Welcome to Short Term Rental Riches.

We’ll discuss investing in real estate, but with a specific focus on short term rentals.

Quick, actionable items to acquire, manage and scale your portfolio.

I’m your host, Tim Hubbard.

Well, welcome back to the Short Term Rental Riches podcast.

I’m really excited for our guest today.

I feel really fortunate just to have had this podcast for a long time, because I get to talk with a lot of really cool people that are doing a lot of really cool things, helping a lot of people and they’ve had a ton of success.

I met Rich Somers, our guest for today, years ago on one of his podcasts actually, and he’s been doing a lot.

He’s been staying busy, so I’m excited to jump into it with him today.

But just to give you a little background first, he is running an investment fund.

They specialize in boutique hotels.

They currently have assets of over $80 million.

He has one of the top 1% podcasts in the business and real estate world called The Rich Somers Report.

He’s just doing a lot of cool things.

So welcome to the show Rich.

Tim, I appreciate you having me on my man.

It’s been forever.

I think the first time we connected was on my old podcast years ago, The Multifamily Takeoff.

And excited to reconnect, man.

And glad to see you’re doing big things, man.

Looking great, looking fresh.

Thank you for having me.

Same to you.

Same to you.

Yeah, a lot can happen in a few years, can’t it?

You know, our audience knows that my team and I have been working with boutique hotels.

I don’t know if everyone knows, but I actually took on an investor and a partner who built a boutique hotel.

And so I’m excited to interview him in the near future and dig in the details.

But in the world of short term rentals, a boutique hotel is really just a short term rental at a scaled level, right?

I mean, the operations are the same.

The purpose is the same.

We have guests coming in to the properties.

We gotta make sure they have a good experience.

And us as investors, hopefully are making some money on the back end.

So Rich, you wanna give us just a little background about your fund and what you guys have been up to?

Yeah, so the main difference between short term rentals and boutique hotels, really the zoning and how they’re valued.

So short term rentals, a lot of single family stuff here in US.

And I own some short term rentals here that are like single families.

We manage a bunch also in different markets, but the main difference is how they’re valued.

So single family is going to be valued based on the comp system.

So whatever that household for across the street on a price per square foot basis, generally speaking, is going to be what your home is valued regardless of what it’s making as a short term rental.

But on the flip side, boutique hotels, because it’s commercial real estate, they’re valued based on the income approach.

And so the more I can increase the income, the more I can decrease the expenses, the more I can force my appreciation, giving me more control over the valuation of the asset, which is one of the things that I really love about the boutique hotel space.

But also, you gotta think, they’re already calling this the greatest transfer of wealth in American history.

We got 40 million baby boomers retiring here in the next six to seven years, and then love them or hate them.

We got a real estate investor taking over office.

And by the way, the Republicans are controlling the house, the Republicans are controlling the Senate.

This is an exciting four years ahead of us.

I believe I’m speculating here, 100% bonus appreciation is likely coming back.

There’s gonna be a lot of policies put in place over these next couple of years that are gonna bode very well for real estate investors.

And I think the Fed’s gonna continue to cut rates here over the next 18 to 24 months.

And so I think the market’s gonna warm up.

But most importantly, I’m very bullish, Tim, on the boutique hotel game.

We got tightening Airbnb regulations in a lot of markets around the country right now.

We saw what happened in New York City.

We saw what happened in San Francisco.

We saw what happened in LA.

And we’re taking advantage right now of these tightening Airbnb regulations as bringing all the demand back to the boutique hotels, increasing the ADRs.

In addition to that, we can go target these mom and pop owned boutique hotels that are underperforming.

They’re not utilizing any technology.

They haven’t been renovated in decades and we can go in there and secure seller financing in a high interest rate environment.

We can negotiate our own down payment and we go in there and do a nice reno and really force a lot of appreciation.

And then lastly, I’ll say this, Tim, there’s a lot of Airbnb investors out there.

You know this better than me.

I go to these real estate conferences all over the country and all these Airbnb investors are like, yo Rich, I cannot wait to do my first boutique hotel.

And so I believe and I’m speculating, I’m always willing to be wrong.

I’m always willing to be wrong.

But I believe in the next two, three, four years, the boutique hotel game is gonna be the next big thing.

And so that’s why I think it’s important to learn it right now.

Yeah.

Thanks for the summary and recap there.

And I agree a lot of really good points there.

I mean, first of all, just being able to add value to a property and then having the bank recognize that value that you’ve added versus the single-family space where that value is really based on what your neighbor sells for.

So that’s something that I think is really exciting.

And I’m excited about real estate in general.

You know, they say good real estate investors make a lot of money and up markets, and they make a lot of money and down markets.

They basically are just always investing, right?

Of course, not in everything and things are changing.

And I agree, I think there’s a lot of opportunity with boutique hotels.

That’s why we’ve been jumping into it as well for a lot of the reasons that you mentioned.

But maybe Rich, we can just step back a couple of steps first.

And I know there’s a lot of our audience out there like, yeah, you know, that sounds great, Rich, but you know, boutique hotels cost millions of dollars.

What would you say to those folks out there that want to take this next leap?

You know, maybe they’ve got a short term rental or maybe they just want to jump right to boutique hotels, but they don’t have the money.

I know you guys are raising money.

So what would you say to those out there that want to get in the space but don’t have the funds?

Or, they’re hesitant because of all the bad news in the marketplace.

We’ve been in a high rate environment for 30 months and a lot of folks are terrified.

They’ve been sitting on the sidelines and you said it two minutes ago.

You said it and it’s a very good takeaway and very important lesson for all your listeners.

