WayBoz Blog

The scariest AirBnb experience I’ve ever had… by far...

Wed, 17 Mar 2021 00:42:48 GMT

There was screaming. Terrible, deathly screaming. Then there was silence. Someone was dead. It was obvious.

If you read our recent post detailing our exact AirBnb earnings from 2020 , you saw that our short-term rental business stayed strong. But, man, was it a weird, and sometimes terrifying, year…

From drunken kleptomaniacs... to vocal lovers turned vocal haters over night... to really bad crackhead wannabe thieves… there weren’t that many dull moments.

Then there was that moment one morning at 6:30AM when my wife and I woke up to absolutely terrifying and violent screaming coming from our basement...

Thursday Morning

My phone sounds - the AirBnb message tone. The Pavlov dog in me has grown to love that tone. It means earnings.

Someone wants to book a room all weekend. Perfect.

I look at the message in the request to book : “We’re super excited to be staying there this weekend. Thanks so much!!”

Great, they seem nice enough.

I check the profile. No reviews…

That’s okay, we have lots of newbies to AirBnb.

I look at the AirBnb profile of the person to see where they’re from. It’s a city just down the road…

Interesting. Why do you need a place to stay if you’re from down the road?

Eh, whatever. I accept the booking.

This now allows me to see the full name and photo of the person. Time for a little Facebook stalking.

Interesting, this guy has two facebook profiles. One hasn’t been used since 2017. Oh well, he must have just stopped using that one.

I flip through his profile pictures in the more active account. Lots of mirror photos… in tank tops… pulling up his shirt... flexing his abs… Whatever - you pay for my room and you can flex your abs in the mirror all you want.

Wait, is that a swastika tattoo on his ribs?

Eh, again, whatever. We’ve had people show up with ankle bracelets that were totally fine. Who am I to judge? Come on over buddy!

Thursday Evening

The kid and his lady friend arrive. My wife and I are in our family room, directly above their bedroom in the basement.

Drama pretty much immediately starts.

Who knows what they were arguing about, but she’s crying, they’re shouting, and we’re upstairs trying to be patient... couples fight, it happens.

But it goes on long enough, so they get a message from me asking them to please keep it down. It’s late, after hours, and they are disturbing others.

I get a message back - an hour later - apologizing profusely. We don’t hear a peep from them afterwards.

Friday

Silent. Nothing. No issues whatsoever.

I see the guy out front for a second and say hello. He’s really nice, respectful. No issues at all.

Saturday Morning, 6:30 AM

“AHHHHH!”

My wife and I are startled awake.

We are on the other side of the house from where the couple’s room is but we can clearly hear screaming bloody murder. Both male and female voices. Something terrible is happening.

I jump up, grab my bathrobe, race out of the room, unlock the door that separates our floor from the basement, and go around the corner to go down the stairs that lead into the basement...

Right when I get to the top of the stairs, the basement barn door at the bottom of the stairs flies open, and the kid, 100% NAKED, looking SCARED TO DEATH comes running up the stairs.

“Help, help. Please. Help me please.”

He starts breaking down. He is super distraught.

I have a million thoughts going through my head, the least of which is that the dude in front of me is totally naked and either completely unaware or so terrified that his public nudity is the least of his worries.

But I have no idea what is going on. What just happened down there? It is eerily silent in the basement.

Oh my goodness. Did he just kill his girlfriend?

My wife comes around the corner and sees our naked guest. She leaves.

I ask him, “What’s going on buddy?”

He’s breathing heavily.

“There’s... something... down there.”

“What?”

“I dont know man…” He starts crying again. “There is something down there. It’s in my room. I was there in my room and then I saw it… It was eating my insides.”

Yup, he definitely killed his girlfriend. We figured this would happen eventually…

I put my hand on his shoulder, “Have you been doing any drugs recently?”

“Well, no, not recently,” he sheepishly replies. I kind of believe him. He doesn’t look crazy or anything. He makes eye contact and everything. He’s just totally naked and terrified (okay, I guess that is kind of crazy).

But me, Mr. Ignorant when it comes to drugs, immediately starts playing out scenarios in my head. Did he do drugs this morning? Who does drugs at 6:30 AM? Did he do them last night? Wouldn’t they have worn off by now? Was he super high or something and thought his girlfriend was a monster eating him alive. Wait, we heard her screaming and now we hear nothing.

Yup, she’s definitely dead.

I tell him, “Let’s go check it out, we’ll go together.”

We walk down the stairs, through the barn door and around the corner. Their bedroom is down a long hall at the very end, but it is visible from where we are standing. I motion for him to follow me.

He starts whimpering, “No, no, no, please. Don’t make me go there. It isn’t safe. There is something in there.”

Okay, this dude has lost it. My hypothesis is there is no demon in the room, he’s high as a kite (though he didn’t look it) and who knows what condition his lady friend is in.

I ask him, “Where’s your girl?”

He responds, wide-eyed, confused, “I don’t know. Not here.”

Yup, dead.

My wife comes down and gives him a towel to cover himself. I want to go check the bedroom but he won’t come with me, and I’m not leaving him alone with my wife, towel or not!

We all go back upstairs and one of us (I don’t remember who) suggests we call the cops. He readily agrees. I dial the police, he talks to them and asks for an officer to come by.

My wife goes outside to wait for the police while I wait inside with the guy. I look him over a bit. He has a little bruise on his head and a few scratches and red marks on his body but nothing major. I start asking him more questions to see what he remembers.

He can’t remember anything. He doesn’t know what he did last night. He doesn’t know where his girlfriend is. He doesn’t remember sleeping. Nothing.

We look outside the front door and his lady friend’s car is there. He says, “Wait a second, that’s her car.”

Moments later 4 police cars show up. They talk outside to my wife. Almost immediately, a jeep pulls up. He tells me that’s his girlfriend’s dad.

I see my wife walk around the side of the house and down to the basement entrance with the officers. They enter. About a minute later they come up the basement stairs and chat with the guy I’m still chaperoning.

Here it comes, what did they find? What happened to the girl?

Nothing. She’s fine.

We go downstairs, the cops find a little drug paraphernalia in their room that was left out (who knows what they stashed away), and basically we evict them (they were supposed to check out the next day anyway).

But the story continues...

Saturday Afternoon

I get a message on the AirBnb app from the couple: “Hey, did you find any money in the room. We had a bunch with us and now we can’t find it.”

We had already cleaned the room and there was nothing in there and I tell him that.

A little later, I’m cleaning the house, chuckling a bit about the morning’s experience, but also realizing it could have been much worse. I walk outside to take the trash out, open the dumpster, and see two bags in there.

My first thought, “Maybe Mr. High-as-a-Kite left money in the bag they threw out.”

I pull out the first bag. It’s actually really nice. I go through the bag, pocket by pocket, and there is nothing in there.

I pull out the next bag. It is a backpack totally full. I start going through it, the smallest pockets first.

Nothing.

I get to a medium size pocket.

I think to myself, I probably should be wearing gloves.

Eh, what the deck. I keep digging

I find a syringe.

Figures.

Then I get to the main pocket. It is completely full with papers. I look at the papers, much of it is mail. I look at the address. It is all mail to the same couple in a neighboring town/city about 15 minutes away.

I, admittedly, put on my Mr. Judgemental hat. I think, “Wow, I bet these jokers broke into cars or houses or something and ditched all the junk they didn’t want here.”

So, I decide to put my Facebook stalking skills to the test again. The name on the mail wasn’t that common. I search the guy’s name first. Nothing. Then I search the lady’s name. Bingo, found her.

She’s older, doesn’t look super active on Facebook. I send her a message. She doesn’t respond - or even see it - within one minute so I lose my patience.

I view her list of friends and find people with the same last name. There are two of them. They look like they could be children and they are the right age where I know they will check their phone every 30 seconds.

I message one, “Hey random question. Is your dad named [person on mail’s name]... and did he happen to have anything stolen recently?”

I get a response back within a minute, “Oh my gosh, yes. His car was broken into on Thursday night.”

Long story short, we exchange numbers, her dad comes by our house with the detective from his town/city and they go through our dumpster and it is all his stuff.

I’m ready to have fun with this so I say, “Detective. I have a great idea. They messaged me and said they left money here. I can respond, tell them we found it, and have them come back. You hide around the corner and BAM, we get em!”

(I played rugby in college - best college team in the country, national championship winner - and I’ve always wanted to tackle a fleeing criminal…)

But alas, the detective said, “Nah, I’m good. These guys are easy to find.”

He was probably right. Earlier in the day, when the four officers arrived during the morning’s chaos, the guy’s girlfriend said to one of the officers, “I don’t know you, are you new?”

Wow.

Moral of the story: Don’t do drugs, folks.

Second moral of the story: Don’t AirBnb your properties unless you have pepper spray , or a gun , or something next to your bed and also know financially why you want to be like other property investors and deal with all that drama.

And what can help with that?

WAYBOZ!

(we need some sort of call to action, right?)

