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Becoming A Luxury Short-Term Rental Host With The Most

Here’s what it takes for luxury homeowners to get in the game.  Becoming A Luxury Short-Term Rental Host With The Most

Chad Waterhouse, the head of design and leasing for Elite Luxury Homes, faced a challenge: His job was to turn a dark, unfashionable and outdated Beverly Hills house into a showcase someone would pay up to $200,000 a month to rent short term.

Becoming A Luxury Short-Term Rental Host With The Most

Investors Purchased This Beverly Hills Home For $15.94 Million In 2017. They Upgraded It Into A Short-Term Rental That Now Generates Over $1.5 Million In Annual Rental Revenue.

Investors had purchased the house for $15.94 million in 2017. They didn’t want to spend millions more, yet the nearly 12,000-square-foot estate needed a new modern kitchen, marble floors, more bedrooms, luxurious rugs, chic décor and lots of art, plus landscaping.

It was time to dig into a bag of tricks Mr. Waterhouse and chief executive Martin Beaurivage have developed as part of Elite’s business of converting houses into ultraluxury short-stay rentals.

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Have You Rented Your House Short-Term, And If So, How Have You Tried To Maximize The Rental Revenue? Join The Conversation Below.

The short-term rental revolution ignited by do-it-yourself platforms including Airbnb and Vrbo is going upscale. In June, Airbnb rolled out Airbnb Luxe, which has over 2,000 properties that cost an average of $1,500 a night. In April, Marriott introduced Homes & Villas by Marriott International, upscale short-term rentals that can be paid for in cash or Marriott points. A host of new, smaller companies with an array of business models have also started marketing luxury properties.

With so many new ways to promote upscale short-term rentals, it is tempting for luxury homeowners to think about jumping in, wherever local law permits. We talked to homeowners, real-estate investors, property managers, short-term-rental company executives and hospitality players about what a home must offer to bag big nightly fares. Here’s their wisdom about what it takes:

Master The Basics

Many prerequisites for success are no surprise: Great locations, ample square footage, and upscale finishes are must-haves for this market. Service is also key; many of these properties come with on-call agents and concierge service.

Larry Mueller, a 69-year-old retired technology executive, started his own luxury short-term rental company, Denver-based Cuvée. He also short-term rents his own homes, including a San José del Cabo, Mexico, home he built for $5.5 million a decade ago. He rents it today for between $3,000 and $10,000 a night, earning annual revenues of $400,000 to $450,000. Another house on Hawaii, which he built for roughly $6 million eight years ago, gets $12,000 a night in peak season; it reaps up to $650,000 a year. A third in Beaver Creek, Colo., cost $6.4 million, charges up to $13,000 a night, and brings in up to $550,000 a year.

But just having a great home isn’t enough, Mr. Mueller said. High-rolling renters have high sensitivity to out-of-date décor, electronics and dishware. He recently realized the granite in his Hawaii kitchen was fashionable several years ago, he said. He’s changing it to white quartzite.

The single most profitable alteration to any house: Turn rooms into bedrooms. Not everyone paying thousands a night is ultrarich; more often, it is an extended family or group of friends looking to save money by not booking hotel rooms, said Joe Liebke, chief executive of Villaway in Los Angeles. The easiest way to boost income—some platforms say by 20% to 30% per night—is to take a home office or den, furnish it with bedroom furniture, build a closet or add an armoire, and add it to the bedroom count.

There are two pieces of décor that short-term rentals have to get right, Mr. Liebke said. “Is there a comfortable sectional sofa, where, if the house sleeps 10 people, also fits eight to 10 people? Is there a big dining table where everyone in the house can eat together?” he said. People go on vacations together because they want to gather, so group spaces are essential, he said.

Furnish For Vacation, Not Life

Mr. Waterhouse’s bag of tricks at the Beverly Hills home included several cost-saving face-lifts. Instead of replacing kitchen cabinets for about $40,000, he refaced the existing cabinets for $12,500. A formal foyer that would have looked good in marble instead got marble-looking porcelain tile. Rather than spend big on artwork, Mr. Waterhouse hired an artist to create a dozen custom canvases painted with colors showcased in each room. They cost $500 to $600 each, he said.