You said good real estate investors, good entrepreneurs make money in all market cycles, up cycles and down markets and I’m telling you right now, the last 30 months have been a grind for a lot of real estate investors.

No one would have predicted that the rate environment would more than double for 30 months.

And so for the folks out there, yes, the mistakes are inevitable.

They’re going to happen.

We make so many mistakes.

We’re making 50 mistakes every single week, but we’re moving quick.

And I’m telling you right now, these 30 months we’ve been able to grow the business.

We’ve been able to figure it out.

We’ve been able to buy good deals and we’ve been able to figure it out.

And all those lessons that I’ve learned over the last 30 months, when most of the folks are sitting on the sidelines, they’re waiting for a better time to enter the marketplace, that wisdom right now is going to pay dividends when the market does turn around.

And guess what?

Over these next four years, the opportunity is happening, and I’m ready to rock and roll.

So I would say for the folks out there that are looking to get their start, I’m telling you guys right now, the greatest transfer of wealth in American history is about to go down.

40 million baby boomers are retiring.

The rate environment is going to come back.

There’s going to be a lot of deal flow that’s going to start happening.

The market’s going to heat up.

And by the way, the Federal Reserve printed 80% of the money supply in the last four and a half years.

A lot of that money has been on the sidelines because of the rate environment.

You can get four and a half, five percent risk-free and a CD, long-term government bonds.

And so a lot of that money has been out pulled out of the economy.

But I’m telling you right now, in the next 18 to 24 months, as the rate environment comes down, we’re going to see a lot of that money that was printed enter the marketplace.

We’re going to continue to see inflation.

We’re going to continue to see asset appreciation in great markets.

But more importantly, the Federal Reserve is going to continue to print money over these next 10 to 15 years.

And so I’m very, very bullish.

And I’m telling you guys right now, right now is the time because there’s not a lot of competition right now.

There’s still bad news in the marketplace.

The rate environment is still high.

But I tell you what, in 18, 24 months, it’s not going to be the case.

It’s going to heat up and you’re going to wish that you bought some good stuff.

Assuming you can buy it a good basis, you can add a lot of value and most importantly, you’re buying good locations.

Yeah, we know about location, location, location, right?

Some people would even add a fourth location in there.

You guys are buying underperforming assets.

Can you tell us just a little bit about that or maybe what are like the top three things you might look for before you’re acquiring an asset?

Yeah, so I’ll give you an example.

The first boutique hotel that we bought, and this is after me playing around in the multifamily space.

And while I was buying larger scale multifamily, I had an investor database and we were syndicating larger multifamily.

In 2021, the rate environment started compressing.

And at the same time, I was building out my short term rental management arm to manage my short term rentals.

And so I thought in 21, I’m like, well, what if we pivot and go take down a small boutique hotel?

I already have the investor database.

And then also I have the management arm.

And I think we can manage a small boutique hotel.

And so the first one I bought was 10 rooms up in Shelter Cove, California.

This is up Beachfront up in Northern California near the Oregon coast.

And this was a 2003 built property.

So relatively new 10 rooms, mom and pop seller.

They had never exceeded $180,000 in gross revenue.

They’d owned the property for 18 years.

And so ended up picking this thing up.

They seller financed the property.

We took the income from $180,000 to $600,000 in 12 months.

We bought the property for 1.5.

It appraised 12 months later at 4.5.

We tripled the value of the asset.

And that was through renovations.

But more importantly, it was through good operations, putting all the rooms on OTAs.

The managers that were on site, they were living in two of the 10 rooms.

We renovated those rooms.

We brought them back online.

And we just put all the units on all the OTAs, including Airbnb, including Vrbo.

And we did a lot of heavy social media marketing, SEO marketing, and we rebranded the property.

We put about $450,000 into it in terms of CapEx and design, furnishing, etc.

So all in cost basis, less than $2 million.

It appraised 12 months later at $4.5 million.

I’m refinancing that deal right now.

We just got a quote.

I just signed an LOI with a local bank in the area for a $2.8 million loan.

Okay.

So think about that.

We bought it for $1.5 million.

We put $450 million.

Our cost basis is under $2 million.

I just got quoted a $2.8 million loan on a property that’s worth $4.5 million.

And we tripled the value of the property in 12 months.

And that’s the boutique hotel model.

And so to answer your question, Tim, what I look for is I look for assets that I can buy and are performing.

I don’t care if they’re negative cash flow, the less cash flow, the better, because I know I can come in and get it at a better deal.

We look for seller financing opportunities.

If not, we can use bridge lending.

We have a really good bridge lender that funds all of our deals.

And then for me, what constitutes a good deal is I need to at least have a clear path to double the value of the property within a 12, 18 month span through our renovation package and through our operations.

Awesome.

Okay.

And how do you go about actually finding the properties?

Are you using CoStar or LoopNet or your network?

What’s your process for that?

Yeah, so a couple of methods here.

So first method, you really want to get clear on your search criteria.

And that comes down to market selection.

But also, what kind of asset are you going to buy?

So what is your ability to buy?

25% of the hotels out there that are priced 10 million and under are our own buddies retiring boomers.

And so we’re looking at assets that are priced 10 million and under.

Anything north of that, you’re dealing with more of a savvy seller, typically going to have a little bit less value to be added or a little bit less of a lift to be added, potential to force appreciation.

And so get clear on your ability to buy.

So if you have the ability to go buy a $3 million deal, you shouldn’t be wasting your time looking at $10 million deals.

But get clear on the search criteria in the market.

For us, we’re looking in California Coastal.

We love beachfront and we love A plus locations.

We like locations to where we can hold these things, these assets long term, you know, 10 years.

