354: Short Term Rentals=Hidden Tax Gems

Buck: Welcome back to the show, everyone, today. My guest on Wealth Formula Podcast is Tim Hubbard. Tim is a real estate investor specializing in short-term rentals. He has a website called Rest Methods dot com, and he’s also the host of short-term Rental Riches podcast. Tim, welcome to Wealth Formula.

Tim: Thanks for having me back. Happy to be here.

Buck: Yeah. So it was that we were discussing outline. I knew you came up by a few of the people in my investor ecosystem as a resource for short-term rentals, which is not something that I really spent much time talking about. Why don’t you start out just kind of explaining how you kind of got in this space?

Tim: Sure. Yeah. I’ve been a real estate investor for a long time and I started with traditional long-term rentals, small multifamily properties in particular. And I’m from California originally. And I started looking outside of California for other markets to invest in a long time ago. And as I was doing that, I was staying in short-term rentals as I was doing some of my market research.

And I ran the numbers on one of the Airbnb as I was staying and as I was looking for long-term rental properties there and realized that it was making way more money than some of the potential investments I was looking at. So I ended up switching some of my portfolio at that point over to short-term rentals and then started kind of focusing on that. And I’ve been doing that ever since.

Buck: Very cool. And so let’s talk a little bit about why you switched in. You know, part of it is the profitability issues, right? So when you talk about some of the advantages of short-term rentals compared to, you know, your traditional you buy a house and rent it out kind of thing for a longer period, I mean, obviously, there’s a monetary advantage there. Right. And maybe you can kind of tell us how typically how much better that is and that kind of thing.

Tim: Yeah, For me, I mean, I got into real estate originally to have passive income and to be able to travel kind of whenever I wanted. And so I guess it kind of came into the short-term rentals in a roundabout way. I started with real estate because I knew that that was a way that a lot of people became wealthy and it could be passive.

So I didn’t want to get into short-term rentals and not have it not be passive too. So I figured that part out. We can talk about that later. But for me, it really just came down to the passive income. But I wanted to be able to travel and support my lifestyle and the things I wanted to do.

And I found that short-term rentals got me there quicker. And I would say the interesting thing is, too, I had quite a few properties in my portfolio that already worked for short-term rentals. So I don’t think that every property is a good candidate for short-term rental. But a lot of mine were in sort of downtown areas and there were near restaurants and stuff like that. So it wasn’t a big risk for me to try to convert a couple of those over and see how they did. And so I did that and haven’t ever really looked back since.

Buck: Yeah. So let me ask you this then, because you brought up the point of, you know, something better and other. What makes a good short-term rental compared to other properties?

Tim: Well, the thing with short-term rentals too, is that they’re not like there’s so many different ways to do it. So like, if we compare it a multifamily building to another multifamily building, for example, we might break it down into Class A, Class B, Class C, and Class D, but we’re short-term rentals just on Airbnb. They have 56 different categories to divide the types of properties are in there, and that can be anything from a tree house.

Now you know, using crazy short-term rentals to an urban apartment downtown. So they’re all different. And that’s one thing that we kind of have to understand in the beginning. They all have different types of guests that they attract. And so for me, I think some of the best candidates for short-term rentals are properties that attract the most type of guests for the most amount of reasons. So, yeah, business travel, vacation, you know. Got it. Places where you can visit kids in college, all those types of.

Buck: Things make sense. So, you know, one thing that I always kind of wonder about with short-term rentals is how do you navigate the local ordinances with regard to short-term rentals versus long-term? You know, I actually live in California, too, and I’m over here in Montecito, and there’s very clear, clearly delineated areas where not very many of them where you can have short-term rentals. You run into that nationally quite a bit.

Tim: Yeah, absolutely. I think for me, what I’ve noticed is that a lot of times the strict short-term rental regulations tend to happen in places that also have housing shortages or have more of a housing shortage, I should say. A lot of times those are in denser areas like Los Angeles or San Francisco or, you know, Manhattan.