Furniture must look modern and new, but shouldn’t be top-tier designer fare, which is too expensive to replace if damaged, Mr. Beaurivage said. Instead of buying Persian carpets, Mr. Waterhouse had a sturdy sisal carpet made for less than $1,000 for a big room. He used furniture from Crate & Barrel’s spinoff brand CB2 and Restoration Hardware, including a sofa with washable slip covers.

Key to a high rental rate are extra bedrooms, so Elite converted an outdoor pool house into a guesthouse.

Kelsey Path, controller for Signet Management, which owns the property, said the investors, whom she declined to name, earned $1.5 million in short-term revenue this year. The property is now rented for the next 18 months for $125,000 a month, she said.

Pump Up The Authenticity

Teri Kelly knows what it takes to get people to pay $700 a night and up for a short-term rental in Lexington, Ky. She has been renting out her own historic home for years, making as much as $1,100 a night.

“It shouldn’t be cluttered. It should be authentic. We’re trying to make it Instagrammable,” said Ms. Kelly, 54, a professional property manager. In addition to renting her personal home, she, along with her husband and sister, is also putting the finishing touches on an 1,800-square-foot condo she plans to rent for $600 to $750 a night.

Ms. Kelly’s own home didn’t cost a fortune: She and her husband bought it for $290,000 in 1999 and spent somewhere around $300,000 over the years improving it. Neither it nor the condo they are developing features Viking stoves nor designer furniture.

Instead, they offer something intangible: An only-in-Lexington vibe. Her home décor, while not very expensive, “is the result of 3,000 hours scouring yard sales and antique marts” for local gems, she said.

In recent years, she’s cut back on renting it to about six or seven weekends a year, bringing in roughly $10,000 annually, she said. The new condo is housed in a once-defunct bourbon distillery Ms. Kelly bought with her husband, structural engineer Chris Kelly, 54, and her sister, Delena Spencer, a 52-year-old executive recruiter.

The family members spent $2.6 million to buy and restore the building; they will spend about $250,000 more to complete the rental unit. Décor includes art depicting horse racing and reclaimed wood from the distillery. Kentucky bourbon will serve as a welcome gift.

The Kellys and Ms. Spencer have tapped into the same concept that drives the model of Onefinestay. Stephen Haskell, general manager, America, for the company, said one of the most popular homes in the U.S. is a Los Angeles house “that looks like an old-fashioned Hollywood movie.” In Brooklyn, classic brownstones with period detail are big sellers. In London, the renters are mostly Americans who crave English traditionalism, he said.

Make It ’Grammable

When Sean Breuner, the chief executive and founder of AvantStay—a company that leases properties from owners, redesigns them and then rents them short term—looks at photos of his properties, he doesn’t talk about bedroom count or square footage. Instead, he describes scenarios.

“Here’s where you sit on the balcony overlooking Lake Tahoe while you’re sipping a glass of wine next to a fire pit, roasting marshmallows with your whole family and telling stories about how the trout you caught was bigger than your brother-in-law’s,” he said.

If Mr. Breuner sounds like he’s narrating an Instagram story, that is on purpose: Consumers, he said, are more likely to book stays when they can envision sharing a picture of themselves swinging in a hammock or engaged in a poker game at a fully stocked card table.

To underscore the notion of a home as an activity center, AvantStay moves out breakfast tables and formal parlors, and brings in ping pong, pool and foosball tables. It decorates walls with surfboards, skateboards, or pool cues, and outfits backyards with bocce ball courts and croquet sets.

In their distillery unit, Ms. Kelly and Ms. Spencer created a sign at the gate with the name of the unit—The Top Shelf—“where renters can take selfies,” Ms. Kelly said. Tile work in the shower is inscribed “Join or Die,” a Revolutionary War slogan.

The goal is to provide “something authentic, local and original that gives people something to write about their trips on their Facebook page or Instagram,” Ms. Spencer said.

If renters follow through and Instagram their trips, that is a bonus, Mr. Breuner said. But the point of the visual storytelling is to get them to book a stay.