Areas that are going to have a lot of organic and a natural appreciation over the long term, but we can also force appreciation with it.

Also, this is very important, Tim.

A lot of real estate investors in the multifamily space, traditional long-term rentals, they look in tenant-friendly areas like Texas, like Florida, like Arizona, because of landlord-tenant laws and I get it.

But with the boutique hotel game, we think the opposite.

We like the more liberal areas, because these liberal areas tend to have more bureaucracy and more red tape, but more importantly, they tend to have tight or strict Airbnb regulations, which brings way more demand back to the boutique hotel, and that’s what we’re playing off of, right?

And so, for example, I own a luxury Airbnb single-family in Scottsdale, 8,000 square foot property.

This thing cranks out.

It did $738,000 last year.

It prints money.

This is in Scottsdale.

I never want to own a boutique hotel in Scottsdale because there’s 6,000 short-term rentals there, right?

And so, we’re only targeting areas in coastal California with tight Airbnb regulations in great locations because these are high-growth markets and every 12 years, organically, a lot of this real estate doubles.

Yeah, it makes a lot of sense.

I mean, I’m from California originally.

I know what the restrictions are like.

I still own properties in California, and they’re still regulated, you know?

And so, being able to bypass that, having a license to operate as a hotel really takes away a lot of your risk, too.

You know, buying a property in a gray area where the rules are not set up yet is really risky, right?

I mean, we see these markets just being taken out.

And so, if you’re on the right side of that, and you know that you can always rent legally, and supply is being stripped, then that’s a good thing.

Yeah, when I hear investors say, I don’t want any regulation, I want to pick markets with no regulation, I’m like, regulation is a good thing, because you learn how to take advantage of the regulation, and it protects your investment.

And it’s not just the boutique hotel game.

I got a good friend of mine, Mikey Taylor, who’s got multiple funds that are doing a lot of ground up development in the multi-family space.

They’re doing it all here in Los Angeles.

Los Angeles, Orange County, San Diego, there’s the barrier to entry to build multi-family here in these markets, larger multi-family is very high.

Takes three and a half years to get permitting, title meant to be shovel ready.

And so it really protects your investment.

And so I think bureaucracy is a good thing.

You just got to learn how to take advantage of it.

Yeah, you just got to play it right.

Great point.

You mentioned there briefly about seller financing.

I just want to jump into that a little bit.

Maybe we can unravel some of the details behind it.

You mentioned the baby boomers, which we know.

They’re the second largest demographic in the US, right?

And a lot of their properties they own outright.

And if we think about a boutique hotel like the one you picked up, for example, you know, that was built over 20 years ago.

If we look back at properties that are a little older and the financing options that baby boomers or whoever were building or buying these properties had, they’re usually shorter term loans, right?

You know, a 10 year commercial loan, 15, 20.

So a lot of these properties are owned outright, which means there’s a lot of opportunity to work a seller financing deal, especially in an environment right now where the rates are a little bit higher.

So what’s your guys’ kind of approach to exploring the seller financing before exploring financing with a bank?

Yeah, so we will always source deals that have not traded in 20-plus years because these deals typically are probably owned by more mom and pop and also are more likely to have a lot more equity to where they can provide some sort of seller financing.

And if you look at the baby boomers, ask yourself what makes a good candidate for seller financing.

It’s typically an older investor that’s not going to be rolling their sale proceeds into another opportunity.

But on the flip side, they’re going to be retiring and they prefer to have some cash flow ongoing in retirement, but also to lower their tax burden.

And so in the boutique hotel game, we’re looking for assets that haven’t traded in a while.

And then my best favorite way to propose the seller financing is to propose two offers.

One offer will be no seller financing, and then another offer will have seller financing.

But the second offer that has the seller financing in it, typically I will make that offer a little bit more attractive, and I will find out before I make the offer, what is the seller needs?

Do they want a quick timeline?

Do they want certainty of close?

Maybe we do a higher earnest money deposit, maybe we go non-refundable on the earnest money deposit day one, just to give them certainty of close.

But often these mom and pop sellers, they just want the highest price.

And so if they want the highest price, I’ll give them two offers, one with our financing, where we go source it, and then another one with seller financing, and I will make that seller financing offer a higher price point.

And I will also show the seller financing terms.

I’ll show them exactly what they’re going to make through the debt service payments.

And let’s just say we do a five-year term or even a seven-year term, I’ll add up all the interest payments over the seven years, and I’ll include that to the purchase price.

And I’ll show them, hey, over seven years, you guys are going to make this versus not doing a seller finance.

And if you show them the comparison, most people are going to pick the bigger number.

Yeah.

If you’re going after like a mom and pop that, you know, they’ve been running this boutique for 20 years, and maybe it’s their only property, they haven’t seen these options before, you know what I mean?

So I think that’s really good what you guys are doing and really valuable, right?

I mean, if they take you up on it, but they need to be educated a little bit, right?

You know, if it’s someone that’s just not a real estate professional, that’s not what they do.

They might not even know that these options exist.

They do.

You got to educate them a little bit, you know, because if you’re buying an underperforming hotel that they struggle to operate, they’re going to be a little bit nervous, seller financing it, right?

The one that I just alluded to, Black Sands Inn, they financed 70% of that purchase and they were nervous.

I mean, this deal was a nightmare for the guy’s wife.

18 years, it lost him money.

And so, they were nervous to seller financing it.

But what people don’t talk about with the seller finances, you go and do something to their property that they weren’t able to do over 18 years.

I mean, we took the value from 1.5 to 4.5, we took the income from 180 to 600, and now all of a sudden talk about trust.

And so now we got to refinance them out.

