July 24, 2023

JF3245: Sief Khafagi — How to Win $200,000 at the Best Ever Conference, Using Data to Thrive in the Short-Term Rental Industry, and How to Identify a Desirable STR Market




Sief Khafagi is the founder of Techvestor, which provides investors with a strategic way to invest in short-term rental investment properties. In this episode, Sief discusses the short-term rental landscape as it stands today and how Techvestor is overcoming some of the common pitfalls many operators are encountering to thrive and build a strong portfolio. He also shares Techvestor’s business plan and how they identify ideal markets for their short-term rental properties.

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Sief Khafagi | Real Estate Background

  • Founder of Techvestor
  • Portfolio:
    • 120+ short-term rentals
  • Based in: Los Angeles, CA
  • Say hi to him at: 
  • Best Ever Book: Purple Cow by Seth Godin
  • Greatest Lesson: Go after the things that scare you, and find folks that are willing to take the ride with you.

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Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed, and today I'm joined by Sief Khafagi. Sief is joining us from Los Angeles, California. He's the founder of Techvestor, the largest, most trusted operator of short-term rental investment properties, with over 120 in their portfolio. Sief, can you tell us a little bit more about your background and what you're currently focused on?

Sief Khafagi: Yeah, thanks so much for having me, Slocomb. We focus on Airbnb and short-term rentals, as the industry knows them, in an institutional passive way; just like many people know how they can invest in a multifamily apartment building and do so as an LP, in a very passive environment, earn tax benefits, cash flow, etc. - it's the same exact thing that we do, except short-term rentals. So a slightly different asset class, a little bit more cashflow income-minded, and we use a lot of data and proprietary tech that we've built to better understand what to do next, where to buy, how to operate and how to deliver those outsized returns.

Slocomb Reed: Sief, I've been excited for this interview for a while. I was at the Best Ever conference earlier this year 2023 when you all presented, and [unintelligible 00:02:29.02] we're funded in part by our panel of judges. There are a couple of places I'd like to focus this conversation. The first is a combination of questions here... We're recording in the middle of 2023. What are you seeing in the short-term rental landscape right now?

Sief Khafagi: We are seeing roughly somewhere between a 15% to 30% increase in top-line revenues year over year on same store properties, or essentially the same dollar year over year. We're also seeing a little bit of price softening in some markets on acquisition, but we're also seeing a little bit of price increases in some of the markets that we're also playing in.

From an operating perspective, we're seeing ADRs continue to pace significantly faster than expected. ADR stands for average daily rate, essentially the amount that we're able to charge per night. Our average daily rate, generally speaking throughout the year, on average, is a little over 400 bucks. So as you might imagine, at any given time our average property is doing somewhere between 10 to 12 grand a month really at a minimum on an average basis, which is a significant increase year over year, and we expect that to continue.

Slocomb Reed: Sief, you make it sound like everything is rosy and pointed up and to the right on the graph. I know that's not what the Wall Street Journal would tell us about short-term rentals right now... There's a very large increase in supply; demand is going up, but supply is out-accelerating it, if that makes sense. I know there are a lot of places in the country, and a lot of places in the market where I operate Cincinnati, Ohio, that are struggling to get solid bookings. What I'm hearing is that that's not the experience you're having. Why is that?

Sief Khafagi: A few reasons. First and foremost, we lead with data for everything that we do when it comes to decision-making. So identifying the right markets to buy in is a big problem for most people, especially for those who are not comfortable with buying outside of where they're located physically. So for us, we're in over 10 plus markets, led with data, where the price to rent ratios are significant. That's the first difference. We also lead with design. So if you take a look at any one of our homes, you'll find that our homes are well amenitied, incredibly well designed, and most importantly, we know how to rank in the Airbnb algorithm. So Airbnb is very similar to, say, something like Google, where when you search for something, it wants to show you a place that you're likely going to book, because that's a good user journey for you as a user. And we're able to play into that. We know who the avatar is who's visiting our five bedrooms, sleeps 16 home, that looks like a resort in Scottsdale. So we're able to rank for that type of avatar, because the demand for that type of client is incredibly high, but the supply for homes that feed that client is incredibly low. In addition to all of these things, we're able to use proprietary tools and datasets on the backend for how we price, how we operate, certain decisions we make when it comes to review moderation, design selection... All of these types of things. In short, in one sentence, we're an institutional operator, in an environment where you have 95% which are DIY mom and pops. We have certain advantages that they don't, we ranked in the top 5% to 10% of performance across every single market that we're in, and we've outperformed the country's largest property manager, which has over 35,000 doors, by 56% per door on revenue.