“Short-term renting is the business of selling experiences through pictures,” Mr. Breuner said.

The Recipe For A Successful Short-Term Rental:

1. ADD A BEDROOM

Turn a home office, storage area, or den into an extra bedroom for the greatest boost to income.

2. SPARE THE CAVIAR

Invest in sturdy, preferably washable, furniture from upmarket brands. Skip the most expensive stuff, which is too costly to replace if damaged.

3. SOFA SERVINGS FOR ALL

Make sure the central gathering space has seating for the maximum capacity of the home.

4. A SEAT AT THE TABLE

The maximum capacity of guests should all be able to sit for group meals together.

5. HEAVILY SPICE WITH LOCAL FLAVOR

Don’t be afraid of stereotypes: Décor and accents should reference the best elements of the location itself.

6. SPRINKLE ON TOYS

Make it easy to envision having fun at the property by providing activities like cornhole, ping pong, pool, pool toys, bikes, etc.

7. SO DELICIOUS IT’S INSTAGRAMMABLE

Stop and consider an emblematic feature of the house—perhaps a sign with the property name on it—where guests will stop and take selfies.

8. SERVICE WITH A SMILE

Luxury renters demand new towels, toiletries, high quality sheets, strong WI-FI, and someone to call if there is a problem.

What to Know Before You Rent Your Home

Short-Term Landlords Need To Follow Local Laws, Secure Valuables And Insure Against Unknowns. Here Are The Must-Dos:

Know The Rules

Many states have complicated rules and requirements that govern what types of homes can be offered for short-term rent, and rent duration. Many state and local governments require hosts to pay hotel or occupancy taxes on their rental income. Separately, it is essential that your insurance carrier knows you are short-term renting, or damages and liability may not be covered at all. Short-term renting may be excluded in some policies, and telling the carrier you intend to rent may cause them to threaten cancellation. Some insurers have policies specifically for short-term renting. Other may require you to take out a business policy.

Learn The Platform’s Policy

Cuvée requires that all renters buy accidental damage insurance for each stay; the company offers its own provider, which typically adds $109 per stay. Airbnb offers up to $1 million in “host protection insurance” for each stay. AvantStay carries $10 million in commercial general liability coverage and tells homeowners it will cover property damage. Policies change, so demand the most updated information.

Build A Safe Room

Rental platforms said it is routine for homeowners to have a locked room or closet where they keep their valuables and anything else they don’t want renters to touch.

Updated: 1-15-2020

Aiming At Wealthy Renters, Developers Build More Luxury Apartments Than They Have In Decades

New rental completion hits three-decade high, as for-sale home prices continue to climb.

Builders are on track to finish more new apartments in 2020 than in any year since the 1980s, a new study shows, with developers across the U.S. chasing after the more affluent tenants.

An additional 371,000 new rental units are expected to hit the U.S. market this year, which is a 50% increase over the number of new units completed in 2019, according to an analysis from real-estate analytics firm RealPage.

In some of the largest metropolitan areas, like Houston and Los Angeles, the number of new rentals in 2020 will more than double last year’s figures for new supply.

State and local governments are grappling with how to create more rentals to combat the rising cost of housing for middle- and lower-income families. But as much as 80% of new supply this year will come from luxury developments, or what the real-estate industry calls “Class A” properties, said RealPage chief economist Greg Willett.

“A lot of these properties are competing for a small group of renters,” Mr. Willett said. “A typical renter can’t afford this brand new product.”

Property developers say that the costs associated with land acquisition and construction have become so steep that catering to affluent renters presents the best opportunity to make a profit.

“Land prices are expensive” said Cyrus Bahrami, a managing director of Houston developer Alliance Residential, which has built several luxury rental buildings there in recent years. “It’s very difficult financially to make sense of building a cheaper product.”

Some housing analysts think this much new supply can have a broader impact. They say that even when it is heavily skewed toward wealthier consumers, it can have a positive effect. An increase in luxury housing, for example, may encourage more economically mobile renters to “move up” to better apartments, freeing up more affordable homes for less wealthy apartment hunters.

