment” (downpayment plus renovation costs). I divided the two numbers to yield my “Cash on Cash Return.” Put differently, how much cash are you generating from your initial investment. I target a 18% cash on cash return for something to be interesting. This is your return before considering equity price appreciation (or depreciation if the value of your home falls). I don’t bank of equity appreciation as part of considering the deal, though if the home appreciates that’s great.

***

So that’s how I quickly screen properties. Is it legal? Is it a high demand location? Could the property stand out? Do the numbers have some margin of safety with your cash returns? If it fits those criteria, then I’d suggest exploring further.

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.