Slocomb Reed: The largest manager has over 35,000 doors, you're at 120. You outpaced their revenue by 56%. It sounds like that's because you focus on larger properties with larger average daily rates though. Is that it?

Sief Khafagi: Not necessarily. On a per-door basis, in the markets that we are in, for comparable properties of size, we outperformed the largest property manager by 56%. So when you look at it apples to apples, size to size, location to location, as crystal clear from A to B as possible, we are outperforming them significantly.

Slocomb Reed: Sief, you said you are in 10 markets currently, one of them being Scottsdale... You mentioned briefly what metrics you're targeting and what is desirable for you in a market. Tell us a little bit more about that.

Sief Khafagi: Sure. When we look at a market, we want to first better understand what's the best possible product to buy in this market. And what I mean by that is in every market there's usually a type of physical real estate as a single family home that is ideal from a price-to-rent ratio. For example, a five-bedroom in Scottsdale will outperform significantly versus say a three-bedroom in Scottsdale when it comes from a price-to-rent ratio, meaning what you're paying for it versus what the annual revenue is to that.

Now, a four-bedroom to a five-bedroom is actually not unnecessarily the largest increase. You can buy a four and get comparable price to rent ratios as you would to a five. Although there is a big advantage if you can get a four and convert it to a five, which we do quite often, when we think about purpose-building these for short-term rentals.

Now, from there you have to better understand who's visiting this type of product. Our average product is a four-bedroom or larger in this market, sitting on a quarter acre or a third of an acre of a lot, meaning a huge yard. Typically, a group of 12 plus people, usually children and/or adults, both coming in at the same time, and spending most of their time outdoors. So outfitting it with basketball courts, pickleball courts, hot tubs, Mini Golf, bowling, disc golf, and a ton of other unique amenities outdoors is incredibly important for this type of avatar, who's looking for something both economical, an experience, privacy, and on the interior something that's going to give them an experience that they're not going to get somewhere else. So we've done everything from things like Barbie-inspired homes, to Chanel-inspired homes, to "Saturdays are for the boys" inspired homes... And we've done everything in between when it comes to amenities as well.

So that's a very simplified answer of what we're looking for in each of these markets, is essentially does the physical real estate supply exist for what we're looking for, for the ideal product? Does it exist in scale? Because we need scale for our level of size. Can we buy that product and add the right amenities and design and experiences to it given its physical nature? Can we do that cost-effectively? And ultimately, can we drive an ideal 20% or better annual revenue to the purchase price ratio? And if so, can we secure financing on it in a way that's economical as well? And if all of those types of things check off, then we are very interested in that type of market.

Slocomb Reed: What markets are hitting those benchmarks right now?

Sief Khafagi: We're in places like Scottsdale, we're in places like the Poconos in Pennsylvania, and It's ironic that you bring up that Wall Street Journal article, because recently there was an article that came out showing the Poconos had one of the largest year over year declines in revenue. And ironically, we're seeing quite the opposite; about 30% increases in year over year.

Now, to be very direct, one of the main reasons we're seeing 30% year over year is in your second year of operating a short-term rental you don't have what's called booking lead time. In that first year, when you launch, you're essentially trying to catch up to a premium rate. In your second year, you're benefiting from the existence of coming into that year with premium booking lead times.

