How do you create a unique short-term rental that will attract renters? Rich Somers, founder of FortuneCribs, reveals his strategy for creating “Instagrammable” STRs, selecting the right market, and pitching to investors.
Rich Somers | Real Estate Background
- Founder of FortuneCribs, which helps clients buy short-term rentals that they design and manage.
- Managing partner at Pac 3 Capital, a syndication company that buys multifamily and short-term rentals.
- Portfolio: GP of 295 units
- Based in: San Diego, CA
- Say hi to him at:
- Best Ever Book: The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It by Michael E. Gerber
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TRANSCRIPT
Ash Patel: Hello Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I'm Ash Patel and I'm with today's guest, Rich Somers. Rich is joining us from San Diego, California. He is the founder of FortuneCribs which helps clients buy short-term rentals that they design and manage. Rich is also the managing partner at Pac 3 Capital, a multifamily and short-term rental syndication company. Rich, thank you for joining us and how are you today?
Rich Somers: Ash, doing well. Thank you so much for having me on the show. I'm excited about this conversation and I'm doing very well. How are you doing today, my man?
Ash Patel: I'm doing great and I'm glad you're here, Rich. Let's get into it. But before we do, can you give the Best Ever listeners a little bit more about your background and what you're focused on now?
Rich Somers: Yeah. I grew up middle class. My mom was an immigrant from Taiwan. My parents both know the value of working hard and saving your money. I was always taught from a young age to go to school, get good grades, go to college, and get a job. For the most part, that's what I did. I have a background in sales. While I was going to college, I started selling cell phones and then cars, and that was the first time I realized that I could impact how much I made. I really wanted to sell commercial real estate when I got out of school.
In 2008 I graduated, I interviewed with a couple of commercial brokerages, CB Richard Ellis and Grubb & Ellis. They were both like, "Hey, we love your hustle but this is not a good time to get into the industry." Everything was starting to come down, they pulled these internship positions that I had interviewed for... And I had found myself on a car lot selling cars, in 2008, not a lot of job opportunities out there, figuring out what the heck I'm going to do with my life, and I act into a career as an air traffic controller, working airplanes for a living. I ended up doing that for 11 years, but along the way, I remember real estate, I read the book Rich Dad Poor Dad, and just figured out a way to restructure my life and jump into the real estate investing realm.
I did, at the time, what a lot of people told me not to do; they said it was too risky. I cashed out my 401K, I pulled out a home equity line of credit against my primary residence here in San Diego, and I started buying some cash-producing real estate. The first deal was an 11-unit building in Cincinnati. Shortly after that, I partnered with a couple of my partners who I syndicate with today, and we joint-ventured on a 32-unit building in Indianapolis. We launched a podcast, we learned how to raise money, and last year, we took down a couple of larger syndicated deals. The Arbors 150-units in Greensboro, North Carolina with our investors, and Timber Creek Apartments, 145 units, also out in Greensboro with our investors.
Along the way, we started buying some short-term rentals. This year realized, man, it's been hard to find multifamily to pencil when we underwrite. There's a lot of competition out there, yields have come down, cap rates have compressed, and it's very competitive out there. Along the way, realize, man, these short-term rentals are cash flowing so great, the tax benefits are awesome. So I thought, "Hey, man. This year 2022, let's focus on building the short-term rental side of the portfolio." My partners and I, we're going to launch a fund to go buy short-term rentals with our investors.
Also, we recently launched a company which you alluded to, FortuneCribs, where we help investors buy short-term rentals in select markets around the country, that we help them close on; they own 100% of the property, but our team will do all the work. We'll design, furnish, and manage all the day to day operations, making the experience truly hands-off to the investor. That's really my story in a nutshell.
Ash Patel: Rich, that first property in Cincinnati - were you in San Diego at the time?
Rich Somers: I was in San Diego.
Ash Patel: How did you buy a property in Cincinnati as your first property?
Rich Somers: I was looking for cash flow, and I was looking for a property that was going to be a good first property to get into, something that didn't have a ton of risk, good cash flow, buy at a high cap rate, and I could add a little bit of value. So I was looking in select markets, my research took me to Cincinnati, and that's how I was able to get it done, man. There were a lot of mistakes made with that one, hired the wrong property manager, the rents were low, had a lot of deferred maintenance... As soon as we closed on it, a bunch of people moved out... But we got in there, we started turning the units. Fast-forward to today, I actually closed on a refi not too long ago and was able to pull all my initial capital out, plus a little bit on top, and we've been able to almost double the gross income on that property over the last two and a half years.
Ash Patel: Did you have partners in that first property?
Rich Somers: No, it was just me.
Ash Patel: What were some of the challenges in terms of remotely managing this property?
Rich Somers: I think the biggest challenge was finding the right property manager; like I alluded to, I hired the wrong one initially. She said all the right things. That's another tip for your listeners, is that a lot of these property managers, the third-party ones, especially with these smaller buildings, are a little bit more mom-and-pop, but a lot of them tend to say the right things in these interviews. But I quickly realized after closing within six weeks that she was not the right fit. I pivoted to property manager number two, who I should have gone with from the jump. That one I met through the listing broker who had sold the deal to me. Since then, I've been using them and it's been a night and day, a much better transition. They've done a great job and, yeah, it's been fun.
Ash Patel: How are you exposed to the world of short-term rentals?
Rich Somers: Man, it's funny you asked that. Actually, I backed into a short-term rental. A couple of years ago I had a pre-approval from a local credit union here in San Diego for a highly leveraged loan, and I thought, wow, why not take advantage of it and see how it does. I've always heard San Diego was a good short-term rental market, let's try it. I bought a two-bedroom condo, brand new construction here in San Diego, furnished it, threw it up on Airbnb, and this thing has just been full ever since, it's just been cash flowing like crazy.