So you definitely run into it. It’s something that’s always changing. So it’s best if you’re planning on best in short-term rentals to being a place that already has that figured out, you know, where you can already get a permit, you know, it’s legal. It gets a little dicey and riskier if you’re going into a place that doesn’t have any rules set up yet because they could just one day institute a new rule. There are some other ways kind of around that. Now, there’s an interesting thing happening with short-term rentals, too, and that’s that people are just staying in them longer now, kind of living in short-term rentals.

Buck: Yeah, Yeah.

Tim: And so if you pass a 30-night stay, for example, most of the time those regulations don’t aren’t enforceable for it’s not short-term rental anymore.

Buck: Got it. And just real quick is a follow up on the is there like a specific resource or website that you use when you’re just trying to figure out, okay, I am looking for a house and maybe it’d be cool to have a place in, you know, Dallas Fort Worth in this neighborhood. Like how do I figure out whether or not it’s legal or is that something that you really just kind of have to drill down to a lot more than one resource?

Tim: It’s pretty easy to find out these days. Airbnb actually has their own section of their website where they can go on It talks about. Yeah. But it’s worth you know, if you’re at all uncertain, you can most of the time Google like the local jurisdiction or the county website and they’ll have rules on there. It is interesting too. I mean, you might have a city like Houston, for example, or Dallas or whatever happens to be that says, yes, you can do short-term rentals here, but you can still have neighborhoods within that city that maybe have an ordinance around it. So you got to check a little further than just the citywide.

Buck: Right. And even within that, like if you have apartment buildings or, you know, like condominiums, things like that, they probably have their own little condo association rules as well, I’m guessing, Right?

Tim: Yeah. Yeah. So, I mean, there are some ways that are for or vacation rentals, you know, and they’re used to that. And then there’s some that don’t allow it at all. And then HRA is again or one of those things that can change, too. So if they don’t have a rule in place and a lot of owners say, hey, we’re not really like in the short-term rental things, they could have a committee meeting and they could change it. So that’s the kind of just know upfront that there’s a process in place already.

Buck: So, you know, a big part of why you said you, you know, you’re interested in this was passive income and I think it’s kind of interesting that you mentioned that faster because I think everybody who or I shouldn’t say everybody but myself included, is, you know, starts out with the purple books of my friend Robert Kiyosaki. You read it and you think, gosh, this sounds like a great idea, right? I mean, you’re just going to like, accumulate passive income and next thing you know, you’re writing off into the sunset. But the challenge is that it’s incrementally extremely difficult to get to those numbers quickly. Like, you know, if even if you’re getting eight, nine, 10% per year, the amount you need to deploy in order to get back, you know, that replacement income that maybe is your goal is huge.

And what you’re suggesting is, hey, short-term rentals might be a way to get there quicker. Right. So the question I have for you is how passive is this? Because, you know, you know, certainly with even with apartment buildings I can’t say that they’re not super passive. I mean, you know, everybody makes it sound like it’s like, you know, mailbox money.

But it is work. And so you’ve had experience both in long-term rentals and short-term rentals. And I’m curious on your thoughts on, you know, how much work it is.

Tim: Yeah, there’s definitely a lot more operational pieces when it comes to a short-term rental. I mean, if you have my average stays like a little less than four nights. So if you compare that to a a year-long lease, you got a lot of people coming in, and you got people going out. But I would say, you know, I’ve had long-term rentals that were a pain in the butt or long-term management Companies were managing my properties were a pain in the butt. So it really comes down to the team and the operations in place. I think one of the nice things about short-term rentals is that if you do find a good property and it’s a good market and it and it’s projected or it’s earning how you projected it was going to, you have a lot more cash flow than you would with a long term rental.