Sign up for WayBo z, so if you stumble across any naked convicts in your rentals, at least you can sit back and know it’s mostly worth it, because you have WayBoz!

With WayBoz, you’ll know the exact returns on all your property investments, and how to grow that property portfolio better than ever (we've used WayBoz to get the equity in our properties to give us returns of about 40 to 80 percent per year… which is why we deal with these moments)!

(Apologies if you don’t like our series of posts that have a bit of levity. If you want pure real estate investing tips, feel free to check out our blog where we have multiple articles on how to maximize the returns on all your real estate investments.)

Our exact 2020 earnings AirBnbing our house… and the impact COVID had (or actually didn’t have)

Thu, 04 Feb 2021 04:44:01 GMT

If you’re curious to how much you can make with short-term rentals, here you go. Real numbers, profitability calculations, and more… all during a wild 2020.

The feedback I get most often from my posts: “I love that you use real numbers and aren’t shy sharing your personal successes (or failures).”

Well, in that spirit, let’s look at exactly how one of our properties performed in dreaded 2020.

As a quick background, we love having our properties be short-term rentals (like AirBnb). We do have long-term renters in some of our properties, but AirBnb is just so much more profitable (you’ll see later in this post) that we always try to do short-term instead of long-term rentals where possible.

Also, if you are wondering how I know all the below data we’re about to discuss, it’s easy: I use WayBoz . That’s why we built it. It shows you exactly how well your properties are performing and even helps you optimize them. Ditch the spreadsheets, get WayBoz.

Finally, to make everything we are about to cover below super tangible for you, we’ll look at the house that my wife and I actually live in (not one of investment properties), so it’s something you could do too in your house.

That being said… let’s talk about how our 2020 as an AirBnb host went.

First, the house.

The house we currently live in we bought in 2018. It’s a rambler with a basement, and the house is only about 2,600 square feet.

When we bought it, it was a 5 bed 3 bath. The main floor had 3 beds and 2 baths and the other 2/1 were in the basement.

After about a month of owning the house, we accidentally flooded the laundry room, which led to us ripping up some nearby, nasty old carpet that got wet…

… and then we started breaking other stuff…

… and then quickly escalated to us destroying the house.

However, my wife and I learned a ton (thanks YouTube ), had some great memories (see photo at top), and the end result turned out great for our needs.

At the end of the day, we turned our 5 bed 3 bath into a 6 bed 4 bath with two kitchens and a new basement entrance. It is basically two complete 3 bed 2 bath apartments stacked on top of each other.

How do we use the House?

Since it is basically just two 3bed/2bath apartments, we just split it down the middle: one floor for us, one floor for the guests.

On the main floor, my wife and I have the master bedroom and master bathroom, I use one of the other bedrooms as my home office (and closet, because my wife gets the full master closet of course), and, until recently, my wife’s sister was living in the 3rd bedroom with private access to the other bathroom on the floor (now the room is empty).

The main floor also has our nice new open floor plan where the kitchen and family room are located.

The basement is fully AirBnb. There are three bedrooms. One room — the master — has an ensuite bathroom. The other two bedrooms share the other bathroom. There is also a full kitchen and family room in the basement.

Finally, and my favorite part, there is a basement entrance with a keypad where each room has its own keycode that you can change directly from your phone at any time.

Let’s look at our 2020 earnings

Before we get into our returns (because that’s what really matters), we first need to look at our income.

We list each room for $30 per night and we target 100% occupancy. Therefore, we shoot for $900 per room per month, or $2,700 for the entire basement.

For context, renting a single bedroom long-term in our area is around $300 to $600 per month.

In the below visual, you will see a blue line which is set at $2,700 denoting our goal.

We can see that the year started strong where we were actually above our goal. In this instance, it was due to having a few reservations where there was more than one guest that stayed (the nightly rate goes from $30 to around $37 for having two guests vs one).

Then COVID enters the scene in March, but, surprisingly, it wasn’t that bad. Ultimately, our revenue only dropped a little over 50% to $1,283.

It stayed low in April at $1,450… bounced back strong in May to $2,067… and then was back to normal in June at $2,684 and has stayed strong ever since (note, all the peaks and valleys above and below the blue line after June are basically when someone booked for a long period of time but it got paid out the month prior, so one month is high and the other is low).

At the end of the day (well, the end of the year), our property averaged $2,523 per month, bringing in a total of $30,274.

Now let’s look at our 2020 returns.

$30,274, or any revenue figure for that matter, really means nothing if it isn’t used in comparison to what it cost you to generate that revenue.

We need to look at two things:

How much of that $30,274 was actually profit (IE, we need to get rid of all the expenses)
What did I have to commit financially to generate the profit

First, profit.

For simplicity, we will say profit is just your revenue minus your expenses. For even more simplicity, we will have a fixed monthly expense.

The house was bought in 2018 for $336,000 with 5% down and a 4.75% interest rate. At the end of 2019 we refinanced to 3.625% producing a monthly payment of about $1,750.

Other monthly house expenses are utilities ($250), internet ($60), and misc AirBnb supplies ($10).

So, our totally monthly expenses are $2,070, or $24,840 for the year.

Therefore, we profited $5,434 ($30,274 — $24,840).

Or did we…?

The complexities of “Total Value Gained”

The profit mentioned above is really just our annual cash flow. However, I like to look at a metric I call Total Value Gained (there is probably some fancy, official term for this, but I call it Total Value Gained).

Total Value Gained (TVG) is exactly what it sounds like: It is the total value you gained on your property for the year.

TVG is the sum of all your annual cash flow (the actual cash profit you made for the year… IE, the number we just calculated above) plus all the theoretical money you made. This theoretical money you made is the increase in equity you acquired throughout the year.

This increase in equity comes in two ways.

First, it comes every time your principal is paid down. Above, when we were calculating our cash flow, we subtracted our full mortgage payment. However, for my property, every time my mortgage is paid, about 30% of that payment, or $500, actually goes to my principal and thus increases my equity in the property.

Since AirBnbers are paying for this, that is value I am gaining, even though it won’t actually be realized until I sell or refinance the property.

So, if I am gaining about $500 in equity each month due to principal payments, I am gaining an additional $6,000 for the year.

The second way I gain value is simply through property appreciation.

The market is crazy where I live and properties have been skyrocketing year after year. If you own property, this is great. If you don’t, it’s really rough (this is why I have a love-hate relationship with all the Californians fleeing here…).

When we refinanced the house at the very end of 2019, our appraisal came back at $395,000. According to the internet machine, my house was worth $409,000 at the end of 2020 (which is about right).

Therefore, we made an additional $14,000 in theoretical value during the year.

Add all three of our numbers together ($5,424 in Cash, ~$6,000 in principal pay down, and $14,000 in property appreciation) and you get $25,434 in Total Value Gained for 2020.

But what did it COST us to make that?

If you want to calculate your return on investment, you first need to know what you invested and then you can figure out your return on that investment.

First off, when I’m in the middle of a longer term investment, I don’t care about my initial cash investment. That is 0% helpful for me at any specific moment in time. Read more about my grumpiness on that topic here .

What matters most is how much money you have committed at the beginning of the PERIOD IN QUESTION compared to what you have at the end .

Think about it. If you want to calculate how well your stocks did for the year, you don’t care what your portfolio value was 5 years ago. You care about how much your portfolio was worth at the beginning of the year compared to what it was at the end. The difference is your Total Value Gained and the starting portfolio value is what it cost you to gain that TVG. If it didn’t give you a good return then you should move that cash tied up in your portfolio somewhere else.

It is the same with your property.

At the end of the year, we made $25,434 in cash and theoretical value. However, how much cash (or equity) did we have stuck in the property that allowed us to make that $25K?

Easy. It’s the property value at the beginning of the year ($395,000) minus your total debt (mine was about $322,000). Therefore, I had $73,000 of value tied up in the property that I was hoping to get some return off of.

So, in a course of a year, my $73,000 (that I could have invested elsewhere) actually made me $25,434, giving me a return of 34.8%. This is your Return on Equity.

Obviously, we can break it down and look at the returns of each of the TVG components individually.

For example, if we look at just the cash flow of $5,434, we made a 7.4% return — still amazing.

Or how about the $6,000 of principal the AirBnbers paid for. That gives us an 8.2% return.

Finally, the $14,000 in appreciation is the final 19.2% return.

I prefer to look at the Total Value Gained when calculating my return on the equity, but if you feel like being ultra conservative, you can look at any of the three items that make up your Total Value Gained in isolation or together.

So there you have it…

In 2020, we grossed $30,274… this cashflowed us $5,434… and we gained an additional $20,000 in equity through property appreciation and principal paydown. This gave us an overall return of our beginning equity of $73,000 of 34.8%.

I like that return.

But technically there is one more thing…

Remember, we are also living in the property. So all our living expenses are also being paid for by this money coming in. One could argue that whatever my cost of living would be should also be added to the “Total Value Gained” metric.