What’s going to happen with that seller?

We go to refinance them out, go pay them the 1.1 back.

That seller is likely going to give me the 1.1 back and now be the largest investor in my fund because now I just built that trust.

Does that make sense?

Yeah, that’s awesome.

People don’t talk about that.

Yeah, let’s see here.

So Rich, a lot of our audience, I started the podcast talking about short term rentals, which used to mean the individual property.

And now, of course, we’ve broadened the horizons and we’re talking boutique hotels as well.

But I think a lot of our audience are still in the more single family space.

Maybe they have some smaller portfolios and some of these concepts might just seem new to them.

And so for someone trying to step into this space, you mentioned bridge loans, which is very common in the commercial space.

It’s literally a bridge between where the property is and where you want it to be.

Can you explain for our audience just real quickly kind of what that is and how you guys are using that?

Yeah, bridge financing is simply just a short term loan.

They typically will finance a percentage of the purchase price, a percentage of the capex, all the renovations that need to happen in the hotel game.

If you have the right bridge lender, they’ll even finance the furnishing and the design.

So our bridge lender typically will do 65, maybe 70% loan to cost, depending on how the deal underwrites.

So in that example, they’re gonna fund 65% of the purchase, 65% of all the renovation and 65% of all the design and furnishing, which allows you to come in with a little bit higher leverage.

And they’re typically gonna look at two numbers.

They wanna know what is the as is value of this property, as is when you come in and purchase it.

And then number two, what is the stabilized value?

And so they’re gonna order an appraisal, and that appraiser is gonna have two numbers, the existing value and then also the stabilized value based on your business plan.

And so they’re typically gonna cap themselves of about 65% of the stabilized value, but it’s not really that big of an issue.

So for example, the last deal that we bought was 44 rooms up in Sonoma Coast, wine country.

This asset was, yeah, gorgeous asset, trophy asset, 1988 built.

It had never traded until we bought it.

April last year, it stayed in the family the entire time.

The father had passed away a couple of years ago.

The son took it over, had poor management in place, and this thing just started spiraling out of control.

And he’s told a broker to sell it, but he’s like, hey, I don’t want anyone to know it’s being sold.

So broker shopped it off market with just a few buyers, but we moved quickly.

We bought this thing for 6.9 and a quarter after the seller credit comes out about, I think just under 135 a door, which wine country, Sonoma Coast, you know Bodega Bay.

You’re from NorCal, right?

Yeah, originally.

Yeah.

Yeah.

So Bodega Bay, really good looking asset.

All 44 units have Bayviews right there on the water for 130 a door.

You can’t build for that price.

And so anyways, that asset, we got a 70% bridge loan.

We’re doing a $2.2 million rental.

So our all in cost basis is about 9.2.

The bridge lender financed 70% instead of 65 because it under wrote well.

And so we got to know, let me just do the simple math here.

So we’re looking at 9.2 million cost basis and then 70% of that.

So we got a note for about 6.4 and change.

That asset will be worth 14 to 15 million when we’re done with the rental and we stabilize it.

We’re almost done with the rental now.

And once we get through this summer season, sometime in the fall winter, we’ll be looking at a 14, $15 million asset with a $6.4 million bridge note.

And so then we’ll refine it some perm debt and we’ll get a 65% loan, let’s just say, on a $15 million asset.

We’re looking at a note of about $9.7 million.

We’ll pay off the prior note and then we’ll return a chunk back tax deferred to the investors, refi and roll.

They can do whatever they want to do with that money.

They can roll it into another opportunity with us, or they can take that money to go buy a personal investment of their own.

But that’s the name of the game.

And that’s why I’m all in on this boutique hotel game.

It’s about debt and taxes.

And even in the high rate environment, we’re able to force a lot of appreciation right now.

Yeah, for sure.

I’ve dedicated years and hundreds of thousands of dollars through trial and error to figuring out how to manage my personal portfolio remotely.

And it wasn’t always easy and it took a long time, but now my amazing team can professionally manage my properties without me.

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Rest easy knowing that with my team, your properties will be in excellent hands.

Well, Rich, you make it sound easy.

I know there’s a lot of steps in there and that, you know, it’s not necessarily easy.

There’s a lot of hurdles to jump over.

One just quick question before we jump into some of the challenges.

When a bank’s financing, refinancing your property.

So, you know, that’s the goal, right?

You guys take a property that’s not performing well, you add value to it, you renovate it.

It’s earning more money, therefore the property’s worth more.

Therefore the bank’s going to lend you more money on it.

But before they do, there usually needs to be some sort of seasoned, you know, the asset needs to be seasoned for a little bit.

And correct me if I’m wrong.

This is going back to my commercial real estate days.

I used to be a broker for commercial properties.

We worked with all investments, actually.

So multi-family.

I don’t remember doing any hotels, but we had land and warehouse and shopping centers.

And, you know, I was a guy like underwriting all this stuff with these big worksheets.

And it was a lot of fun.

I learned a ton.

When you say broker, you were representing buyers and sellers, or you were sourcing debt?

Broker representing buyers and sellers.

Got it, got it.

Okay, cool.

And investors, yeah.

Love it, man.

And so there’s this period of time where the bank wants to just verify that the property is in fact worth more, it’s earning more.

And so what have you guys seen is that sort of time horizon?

I mean, you get the property renovated, you got new guests coming in, the ADR, the average daily rates gone way up.

What’s kind of the timeline there before you could actually refinance and pull out some of that money?

Yeah, if you can have trailing 12 months of like strong financials under this new model, and obviously there’s going to be a ramp up period whenever you re-brand a property, a lot of these hotels that were taken over were completely re-branding the name.