So you can afford to hire a good property manager and still be making more net income than you could with long-term rentals. That’s you know, every market is different, of course, but that’s what I sort of found is that I was looking at these single-family homes, turnkey type investments that were making a few hundred bucks a month after everything was said and done after pain management. And then I realized I could get just a few properties that earned, you know, three, four or five times that in terms of net income. And so that cut my goal down. The amount of properties I needed to reach that financial freedom to leave the rat race if you will. Yeah. It cut it in half or by in thirds or in quarters.

Buck: Yeah. Well that did I mean again, that makes a huge difference. But you mentioned property management are they’re typically companies that are specific that deal with short-term rentals as opposed to long-term rentals. And, you know, is that part of the strategy in terms of deciding where to buy?

Tim:

Yeah, I think one of the nice thing is they’re all when I started years ago of short-term rentals, it was kind of like the wild, Wild West. You know, there wasn’t a lot of regulations in cities and it just wasn’t as evolved as it is now. And so now we have tons of software tools that we can use to automate a lot of parts of the process.

We don’t have to actually meet our guests to get them into our properties and to protect our properties. There’s all these types of things. And along with that has come a lot of professional property managers too. So it used to be a lot harder to find a good short-term rental property manager. But now as they become much more popular, it’s easier, but it’s also a lot easier to manage it yourself if you wanted to. And that’s how I’ve set up my portfolio.

Buck: Now, do you use I mean, should anybody who’s really doing these kinds of short-term rentals, basically you are I mean, you’re going to use Airbnb or Verbio or Booking.com. I mean, there’s you’re not going to just go out there and market yourself, Right? I mean, is that the case in general?

Tim: Yeah, I think most people start off with just Airbnb, maybe, you know. But again, it depends on the market you’re in because Verbio and those other OTAs, online travel agencies have been around for a long time, but it’s definitely easier to maybe just start with Airbnb because they handle the payments for you. They provide additional liability insurance and property protection. But I think the professionals out there are on as many platforms as makes sense for that market. So the more exposure you have, the better for your properties.

Buck: How much of a cut do those guys take?

Tim: Typically it ranges. You know, Airbnb actually takes like 3%. Oh, that’s if you choose it. But they charge the guest a lot. They charge the guests like 13 to 17%. And so it’s adds up to quite a lot. And they also have another option if you want to handle more of the fees upfront and the guest pays last. But they have a minimal fee by Booking.com, for example, 15%. So they kind of range that kind of range.

Buck: Let’s talk a little bit, you know, when we talk a lot about taxes on this show, my friend. And so tell me about the tax advantages. Compare and contrast of the short-term rental versus long-term rental situation. Now, in the long-term rental world, you know, you’ve got your typical stuff, which you’re going to have in short-term rentals, like, you know, your interest payments and your mortgage. But let’s talk about depreciation in particular, because, you know, one of the big things with long-term rentals, at least through 2020, 2022, was that you would do a cost segregation analysis, get your 100% bonus depreciation right under the sunset, writing off your entire equity stack there. So can you still do that in short-term rentals?

Tim: Yeah, you can. And there’s actually an interesting thing with short-term rentals. You know, if we want to take the max tax benefits from a traditional real estate investment, we want to be a real estate professional. Right. And that can be difficult to qualify for a lot of people, especially if your doctor, you’re you have a full-time job.

You can’t technically qualify as a real estate professional, but with short-term rentals, they’re different depending on your average length of stay. So if your average length of stay is seven days or less, it’s it’s considered more of a business and it is a real passive real estate investment. So they have what they call materially participating, and that can make you eligible to use all of those losses or that depreciation to offset your other income. Interesting. So from an.

Buck: In that scenario, the depreciation becomes activated for a non real estate professional, right? That’s you, right?

Tim: That’s absolutely true.

Buck: Is there a difference in the amount of depreciation that you can take? So, for example, in 2022 of you, did it cost SAG in? You had, you know, 30% of the property was considered personal property. You could take that entire 30% in the first year. This year, it’s, you know, 80%, not 100%. Right. Same rules. Are they different And is it depend on you know, how long it will stay and all that kind of stuff.