So, if we said that an apartment plus utilities for a couple like my wife and me should be around $1,400 a month, then AirBnbing our property gave us an additional $16,800 in value.

This brings our TVG up to $42,234, and our Return on Equity to 57.9%.

So for me, in 2020, our property gave us a return of somewhere between 35 and 58%.

Not bad 2020, not bad.

Tell us your thoughts below or on our LinkedIn or Facebook posts.

If you’re interested in knowing how well your properties are doing at any given time, get the WayBoz app today !

Also, if you want to jump into the ever interesting world of short-term rentals, use this referral link and you’ll get a decent cash bonus when you host your first guest .

Our incredible 2 week Costa Rica itinerary… and how we basically did it for free

Sun, 24 Jan 2021 03:20:48 GMT

We spent two weeks in Costa Rica over Christmas. Here's our detailed itinerary, overall cost, and how the trip paid for itself.

First off, we aren’t travel bloggers… we aren’t sponsored… no one is getting paid for this article and no one gave us anything for free.

… and no, we didn’t do a timeshare tour with some free vacation package…!

(though, true story, my wife and I did THREE of those in one day once in Vegas to get all our show tickets for the week paid for — Vegas during the day is hot and miserable anyway)

But for this Costa Rica trip, candidly, we paid for everything.

Let’s face it, traveling through Costa Rica for free is pretty much impossible. Unlike some places where there are endless free hikes and outdoor activities you can do (like in Utah, where I’m from), literally everything in Costa Rica has a price tag to it — everything is either a national park or someone’s private land they have laid claim to and built a park on.

And after 2 weeks we spent $3,697… (I like spreadsheets) .

But before I tell you how it ended up costing $0, look at what we did!

(disclaimer: don’t judge my photos, I’m not a photographer… remember, not travel bloggers)

Day 1

We arrived, landing in Liberia. Rented a little Hyundai Accent and drove to our AirBnb — the Hobbit Cottage — in the hills above Bagaces.

Day 2

We rafted the Tenorio River and then hiked the back way to the Llanos de Cortez waterfall .

Day 3

We pushed our Hyundai to its limits and drove up to the Monteverde Cloud Forest where we met a new friend.

Day 4

We left our AirBnb and drove to La Fortuna, swinging by Rio Celeste waterfall and spelunking in the awesome Venado caves along the way.

Day 5

We did a repelling and cliff jumping tour , and then spent hours at the rope swing with the locals before a quick stop at La Fortuna waterfall .

Day 6

We hiked around Arenal Volcano via the hanging bridges at Mistico park and the 1968 trail .

Day 7

We left La Fortuna and drove to Jaco, driving by the Del Toro and Los Gemelos waterfalls and up some insanely steep and cloudy roads.

Day 8

Went to church in Quepos and did a Mangrove tour nearby (after following our tour guide and driving into oncoming traffic on the highway and almost dying… also, PS, apparently Manuel Antonio was at “capacity” and wouldn’t let anyone in…)

Day 9

We did a zipline and ATV tour in Jaco and then visited the crocodiles at Tarcoles bridge .

Day 10

We returned our trusty rental car in Quepos and took a Cab, then Bus, then Cab, and then River Speedboat to Drake Bay .

Day 11

We kicked off our 2 day overnight tour of Corcovado, Sirena station (I have endless wildlife pictures from this, but I’ll spare you…).

Day 12

We finished at Corcovado after learning about how ants make good stitches and spent the evening exhausted in Drake Bay as New Years eve fireworks sounded over the bay.

Day 13

I threw up as we went to Cano island for snorkeling, and then explored the beaches around Drake Bay.

Day 14

We almost walked into Panama looking super touristy, but got tired, and took a River boat, then taxi, then bus, and then Uber to Alajuela where we ended with a nice parrillada and dog butt…

Day 15

Ran to the airport at 4AM because there were no Ubers and we were 100% out of colones (Costa Rica money) and flew home on our 100% at capacity American Airlines flight.

(sorry, no photos of this, I was too tired and stressed and fearing for my life to take any)

S o, like I said, we wanted to have fun and didn’t want to stress over costs, so we just did whatever we wanted… and ended up spending $3,697.

So, how’d we do it for “free?”

AirBnb .

Not as a guest… A host!

The Strategy

While you’re gone on a trip, your house is back at home waiting for you… empty… doing nothing but accruing you a higher utility bill.

So, why don’t you put your house to work while you’re gone? That’s what we do and it offsets all our travel expenses. Every… single… one…

We live in a 6 bedroom house. In our area, you can Airbnb a single bedroom for an inexpensive $40/N.

So, per night, for our 6 bed house, we can get $240 total.

We were gone 16 nights (overnight flight to Liberia) and our place was booked 100% of the time when we were gone (we’ve figured out this whole AirBnb thing).

So, we were on vacation and our house made us $3,840 — paying for our entire trip.

You might be thinking, “Ugh, I don’t want to rearrange my entire house or lock my stuff up, or worry about having people stay in my personal spaces.” We get it. We often feel that way too, so here’s what we do.

We only AirBnb half our house, but our guest half.

Of those 6 bedrooms, 3 of them are in the basement — it’s our pseudo guest suite. It’s basically a 3 bed 2 bath apartment (all our properties are the same floor plan — check out the WayBoz blog for more on that).

When we don’t want people in our personal spaces — ever — but also want to cover all the expenses for our trips, we’ll AirBnb half our house for the entire month. So, 3 rooms, for 31 days, at $40/N/room… $3,720.

The trip, again, pays for itself, and no one stays in our part of the house, ever, even when we are gone.

Obviously, you can combine both of those strategies and make even MORE money while you’re gone — it’s your call. For us, it’s our strategy we use that lets us pick up and leave whenever we want, being less concerned about money and more concerned about memories.

This is a big reason why we built WayBoz , so you can track exactly how each of your properties are financially performing and expand your business. What I shared today was simply about our personal home, but we do something very similar with all our investment properties.

Best way to see if this is right for you? Try it.

If you’re interested in becoming an AirBnb host, definitely use this link so we can help you get started — plus you’ll get a cash bonus.

And don’t forget, sign up for WayBoz today to make sure all your properties, whether it’s your personal or investment property, are performing the best they can.

LinkedIn: https://www.linkedin.com/company/wayboz/

Our Blog: https://medium.com/@wayboz

We use just 2 metrics to buy real estate - and it’s continually easy and profitable for us (Part 1)

Thu, 17 Sep 2020 04:24:59 GMT

How and when to leverage powerful real estate metrics like Return on Equity and IRR to confidently make real estate investments

Math - it makes making money way easier.

Recently, we covered a number of key metrics you should know when it comes to buying real estate: Return on Equity , Cash on Cash Return , IRR , and more (it wouldn’t hurt to give these a quick re-read to refresh your memory).

Today, we’ll focus on the only two I actually ever use: RoE and IRR.

We’ll dive into WHEN and HOW to use each of those metrics. The will help ensure:

You’re not wasting money on your property investments (future or current)
You’re not missing out on, or unnecessarily fearful of, potential investment opportunities

We’ll cover 3 stages:

What metrics to consider Before you Buy
What metrics to consider When you Own
What metrics to consider After You’ve Sold

The below information isn’t just for real estate investors - you should be tracking this on your personal home as well. I know a number of people who are losing thousands each month because they have no idea how their monthly payments and expenses actually break down… or others that simply sold their house because they “had a ton of equity.”

Something worth noting - you can do everything we are about to discuss manually yourself. It’s possible and what I used to do. However, we built WayBoz specifically so you don’t have to (trust me, it gets really annoying). So if there are certain parts below that have you concerned, don’t worry about it, WayBoz makes it a breeze, plus it automatically alerts you when you need to pay attention.

Let’s Dive in with Before You Buy

Before you buy, you haven’t invested any money nor made any either, so all you can do is make projections and predictions.

When deciding if I want to buy a place, I focus on my two metrics:

Return on Equity (predicted)
IRR (predicted)

Let’s refresh what they mean:

Return on Equity: This is how well the cash value of your ownership in an investment - AKA your equity - is performing at a point in time (EG, at month 7, my $50,000 in equity gives me an 8% annualized return)
IRR : This is how well your overall investment performed annually assuming it stopped at a certain period (EG, I sold on month 72, so my overall return on the investment each year was 13%)

As you noticed, these all deal with a point in time. That is because property values, incomes, expenses, total equity, etc are always changing. So, when deciding on a property, we can’t look at just a single moment or single metric, but we need to look at how our metrics and returns change over time .

Below, we will be creating a number of charts to track these metrics over time to show how they can be used to decide if an investment is wise (FYI, in WayBoz most of this is managed for you and you can easily see the impact over time with charts and notifications).

I actually am in the process of buying a new home, so I will use real numbers from that investment in this section as I provide examples.

Identify Projected Incomes and Expenses

To get started, in order to identify if this is a good buy, I need to identify my incomes and expenses.

I project my income in a Best case, Average case, and Worst case scenario.