And sometimes we’re even starting from zero in terms of the reviews.

And so there’s always a ramp up period, but if you can show a strong trailing 12 of financials of like, hey, this is when we re-branded, we did the official launch, and then you can see the financials ramping up over the trailing 12, that’s huge.

But everything’s negotiable with these banks.

And so if you enter their asset where maybe you got a maturing bridge loan and you’re like, hey, the reno took a little bit longer than expected, we got a maturing bridge loan.

We only have eight to nine months of financials.

They’re going to work with you and they’re going to do what they can.

But worst case scenario, and this is one thing I didn’t touch on with the bridge debt, is bridge debt’s typically got a shorter maturity date.

So you’re often looking at 24 months, maybe 18 months, and on the high side, 36 months, you can typically get some extensions.

These bridge lenders are not trying to be hotel operators.

The last asset they want to operate is a hotel.

And so that typically work with you.

This whole concept of like, lend to own, I hear this, like, oh, I get a watch out for these bridge lenders, they lend to own.

I’ve never seen that before.

All the bridge lenders I work with, like we have great relationships with.

Shoot, our bridge lender that funds our deals, they sold us a hotel that they repossessed from another borrower in December of 2023.

And so they were like, hey, we’re not hotel operators, we gotta get this off our books, we’ll give you a discount, we’ll finance it for you.

So this whole like, lend to own thing, I’ve never seen it.

All the bridge lenders I work with, we have great relationships with.

They’re trying to help us, because when we win, they win.

But anyhow, I think 12 months trailing financials, great.

If you can show a whole year on a tax return, even better for the perm financing.

And obviously a lot of that’s gonna be contingent on what kind of perm financing you’re going after.

If you’re talking smaller hotels, you’re dealing with a lot of local regional banks that might have a construction, I’m sorry, a commercial products, right?

But these are full recourse loans, typically five, seven year fix with some sort of balloon payment at the end.

And so you’re looking at a lot of local banks and then you got CMBS product as well.

But you know, that’s typically going to be for boutique hotels, kind of like they probably like a little bit north of 10 million in terms of loan balance.

Okay, awesome.

Well, thanks for the details, Eric.

Gosh, you know, we always get in these conversations and it’s like I, you know, I wish the podcast was normally like two hours, but we traditionally had pretty short episodes.

I want to get into some.

We can keep running, dude.

I got plenty of time, man.

Yeah, no, no, we’ll keep going here, but I want to kind of get a full view here.

So let’s get into some of the sticky stuff, you know?

Yeah, let’s do it.

These deals are exciting.

We know there’s a ton of opportunity out there.

What would you say have been like the two biggest challenges you’ve ran into, maybe that you didn’t expect?

The biggest challenge is going to be when you’re shutting down these properties, doing a full reno.

Often you’re shutting down the entire property, so zero income coming in.

You still have all your fixed expenses going out.

Property taxes are still going out.

You still have insurance.

Insurance costs have tripled here in California and a lot of markets around the country.

Florida as well.

Insurance rates are insane.

And then you got bridge debt.

That’s not cheap.

So bridge debt on hotels can be 10, 11, 12%.

That’s not cheap and you have zero income coming in.

And so you really have to get very precise with your underwriting, but also have contingency baked in for these projects.

And so for the bodega deal, it’s a $2.2 million reno, but it’s always good business practice for any real estate investor out there doing a big renovation to have contingency capital set aside.

So we typically enter right for 20%, sometimes 25% contingency capital set aside.

So if it’s $2.2 million reno and you’re going to have 20% set aside, that’s an extra $440,000 if I’m mass correct, set aside for change orders going over timeline, et cetera.

Almost all these projects typically go a little bit over timeline.

There’s always punch list items and then there’s going to be some change orders because once you start peeling back the walls, you’re going to start to see some items, especially with these old retired properties that you didn’t expect for.

So always have your contingency capital set aside.

But that’s the biggest risk, Tim.

Like you got multiple projects going on on expensive bridge debt, the properties are shut down, they’re not bringing in any income.

And then you still got to stabilize these properties.

And so money can go very, very quickly.

And you don’t want to lose these assets.

You know, you got, especially if you’re raising capital, I don’t know about your listeners, but I want to sleep good at night.

I want to sleep good at night, knowing I’m being a good custodian of other people’s money.

And so I want to take care of my lenders.

I’m playing the long game.

Like I want to build a big thing.

And so I know the way to do that is I got to like, make sure my lenders get paid.

I got to also make sure all my investors get paid.

I’m fully transparent with what’s going on.

And the last thing I’ll say is this, this is probably the one of the biggest challenges that I personally had last year that we dealt with.

We talked about insurance rates going through the roof.

We did a full reno of $1.4 million reno on a 24 room boutique hotel here in downtown San Diego in the Italy neighborhood.

It’s like the hottest, trendiest neighborhood where all the cool restaurants are popping up here in downtown San Diego.

It’s where our office and podcast studio is located.

We did a $1.4 million reno on a property that we bought for $5.8.

It had all the problems.

It was like a one-star hotel, had bed bugs, like it had squatters living in, and it was disgusting.

And so we completely turned this whole property around.

We did the grand opening in December of 2023.

And in January of 2024, we had a record rainfall in San Diego, like rainfall that like we hadn’t seen in like 45 years.

And like all the streets downtown were flooded out.

My podcast studio got flooded out.

Shoot, even my new high-rise apartment, brand new construction high-rise apartment got flooded out.

And like all these buildings were getting flooded out downtown.

Our hotel got flooded.

Four, no, six of the rooms were affected.

We just did a brand new reno.