So what we're seeing in our first year, even though we're meeting our revenue expectations in our first year, is we're seeing significant increases in our second year because of that premium booking lead time. And for those who aren't familiar with premium booking lead time, a lot of industries actually use this. Hotels, all-inclusive resorts, airlines, even movie theaters, depending on what time you want to book something, how far in advance, the seller or the owner of this business might set a premium to secure your spot. And statistically, the larger your group, the further you have to book further advance, because there's more schedules that you need to align to. Therefore, with our focus on larger groups, we're able to secure a larger premiums further in advance, have rent on the books, and always be cashflow-positive, really in any given month that we're entering as a portfolio, especially because we're seasonally diversified. And I mentioned Scottsdale, the Poconos, Clearwater, Memphis, McGaheysville, Virginia... Some of these places where people might go, "Hm... Where is that?" And that's exactly what we want you to think, is "Where is that?" Because our data is telling us we can enter these tier-two level markets, destination markets and metros, which are generating the price to rent ratios that we're looking for, while most of the country's looking in places like Big Bear, Joshua Tree. Very flashy, very big name, where there's an incredible amount of saturation and supply. Not to mention, the real estate doesn't exist for the [unintelligible 00:12:11.07] product to buy in those markets, at least not with enough density and scale and enough demand to meet the prices that you're going to be looking for.

So all of this is led by our proprietary insights internally. We're also advised by the likes of folks over at AirDNA; Jamie is a friend and the chief economist over there. We have a head of data internally, our head of asset management comes to us from Vacasa, where he used to run portfolios... So our team, our insights, our access to data, and most importantly, our ability to infer and use that data leads us to make these really powerful decisions in real time.

Slocomb Reed: Boiling down a lot of what you've just shared, it sounds like the theme is currently a focus on second-tier markets, because the price to rent ratio meets your guidelines better. Is that it?

Sief Khafagi: On a super-high level, we're sitting in a bar, back of the napkin, absolutely.

Slocomb Reed: Are there any new markets you're looking to break into right now?

Sief Khafagi: There are. There's a number of them. We track about 257 local markets, where we aggregate data on a daily basis, and we map it before we ever enter it. An interesting market to us right now are the six outside suburbs of Asheville, North Carolina, which is a very interesting market where short-term rentals are actually not allowed in the city center. But within about 15 to 20 minutes outside of downtown, it's essentially very much regulated in a pro short-term rental manner. And there's enough density in those six sub-markets outside of Asheville or surrounding the Asheville downtown area, which is very interesting to us.

Separately, what's also interesting to us is the lack of well designed, well-amenitied homes in that market. They all look the same, and they don't have the types of amenities you might imagine in, say, Scottsdale, where you have hot tubs; they don't have outdoor mini golf, they don't have bowling... They don't have these activities, even though the market is a predominant family one. And they have the physical real estate nature to actually have these types of amenities, and we believe that if we're able to enter this market, and if we wanted to, we can certainly bring our flair to this market that would allow us to really own the top, as we like to call it.

Break: [00:14:31.09]

Slocomb Reed: Sief, I'd like to transition the conversation here to the other topic I've been wanting to discuss with you ever since you presented and won second place in the Best Ever Conference back in March. Stepping aside from the operations of your portfolio and how you target future acquisitions, focusing in on how you treat this as an asset class and an opportunity to invest, globally speaking, tell us more about your business plan. The returns that you're looking for in cash on cash, are your properties designed for a defined hold period with a sale on the end, or is this a long-term hold? Tell us more about those things.

Sief Khafagi: The short-term rental industry is a $150 billion industry globally, half of which happens here in the United States. And most of that revenue happens within what we call drivable destinations for major metros, which is why a big focal point of ours is "Are we within a lot of people where people can get to us?" For example, the Poconos is a few hours away from New York, Boston, DC, etc. Atlanta, and moving forward. And our business plan is very simple. We know that this is going to be an institutionalized asset class sometime in the future, because every asset class becomes one eventually. It's just a matter of demand and interest, and the interest in single family homes is incredibly high, and will continue to be high in the future, except the yield is not as attractive in long-term rates.