The property I am buying is a 3,000 square foot, one-story, single family home with a finished basement. The main floor is a 3 bed 3 bath. The basement is a mother-in-law with a full kitchen and a 3 bed 1 bath. There is also a detached building which is a workshop and 3rd car garage. The sale price is $460,000.

The Worst case scenario is putting a single family in the entire property. They would pay around $2,200/M for rent.

The Average case is renting the basement to a family for $1,300/M and AirBnbing the main floor. I typically get $900 per month per room for AirBnb in the area, but for the Average scenario I will say $700/M/R. Total for Rent and AirBnb would be $3,400/M.

The Best case is renting the basement and workshop to a family for $1,600/M and AirBnbing the main floor at $900 per month per room. Total would be $4,300/M.

So I have three monthly income projections: $2,200, $3,400, and $4,300.

Next - monthly expenses.

We’ll do 20% down for 30 years at 2.65% which is a mortgage payment of $1,482.91/M. We’ll assume property taxes, and insurance totals $266/M. We’ll also assume $100 in utilities (the house has solar). Total monthly expenses are $1,848.91.

We also can assume $8,000 in closing costs.

We’ll start by looking at predicted Return on Equity.

Take a look at the chart below. (Again, refer to the previous articles linked above if you need a refresh on how to calculate RoE).

As you can see, even in the Worst case scenario, the predicted RoE still starts around 13% annually and will take a few years before it drops under 10%. Meaning my $92,000 down payment is going to generate me somewhere between $9,000 to $12,000 a year in value after all expenses are paid.

In the Best case scenario, things are obviously great with a starting annual RoE around 40%. That’s $36,800 in annual value generated! I don’t know where else I can possibly get a 40% return without having to stomach a huge degree of risk.

So, in summary, what we see here is that the money or equity that is going into this investment is predicted to generate a great return each year (10% to 40%) - way better than stashing it in a bank account that only gives me a .5% return annually (which would only be a miserable $460 in annual value gained).

Quick reminder, ROE usually decreases each month. This is because as the mortgage gets paid, my equity is increasing but my income is staying flat. So basically, I have more and more money invested in the property, but my income is staying the same, which decreases my overall return on that equity (basically my denominator keeps getting bigger while my numerator stays the same).

Now let’s look at IRR

Remember, IRR will help us see what our overall return might be.

Below, we see what our overall annual return is predicted to be if we happened to have sold at any of the specific months shown on the X-axis (I only show the first 40 months because it remains fairly consistent).

What I see here is that as long as I keep the property for at least 10 months, my overall return will be positive (though extremely small - barely 1% for Worst case). So it’s at least safe. Great, I plan on keeping it for a number of years.

However, since I am planning on keeping it longer, I need to see what is happening over time.

In the Worst income case scenario, my IRR seems to cap out around 9% after three years. In other words, if I sell at year 3 or 4 or 7 or 9, as long as things stay consistent, I basically will keep averaging around a 9% return each year.

9%? Hmm. I possibly could beat that return in the stock market. Should my money go there instead? Maybe, that’s up to the investor.

My real estate track record is much better than my stock market track record, so I am keeping my money here, even if just for a 9% return. IMHO, real estate is also a lot less risky than stocks if done right, and can still generate enormous returns, as demonstrated above.

For me, the IRR looks good on this investment. I’m targeting Average or Best case income levels, which have an IRR that caps out and steadies around 23% and 33% respectively. Plus, as mentioned, 9% in the Worst case isn’t that bad.

RoE vs IRR

Just to provide a bit of clarity on the difference between the RoE and IRR metrics… RoE is looking at your equity at a moment in time - it doesn’t care about the past or future. It is telling you how your equity is doing right now. IRR is taking the entire investment - beginning, middle, and end - into consideration.

Some might argue you just need IRR. I personally like to pair it with RoE because I get a snapshot and overall picture at the same time. However, if you had to pick one, you could get away with just IRR.

So, prior to buying, considering these two core metrics can give you a high degree of confidence in your purchase. In my example, I see that the Return on my Equity is not only positive each month, but it is very positive (anywhere from 13% to 40%), providing a return better than the stock market and other investment options. I see that if I keep my investment for at least a certain period, my overall return, or IRR, is very strong (anywhere from 9% to 33%).

But what about those variables we didn’t change?

Another great thing about these metrics is it can help if you want to factor in even more worse case scenarios. Like, what if there is a big market slump and property values decrease?

It just happens that where I am buying my next property, it is predicted that the property values will decrease by 1% during the next year.

Should I be worried? Let’s see.

I’ll use the Predicted Return on Equity with the Average income scenario. However, now I’ll take that scenario and show the impact of market growth rates: one where property values increase annually by 1% (it’s actually been doing much better than this), one where they stay flat, and one where they decrease annually by 1% (as predicted).

Even with the -1% Growth, my RoE is still quite strong and actually staying stronger than the other rates. This is mostly because my equity isn’t growing as fast as the other two scenarios (IE, the denominator isn’t getting bigger as quickly).

However, this could be dangerously misleading. We need to look at IRR to get a more accurate impact of the -1% growth rate.

The -1% growth rate puts us just slightly under our original estimate. Originally we capped out the Average income IRR at 23%. Now it caps out at 20%. Still a great annual return!

You can buy with confidence

Prior to buying, considering these core metrics can give you a high degree of confidence in your purchase. In my example, I see that the Return on my Equity is not only positive each month, but it is very positive (anywhere from 13% to 40%), providing a return better than the stock market and other investment options. I see that if I keep my investment for at least a certain period, my overall return, or IRR, is very strong (anywhere from 9% to 33%). If I apply a NEGATIVE growth rate, I will have a strong IRR of 20% (for the Average income scenario).

I feel quite good about this investment.

As mentioned, if you wanted, you could make the above chart even more exact by slightly discounting your income to account for even more bad scenarios, like vacancy. One thing I like to do - which I won’t cover here - is go into “Ultra Worst Case” scenarios. Basically, what happens if all my properties go vacant? How long can I afford that with just savings? If I have a day job, can I cover this extreme scenario?

What if you already own a property… now what?

Next up is how to manage your investment after you already own it. So many people sell their properties just because they have a ton of equity.

That might be costing you thousands each year!

Stay tuned for Part II coming soon.

Also, if you haven't already, don’t forget to sign up for WayBoz !

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Too many homeowners doom their real estate investment by looking at the wrong ROI metrics...

Wed, 12 Aug 2020 19:32:42 GMT

A clear list of ROI metrics to consider in real estate investing, and how to calculate them... in normal-people speak.

One of my favorite videos is of golfer JC Anderson explaining how to hit a golf ball. Here it is for reference .

His explanation is insanely complicated! Fortunately, he's joking.

Unfortunately, when you want to learn anything about real estate investing - like what metrics to track, how to maximize the value of your real estate properties and portfolio, etc - most of what you read on the internet sounds just as complicated… and the authors aren't joking.

People then don’t understand what they read, latch onto the wrong metrics, and end up using them totally wrong, dooming their investments from the start!

With real estate metrics it’s tricky because different metrics should be used at different points. Some metrics are great for before you buy - they help with making purchasing decisions. Some are ideal for when you own - they help with knowing how your investment is faring at this very moment in time and if you should make a change or not. And some metrics are ideal for if you’re considering selling or after you’ve sold - they help with knowing how well your overall investment performed.

We recently wrote about Return on Equity (our favorite metric) and Cash on Cash Return . These metrics are great for purchasing decisions and knowing how to optimize a current investment.

Today, we’re diving into ROI or Return on Investment metrics. If you invested money into something - like a property - and then you sell or cash out that investment... how did it perform overall? What did you put in versus what you got out? What was your return on the investment ?

Three common ROI-esque metrics we’ll discuss:

A pure, basic boring ROI
CAGR
IRR

We’ll keep it clear and direct - no JC Golf Swing explanations here.

First, what is a good ROI?

Any ROI calculation is going to end in some percentage return, like, “my money increased by 5% every year,” or, “after 7 years, the value of my investment increased by 80%.”

So a question always arises, what is a good return ?

Honestly, that's a personal thing. It’s really about what is good for you!

For example, here are some standard returns you can expect in different types of investment. These are annual returns, or returns you’d expect every year (IE, not the start-to-finish return).

Savings Account : National Average is .06% , but Citi has one up to 1%
CD : National Average is .45% for 60 Month CD
Mutual Funds : Vanguard’s 500 Index Fund averaged 13.8% annually the last 10 years
Single Stock : Amazon’s stock averaged 38% annually the last 10 years, while GoPro’s stock has averaged -28% since it became available to the public

So, if you were to put $1,000 in a Citi savings account, after 10 years you’d have roughly $1,105 dollars. However, you instead could have bought $1,000 worth of Amazon stock and after 10 years you’d have $25,049 (we’ll discuss the math later on).

Obviously, that is a huge difference, and on the surface Amazon seems like a no brainer. However, the higher the returns, the higher the risk. Just look at the GoPro example above. When they first offered their stock to the public, they had huge positive returns. Then they crashed. High risk, high reward.

