Veteran Joe Riley saw an opportunity in the market when he rented his home while on deployment: creating temporary housing for families near military bases. Now with over 300 properties, Joe has continued to grow his portfolio to fit this overwhelming need for military housing. Joe talks about how he created Patriot Homes and how to scale your short-term rental portfolio.
Joe Riley | Real Estate Background
- Founder of Patriot Family Homes, a veteran-owned company that meets the need for short-term housing near military bases.
- Portfolio: Owner of 300+ properties.
- Prior to starting this company, Joe was a Captain in the Army, having multiple overseas deployments, and previously served on the National Security Council at the White House.
- Based in: Chattanooga, TN
- Say hi to him at: www.patriotfamilyhomes.com
- Best Ever Book: The Politics of Diplomacy by James A. Baker III
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Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed and I’m here with Joe Riley. Joe is joining us from Chattanooga, Tennessee. He is the founder of Patriot Family Homes, which specializes in short-term housing near military bases. He has over 300 properties and he was a captain in the Army and served on the National Security Council at the White House. Joe, can you start us off a little more about your background and what you’re currently focused on?
Joe Riley: Yeah, so I was in the army, and on a deployment to Afghanistan, my wife and I decided to throw our house up on Airbnb and HomeAway, because she traveled for work Monday through Friday and there was no reason for her to stick around Columbus, Georgia. We’re not from there, and with me being gone, instead of trying to take all our stuff out and put it in a shipping container or something, we just left it in the house, rented it on Airbnb and HomeAway, realized (no surprise) that there was a big need for furnished temporary housing around military bases with families coming and going all the time. We then came back, started getting some more houses. The short version of the story is that it just kind of morphed from there, we started working with other veterans and folks in the service, a ton of military spouses… In fact, it was on another deployment to Ukraine that we started relying on other military spouses to kind of take care of the houses while we were gone. That’s really been the secret to what we’ve been able to do.
Slocomb Reed: Nice. So 300 properties around military bases. Are those still all single families?
Joe Riley: The vast majority of everything is single-family and we do have some small multifamily. We’ve branched out now, we’re no longer just around military bases, we’re also in some kind of vacation areas and other markets. We are in Pennsylvania, Virginia, North Carolina, South Carolina, Tennessee, Alabama, Georgia, Florida, Texas, Kentucky, Mississippi, is kind of our current footprint.
Slocomb Reed: Gotcha. So every time there’s an SEC football game, you guys are fully booked out, it sounds like.
Joe Riley: The University of South Carolina or the University of Georgia, or Alabama or whoever else is playing, we have houses in most of those markets. We find that many of the same characteristics that make army bases attractive for short-term rentals also make university towns attractive for those.
Slocomb Reed: Joe, tell us about your partnerships. You said that you were working with other veterans; tell us how your partnerships work.
Joe Riley: We started out, my wife and I, just kind of having our own houses. When we ran out of money, we did a rental arbitrage model where we would go and sign a three or five-year lease on a property, and then turn around and sublease it as a short-term rental. We had landlords who came to us and said, “Hey, how are you paying our rent and still making money on top of that? Would you just like to manage for us?” Then we started a management company, to kind of manage for those types of folks. We had other service members who wanted to do this, but didn’t want to have the hassle of managing the properties themselves. From that, we’ve now morphed into working with larger investors who are looking to buy 50-100 homes. We go put that to work and spread them out across our markets.
Partners range from just a single-family who has a home, maybe they’re what we call PCS in the army, moving from one base to the next; it could be just somebody who has a second lake house or beach house, it could also be somebody who’s looking to go and do this for 10, 20, 40, 50, 100 homes. We’re fully vertically integrated, so we have our own acquisitions team, we have a renovation oversight team that oversees that, we have our own warehouses where we warehouse all the furniture to set up the houses, and then obviously, we manage it on an ongoing basis. So we can come when someone just says, “Here’s an amount of money I want to put to work”, and we can go do soup to nuts everything from there.
Slocomb Reed: Awesome. Out of those 300 properties, how many do you all own?
Joe Riley: We have full ownership in about 100 of them, partial ownership in another 150, and then just pure management on another 75 or so.