It was, it cost us about $500,000.

It was a 500K loss.

We had to shut down the property for like six weeks after we did the grand opening, you know, do all the mitigation, all that sort of stuff, and get this property back up and running.

Insurance did not cover a dime.

They have still not paid a dime.

We pay almost $60,000 for that premium, and they didn’t cover a freaking dime.

And so that was something that definitely set us back.

But I’ll tell you what, Tim, I alluded to, I’m playing the long game.

I was fully transparent with the investors.

I went over, shot a couple of video updates.

We do monthly reporting with all our investors, video photo updates of all the properties or renovations.

But I went and shot a video, and I was just like transparent.

I even put it on social media.

I’m like, hey, you know, not every day is going to be bright and sunny as a real estate investor.

We had our hotel flooded out, insurance to cover a dime, about a 500k loss.

But guess what?

We grinded.

We hustled and we figured it out.

My team rallied and I’m very proud of them.

But none of our bridge lenders missed the payment.

Our investors never missed a distribution.

And we got the asset back up and running.

Did it set us back?

Yeah, it did.

But I would rather lose my own money than invest your money because I’m playing the long game.

I want to build a big thing.

I’m trying to build a billion dollar real estate portfolio.

And this is coming off of being an 11 year air traffic controller.

Six years ago, Tim, I knew nothing about business, nothing about real estate.

And I cashed out my $300,000 401k to get my start in real estate investing.

And so I want to build a billion dollar thing.

And I know in order to do that, the only way I’m going to build a billion dollar thing is by doing what I say I’m going to do, taking care of my investors, taking care of all my lenders, even when shit hits the fan.

Awesome stuff.

And yeah, necessary values.

If you want to be in the real estate world, you got to be honest, got to be transparent and you got to be continuously learning.

You know, I guess that’s one of the nice things about buying more than one boutique hotel or having a plan to acquire a billion dollars is the next one, you’ll have all the learning experiences of the prior one.

So great stuff, they’re rich.

And I would agree, probably the biggest challenge that I’ve had in my personal real estate career has been not budgeting enough, you know, big renovations.

You got all those things that can happen.

So yeah, awesome stuff, awesome stuff.

Okay, so.

And real quick, all those challenges are like, they’re gonna happen.

You can stress test your underwriting, you can plan for like all the what ifs, there’s a million what ifs.

But the main thing is like, you just gotta take action and go.

Because like these challenges are just gonna pop up.

Like every day I’m putting out fires, like there’s just left and right.

And that’s just the game.

As an entrepreneur, as a real estate investor, it’s just part of the game.

But each time you push through and you figure out how to like get through these challenges, you level up your game.

A new door gets unlocked.

You look around and you’re like, oh my gosh, I just reached a new level with new opportunities.

And it all starts with challenging yourself.

Life gets overwhelming before the level up.

And so I wouldn’t shy away from it.

I would lean into it.

And it’s just the mistakes are inevitable.

It’s part of the game.

That’s why this game is not for everyone.

It’s not.

It’s not for everyone.

100%, 100%.

And sort of leading into one of the other challenges being a real estate investor is management.

And one of the really important things with a short term rental or boutique hotel is ensuring that our guests have really good experiences and they leave us good reviews because we know that a property that has subpar reviews can literally earn a fraction of the same property that has good reviews.

And we talk about management a lot on this.

Our audience knows that we manage properties in a lot of different places, our personal portfolio, and we’re constantly learning.

So curious to hear just a little bit of insight from you guys.

You’re acquiring, these are big properties too, and a lot of them.

What’s your sort of strategy and maybe some tips for our audience on just ensuring that you get the management piece nailed down?

Yeah, man, you nailed it.

The management arm is definitely the most challenging arm.

Boutique hotels, short term rentals is not a passive game.

Like it’s very, very active.

It’s very hands on.

And the second you get complacent, you’re going to get smacked.

And so revenue management is key.

Really, really paying close attention to the comps.

And you said it, driving guest reviews.

Like that’s the name of the game and tracking your KPIs.

And so we run a level 10 meeting every single Monday.

We self manage all of our stuff.

I think there’s something to be said about going third party because there’s a lot of headaches in property management.

You know this better than I do, but I’m a control freak, man.

I like to be able to have full control of these assets.

I don’t want to buy all these assets and raise money from investors and then just give it away to like some third party to go manage our stuff.

And if it works out great, I’m not in that boat.

And so for us, if we have an issue with any of the properties, or one of the properties is not performing the way that we needed to, we’ll sit down, we’ll meet, and we’ll make a pivot.

And I’m willing to pivot, I’m willing to try anything.

If it’s going to give us an opportunity to give us a competitive advantage, I’m willing to try anything.

And so from a revenue management standpoint, from a guest experience standpoint, playing with the front desk, like we try to operate lean if we can, especially with the smaller hotels, with a self-check in self-checkout model.

But some hotels, they might have a lobby, they might have multiple access points, they might just not be in an area or have a guest avatar that is okay with the self-check in self-checkout model, it can lead to bad reviews.

And so you got to be able to pivot.

And pivoting might mean, hey, like let’s staff a front desk.

And that’s just part of the game.

And so a lot of it is really driving the reviews and really defining the team, man.

Like I think, like I just made a shuffle with my team personally.

We had our annual meeting this year just last week.

And you know, someone that was with me for quite some time, I had to let go.

It was a tough conversation, but I had to reset the bar and had to bring in some fresh talent.

And we’re bringing someone else in that actually starts tomorrow.

And she’s got 11 years managing and operating small boutique hotels, 50 rooms and under 11 years as a revenue manager and has a lot of experience.