Just to see what this looks like over time, take a look at what’s called an Asset Class Return chart. Below is one of many variations.

As you can see some items - like Small Cap Equities or REITs (“Real Estate Investment Trusts”) - have huge returns in some years, and terrible returns in others. While others are more down the middle - like Bonds - where there are smaller wins but also smaller losses.

Generally, the wider the range of potential outcomes, the riskier we would consider the investment. In other words, the more risky an investment is, the more money we might be able to make if things go well, but the more we could lose if things don’t go as planned.

So your targeted return is really up to you, your risk tolerance, and where you are in life. Just don’t leave your money under the mattress - that’s the only way to guarantee you’ll lose money (more on that later).

Now, on to the ROI metrics...

Metric 1 - Return on Investment.

We will start here because it is the most fundamental and really explains what an ROI is (it is the name of this metric after all).

To calculate, you take all the value that you have gained (commonly known as your Net Profit ), and divide it by all the cash you had to invest (AKA Cost of Investment ). Multiply that by 100 to get your percentage. If you read our previous article on Cash on Cash, this is very similar to our Adjusted CoC.

ROI = Net Profit / Cost of Investment * 100

First, the cash you had to invest or your Cost of Investment: In Real Estate, this is basically your down payment and closing costs. If you do any major home renovations, this likely would go in here as well.

Remember, if you buy for $300,000, your cost of investment isn’t $300,000 (unless you buy without a mortgage, which you wouldn’t do of course because you read this ). It is likely something like 20% down plus closing costs, so around $65,000 total.

That's your investment - $65,000. Now we need to figure out what you gained from that.

Where does the gained value come from? It is basically the sum of all your cash flows which come at three different moments: during your down payment (a negative cashflow), each month when rent is paid (ideally a positive cash flow), and when you sell (ideally a positive cash flow).

So first, the down payment. You paid $65,000 to buy the house so you have an initial cash flow of -$65,000.

Let’s say that after you bought the house, you got some renters and now cash flow $500 every month (cash flow being the rent they pay minus your mortgage payment and any other monthly expenses). You do that for 5 years and then sell.

In total, you've cashflowed $500/m for 60 months or $30,000.

After 5 years you decided to sell and you find someone willing to buy for $350,000. Well, you don’t get all that money because you have a mortgage, so some of that goes to the bank to pay off your loan. Let’s say your loan balance is now at $225,000 (remember, you did a $60,000 down payment). So you are left with $125,000 ($350K-$225K). You also owe some money for commissions and closing costs, so let’s say you finally end up with $115,000.

So total value gained is -$65K + $30K + $115K, which equals $80,000.

To find the ROI, we just compare the two: $80,000 earned divided by the $65,000 invested (times 100 to get the percentage). This comes out to a 123% return on your investment.

Naturally, you’ll want to compare this to the returns we mentioned above for savings accounts (.06%), CDs (.45%), mutual funds (13.8%), etc, however, those are in annual returns and what we just calculated above was an overall return.

Perhaps you think, “Oh, let's divide 123% by five for the five years I had the investment, so 24.6% annually, right?”

Not exactly. You’d actually have to do:

Annualized ROI = ((1 + Overall ROI)^(1 / Years)) - 1

This would give you an annual return of 17.41% . You do this because of something called compounding, which leads us to our next ROI metric called CAGR...

Metric 2 - CAGR

CAGR stands for Compound Annual Growth Rate. It addresses the problem above around compounding and takes you right to an annualized ROI (instead of an overall ROI that requires a tricky formula to find the true annual ROI).

First, let’s talk about compounding...

As a reminder, in our first example with ROI, you had a beginning investment and an ending total profit. Start and Finish.

The thing is, with most investments, you typically don’t get all that profit or value only at the END of the investment, but you get it periodically throughout the investment lifetime. If you lended money to a bank (that is what you are doing when you put it in a savings account) you earn value through interest on the money you’ve invested. If your investment is through purchasing an asset, like a stock, you gain money when that asset increases in value which is capital gains .

In both cases these increases in value can ALSO start generating more value and growth. This is called compounding .

Let’s pretend you were fortunate enough ten years ago to have bought a share of Amazon stock. In August of 2010, Amazon’s stock price was around $125 a share. Currently, in August of 2020, their stock is about $3,161 a share. If you ran the ROI formula we just described with Metric 1 without accounting for compounding (IE, dividing your overall ROI by 10 years only), you’d get a 242.9% return each year. That obviously is very different from the 38% return we mentioned at the beginning of this article.

So where did that 38% return come from? We accounted for compounding.

We could have accounted for compounding doing the two steps required in the ROI formula (first finding the overall ROI and then finding the annualized ROI), but instead we used just one step by leveraging CAGR.

CAGR accounts for this concept of compounding and generating value throughout your investment and finds the average growth rate of your investment across its lifetime. Keep in mind it has to be an average because in reality a stock’s value is constantly going up and down every second.

Here is how to calculate CAGR by hand:

CAGR = ((Ending Value / Beginning Value)^(1 / Time Period )) -1

However, calculating CAGR in Excel is even easier. You use the RRI function and enter three parameters. The first parameter is how many periods are in the investment. We want to think in terms of annual, since we are calculating CAGR where A stands for Annual . So, for the Amazon example above the period value is 10 for the 10 years.

The second parameter is the starting value and the third parameter is the closing value.

So, =RRI(10, 125, 3161) which gives you a compound annual growth rate (CAGR) of 38%.

You can check this by multiplying the $125 by 1.3813 ten times and you’ll get close to $3,161 (rounding errors account for the difference).

You can also use CAGR for real estate investments.

Looking at the example from metric one, we sold after 5 years, so the first parameter in excel is 5. Our starting value was the $65,000 in cash that we had to invest that went towards our down payment and closing costs. Our ending value is the cash we captured from the sale ($115,000) plus all the cash we earned throughout the investment ($30,000), so $145,000 total.

Plug it into excel (or calculate it by hand) and we get 17.41% - the exact same annualized return we got from our two step formula in Metric 1 when we accounted for compounding!

However, CAGR (and the annualized ROI) has two slight pitfalls. First, it assumes that all the cash earnings - your cash flow - are reinvested into the investment. Because of this, it has its second pitfall - it doesn’t account for the different periods that cash flows occur and something called the “time value of money.”

Enter IRR - an advanced ROI metric that solves all of the above issues.

Metric 3 - IRR

IRR stands for Internal Rate of Return. However, to begin, we need to talk about the "time value of money."

The general principle is that money today is worth MORE than money tomorrow.

Why?

Because money that you have today can be invested to become worth more tomorrow. Even if you didn’t invest it, inflation is going to devalue your money over time. That’s why it now costs more money to buy a burger than it did 10 years ago.

This goes back to the beginning when we talked about not putting your money under your mattress. If you do that, then that same $10,000 you have under your mattress today will still exist in 50 years, but due to inflation and everyone else investing their money, $10,000 won't be worth as much in 50 years. This is the time value of money.

So, money today is worth more than money tomorrow.

Now, in our previous ROI metrics above, a lot of money was exchanging hands at different moments in time. We did a big investment up front of $65,000 when the money was "worth the most." Then we gained $500 month after month, where each month that $500 is worth less and less. Finally, at the end, we got a big payout. However, at the end, money is worth the least because we’re at present day and our investment period (for this investment) is over.

The magic of IRR is it takes all these things - money exchanging hands at different periods of time - into consideration and finds your truest annual return.

This might sound complicated, but, again, with excel it is VERY easy to calculate (by hand it is a nightmare, so we’re not even going to explain that).

With excel, you’re going to use the same data from metric one: all your cash flows. Lay them out in a sequential manner, starting with your large initial negative cash flow from your down payment. Then you’ll have in a regular pattern all your $500 monthly cash flows. Finally, we’ll end with the cash gained from the sale.

From there, you just use excel. Enter =IRR and highlight the range and BAM, it spits out your PERIOD IRR of 1.53%. Our period is monthly because our cash flows were monthly, but we can annualize this by multiplying our results by 12 to get 18.39%.

This metric is higher than CAGR and the Annualized ROI because it accounts for the time value of money being earned early on.

One quick note - if your cash flow activities are irregular, you can actually use the XIRR function in excel instead, and include the dates of each cash flow activity.

There you have it, three ROI metrics.

So which one do I use?

If you are just interested in the overall return of an investment, use Metric 1 - ROI.

If you want to know the annual ROI and but don’t have excel handy or don’t want to get into exact monthly cash flows, use CAGR.

If you want to be more exact on your annual returns, and have excel, use IRR.

Another benefit of IRR is it can help you decide between two different investments with different scenarios and different estimated payoff periods because of this accounting for the time value of money. In the below example, even though the profit is the same for each scenario, Scenario 2 has a higher IRR because it collects that profit faster, allowing it to theoretically be reinvested elsewhere.