So for us, and what we've heard from several private equity partners and potential buyers, has been "If you build it, we have an interest in buying it. But we have no interest in building it, because it doesn't make sense for us to go buy a $500,000 property at a time, do a $150,000 renovation, understand what to buy, how to operate that, do it without it being stabilized, and then figure out how to run it after." What an institution is looking for is a portfolio of 50, 500 or 5,000 doors, where they can pick up with accurate books that they're getting from an institutional operator like ours, not mom and pops who have everything on a napkin... Incredibly important for institutions are the books and records and the stabilized revenues and performance. Data, and a built-in operator who could actually continue to operate these homes in the event that they wanted to buy them as an option.

So in short, we're buying a bunch of single family homes, we're purpose-designing them for the efforts of short-term rentals, we're operating and stabilizing typically between an 8% to 12% average cash on cash, a 17% to 20% average annualized return, roughly a 2x equity multiple over a projected five-year hold period, and the idea is to exit the entire portfolio to one of these institutions, or many institutions who are interested in buying a stabilized short-term rental portfolio as part of their alternative investment strategy. Because to them, all this is is a play on single family homes that has an operating business within it. It's got real estate backing, looking with the upside of a business. And we've been able to exit eight properties to date, all of which has been between a five and a half and a six and a half cap across our funds. We've raised a little over $55 million in equity from investors, and we expect to continue to stabilize our first fund, and today what we're raising four is our second fund, and we expect that to continue pacing just as well.

Slocomb Reed: Focusing on fund one here, which has closed, it sounds like, with regards to the raise of capital... Where is it in the business plan right now?

Sief Khafagi: So fund one, we've raised 37 million and change in equity. We bought a little over 81 properties, of which we exited eight. And the last properties of fund one finally went live. We're recording this in June of 2023. So as of today, every single property in fund one is live and accepting bookings. We're averaging and on pace for roughly a 9.6% average cash on cash through our portfolio in fund one. That is pre-stabilization, meaning we're not enjoying the benefits of true booking lead time on over 65% of our portfolio, because over 20 million of the money that we've raised in fund one came at literally on Christmas, or right around Christmas of 2022.

So all that capital is then allocated, deployed and is now starting to effectively go into operation for fund one. So we expect 2024 to be our first full year of true stabilized revenue, which we're currently on pace for roughly in that 11% to 13% cash on cash range.

Now, the excitement that we've had with fund one has been fantastic, as well has been the demand that we've had for fund two. But what we're seeing in fund two is that we're bringing properties live faster, and they're performing better, because we've avoided any mistakes from fund one that we've learned, and now we're also proprietary data holders of our own properties in those markets, where things which were projections to begin with are now actuals, and we can actually comp to our own dataset. Meaning, in short, we know what to do and how to do it without making the same mistakes twice.

Slocomb Reed: Sief, returning to fund one here, you're at a point where you don't have that lead time for premium bookings yet on the bulk of that portfolio. That will come soon. And it sounds like you still own 73 of those properties in that fund. How long will you need to operate in a "stabilized manner" with your premium lead time before you expect to attract institutional buyers to that portfolio?

Sief Khafagi: We're typically getting premium bookings. And again, each market is different. In Scottsdale, you're gonna get about a 100-day roughly booking lead time; in the Poconos it will be a lot shorter. Florida will be somewhere in the middle. But also it's about seasonality. So even if we launched a property today, you can get a premium booking lead time, easily. But you're not going to get true premium bookings until January through April of next year, because that's super-peak season. And the Poconos, which peak season is in summer, if you launch a property today, you're gonna get some premium, but you're not going to get true premium until summer of 2024. Because it's typical peak season.