Tim: Same rules when it comes to depreciation, as long as you’re materially participating. So if you switched and you started having month-long stays, for example, and your average throughout that tax year was higher than seven days, then you wouldn’t be able to materially participate Again, that would go back to being a more of a long-term rental. So you got to make sure if you’re trying to offset your other income that you keep your average reservation at seven days or less. But otherwise everything should.

Buck: And if you are an RFP, it doesn’t matter anyway. I mean, then you’re golden either way, because we have both. I mean, certainly I’m I’m a real estate professional myself, although I played doctor on some podcasts. So, you know, I’m curious about this to him. I have, you know, my crew hereon Wealth Formula nation. There’s a lot of people who make a good chunk of money. Right. And do you find that in some cases people are looking at this and saying, well, up just, you know, buy a place in Tahoe and I’ll spend a couple of weeks there every year myself. And then I’ll also use it as a short-term rental and maybe I make a little bit of money, but at least I don’t lose any money. Do you find like that being a common, you know, approach to this?

Tim: Yeah. I mean, if, you know, you’re making a really high income and you’re paying a ton of tax and you can buy a property for $1,000,000, for example, take all that bonus depreciation. I mean, you’d be fine breaking even, I would think, because you’re going to save a ton of money and then you are, you know, hopefully it’s a good investment that’s actually cash flowing to one.

Another nice thing is that a lot of times short-term rentals are different than long term rentals too. They can be fun as well. They can be vacation rentals, places where you want to spend time. And so a lot of times you might have a couple scenario where the wife or the husband has more time and maybe they tackle the short-term rental investment a little bit more. But as long as they’re filing jointly, they can still get the tax benefits and you can still have some good investments and then also place that maybe they can enjoy a little bit of the year as well.

Buck: So I think.

Tim: That’s a good strategy.

Buck: Yeah, absolutely. And let me ask you, so if you’re looking at, you know, what’s going on in the economy right now with inflation, post-COVID, etc., what’s the timing like right now for this kind of stuff? Do you feel like it’s, you know, as good a time as ever to get in? Or do you think it’s maybe hold up for a few months or what?

Tim: Yeah, good question. I think it comes back to what type of short-term rental you’re investing in and also what market it’s in. We had COVID. I mean, travel was crazy during those times. Everything was kind of crazy, right? And a lot of people were leaving big cities and they were buying vacation rental homes outside of the big cities.

And so over the last couple of years, we saw a huge increase in supply and in the vacation rental type category, not necessarily in every market, but in some cities a lot more than others. At the same time, we kind of saw a lot of the short-term rental supply diminish or go down in the bigger cities. So the supply and supply is changing and all these different types of categories over the years.

I would say that depending on the market, there is some oversupply going on in some of these cities with vacation rentals, just pure vacation rentals. But there’s good data that we can use now to sort of dig into this a little more. There’s a company called Air DNA that’s all they do. They just pull statistics. They pull average occupancies and average daily rates. They’re worldwide and they get their data from Airbnb and VR bio and HomeAway. So you can see, you know, if I was interested in investing in a city, for example, I would see what the occupancy is doing and the average daily rate. And if it’s kind of fallen off a cliff, then that might make me a little more cautious. But if I can see that the amount of supply is going up the same time that the occupancy staying steady, then that’s a really good sign for a market.

Buck: From an IRS perspective, is there a minimum like, say, you’re having trouble running the place? Is there a minimum amount of time that it needs to be rented in order for it to qualify for all of those benefits that we discussed?