Slocomb Reed: Gotcha. Joe, what I’d like to ask about is raising capital for doing short-term rentals. The people that I know who do short-term rentals are doing it with all their own capital or they’re arbitrating. As you said, you sign a lease with the landlord to rent the space with permission to sublet as a short-term rental, which means that your startup cost is significantly lower. But it also means you don’t own the asset, you’re not building equity or gaining appreciation, you’ve just got the cash flow. It’s much more of an active business than what most people are looking for from real estate investing.
Similarly, people who are looking to invest more passively tend to shy away from short-term rentals, because they’re looking for something that doesn’t have the fluctuations that the short-term rental market is perceived to have. So let me ask, the people who are coming to you looking to buy houses or looking to partner with you in this, or just for lack of a better term, hand over their money and let you invest it in 50 to 100 houses at a time – what is it that they’re looking for and what is it that is attractive to them about investing in short-term rentals?
Joe Riley: In terms of what’s attractive, we tell people we offer hotel-style cap rates with a single-family backstop. When we approach most of our lenders, we do manage million-dollar beach homes and lake homes, but the preponderance of our portfolio is actually just kind of run-of-the-mill single-family homes that you could also run in cash flow as a long-term rental. One way you get banks comfortable with financing is that you show them that this property could also cash flow as a long-term rental. We think we can use the returns as a short-term rental, so the bank feels confident, “Okay, if they do well, good on them. If they do poorly, then it still cash flows.” So hotel-style cap rates, single-family backstops.
Slocomb Reed: When you say hotel-style cap rates, what do you mean?
Joe Riley: Double-digit cap rates, unlevered cap rates. What we would say is that we find across our portfolio we have about a 13% unlevered cap rate.
Slocomb Reed: Gotcha. When you say unlevered, what do you mean?
Joe Riley: If you just went out and bought a $100,000 house, then we would say that your net income at the end of the year would be $13,000, assuming you had no debt on it. Then if you add in leverage, that 13,000 goes down, but then you don’t have 100,000 in cash sitting in it.
Slocomb Reed: A 13% cap is going to sound very exciting, especially with the kind of debt that is available for single-family homes; and as you said about the backstops, if there is a dramatic market shift, then single families tend to be easier to sell, and you do have the long-term rental potential in some cases. A 13% cap is pretty impressive, of course. What analysis do you do to determine the market that you’re going to go into?
Joe Riley: At the broadest level, we want cheap markets with a lot of turns. Sometimes that is secondary and tertiary markets which is the kind of the main place where we play. We also look at blue-collar vacation destination sites. We’re not out in the Hamptons, we’re in the Poconos; we’re not on Destin, we’re in Pensacola; we’re not in downtown Savannah, we’re out in the kind of rural areas outside of Savannah. Gatlinburg, Pigeon Forge… That’s what we’re looking for, cheap markets with a lot of turns. Then when we look at an individual house, we target a minimum of 25% of the asset value in annual revenue. A $200,000 house, we want to generate $50,000 a year in top-line revenue. You back out your net operating income is typically about 40% of that, inclusive of our management fee.
Slocomb Reed: The expenses are only 40%?
Joe Riley: 60%. So your net operating income would be about 40% of the top line.
Slocomb Reed: Gotcha. It sounds like you’re all over the Southeast, possibly because you’ve talked about Georgia and you’re in Chattanooga, Tennessee. Why is it that you’re focused in the Southeast? Is it just geographic proximity and that makes things more efficient?
Joe Riley: Yeah. Obviously, a big piece of it is proximity. We started our first market in Georgia, then we were in Alabama and Tennessee, and we’ve just kind of spread from there. This is an incredibly operationally-intensive business. Do you think managing long-term single-family rentals is operationally intensive? We turn our houses on average six times a month. So if you’re doing 70 turns a year compared to one turn a year, and then in addition to basic maintenance, you’re having to worry about linen, soap, shampoo, toilet paper, and cleaning at every turn… It’s a very operationally intensive business. We tell people short term rentals are easy on the [unintelligible [00:12:11].24] hard on your emotions.