Now, for institutions, they're typically looking for what we call a T24, ideally, a T36. So really, what you're looking for is two plus years at a minimum, ideally three, of stabilized revenue. So the reason we have a five-year hold is looking for 7 to 12 months of capital raising, which [unintelligible 00:23:28.14] buying and doing our renovations and bringing properties live, plus another six months to get the rest of the capital deployed. So call it 18 months. And then you take that 18 months and you tack on another 24 to 36 months, that's where you get your T24, T36. And what they want to see is they want to see year two revenue increase, they want to see your three revenue stabilized, and match and continue to pace. They want to see rev par get better over time, and they want to see how you improve on certain metrics, like occupancies and ADRs, and operate for things like OpEx. Is your OpEx going down or is your OpEx going up? Because people often forget that revenue is king.

Slocomb Reed: Sief, I want to stop you because you haven't explained rev par yet. Can you explain that for our listeners and then continue?

Sief Khafagi: Yeah, rev par is revenue per available nights. Essentially, in short, assuming that you have 30 days in a month, and you are generating $10,000 that month in revenue, it is 10,000 divided by 30, which is going to give you what your rev par is. Now, you might not be booked every single night. Rev par is essentially revenue that you have on the books regardless if that night is booked or not. It's a great metric to essentially predict what your average monthly revenue will be, although you don't know what days that revenue will occur on. So it's essentially like I can bank on X amount today versus tomorrow.

Now, ADR comparatively is what you're getting on a per-night basis. ADR should always be higher than your rev par, because of rev par is assuming essentially 100% occupancy throughout the month, assuming what you're getting on average per night. So that's a little bit about rev par.

Now, when it comes to this notion where we're thinking about performance and stabilization with institutions, they're looking for an increase of certain metrics. And they're also looking for a density of scale. The reason why we focus on core markets and why we raise new funds every single year in a different [00:25:29.08] is that by year three or year four we'll be on fund three or four. We're going to have not only density in geographies hyper-locally, which could be an exit right there for multiple funds, we can also exit the entire [unintelligible 00:25:42.28] at a time, because someone can actually come in and buy 300 doors across four funds in the same transaction. Even though they don't all have a T36, they feel confident that they will continue to operate well because of the prior history of the others. So there's a lot of value that we're doing, and each fund that we launch actually strengthens the one before that, and will strengthen the ones after that.

Slocomb Reed: That makes a lot of sense. Are you ready for the Best Ever Lightning Round?

Sief Khafagi: Let's do it.

Slocomb Reed: What is the Best Ever book you've recently read?

Sief Khafagi: Purple Cow, Seth Godin, off the top my head. Do everything that everyone isn't is the mantra in that book.

Slocomb Reed: What is your Best Ever way to give back?

Sief Khafagi: We plan on launching a heads in beds nonprofit, as you might imagine with what we do. It's something that we feel very strongly about to not only provide housing and experiences and returns to investors, we also want to be able to provide experiences for those who need it most.

Slocomb Reed: Within your current portfolio, deals you have done, what is the biggest mistake you've made and the Best Ever lesson that resulted from it?

Sief Khafagi: We bought a property in a market where we didn't accurately vet the data and bought the wrong product. That property ended up doing roughly about a five and a half to six percent cash on cash in its first year, which I know isn't the worst thing in the world for a lot of folks... But to us that was a very large miss, because we broke our own ethos and buying the wrong product in that market.

Slocomb Reed: And what is your Best Ever advice?

Sief Khafagi: Jump in and absolutely go after the things that scare you. For us, we have an incredible team, and each and every one of us is an expert in an area that we do. We couldn't do without them, but every other area of this business scares other people. But we find the right people who are passionate and ready to take on that part of the business. So jump in and find folks who will take that ride with you.

Slocomb Reed: Last question, where can people get in touch with you?

Sief Khafagi: You can find me on LinkedIn. I'm the only Sief Khafagi that I know of. And you can also reach out at sief [at] techvestor.com or check us out at techvestsor.com to learn a little bit more about short-term rental investing and getting involved.

Slocomb Reed: Those links are in the show notes. Sief, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show, leave us a five star review and share this episode with a friend you know we can add value to through our conversation today. Thank you, and have a Best Ever day.

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