Tim: Yeah, that’s a good question there. As far as I understand it, that’s talk to your tax professionals always. But as far as understand, there’s actually like seven different ways that you can qualify to materially participate. I think the two most popular ones are one, if you spend 100 hours on a short-term rental and no one else spends more time than you, whether it’s a housekeeper, whether it’s whoever it is, which this can be a really good strategy for someone that maybe buys one towards the end of the year, does design and furnishes the property and does all that, and then maybe hands it off to manager the next year. That’s one way as far as I know. I don’t know of a requirement that I actually had to be rented for a certain amount of time during that year. But I would definitely, definitely check the second way that a lot of people are qualified to materially participate as if they spend 500 hours throughout the year on the property and that can be combined too. So if someone went out and bought five short term rentals, they can combine all those hours as well.

Buck: Yeah, fantastic. And if they combine those 2 hours, by the way, is that just for I mean, could that also qualify? I mean, again, I’m asking you a tax question. I know you’re not a CPA, but you’ve been around this. But in your opinion, from what you know, could having four or five of these short term rentals actually go ahead and help you to qualify towards just being an RFP? In other words, could you be an RFP just because you have short term rentals or is it or is it you know, that you’re already in RFP and you’re using this also or you’re activating it because you know, your active participation? I know that gets a little complicated, but.

Tim: It’s a good question. It’s actually. So you’re either going to be one or the other when it comes to a property based. So like you’re not going to be a real estate professional and literally participate because to qualify for material participation, it has to have that average reservation length of seven days or less. And if it goes over that, then you can’t qualify on the material participation side. But if you were spending more time on that property than any other job that you had and it was over seven days and you would be a real estate professional if you met their requirements. So you’re not going to be both. And it’s interesting because I have multifamily properties, for example, where I don’t have all of the units and there is short-term rentals. And so then that brings up, you know, makes it a little more difficult, like, okay, are you I guess I’m a real estate professional too. It’s like, okay, do you want to use that? I think the benefits are the same. Yeah, either way.

Buck: Yeah, yeah.

Tim: Yeah. It does get overcome.

Buck: Yeah. And, but it’s, but it’s a very I mean, it’s a very powerful tool for W2 individuals who have been trying to figure out in fact, you know, I can’t think of anything outside right now of oil and gas that can get you an activation of depreciation. You know, and of course, my listeners know that I’m not a believer in oil and gas because it’s full of crooks.So this is a good, good way to do this. All right. So you have a course or you have some courses, right? They are at this restmethods.com.

Tim: Yeah. So I’ve been you know, years ago I lived really far away from most, most of my portfolio was all in the US And so friends are asking me over the years, how are you managing this? Because I do manage with my own team, all my portfolio, and we’ve managed tens of thousands of guests. So we’ve learned quite a bit. And so I’ve been doing some live events over the last year, and I’ve wrapped some of that into an online course that you can find at rest methods. Dot com. It’s got kind of my whole process for what I look for and how I look for a team and how I set things up and automation all that, all that fun stuff.

Buck: Got it. And the podcast again is short-term rental riches, and I’m sure you can find that everywhere. Hey, one last question before I forget because I should have asked you this financing this kind of property is a lot more difficult presumably than financing, you know, residential stuff in long term.

Tim: Yeah. Good question. Important piece of the real estate investment puzzle, isn’t it? Well, so it depends on the type of property. Again, a lot of my properties are smaller multifamily properties and a lot of them were actually rented as long-term rentals before I converted them. So I bought them with traditional commercial financing. They do have a lot more lenders, just like they have a lot more property managers now that specify or specify in financing for short-term rentals. And there are a lot bigger nationwide lenders that are open to it. And so way more options than before. But it’s definitely something you got to make sure everyone’s aware of.

Buck: Yeah, good stuff, Tim. They appreciate you being on Wealth Formula podcast and I’m sure a bunch of people are going to be heading over to that web website restmethods.com and listening to you on your podcast and you know you’re doing great work. So thanks for being on Wealth Formula podcast and love to have you back again soon.

Tim: Yeah, thanks for having me.

Buck: We’ll be right back.