Podcast Episode 105 Transcript

Episode 105: Best of Short Term Rentals with Rich Somers

Are you ready to bring your real estate game to the next level? My name is James Prendamano. I'm the CEO and founder of Prereal. And over the past 25 years, I've closed over a billion dollars in transactional real estate. Each week I'm meeting with outstanding and investors, highperforming individuals and visionaries operating in the real estate space. These are the people that are actually out there in the real estate game right now getting it done. This podcast aims at bringing anyone's game to the next level. This is the prereal podcast. Welcome everyone, to the Prereal podcast. We're joined today by Rich Somers. Rich is the founder and CEO of FortuneCribs and he has built a portfolio that's so damn impressive in excess of $35 million. He's got an awful lot to offer. We're really excited to have him on the show. Rich, thank you so much for taking time out of the busy schedule for us today. Yeah, of course. Thank you so much for having me on the show. I'm a big fan and I'm excited to dig into this conversation today. It's an honor to be here. Thank you very much. So, Rich, people don't wake up with $35 million investment portfolios, right? And I know that you at one point took a hell of a leap to get into the game. I was wondering if we could talk a little bit about your life before then. Talk a little bit about the why, what was happening and how did we get to making the leap, if you will. Yeah, of course. So I grew up middle class. My mom is an immigrant from Taiwan, and my parents both know the value of working hard for your money and saving your money. I have a background in sales. As I was going to college, I started selling cellphones and then later got into car sales. And that was the first time I realized that I could control to a certain extent of how much I earned and I wanted to sell commercial real estate at a college. And so I interviewed with CB Richard Ellis and Greban Ellis, a couple of commercial firms back in 2008 when I graduated. And as your listeners know, the economy was starting to come down at that time and they pulled both of those internship positions and they said, hey, we love you, you're hustle, but this is not the right time to get into the industry. So I found myself end of 2008, working on a car lot, trying to figure out what I'm going to do with my life. And I backed into a job as an air traffic controller controlling airplanes, and I ended up doing it for eleven years. And along the way I remembered real estate and I read the book Rich Dad, Poor dad and I said, man, I got to restructure my life and get into this real estate game, but this time I'm going to do it on the investment side and not on the sales side. And so I did at the time what everyone says society says. It's a little bit too risky and you shouldn't be cashing out your 401K, but I cashed out my four hundred and one K. I pulled out a home equity line of credit against my primary residence here in San Diego where I live, and I started buying some cash producing real estate. The first deal I did was eleven units in Cincinnati, a C class deal. Shortly after that I partnered with a couple of guys that I worked with controlling airplanes, and those are still my partners today in one of the businesses. And we JV and Joint ventured on a 32 unit building in Indianapolis. Shortly after that, we launched a podcast. We learned how to raise money, started a networking event here in San Diego, and took down a couple of larger syndications. Last year. 150 units in Greensboro and then Timber Creek Apartments, which is 145 units, also in Greensboro, North Carolina. Bought some short term rentals along the way. And yeah, excited this year. I just recently, a couple of months ago, launched a new company called FortuneCribs, which is a company to where we help clients buy short term rentals in select markets around the country, which we feel will do good under our management. Our team will design, furnish, and manage all the day to day making the whole process hands off to the client. But they'll own 100% of the deal and my partners and I are launching a fund here in a couple of months to go buy more short term rentals with our investors. That's kind of my story in a nutshell. Remarkable. So I listened to the multifamily Take off that's Rich's podcast. He has two partners there. Definitely a great listen. And now I understand the connection because I believe your two partners just retired now, right? They just left the air traffic control now. I got it. They just left recently. I think they both just had their last and final shifts about two weeks ago and I couldn't be more excited for them. They're amazing guys. That's great. So is there a place in the program, Rich, if I have a vacation home that isn't in a location that your company services, is there an opportunity for us to contact your team and say, hey, I have this house on Lake Wallenpaupack, and we never get up there. I'm always working the usual story. Is there an opportunity for you to take existing assets or is it only assets that go through the acquisition process with you? We will 100% take on an existing asset if the deal makes sense for us. So for us, we really want to stick to new construction or fully renovated properties. And that doesn't mean it needs to be a high price point, but it could be a