Even though it is more difficult and less profitable, some developers spread their bets by building some lower-rent apartments. Mr. Bahrami said his company has started construction on simpler properties with fewer amenities that will rent at a roughly 25% discount to one of its latest Houston buildings, where two-bedrooms are now on the market for between about $2,200 and $2,500.

The gap between a luxury rental property and one rung lower is widening, according to RealPage. High-end building rents are now on average $500 a month higher than the next class down, up from roughly $300 a decade ago. That spread is even greater in Los Angeles, where a luxury apartment is an extra $880 a month.

RealPage’s Mr. Willett said that the potential oversupply in high-end developments is likely to lead to some price concessions for the most expensive apartments, with developers offering incentives such as a month free to fill up their new buildings.

This year’s surge signals that projects planned around the 2015 peak of the rental market are reaching completion.

Large new rental buildings now opening in the Los Angeles area include the 329-unit Weddington in North Hollywood, where 600-square-foot one-bedroom apartments start at $2,300. In downtown Houston at the 21-story Camden Downtown, a two-bedroom, 1,900-square-foot unit goes for $6,500 a month.

The lack of single-family houses available for sale, and the rising price to buy them, has been one major boost to the luxury rental market, Mr. Bahrami said.

And although rental supply this year is the highest in more than 30 years, the construction of single-family homes for sale is well below historic norms, sending more people in search of apartments, said Calvin Schnure, chief economist for the National Association of Real Estate Investment Trusts, a trade group,.

“These are people who would have been homeowners in just about any other market environment,” Mr. Schnure said.

Later this month, the Harvard Joint Center for Housing Studies plans to release a report detailing that the number of cost-burdened renters in America, or those spending more than 30% of their income on rent, is rising.

Updated: 9-9-2020

Stock Investors Stay Bearish On Apartments

Sun Belt is more resilient, but rents in coastal cities could continue falling.

Apartment owners who have been regularly reporting rent collections from more than 90% of their tenants seem to be weathering the pandemic better than landlords of malls and hotels.

But Wall Street isn’t buying it. The FTSE Nareit Equity Apartments index, which tracks the stock prices of publicly traded apartment landlords, is down more than 21% year to date.

A big reason: Dramatic cuts in rents in coastal cities like San Francisco and New York City by landlords like Equity Residential and AvalonBay Communities Inc. have sent shudders through the market.

In New York, for example, asking rents for apartments owned by publicly traded landlords have fallen by about 15% since August 2019, according to Green Street Advisors. That figure doesn’t include the full impact of concessions, like months of free rent.

Landlords in these hard-hit coastal markets haven’t suffered large spikes in vacancy, but that’s largely due to the rent cuts.

“They’re effectively buying occupancy,” said Haendel St. Juste, a real-estate investment trust analyst at Mizuho Securities USA.

To be sure, markets in some regions—like the Sun Belt—don’t look as bleak. Suburban rents are holding up better than urban rents on average, according to a recent report from Zillow. And values of rental buildings, especially those with more affordable rents, remain solid in the private market.

Mid-America Apartment Communities Inc., which owns many Sun Belt and suburban apartment complexes, reported that its July leasing volume was on track to surpass the same period in 2019, with suburban activity being particularly strong. Similarly, Equity Residential reported that the percentage of suburban tenants renewing leases is higher than at the company’s urban properties.

But the pandemic and the recession are clearly taking somewhat of a toll on suburban and Sun Belt apartment buildings. A Green Street analysis found that rents at buildings owned by publicly traded apartment landlords were still falling in most suburban markets, albeit less sharply than the rent declines in the corresponding cities.

Asking rents in Bay Area cities fell 9% through the month of July; they slid 6% in Bay Area suburbs. In Sun Belt suburbs—such as those around Atlanta, Dallas and Orlando—rent growth was flat or positive.

Pessimistic stock investors are worried that the dramatic downturn of markets like New York and San Francisco could get worse and spread to other regions of the U.S. if the recession is prolonged.

“There’s a question about when a trough in rents is coming,” said John Pawlowski, an analyst at Green Street.

Moreover, investors are keeping a close eye on eviction moratoriums. A federal moratorium ordered by Congress expired on July 25. But the Trump administration last week—through the Centers for Disease Control and Prevention—imposed a new and more extensive executive order, which could reduce options and cash flow for landlords throughout the country until at least the end of the year.

