We don’t do short term rentals
“Mr. Insurance man, we don’t do short term rentals.” This was an actual conversation I was having this week when we got approached by an insurance company looking for a rental for one of their clients.
The client’s situation was they had had an accident that had destroyed their home. And when I say destroyed, it was a total loss. They were currently living with their family in multiple hotel rooms and were in need of a place to rent while they rebuilt. They had small children and needed much more space than a hotel room could afford them.
They had been looking for a rental for nearly a month with no success. The problem was they couldn’t find a place that was close by that didn’t have a bunch of steps to get into the house, which was a must because of knee issues.
Well, we had a beautiful brick ranch on the market that had no steps. And when I say beautiful, we had just completely redone the house. Everything in the home was brand new. What I mean by that was it was not just rent ready, it was resale ready with a brand new kitchen, bathrooms, paint and floors throughout.
Now, I have never taken on an insurance claim tenant before, so I didn’t know what to expect. So, we defaulted to our standard operating procedures and had the client go view the property and then submit an application. After vetting the application, we set up an in-home interview in the hotel room.
Normally when we’re doing an in-home, we’re there for three reasons. No.1 is to introduce the four jobs of a tenant. No.2 is to get to know the people to see if we can gauge if we will work well with each other. And No.3 is to see how they keep their house. And I always say that whatever condition the applicant’s house is in when I meet them is what our house will look like in about three months if they get ours.
If their house is well kept, ours will be as well. If their house is kept poorly, they don’t get our house.
Meeting in a hotel room is not a normal situation. But I still needed to meet with the people, introduce the four jobs of a tenant and get a feel for them.
So, I went. And I’m glad to report that I liked the people and I believe we will have a good relationship.
That being said, I needed to find out how long they thought it was going to take to rebuild. That’s when I explained that we don’t do short term rentals. You see, our average tenant stays for around four years. And the way we structure our business, and how we calculate our rent rate, is based on that fact.
Let me explain what I mean by that.
As we all know the cost of rehabs have gone up. And we track what our rehabs cost by the square foot. This is important for flip projects, but it also important for projecting how much it will cost to rehab one of our rentals when it goes vacant.
Our last house that needed paint and flooring cost us $10 per square foot. So if the house is 1,100 square feet, it will cost $11,000 just to paint and floor it — which is crazy high to me.
Let’s say that house has a projected monthly cashflow of $350 a month. That means it will take 32 months for you to regain your investment before making a profit. So to us, even just a one-year tenant is risky because we will lose money if we have to do any rehab on the house when they leave.
After the in-home, or in-hotel rather, the insurance man gave me a call later that day and I explained all this. We negotiated back and forth and we adjusted the rent up to where it would make enough sense to do the deal knowing we would be getting the house back in a year. But he admitted to me that he had never considered the landlord’s side of things before. He thought the investor just saw the word insurance and thought they would get a payout in the process.
Now if they had told me it was going to take six months to complete their house, I’m not sure I would do the deal. But if I did, they would need to get somewhere between double and triple of what we were advertising rent for to cover our costs and make a profit.
When you see double and triple, that almost sounds like price gouging. But when you do the math, it comes out to about the same profit as our normal 4-year tenant. And that price is still much cheaper on the insurance company than renting a short-term rental, or a hotel.
For instance, a comparable short-term rental to our house rents for $350-$500 a night. At $350, that’s $10,500 a month. Triple of our rent would only be $4,200 on this house. So which is the better deal?
But for the landlord, you have to ask yourself if it is worth the risk of damage to your house (you know because you can’t view the condition of the applicant’s current house), the risk of repairs going up higher and the work associated with rehabbing and filling it again. And if it is, negotiate accordingly knowing the insurance company is still getting a deal.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.