In the above example, we used the same time period for the two scenarios. However, another good reason to use IRR is if you happen to have two scenarios with radically different investment periods it standardizes the output to a comparable yearly return for each investment.

Final Thought.

As always, if you don't want to have to track all this yourself and then on top of that, have to know when to use what, just use the WayBoz app. It truly is the easiest way to manage how well all your properties are doing, it guides you to know what metrics to look at when, and informs you when it's time for a change to ensure you are maximizing your profits.

Our next article will be closing the loop on all these metrics we’ve been discussing the last few weeks. We’ll be sharing our secrets on when to use Return on Equity, Cash on Cash, IRR, and other metrics to make sure that retirement account of yours is regularly growing.

LinkedIn: https://www.linkedin.com/company/wayboz/

Our Blog: https://medium.com/@wayboz

My AirBnb is still generating thousands each month even with COVID-19…

Mon, 13 Jul 2020 21:28:47 GMT

How COVID-19 is impacting my short and long term rentals differently and how it’s impacting our property investment strategies.

My wife and I own a couple of properties in both the US and South America. We’re not a big business, just middle-class investors like many of you. Some of our properties use a short-term rental strategy (like AirBnb) while others target long-term renters. Right now, both strategies are taking a hit — but a very different hit — due to the COVID-19 pandemic.

The Larger Picture — By the Numbers

September 2019 through February 2020 saw the lowest unemployment rate (3.5%) in the US since 1968 . The economy was great, property prices up, market demand was strong. I was prepping for another lucrative AirBnb summer.

Enter the latest Coronavirus. COVID-19 has officially generated one of the biggest and fastest economic crashes in the last century. In just one month, unemployment skyrocketed to 4.4% in March of 2020 and the stock market dropped nearly 30% (FYI, the market drops during our last two recessions — the Financial Crisis and Dot-com Bubble burst — took years , not one month).

How’s it Affecting our Short Term Rentals?

One of our US properties is 100% AirBnb. Typically we’ll gross about $3,000 a month on the unit. In March and April, we came in just under $1,300 and about $1,450 respectively. Frankly we were a bit surprised. We still generated thousands. However, we had a greater than 50% drop, which also prevented us from covering the mortgage those two months ($1,750).

Two factors contributed to this, one more obvious than the other.

First, travel was simply down — duh. With shelter-in-place, flights getting cancelled left and right, and more, it shouldn’t be much of a surprise. However, when you look at our page view statistics that AirBnb provides, there were still almost 1,000 views for the month — that’s crazy! One thousand views when apparently everyone is stuck at home creating new random social media challenges.

So why the drop in business? Factor two — shared spaces. We rent out our AirBnb per room vs the entire unit. We continue to have numerous inquiries about renting (just a little less than normal) but people are way more hesitant to book with others being in the house.

So how have we changed our strategy? We haven’t.

For a moment we considered changing our strategy to renting the entire unit as one instead of each room individually, but we continue to stay busy. So for now, strategy stays as is. (FYI, someone can rent the entire unit, but we charge a premium for that, and with COVID, we haven’t seen large groups traveling, just a bunch of locals in between housing).

Obviously we weren’t the only ones affected, with AirBnb announcing serious layoffs of about 25% of their workforce this week. However, as a SuperHost, kudos to AirBnB for having excellent communication with us throughout the process.

How’s it Affecting our Long Term Rentals

This one is fairly random and, for us, is very dependent on our renters and their professions.

Example 1: One of our stateside condos is filled with working professionals in the tech industry. No noticeable changes there. No lost jobs. No request for rent deferrals. Business as usual.

Example 2: One of our other homes is occupied by a family who runs their own home improvement business. Business is slower, but not stopped. The father asked if rent could be lowered for a few months and then (ideally) paid back later. We obliged and he’s been consistently paying during the pandemic (and we feel warm fuzzies for helping).

Example 3: Our apartment downtown in a large city with extreme shelter-in-place orders recently became unoccupied. It still is. We can’t even get people to take a look. Typically this unit rents extremely fast due to its prime location (downtown by a university) in a massive city.

What changes are we making? At the moment nothing, just biting the bullet on the apartment right now as the other two are doing fine.

Is it a Good Time to Sell?

I wouldn’t go that far, especially without consulting WayBoz, but even if you wanted to, selling is a huge pain right now.

Let’s face it, the real estate industry is way behind the curve when it comes to digitization of archaic processes. When human interaction is needed to close on a house, get a home tour, collaborate with a real estate agent, you know it’s time for a change. (Don’t even get me started on how backward and outdated Title Insurance is).

According to Realtor , “About 16% of Realtors saw sellers take their homes off the market due to the coronavirus — compared with only 3% a week earlier” (early March).

Our best advice: Hold.

Is it a Good Time to Buy?

This one is more interesting. It appeared that we were in for a big market crash — which we got to a degree — but has since recovered fairly well. So, in many areas, home prices are fairly unaffected.

However, the unemployment rate — which unfortunately is hitting millions — might open up a number of investment opportunities with short sales and foreclosures… and while I love a great investment opportunity, I’d much rather prefer it didn’t come at another’s expense.

Interestingly enough, businesses are opening and those unemployed are getting reemployed. A few examples in my area: my sister-in-law works at a fast food restaurant which recently began allowing guests to dine in, gyms have again opened (you have to book a time to come in advance), and a few entertainment establishments are again taking reservations.

On the flip side, there was a study released in April 14th, 2020 by Harvard University saying “intermittent distancing may be required into 2022 unless critical care capacity is increased substantially or treatment or a vaccine becomes available.”

Our best advice: We love buying — pretty much always :), just depends where and what your investment strategy is. Short term? Long term? Flip? Sit on it? We’re actually about to buy a big chunk of land — so there’s nothing to put tenants in quite yet. :)

How are you Handling Everything?

What changes have you seen with your rentals?

How, if at all, has your strategy changed?

Please leave your comments, tips or articles you recommend we read.

We’ll keep diving into this and releasing more detailed information and thoughts related to how COVID-19 is impacting all our personal and investment properties.

COVID is OVER! According to my rapidly booming AirBnb income…

Mon, 13 Jul 2020 21:15:36 GMT

The two most common AirBnb questions I get: How much do you make? How is COVID impacting business? Well, here you go — pure factual numbers.

People ask all the time:

How much do you make on your AirBnb?
How is COVID impacting it?

Like discussing salaries, you can’t help one another without sharing real data. So, I’ll just give you real numbers — it’s easier that way.

Super fast background.

My wife and I have a goal of buying a property once a year. We use different rental strategies : some properties are for short-term rentals (like AirBnb ), and others are for long-term rentals that come with a lease or contract.

The metric we use to measure how well we are financially doing with all our properties, regardless of the rental strategy, is Return on Equity . We like to go in with as little as possible, I.E. have as little equity as possible, and maximize our income and ultimately our return on the equity we have stuck in the property.

For example, one of our properties is valued at about $400,000. We gross around $42,500/Y in AirBnB income on it. Let’s say I bought the house in cash (which we didn’t). My net income would be the $42,500 minus all our expenses — taxes, insurance, utilities, and misc items… about $3,500 — which leaves $39,000. If I bought the house in cash, I’d have $400K in equity, or in other words, I would have had to tie up $400,000 to make that $39,000 per year. That’s a 9.75% annual return. Pretty amazing.

However, my wife and I put minimal down on the house and only have about $75,000 in equity today. Yes, that forces our net income a bit lower — about $15,000 lower — because of interest payments. Now we net about $24,000/Y. However, in this case, we only had to tie up $75,000 to make that $24,000, or a 32% return!

We love looking at our real estate investments this way. We used to manage it ourselves, now we just use WayBoz — 100 times easier.

Now let’s look at our real numbers over the past year.

For simplicity, assume our total monthly expenses (not including principal payments) are about $1,800 (interest, PMI, taxes, insurance, utilities, misc) and our total equity is $75,000. Side note, we are living in some of the units as well. It is a 6 bed 4 bath house. In January we moved to only renting out three rooms instead of the four we were previously doing (a family member moved in with us).

Since rental rates vary across the country (e.g., In Utah, where our example property is located, a room would rent for 400–500/m with a year lease), focusing on RoE somewhat standardizes the data.

Now, let’s see how things went during the past year and how COVID impacted one of our properties.

Some quick observations…

Most obvious, our short-term rental bring in almost twice what a long-term rental would ($400 vs $800/M). Even during COVID, it only dropped to what a long-term rental would have been.
Looking at the per room average there was an expected large dip during COVID — around 50% lower than what we were averaging prior (frankly, I’m surprised it didn’t dip more). However, in May we were only down about 25%. Also, our entire July is already 100% booked. Are my AirBnb bookings saying the COVID craziness is over?
Per door is important. Previously we were renting out 4 rooms and then switched to 3. We reduced our income by 25% which dropped our ROE percentage from the high 20s to the mid teens — a huge drop!
Even in the months where we had a negative RoE we have to remember we are living in the house at the same time! If we were to move out and have six doors all bringing in the same ~$900/door (assumes no COVID), our ROE would be 57.6%! Yes, we are doing that soon…

So, there you have it…

I could get into strategies about how to better leverage equity and repurpose it across multiple properties to increase your return, etc etc, but honestly, like I said above, I just use WayBoz for that. So even during a crazy, unparalleled, economic disaster we were still able to have a 17.6% return on the equity we have in our property over the last 12 months… while living in the house basically for free. Not bad.