The biggest reason we see people not succeed in short-term rentals – one, they become too emotionally attached and that leads them to just have a lot of stress and take it personally when people say bad things about their home. Also, then they turn around and they spend way more than they should on furnishings and finishings and everything else, which is relevant in some kind of prime markets for prime properties, but for what we do, we call ourselves the Walmart or short-term rentals. We’re just offering consistent, good quality, but not premium, not luxury accommodations for traveling groups of workers, electricians, plumbers, families on the move, military families. Again, we’re not the Saks Fifth Avenue, we’re the Walmarts.
Slocomb Reed: Gotcha. A little bit of background on me, Joe. I’m in Cincinnati, Ohio and I’m a buy and hold guy, landlord, long-term rental. I tried Airbnb for a while; I say tried – I had at most three units at once. Superhosts, over 200 reviews. I had some success, my issues were operational; I didn’t have the scale to leverage or delegate the majority of the responsibilities within Airbnb with only three doors. I would at least like to say that it wasn’t for emotional reasons that I decided to get out of Airbnb, it was because I saw my portfolio, my goals heading in another direction. But I am certain, Joe, that there are people who are listening to this episode who have flirted with Airbnb, gotten in, gotten stressed, whether it’s because they’re too emotional or because of the operational difficulties of the short-term rental space. They’ve gotten in, they’ve gotten stressed, they’ve gotten out, as I did.
I think my biggest issue was scale. Three doors is a terrible number to have. I want to ask two questions at the same time, Joe. Someone like me, who wants to get into this and wants to be able to delegate the majority of responsibilities… I don’t want to be the one who has to go through it during every turn. I want to know that I have a cleaner who’s reliable, I want to know that I have someone else sending the vast majority of messages, responding to the vast majority of the inquiries, and doing the legwork that’s required to set nightly, weekly, monthly rates, along with the software platforms that are available. How much revenue do I need to have in order to get to that point where I can hire out the majority of the day-to-day operations for short-term rentals? How many units do I need? Another way to ask basically the same question, Joe, how many units do you need to bring on to enter a new market and have the same infrastructure and efficiency that you have where you’re operating already?
Joe Riley: For us to enter a new market, we would want five with a pathway to ten is what we would be looking for if we were going to do full service. Now, we also offer a digital-only package. Let’s say you had your three doors in Cincinnati, and you were like, “I’ve got a cleaner, but I don’t want to make sure the cleaner gets all the automation to go there, and I don’t want to answer the guest’s questions before they arrive, and I don’t want to do the pricing. I don’t want to have to put together software that pushes me to Airbnb, Vrbo, Booking.com, and integrates all the backend stuff. I don’t want to do all that, but I’ve got good maintenance people on the ground and I’ve got a cleaner.” Then we could do a digital-only package for you and we can do a digital-only package anywhere and you don’t have to have scale or volume. For us to come in and pull up a full-service operation, then it’s five with a pathway to 10 is typically what we tell people. Does that answer your question?
Slocomb Reed: It does, and that number surprises me, Joe. Five with a pathway to 10 seems low.
Break: [00:16:06] – [00:18:02]
Slocomb Reed: Now, you have much more experience in this space than I do, of course, although I was Superhost and got a couple hundred reviews, so I have some experience. My units were studio apartments in a walkable downtown. The vast majority of stories that you hear about Airbnb are people who are getting larger spaces, multiple bedrooms; you said single-family homes. So with that five with a pathway to ten, how much revenue is that, that you’re looking to have when you start in a new market?
Joe Riley: To be clear, at five or less, what we would do is we would find a local cleaner who does a good job, and we would sub out the cleaning. Then we would have a maintenance person that we have on retainer that we can call out. That’s why we say we’re the Walmart, not the Saks Fifth Avenue. If you want white-glove service and fresh cookies in the house when the guests show up, we’re not going to do that even with 30 houses; that’s how we operate [unintelligible [00:19:03].07] you said Superhost status.
So we do have some profiles, we segment out profiles into premium, intermediate, and budget properties, and we find that actually often our budget properties are the best return on investment for the asset owner. The analogy I give is I can have a $100,000 house in a transitioning neighborhood that will generate $36,000 a year pretty consistently, or I can have a $300,000 house that’ll make $70,000 a year or $75,000 a year, or I can have a million-dollar house that’ll make $100,000 a year.