lower price point. But we just want to put out a good quality product out there in the marketplace, then we always strive to be in the top 90th percentile of all short term rental listings in whatever given market we go into. So, to answer your question, yes, we'll look at existing properties for clients. If the deal makes sense, we'll totally manage it for them. And then also another arm of the business is the Master lease. So if we have a client with an existing property and they don't want to invest in designing and furnishing, we can actually do a long term lease. We can do a two to three year lease agreement. We'll actually pay them ten to 15% above market rate. We'll invest in their property in terms of the design and furnish in exchange for the right to sublease it as a short term rental. Wow. So in the program, do you find these things that typically be seasonal? Are you never going to go and use the house as the owner, or are there block out periods or how does that work? Yeah, our owners can use their properties whenever they want. All they have to do is just let us know what dates they want to block out. We'll block out the schedule for them. They can go visit the property at any time. Which is kind of cool, because not only do you get to vacation at your own place, but also if you ever want to get eyes on your property, it's easy to do so versus having a long term in there. But what we're telling clients, and what our clients are discovering now, is the cash flow is so good that the opportunity cost of booking your own place is more expensive than what they're willing to give up. You're better off just taking the cash flow and using that money to go vacation wherever you want. So what does Occupancy look like? What can we expect? How often are you filling these units up? Yeah, so we make our money when we operate. There's a lot of third party management companies out there, but I don't think there's anyone doing it exactly to how we're doing it. But market Occupancy can fluctuate anywhere from 45% to 60%, depending on market. But we always strive to operate at 90% or greater. And that's really what we do with all of our assets. We manage these properties as if they are our own. My short term rentals that I own are actually also managed by FortuneCribs. And so we've implemented a lot of the same strategies to keep the Occupancy 90% and up for all of our units. So once you've completed the staging and everything is ready to roll, do I have to then get involved with collecting money from people in security, or does it go through you and you pay out the distribution? How does that all work? Yeah, so we handle everything. So we handle all the reservations, the cleaning, the management, the turns, all the guest communications. We can even handle the utilities on behalf of our owners. All the revenue comes into our account and then we pay all the expenses out of our account. And then at the end of each month, we send our owners a statement which will have like a profit and loss for the month, and then they'll also receive a ACH payment. So I don't even have to be involved in the collection security? No, you don't have to do anything. It's all taken care of, man. The A to Z. Wow.

Okay. And I'm sorry for all the questions, but as I'm thinking about this right now, I have a small exchange. We have 450 or 500 in exchange. And being in the business, it's funny, you find and source deals for clients all day long, but when it's yours, it seems like you never have the time to find the right spot. So I would be able to come to you with this exchange. You guys would place the money, we grip it and rip it. What are some of the shortcomings? Do you find that there's issues with the parties, with damage in the house? What are some of the cons to the operation? Yeah, so you can eliminate about 99% of bad guests by qualifying and only hosting the right guests. So a lot of this stuff is eliminated on the front end. So we tend to only host guests that have positive reviews from other hosts. We tend to host guests that have positive track records. If there's anything fishy, like, let's say, a good red flag is this. So if someone has no reviews and they're trying to book a short term rental on a weekend, and they also live in the same market where the short term rental is, that's a big red flag. Right. And so we eliminate a lot of that stuff on the front end. That said, there's always going to be some things that are missed. And so let's say in the event that there is a noise issue, we install noise sensors inside and outside of all of our properties, and we actually have a decibel level that we set for each one. So if the noise ever goes above a certain decibel level, the guest automatically gets the message. And then in terms of if there's ever a damage or missing item, this rarely, rarely happens. I would say it happens like less than 1% of the time. It's usually something that we can come to an agreement with the guests. They'll just pay us for it and it's completely taken care of at that level. If not, we can escalate it with airbnb. They have a program to where they'll actually take care of you up to X amount. And then if it's not taken care of at that point, then your insurance, short term rental insurance, would kick in. And then after that you would have liability insurance if you have an umbrella and that sort of thing, but it's rarely gone