In an earnings call last month, Paul Beldin, the chief financial officer of Apartment Investment & Management Co., noted that rent collections had been more challenging in areas where local governments had imposed restrictions on evictions for unpaid rent.

“When somebody tells you, ‘You don’t have to pay your rent,’ people tend not to pay,” Mr. Beldin said.


Trumponomics Driven Recession Spells Trouble For Student-Housing Owners

Investment firms that buy and rent out student housing are under pressure as colleges retreat to remote learning.

A wave of Covid-19 outbreaks at universities is adding to the challenges facing the student-housing sector.

In August, a number of major universities said they were moving to remote learning after the first days of classes led to a spike of infections in and around campus. That is bad news for the investment firms that buy and rent out student housing in college towns, some analysts say.

The share of nongovernment-backed mortgage bonds secured by student housing that are delinquent rose to a peak of 13.7% on July 1, according to Trepp LLC. That is up from 9.7% at the beginning of March and the highest figure since at least 2005.

The worst fears that faced the sector earlier this year proved to be overblown. Leasing held up relatively well at many universities that are attempting in-person classes. Some landlords may see more demand as on-campus dorms close.

But on balance, the new surge in Covid-19 infections at universities is hurting student housing, according to a recent report by John Pawlowski, a senior analyst at Green Street Advisors. Landlords face greater risk that students either don’t move into student housing or demand refunds, the report said.

Also, the sector was showing the signs of strain even before the pandemic because of overbuilding.

Investors fled the student-housing sector in the spring as the first universities, including the California State University system, said they would teach remotely in the fall. The share price of American Campus Communities Inc., the only major public student-housing-focused real-estate investment firm, fell by more than half between late February and late March.

Since then, shares of American Campus have recovered some of the loss. But they are still down 24% for the year and trail other real-estate investment trusts and the S&P 500 index by a considerable margin, reflecting lingering concerns over student housing.

David Adelman, chief executive of Campus Apartments, which says it owns more than $2 billion in student housing across the country, said his portfolio’s occupancy is in the mid-90% range. Income has dipped slightly at some properties, but increased or stayed flat at others. “Flat is fine as far as I’m concerned,” Mr. Adelman said.

Student housing has seen a surge of investment over the past decade as low returns on traditional real estate led institutions to seek out more obscure sectors of the property market. Investors were drawn to student housing because of a rise in college enrollment and because it was seen as generally more recession-proof.

It fared relatively well during the last recession in part because some people who lost jobs chose to go back to school, investors say.

The health concerns of the current crisis have undercut the recession-proof theory, however, as major universities moved to remote learning because of Covid-19 outbreaks.

The University of North Carolina at Chapel Hill, for example, initially opened its campus to students last month, but backtracked and switched to remote learning for undergraduates after an outbreak in Covid-19 infections that saw 135 cases in a single week.

A day after the announcement of UNC’s policy change, Michigan State University, which had around 50,000 students last year, asked undergraduates to stay home and study remotely. It also encouraged students who live off-campus to stay in their home communities.

The steps taken by some colleges are pushing student housing already under pressure to the breaking point. Take a portfolio of five student-housing properties near the University of Connecticut in Mansfield, Conn. Income fell sharply in recent years because of competition from newer buildings, according to watch list commentary on the buildings’ mortgage bonds.

The properties’ owners stopped making loan payments and were more than 90 days behind on their $15 million mortgage as of August, according to Trepp. In a statement, the property’s owner, CT Liberty Group, said it has since reached a consent agreement with its lender.

“Virtually overnight, we lost 90 percent of our tenants and the income that came with that” when the university closed its campus in March, the company said.

The University of Connecticut said it reopened its campus at reduced capacity last month and about half of students are taking all their classes online.

Green Street’s Mr. Pawlowski said some lower-tier universities had already been struggling financially and the recession is likely to worsen the problem as enrollment drops. School closures or downsizing could in turn lead to empty student accommodations.

“The long-term outlook is probably weakened at the smaller universities,” he said.

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