What were your real estate investing strategies during COVID?

What issues did you have?

How did you address them?

Has COVID changed how you approach real estate investing?

Comment below and let us know!

Also, you might be wondering when or if we use other ROI metrics like Cash on Cash Return or Cap Rate. Check out our blog to see the articles we've written.

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Cash on Cash Return… one of the most popular - but WORST - real estate metrics you can be using.

Mon, 13 Jul 2020 20:59:59 GMT

Focus on the right real estate metrics and you can increase your portfolio value by tens of thousands each year.

I can’t tell you the number of people I’ve talked with who think their real estate investments are doing great… but they’re actually junk.

Why?

They’re focused on the wrong metrics!

With any type of investing — real estate, stocks, savings accounts, etc — in order to know how well your investment is actually doing you need to be tracking some sort of return on investment (ROI) metric. Usually, this is some percentage telling you how well your investment did for that year.

For example, if you invested $100,000 and made $5,000 that year then you made a 5% return and now have a total of $105,000. 5% isn’t a bad return. As a comparison, you probably get less than 1% in your bank account.

Another example: the S&P 500. That has yielded a 10–11% yearly return historically , even when accounting for all the crashes.

Bottom line, you invest an amount. A period of time goes by. You have a different amount. From there you can calculate your return on the initial investment.

But with real estate, it gets a little trickier.

Why?

There are a lot of different investment tracking metrics you can use, and frankly, some of them can be very misleading.

A few types:

Return on Equity
Cash on Cash Return
Cap Rate
IRR

Previously, we published an article on our favorite metric, Return on Equity , or ROE. I highly recommend reading that prior to reading this article.

Today, we’re going to discuss Cash on Cash Return, one of the most popular — but misleading — metrics out there. In later articles we’ll discuss Cap Rate, IRR, and how to use all four of these together to maximize your returns!

Cash on Cash Return and Return on Equity work differently.

Unlike Return on Equity where you are looking at how well your property’s equity is performing for you, Cash on Cash Return (CoC) is the return from the actual cash you have invested into the property.

In other words, ROE is comparing your earnings or profit against how much of the property value you own — the equity — which might have simply come from growth in the market and not from any actual cash investment on your part… while CoC is only comparing against cash investments you have actually made.

“But wait, isn’t that better then? Shouldn’t the best metric actually be looking at the return of the actual investment I made? Cash on Cash does that, ROE doesn’t…”

True, but CoC is extremely misleading and can actually cause your portfolio ROI to plummet!

Let’s look at the formula for CoC to understand why.

Here is the most common way to calculate CoC. This assumes we are calculating CoC for a single year period.

Cash on Cash Return = Cash Flow / Core Cash Investments

First, Cash Flow.

(Quick note, some people use NOI instead of Cash Flow -- just be consistent with whatever you choose).

This is all the cash you net during the year. So it’s all your income (rent, Airbnb, charging the in-laws to crash in one of your properties for the weekend) minus all your recurring expenses (mortgage payments, insurance, HOA, lawn care, utilities, etc).

So, let’s say you charge $2,000/m for rent or $24,000 annually. Let’s assume you have a mortgage of $1,500 plus $100/m average for misc expenses that don’t get passed on to the renter. So your expenses are $19,200. Your cash flow is $4,800 annually.

Next, Core Cash Investments.

These are all your major expenses that don’t already get covered in your cash flow… things you had to front a chunk of cash for. Things like your initial down payment and closing costs. Maybe a big renovation project you did at some point. Honestly, there is some flexibility between what you put here versus what you put in cash flow. I tend to put anything that could possibly recur year after year in Cash Flow and misc things that pop up (like, I need a new roof) in Core Cash Investments.

So, let’s say you did a down payment of $15,000 with $6,000 in closing costs. You also did a $25,000 improvement project to prep the house. Your Core Cash Investments is $46,000.

Cash Flow is $4,800. Core Cash Investments is $46,000.

So, your CoC return for the year is 10.4%.

Assuming your rent stays the same, your expenses stay relatively even, and you don’t have any major projects, your CoC is going to stay roughly the same over time. This is one reason people like this metric — it’s easy to calculate and quite stable. But this is the reason I hate this metric.

It isn't actually showing me my true return.

In the above example, let’s say the property was worth $350,000 at the start of the year, but by the end of the year it’s worth $400,000. If I sell the property, I get that extra $50,000.

What if during the next year, the property goes from $400,000 down to $325,000. I’m now down $25,000 from where I originally started ($350,000) and $75,000 from where I was at the beginning of the year ($400,000).

CoC doesn’t help me see this at all! During that entire period, assuming I have a lease with a locked in rental rate, my CoC return is still sitting at 10.4%. It’s not telling me that I’m losing thousands of dollars every month by holding onto my property. This is where ROE surpasses CoC.

However, I’ve corrupted the CoC formula to be able to get some visibility into this. Note, we are now taking a step away from a true CoC formula.

Adjusted CoC (or CoCV2) = Total Annual Increase / Core Cash Investments.

Core Cash Investments is the same as above. Total Annual Increase is what has changed. If you’ve read our post on ROE, this will look familiar.

Total Annual Increase is the combination of your annual cash flow (what we calculated above) plus the equity you have gained (or lost) during the year. You get that by calculating your year-end equity minus your year-beginning equity.

So, building on the above example. You had a Cash Flow of $4,800, but now we have to identify the rest of your annual increase. We need to look at equity.

We previously said that the home value went from $350K to $400K. So, a $50K value increase, right? WRONG.

You also paid down debt throughout the year, which is why you have to look at equity. In the beginning of the year you had $335K in debt. This comes from the $350K sale price minus your $15K down payment. This gave you a starting equity of $15K.

By the end of the year, your debt is roughly down another $15,000 due to the principal portion of your mortgage payment, so it’s at $320,000. The home value is now at $400,000 as mentioned above. This is simply because of market forces (congrats on living in an awesome market). Now you have $80,000 in equity. So your equity increase during the year was $65,000 ($80K minus $15K).

Your cash flow of $4,800 plus equity increase of $65,000 gives you a Total Annual Increase of $69,800.

Divide this by your Core Cash Investment of $46,000 and now your Adjusted CoC is 151.7% . That’s more like it!

And now, let’s look at year two when your property value drops to $325K. Let’s say your debt went down another $15K to $305K. Ending equity is now $20K minus the starting equity of $80K. Your equity increase was NEGATIVE $60,000. Add in the cash flow for a Total Annual Increase of -$55,200.

That gives you an Adjusted CoC return for year two of -120.0%. The original CoC formula would tell you you had a return of 10.4%.

10.4% versus -120.0%. I personally would want to know that difference…

However, Adjusted CoC is still far from perfect.

It still only takes into account your initial investment, not how much money you are actually using to make money.

For simplicity, let’s ignore cash flow and principal pay down for a second and say every year your Total Annual Increase is only from appreciation. Let’s say your property appreciates $20K every year. According to Adjusted CoC, your return is $20K divided by $46K or 43.5% every year.

However, this again is misleading because we are only looking at Core Cash Investments, not the actually tied up value that allows us to make that $20K every year. In year one, it cost you $46K to make that $20K (43.5%). However, in year two, it costs you that same $46K plus the $20K you still have tied up in the property (assuming you didn’t refinance). So it cost you $66K to make the next $20K (30.0%). Year three, it will cost you $86K to make the third 20K (23.3%). So, your return in going down and down every year. CoC doesn’t catch this.

This is why I love ROE vs CoC (even Adjusted CoC). ROE accounts for all this.

Let’s end with a visual or two.

This is realistic data — nothing crazy: a 1% growth rate for both rent price and property value, a normal loan amount and payoff schedule, etc etc.

Take a look, what do you notice.

Here’s some things that should jump out.

CoC is going up every month, things seem to be going well
Adjusted CoC (CoCV2) is also going up every month, things must be going well
Wait, the ROE is going down every month, and not even linearly

Here is the same visual for the first 24 months of one of my properties. Rent stayed the same, but we had a very strong year where the property value skyrocketed. Check it out.

Things you should noticed:

CoC stays flat the entire time
Adjusted CoC (CoCV2) catches the big value increase and then reduces, but if you look at the raw data, the line continues to trend upwards after the reduction
ROE catches the big value increase as well but catches the reductions before Adjusted CoC, and if you look at the raw data, the line continues to trend downwards !

So whereas CoC makes things appear grand and trending upwards, ROE shows how your return is actually decreasing month after month.

Do you see how CoC and even Adjusted CoC could get you in trouble?