And so we’re going to bring in some better talent and reset the bar.

But it’s all the things to get better as an entrepreneur and as a real estate investor.

It’s all the reps, all the at-bats.

And I’m telling you right now, you know this better than I do, property management.

It’s a lot of fires and a lot of moving parts and it never stops.

There are certainly a lot of pieces.

It seems like every day there’s a new piece, you know?

Yeah.

And you really have to stay on top of them.

I mean, if you let a couple pieces go under the radar and it comes back to you real quickly in the form of a not so good review or a loss to your market, a loss to your competition.

You’re basically earning less than your neighbors, your competition.

So these things have to be watched.

And I think that’s one of the things that’s exciting about the boutique hotel space too, is that there is a little more scale there, right?

I mean, if we own a single family Airbnb short term rental, we’re not in a position really to go out and hire a revenue manager, to hire a manager that has 11 years in the boutique hotel space, right?

And that’s one of the nice things that come with boutique hotels.

We have some scale, we can afford to hire a team and especially the bigger you get, you know, the bigger your team can be.

And we know now with all the technology that we can centralize a lot of these options.

You know, you mentioned some properties having reception on site and some not having it.

Let’s see here.

Well, maybe just real quick, Rich, what sort of leads you to decide whether you are going to have an on-site reception versus removing that and saving a lot on operating costs?

Yeah, it all comes down to the reviews and the guest experience, because obviously you know this better than I do.

The reviews drive everything.

You said it.

And it’s not just the Google reviews, but it’s like all the OTA reviews.

And so you got to look at the operation.

You got to look at the number of units.

How much revenue is it going to bring in with or without it?

So we have the one hotel where it has a 4.9 star Google average.

The Black Sands in up in Shelter Cove and that’s self check and self check out.

That thing crashes.

It has great reviews and we just run a self check and self check out model.

It’s garden style, so it’s easy for the guests to find their rooms.

And they don’t need a front desk.

We have another hotel here in Italy, which is 24 rooms and that one, there’s like multiple access points and it’s very, very hard to run remote.

And so a lot of our poor reviews come as a function of that.

And so we made a pivot to start going to a part time front desk.

It started working pretty well.

And so now we’re going to staff a reception from morning to evening.

And that’s going to allow us to one drive them our reviews, but also bring in a lot more revenue.

And so you just got to work backwards.

And so the best way to do that is ask yourself, okay, well, what is a front desk going to run you for that particular property?

Like I think 12 to 13 hours of front desk is going to be sufficient.

So someone’s showing up probably at eight or nine o’clock in the morning, and then someone there till nine o’clock at night.

So just work backwards.

So for example, 12 hours a day times, let’s just say 25 bucks an hour, you’re looking at $300 a day in front desk personnel.

That’s probably going to be two people, right?

Two people work in six hour shifts times 365 days in a year.

You’re looking at $109,000 and let’s just add a 25% for payroll taxes times 1.25.

You’re looking at a cost of about $136,000 to have a front desk, 365 days a year for 12 hours, greeting people when they show up, helping them find their room, helping them with restaurant, you know, recommendations, you know, any activities they want to go do, they want to go out in the boat, they want to go hiking.

They can help with all that sort of stuff and just be that friendly face.

That’s going to welcome them.

But also we can lean on the front desk now to do a very small package of breakfast in the morning.

So the front desk that shows up in the morning, they can go get local donuts, croissants, anything packaged is legal.

We don’t need a food and beverage license to do it.

So as long as it’s packaged, we can do it.

They can put out coffee, orange juice, and grab and go stuff, granola bars for the guests.

And now we can check the box in the OTAs as, hey, we got free breakfast included.

And then secondly, we can do some like more like cool stuff, like in the afternoon evening with the front desk, they can do some sort of happy hour stuff.

Maybe we can do some wine stuff in the afternoon for like an hour or two, and it’s a good little amenity for the guests.

And so we can really utilize that sort of stuff to just have an extra touch points for the guests and really drive reviews.

And so in this example, we’ll bring in $136,000 of additional payroll, but we have the opportunity to bring in an extra five, maybe $600,000 in top line revenue.

That’s a 5X multiple.

I’ll take that bet any day of the week.

And guess what?

If it doesn’t work out, you can always cut back on staff.

I’m willing to try anything to see if it’s gonna give us a lift.

And if not, you can always cut back.

And then so it’s a risk-free proposition.

Yeah, that’s some really great insight.

I mean, a lot of times when we look at reception, we’re just thinking about reception, you know, answering the phone, making a reservation, but really having your team kind of go the extra mile and offering more amenities and really just checking the boxes, as you mentioned on the OTAs provides more visibility, which means you have more chances of getting booked, which means it can drive your top line revenue.

And yeah, great, great insight there.

And great, great insight throughout this interview, Rich.

We’ve talked about a lot of stuff, right?

You really gave us some good detail on sort of the process for acquiring a boutique hotel, sort of what you guys and your team and your fund.

And I want to make sure we’ve got a minute so you can share that.

Let me give you a couple more quick pointers real quick, because these are good nuggets right here.

So the marketing for these boutique hotels and the SEO is very big.

And the most important reviews is your Google reviews.

And so we use a company, my buddy Colton owns this company, it’s called Jumper Media.

And what they do is they can simulate basically these artificial drives, GPS drives to your property.

And what they do is these GPS drives will go on Google and they will Google your hotel and they will simulate a drive and they will go park in front of your hotel for like an hour.

And so now what this does is it bumps you up in the Google ranking.

And so use these guys in three months, they guarantee that you’re going to be in the top three on Google ranking in whatever market you’re in.

So that’s one good tip and you can use this for any business.