to airbnb. And then we've never had to escalate it past that point. It's a hell of a program here. You make this transition and in the multifamily space, you're enjoying significant success. Rich, what's the reason for taking this step and launching another company? What's the why for you? Yeah, it all goes back to what we mentioned earlier. It's been very challenging to find multifamily deals to pencil. And like I mentioned earlier, along the way, I backed into some short term rentals. And I'm like, man, even through the pandemic, I'm looking at these properties and they're just completely booked. And these things are cash flowing like crazy. And so I'm like, man, why are we forcing multifamily right now? We'll go back to it down the road when the opportunity might be better. But for right now, I'm like, why aren't we scaling the short term rental side of the portfolio? And so with that, we're like, man, let's launch a fund this year and let's go buy some more short term rentals with our investors. And it got me thinking. I'm like, man, there's not a turnkey service that actually does acquisition, design and management in the short term rental space. And I thought, there's got to be a huge demand for it. Let's put some feelers out there and see. We did that. And the demand has been tremendous thus far. And so I thought, man, we better start building out the infrastructure. And so I really focused on building out the team, creating the right systems, and now we have the right team in place, and we're ready to start scaling this thing. There's a lot of economic factors now that are driving these things. As we touched on earlier, where do you see the market in two years from now, three years from now, both the multifamily and the short term? Yes, we can talk about real estate market and where we are for hours. Yes, we talk about this all the time. So there's two main drivers right now. I'm very bullish on the next three years, and I'll tell you why. 140 percent or more of the economy's currency has been printed in the last 18 to 24 months. All that money needs to find yield, and they're still printing money as we speak. Number two, and I think this might be the biggest driver, is the supply and demand metrics across of America right now. The baby boomers are living longer. They're not moving out of their homes. They're not going into retirement homes as soon as they used to. They're not selling their homes. And then you've got this millennial demographic which are starting families and buying their first homes for the first time. And so now that's creating a big tick up in demand. And then you have this demographic behind us as the Gen Z. They are even bigger than the millennials and they're looking to move out of their parents house for the first time. They're looking to rent apartments. And so whether it's single family, whether it's apartment units, whatever it is, there's just been a huge shortage. I mean, from 2008 to 2011, they didn't build much supply. And then 2020, there was a period for nine months during the Pandemic where they weren't building new supply. And so there's just a lot of pen and demand. And the reason I say the next three years looks safe to me is because I think it's going to take a minimum of three years for them to build enough supply to meet the demand. And yes, there's some other factors that are going on right now with all the stuff in Ukraine and Russia, but let's be honest, if that escalates to something more than what it is today, the government is just going to continue to lower interest rates and they're going to continue to print more money, which is going to bode well in the long term for real estate investors. Yeah, I think and it's not because I'm in the business and I love the business, but I think in times of uncertainty, there is no better place to put your cash than into real estate. It still just proves time and time again to be the safest long term option available. There's a lot of things that come and go and certainly there's diversification, and I'm a fan of taking risks and trying different things, but, man, it's hard to beat good old fashioned real estate at the end of the day. No, it really is. And I said this about a month ago before they started raising rates, but there was a lot of talk about the inflation, is the Fed going to start raising rates? And I said this a month ago when rates were still relatively low. I said two years from now, rates will be lower than they are today. And yes, they've gone up since, but I think they're going to be lower two years from now. Yeah. So there's a lot of things that play geopolitical election cycles. There's a lot of things to keep an eye on. So, look, none of us have crystal balls, but we all give it our best shot to try and put ourselves and our clients in the best position. Rich, where is the best place for folks to find you? Yeah, so you can find me on social media, Instagram, my handles at Rich Somers. That's somers if you want to learn more about FortuneCribs, you can check us out fortunecribs.com. And if you want to check out our podcast, it's the Multifamily Take Off. And if you want to learn more about the fund that we're going to be launching that's pac3capital.com. As always, everybody out there, please stay safe. Rich, thanks so much for the time today. Of course. It was a pleasure. Thank you so much for having me on our pleasure.