In many instances for the asset owner — selfishly for the management company, we like to manage the million-dollar home. Because if you can take 30% — and oftentimes in vacation markets, the owners are price-insensitive; they didn’t buy the house for an investment, they bought the house because they wanted to go there on vacation. So anything that makes them money is better than their alternative. So they’re the ones carrying the million-and-a-half-dollar cost, but then that house turns around and makes $150,000 a year, and the management company takes 35%-40% of that, because again, the owner is relatively price-insensitive. ..So selflessly, from a management company, those are the houses you love to manage. What’s harder is to manage the standard 3/2 in a transitioning neighborhood that makes $36,000 or $40,000 a year. We do that, but the difference is there’s not someone meeting the guests to check them in, and there’s not a bottle of wine and cookies.
That’s what we have to talk with owners about, is – if you want to have only five-star reviews, then we can do that but that’s at a different price point, both in terms of the asset and in terms of the management fee to be able to manage that. But our view – and this is what we’ve done with our own properties – is that, again, from an asset-owning standpoint, we find that the best return on investment is more of those kinds of Walmart-style properties. And more specifically, we find that the two best types of assets are either small multifamily or large houses in urban cores. Small multifamily, we would break into like duplexes, quadplexes, something like that… Because let’s say I have a duplex, I don’t have two listings, I have three listings. That’s really important. I have unit A, unit B, or the two together, and that allows me to touch multiple points in the demand curve, which allows me to then push the average nightly rate for each unit up without having a major hit on occupancy.
Let’s say they’re three/twos and they sleep 10 people each, or collectively they sleep 20; then I’m hitting two different points, again, on the demand curve. The other types of assets that we find that do really well, maybe they used to be student accommodation, college rentals so they’re big houses and urban cores. Ultimately what Airbnb is, from a value play at the macro level, is a volume counterweight to a hotel room. If you go stay in a Marriott hotel room, you’re going to get a Marriott experience, but you’re going to pay 250 or whatever it is a night for one room, versus getting six; where you start to get those really big cost savings from a renter is if you’re renting a four or five-bedroom house in an urban core, that’s where that arbitrage opportunity is there.
The other thing that does really well is anything that’s got a mother-in-law suite or [unintelligible [00:22:26].07] in the back or something like that, because then you can rent out the mother-in-law suite or the casita to a traveling nurse or somebody who needs it. Then you’ve got the main house that’s generating the bulk of the revenue, or people can run out the two together.
For example, if you came to us and said, “Hey, I’ve got five houses in Cincinnati that I’d like for you to manage”, I’d say, “Absolutely. We can do it digitally or we can do it full service.” Our full service would not be us putting a W2 person on the ground, it would be us going and finding a 1099 cleaner and a 1099 maintenance person and paying them a retainer in addition to the cleaning fee are the service call to kind of come out and manage that stuff on the ground for us. This means the guests would probably, frankly, not receive the same level of service as when you manage that yourself because you were much more personally involved and there’s a much more personal relationship that the guests receive, versus us, which has a larger, more of a kind of management company, corporate style, experience. But again, our view is with the pricing — we also work with a lot with insurance companies, we have a lot of direct partnerships, so around 30% of our revenue comes off-platform, which is a huge benefit.
Slocomb Reed: Tell me a little bit more about that, Joe, 30% of your revenue comes off-platform. Let’s dive into that a little further.
Joe Riley: So we’re a preferred vendor for a lot of insurance booking companies. Let’s say your house burns down, tornado, water damage, whatever have you; the insurance company has to put you up. So those are really nice, juicy, two-month, three months, six-month-long bookings that we’re able to get; then we work with a lot of different corporate housing groups more generally conceived. Then we have a really good program – let’s say someone stays with us, anytime one stays with us for five days or more, we do an outreach and ask them why they’re coming. A lot of the time, that’s like a group of traveling contractors, and they’re coming back next week and the next week, so then we allow them to go directly with us; they save money, it’s better for us as well. Our strength is really in that kind of digital package that you get of pricing pushing out across all the different platforms, the off-channel stuff, and then the efficiency at which we manage turns with our 1099 vendors. Frankly, we run markets of 25 houses with not a single W2 person on the ground.
Slocomb Reed: That’s awesome. Joe, a couple of questions before we transition into the final phase of this episode. Have you entered a market and then decided to leave?
Joe Riley: Yes.