Some last thoughts.

If it all seems a bit overwhelming, don’t let it. People think real estate investing or buying your first home is scary. It isn’t. I remember the first time I bought a plane ticket. I was terrified I was doing it wrong. Now it’s easy - you hop online and you’re done. IMHO, buying a home should be just as easy, and tracking how well it is performing should be no different.

The DIY home buying and selling process is getting easier thanks to companies like Homie , Redfin, “iBuyers”, etc…

Managing how well your real estate investments are doing is easier than ever thanks to my favorite app, WayBoz.

WayBoz helps you manage your ROE, CoC and other metrics associated with your properties. You can get notified if any metrics drop below certain thresholds or get tips on how to improve your numbers. You can run numbers for new deals using super user-friendly calculators and even check out how well markets are doing across the United States. During July 2020 you can get a lifetime free membership on the website.

However, if you like to manage this sort of thing on your own, CoC can be useful, but you have to use it with a grain of salt and in conjunction with the other ROI metrics we mentioned above.

Hope this helps!

Make sure you check back so you catch our upcoming article on how to use all the ROI metrics together to maximize the profitability of your real estate portfolio.

Paying off your House... the Best Way to LOSE Money!

Mon, 13 Jul 2020 20:17:45 GMT

Return on Equity — perhaps the most important real estate metric you should be considering.

Sometimes I drive my wife nuts.

I take too long to explain things...

I open the fridge and freezer doors at the same time...

Or I use this phrase: “it’s just a math problem.”

Whenever my wife and I talk about money or investing, I always just shrug and say, “it’s just a math problem”… because it always is: inputs, outputs, variables, solver functions, risk profiles, etc.

It’s just math, and math is why I will never pay off a house.

Don’t pay off your house? You’re crazy!

Maybe, but let’s do some math. Particularly, let’s talk about Return on Equity.

In real estate, and particularly real estate investing, there are tons of metrics that people look at: Cap Rate , Cash on Cash Return , IRR, etc. We’re going to focus on Return on Equity, which, as you might have guessed from my last post , is my go-to.

Defining Return on Equity is quite easy (much easier than the others). It’s… drumroll… the return on all your equity ( wow ). I’ll illustrate it with a bank account example.

You put $1,000 in a bank account. That is your equity investment, or maybe we could even call it a down payment (hmmm…).

The account pays 1% annually. So, at the end of year one you now have $1,010 (yes, I know there are other factors here too, we are keeping it simple). You had to tie up $1,000 worth of equity to make $10 and thus had a 1% return on equity. This repeats year after year with the total equity commitment increasing each year ($1,000… $1,010… $1020.10… etc).

Do not confuse this with Cash on Cash return, which only compares against the initial equity investment, not the current available equity (more on this in our next post).

The nice thing about a bank account is the Return on Equity rate is basically fixed regardless of how much equity you have. However, in real estate, it’s not fixed at all, and this is where people get in trouble.

Let’s look at Return on Equity in real estate now.

First, there are a few variations of the formula. Here is the one I like:

Return on Equity (ROE)= Total Annual Increase / Total Equity

We will start with the easiest of the two: total equity. Total equity is the current value of the home minus any debt owed (your outstanding loan or mortgage balance(s)). If you want to see your ROE for the past year, we recommend using your total equity from the start of the period instead of the end of the period (because your equity is always changing!). However, either works, just be consistent.

So, if the home is worth $400,000 and you owe the bank $300,000, you have $100,000 in equity.

What is “total annual increase?” It is the increase in value that you captured that year from the property. Some of that value will be in your hand, like the cash flow you are ideally getting each month. The remainder of that value will be from the increase in your equity balance. This comes from property appreciation as well as principal pay-down (this is why your equity is always changing!), which increase (or decrease) your total equity.

So, we could rewrite the formula:

Return on Equity (ROE) = (Annual Cash Flow + Annual Equity Increase ) / Total Equity

Or, to get super technical by defining each of the variables in the equation:

Return on Equity = ( (Total Annual Income — Total Annual Expenses) + ((Current Home Value — Current Loan Balance) — (Previous Year Home Value — Previous Year Loan Balance))) / (Previous Year Home Value — Previous Year Loan Balance).

Let’s look at Return on Equity in action.

Let’s say you bought that $400,000 house we just mentioned above, but in cash. No loan. So you have the full $400,000 in equity.

You rent out the house each month for $2,000. You don’t have a mortgage payment, but you still have to pay property taxes, insurance, etc, which, let’s say, is $250/m, so your cash flow is $1,750 monthly or $21,000 annually. For simplicity, let’s assume there is no appreciation during the year.

You then divide your $21,000 increase by your $400,000 in equity to get your ROE of 5.25%.

In other words, you had to tie up $400,000 to make $21,000 — a 5.25% return. Not bad. It is definitely better than 1% from the bank account.

But wait, that example assumes the house is paid off. The article title said DON’T pay off the house.

Here’s why I don’t pay off my houses.

Instead of spending $400,000 and buying the house from the above example in cash, let’s pretend you put down 20% or $80,000 at 3.5% for 30 years.

Your denominator — total equity — will be $80,000. As mentioned previously, it depends what period we are looking at — for this example we will start with the first period, so our total equity actually equals our down payment.

For the numerator, we need to identify the increase in cash and equity we obtained by the end of the period.

For cashflow, we previously had $1,750 per month (our rent minus taxes and insurance). Now, we also need to subtract the mortgage payments, which in this situation is about $1,437. Leaving a cash flow of $313 monthly or $3,756 annually.

For equity increase, we need to compare our total equity at the start and end of the period under consideration. After about a year, due to paying down principal, your loan balance will be $313,900, so your ending total equity will be $86,100 (again, let’s assume no appreciation). So our equity increase is the ending total ($86,100) minus the starting total ($80,000), equalling $6,100.

So, we add the annual cash flow and equity increase together to get a numerator of $9,856.

“Wait a second, $9,856 is way less than $21,000. I don’t want that.”

Remember, it cost us $400,000 to make that $21,000. Right now it’s only costing us $80,000 to make $9,856. What’s the equity return in the second scenario? 12.32% — more than double the previous “no mortgage” scenario.

But your return doesn’t stop there.

Recall, you had $400,000 in cash to invest. That’s how you did the “no mortgage” scenario. However, if you decide to do mortgages at 20% or $80,000 down instead, you have enough cash to do that FIVE times.

So, if we take the $9,856 from scenario two and multiple that by five, we get $49,280 in annual increase instead of the measly $21,000 from the first example.

But wait, there’s even more return…

What if the property values happened to appreciate, let’s say, three percent, or $12,000?

In both scenarios, you get that $12,000 in new equity. However, in the second scenario, it only cost you your initial $80,000 down to make that same $12,000, not the full $400,000. Even cooler, if you spread the $400,000 across five properties as discussed, you aren’t just making that additional $12,000 once, but five times for an extra $60,000 in value.

So, in the “no mortgage” scenario (scenario 1), spending $400,000 gets you an additional $21,000 + $12,000 annually, or $33,000 giving you an ROE for the year of 8.25%.

In the “mortgage” scenario (scenario two), spending $400,000 across five properties annually gets you an additional $49,280 (original cash flow + non-appreciation equity increase) + $60,000 equalling $109,280 giving you an ROE for the year of 27.32%.

In this scenario with $400,000 to invest, that difference between 27.32% and 8.25% equates to an extra $76,280 for the year.

This is the power of considering Return on Equity.

One last very important note…

Unless your market’s growth rate is increasing month after month, your ROE actually goes DOWN every month. That’s because as you pay off more of your loan, you have more equity getting tied up in the investment. In other words, it is costing you more money to make money, and the money you are making stays relatively flat (unless you are increasing rent every month).

Or, perhaps you had a killer few years when it comes to appreciation, which handed you amazing ROEs. All of a sudden appreciation stops. You now have a TON of equity built up in your property, but maybe rent hasn’t caught up yet. Your ROE will have a huge drop.

That’s the additional power of tracking Return on Equity. It helps you to know how your properties are doing right now, regardless of how great your initial cash investment is doing. So even though your overall Cash on Cash Return seems to be doing great, properly tracking ROE helps you know when it’s time to do something different with your property , whether that means to sell, refinance, do a home equity loan, etc (more on this in an upcoming article about using ROE and Cash on Cash together).

You need to regularly be tracking your ROE.

I’m biased, but IMHO WayBoz is the easiest way to track and act on ROE — it’s the whole premise of the tool. You’ll see your ROE at any moment, be notified when it drops below certain thresholds, and even prompted on ways to better leverage equity that you have. There’s a bunch of other bells and whistles, but it is arguably the best tool out there to help you keep track of how your real estate investments are actually performing.

Comment below with your thoughts. I’m sure some Cap Rate and Cash on Cash fans have something to say. :)

Don’t forget to check back to see our future articles on Cash on Cash Return, Cap Rate, Using Cash on Cash with ROE, and more!