The other thing is SEO.

SEO is very, very important.

We started using an SEO company very recently, so they’re going to be writing blog articles for all the properties with certain keywords.

It’s going to drive online traffic and point all the traffic to our direct booking website for these specific hotels and whatever markets they’re in.

And they can structure these blog articles to like loop in the local wine bars, the local restaurants, the local concerts that are going on in the area.

And it points all these arrows back to our hotel, which is going to give us more visibility.

And then the last thing I’ll mention is this.

This is very important.

I have had Isaac French on the podcast, Ben Wolfe on the podcast.

These guys have had pretty big exits, especially Isaac French, and going very heavy on the social media presence.

And so the social media presence for all these properties is big.

So influencer marketing, influencer stays, having the right photos and the right videos to push out on social media so you can grow your social media account is huge because it’s going to be a big lever for not only your direct bookings, but it’s going to be a massive lever for your exit.

Isaac French had a, what is it called?

One Oak Lake or One Oak Live out in Fredericksburg, Texas.

He sold this property.

It’s a smaller kind of like unique stays type of experience.

I think it’s only like 10 units, all individual units, but he had a massive exit on this property.

And he said the seller paid an extra $2.2 million in addition to the purchase price because his property had this massive social media following on Instagram, which was driving a bunch of direct bookings.

And they were able to charge this tremendous ADR.

And so one thing that we’re doing, and we’re going ham on this year, is like I hired a marketing director last year, and we are going all in on influencer stays and going hard in the paint on really growing the accounts, the social media accounts for these properties, because it’s gonna help us tremendously with these exits, but more importantly, driving a lot of like, you know, direct bookings and allowing us to ultimately get a lift for those ADRs.

Yeah, great nuggets.

And yeah, we know, I mean, direct bookings earn more, right?

We don’t have to pay booking fees.

And much more important, I mean, I would say it’s important for anyone out there with a short-term rental.

But as a hotel, you have your own brand, and it really does guarantee your occupancy a little bit more if you’re not relying on OTAs, right?

You’ve got repeat cash coming back, you’ve got new cash coming directly with you.

And then, of course, the value of your property.

If you’ve got this big brand behind it, there’s a bunch of value there.

Yeah, of course.

Awesome stuff, Rich.

Geez.

We covered a lot of great things.

Got one other question before we make sure everyone knows where to find you.

And that is, it’s not related to real estate.

Doesn’t have to be anyways.

The name of the podcast is Short Term Rental Riches.

And so a lot of times when people hear the word rich, they think of finances, right?

But we know that there’s a lot more to life than just being financially rich.

So I’m curious if there’s something in your life that you’ve changed recently, maybe a product or something that’s enriched your life in a non-financial way.

One of my like favorite quotes is, money is time, wealth and freedom.

And that’s true wealth right there.

Your true riches in life are time, money and health.

And so I’m a big believer in taking care of your body.

So waking up early, going to the gym, it all starts with fitness, right?

Taking care of your own body.

If you can’t take care of your body, how are you gonna take care of your real estate investments?

How are you gonna take care of your business if you can’t take care of your own fitness?

And so I’m a big believer in going to the gym, lifting weights, getting outside, hiking, walking, being into hobbies, and also impacting a lot of different folks.

And so for me, money really comes down to time, health, and freedom.

Money is just a vehicle to buy all those things.

Yeah, great stuff.

Well, I really appreciate you coming on.

I know you’ve got a lot of stuff doing.

You talked about your fund.

You’ve got the podcast.

You have one of the largest real estate networking events out there.

Can you tell us a little bit about that and where to find you?

Yeah, so everything’s on Instagram at Rich underscore Somers.

That’s S-O-M-E-R-S.

We got a hotel fund.

We got a bunch of investors.

We do passive income, tax benefits.

If you’re interested in learning more about investing and if you’re an accredited investor, you can go to somerscapital.com/invest.

And then I got a podcast called the Rich Somers Report.

We’re going to have Tim on at some point next time you’re in San Diego.

I do three episodes a week, all in person.

I bring on all sorts of stuff, different people from athletes, to real estate investors, entrepreneurs, but the main focus is business and real estate.

Super, super fun.

Check that out, the Rich Somers Report on Apple and Spotify.

And then lastly, if you’re out there and you’re like, Hey, I want to check out the boutique hotel game, but I don’t know where to start.

You can go to hotelinvesting.com and I have a hotel investing mastermind where we have about 71 members, 42 hotels owned collectively.

And we have five hotels under contract right now being bought, partnership opportunities, forward thinking, like-minded individuals that are doing deals, buying boutique hotels.

You can go to hotelinvesting.com to book a call with my team.

Awesome.

Fantastic.

Well, thank you, Rich.

It’s been a pleasure having you on.

Tim, is this the longest podcast you’ve done in a while?

It’s up there.

It’s up there.

Yeah.

Yeah.

Usually they’re a little shorter, but it’s been value packed, a lot of nuggets.

And yeah, definitely appreciate you coming on.

Love it, dude.

Appreciate you, man.

And we got to run it back on my podcast here soon.

Appreciate you, brother.

Sounds like a plan.

Whether you’re just getting started or you have dozens of properties, one thing remains the same.

Poor management can crush your investment returns.

Our team has learned a lot managing over 40,000 guests, and we’ve compiled our biggest takeaways into a handy guidebook to help you better manage your property.

Equipped with checklists for guest verification to pricing strategies, it breaks down our whole process from start to finish.

Best of all, it’s free for you for being one of our loyal subscribers.

You can get your copy by going to strriches.com.

That’s strriches.com, and I hope it helps you earn higher returns with less headache.