Slocomb Reed: Okay, tell us about that. You go into a market, you try it out, it didn’t pan out or didn’t meet expectations, and you decided to step away from the market. Can you tell us what market that was and how that went down?
Joe Riley: Yeah. The most recent one would be Athens, Georgia, which we’re actually now going back…
Slocomb Reed: College town.
Joe Riley: We left and now we’re coming back. So we went into Athens at the worst time, which was February of 2020, is when we closed on our first homes.
Slocomb Reed: You purchased them, that wasn’t arbitrage?
Joe Riley: We bought them. We basically then pivoted to some more kind of long-term rental stuff, and then we’ve brought them back to short-term rentals, and they’ve done really well. It’s not a full left the market, but we had to pivot focus, because that whole market was wrapped up in university traffic, which all shut down for 2020 in COVID. Then we had to kind of push through those longer-term leases, and now we’re transitioning back.
So that’s the main one that we’ve kind of gone into and had to leave. This is not me trying to blow smoke. I tell people, nine times out of ten, if you have a standard home in an area that has a metro population above 100,000, I’ve rarely seen an instance in which you don’t make more money as a short-term rental than you do as a long-term rental.
We’ve had a turn loose some of our leases… The arbitrage business is the biggest one where it’s great if it does really well, but you can have thin margins. We don’t arbitrage anymore on small units, because there’s just not the margin. Again, if we go back to what is the arbitrage of short-term rental – it is a volume play vis-a-vis hotels. If you have a small unit, you’re not taking as much advantage of the difference.
Let’s take Birmingham, Alabama. I can get $1,000 a month rental and then make $3,500 as a short-term rental. I can go get an $1,800 a month or $2,000 a month rental and make $7,000 a month. Now I’ve taken that $2,500 spread up to almost $5,000. Or I can go get a $3,200 a month rental and I can get $11,500 on average, where now I’ve got an $8,000 spread.
So as you go up to those bigger properties — because no one’s going to pay $8,000 a month in rent, you cap out on the long-term risks for some of these bigger nicer houses, because people who can afford that are either going to move out into the suburbs and have better school districts, or they’re going to buy the house. So where we found the arbitrage to not work – it’s on smaller properties that are not as premium in location.
Slocomb Reed: Because they have slimmer margins. What is the biggest challenge you’ve had to overcome thus far in getting your portfolio to where it is?
Joe Riley: Accounting.
Slocomb Reed: Accounting.
Joe Riley: Accounting is the name of the game in this business. If you just have one unit, you don’t really fully internalize that. But at 300 plus, closer now to 350 units spread across a mix of arbitraged, owned, fractionally owned, and managed, the different lodging occupancy taxes in every spot… There’s just like — every time you turn around, how does the pet fee get split? All of those things seem relatively simple when you have one or two or three properties… And it’s even somewhat simple if you manage in one market…
Slocomb Reed: Joe, let me ask, what is it that you have to do to be able to handle the accounting for your short-term rental portfolio?
Joe Riley: We’ve had to leave QuickBooks and go to Sage Intacct to allow multi-entity accounting. We have a pretty robust in-house team, and then we have an outsourced…
Slocomb Reed: How big is your in-house team, just specific to accounting, for 300 plus?
Joe Riley: Five people.
Slocomb Reed: Five people to do the accounting for 300 plus units.
Joe Riley: Plus an outsourced team.
Slocomb Reed: Plus an outsourced team. Wow, that’s a lot for sure. At the end of the day, though, you’re still talking about a 13 cap on average across the portfolio. High-intensity operations, high-intensity business plan, but also high-intensity returns. Joe, are you ready for our Best Ever lightning round?
Joe Riley: Let’s do it.
Slocomb Reed: What is the Best Ever book you recently read?
Joe Riley: The Politics of Diplomacy by Jim Baker. Not relevant to real estate at all, but I’m a big fan of Jim Baker.
Slocomb Reed: Joe, what’s your Best Ever way to give back?
Joe Riley: We’ve been working with a lot with Afghan refugees to house them in these units as they’re waiting for more permanent housing.
Slocomb Reed: What is your Best Ever advice?
Joe Riley: Love your tenants and never sell.
Slocomb Reed: Where can people get in touch with you?
Joe Riley: They can go to info at email@example.com as an email, or you can send me an email to firstname.lastname@example.org.
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