Ash Patel: Have you taken any of your multifamily properties and converted a portion or all of them to short-term rentals?
Rich Somers: No, I have yet to do that. I've definitely made a couple of runs at some smaller multifamily properties in hopes to transition them to short-term rentals, but haven't been able to find anything that really fit that mold. I have yet to do that.
Ash Patel: Is it all single families that you're converting to STRs?
Rich Somers: Yeah, mostly single families. Some of the client properties that we're bringing on are smaller multifamilies, duplexes, and up to four units. My partner, Mike, actually has a fourplex in Cleveland. That was all long-term when he bought them; operated it that way for a couple of years, and recently converted them all to short-term. The cash flow is just so much better, from what he's mentioned, at least.
Ash Patel: Rich, what do you tell somebody who wants to dip their toes into short-term rentals? What advice would you give them?
Rich Somers: Well, I'd say this... If you're an investor out there and you can only afford to do one deal in the next couple of years, and maybe it's your first deal, whatever it is, I always suggest to investors all the time, you probably want to consider going the short-term rental route. People all the time are like "Man, I just closed on my long-term. I'm making 150 bucks a door." I'm like "Dude, that doesn't even get me out of bed." If you're looking for cash flow and passive income, and you only have the ability to do one deal every couple of years, I would highly suggest going the short-term rental route. Do your research, reach out to someone that's already done it before, make sure you go into the right market, and you understand the fundamentals but you also understand the projected revenue, the seasonality, and the occupancy in any given market that you go into.
Ash Patel: Rich, the fund that you're starting, what are the anticipated returns?
Rich Somers: The fund that we are starting, we are looking at cash on cash returns in the 20% range for the investors. Overall returns are a little bit more challenging to measure because this is not a value-add multifamily where we're forcing our appreciation. We never want to bank on long-term appreciation, but cash-on-cash returns in the low 20% range.
Ash Patel: Is that available immediately or is there a hold period or waiting period?
Rich Somers: It is not available at this very moment. We are putting together the fund now. We're probably looking at sometime around May of 2022 before we launched this fund.
Ash Patel: Let me rephrase the question. Once somebody invests their capital into this fund, do they immediately start getting returns or is there a lockout period, a hold period?
Rich Somers: Yeah. It won't be immediately but it'd be pretty quickly. Because it's not like multifamily where we're going to start a fund and then we got to go find these deals where it could take potentially a long time to find the right deal. With the short-term rentals, it's a lot easier to find deals that actually pencil. The hold period or the wait period might only be six weeks before you actually start making some money versus multifamily where it might be a little bit longer.
Ash Patel: Got it. You mentioned that you help clients design and set up their short-term rentals. What is that?
Rich Somers: We have an awesome design team with our company FortuneCribs. They will actually fly out to whatever market that we purchased the short-term rental for the client. They'll fly out, design, furnish, come up with a house manual, set up the cleaning, the maintenance, and all that sort of thing. The furnishing and the design for any short-term rental is one of the most crucial pieces to this investment vehicle because you want to bring something that's unique to the marketplace.
A lot of guests that travel and stay in short-term rentals are millennial demographic or younger and everyone is looking for that property with that Instagrammable feature. We try to include an Instagrammable feature on the property whether it's inside or out. We like to use unique styling and concepts that do well in that particular market. We'll do market research and see what the top-performing properties in that market, what they look like from a furnishing standpoint, and we'll try to match that so we're not guessing.
Break: [00:12:43] - [00:14:40]
Ash Patel: What are examples of Instagrammable experiences?
Rich Somers: I'll give you an example. I just closed, about a month ago, it's a luxury home in Scottsdale. It's a $2.5 million project, going to put about $500,000 into a full renovation. Right now, it's like six-bedroom, seven-bath, we're going to convert it into eight-bedroom, eight-bath. It's a 7600 square foot property. Our Instagrammable feature is that we're going to include a speakeasy on the property. We're going to have this library-looking wall with like a secret door that pivots into the speakeasy. We're going to have a cool bar, a tiki-style looking bar in there, like a lounge area. That's going to be our Instagrammable feature for this particular property.
To give you an idea of what these things make, this particular property in Scottsdale, the comps out there in the neighborhood are bringing in anywhere from $500,000 to $800,000 a year in gross revenue. In this short-term rental asset class, about 50% of your gross revenue will drop to your bottom line and be your net cash flow after all expenses and after debt service.
Ash Patel: That is insane and I want to stay there. I want a speakeasy in my short-term rental. That is awesome.
Rich Somers: You're welcome to come out anytime, man. You're more than welcome.
Ash Patel: Do you still look for multifamily deals? Is it on your radar?
Rich Somers: Yeah, we're still operating the ones that we have but we focused our attention, at least for this year, away from searching for multifamily. We're just pivoting over to short-term rentals. We might get back in multifamily maybe next year, maybe the year after, I don't know. But for this year, where it's solely focusing on short-term rentals.
Ash Patel: Let's play devil's advocate for a minute. A lot of cities are cracking down on short-term rentals, hotels have incredible lobbying power, where do you see the future of short-term rentals going? What are some of the headwinds you're going to encounter?
Rich Somers: That is the biggest risk to this asset class, in investment vehicle is the regulatory environment changing. As you know, there are a lot of markets around the country that have already cracked down on short-term rentals. There are ways to mitigate that. One of the things we do is we like to go into markets that are a little bit more short-term rental friendly. These tend to be markets that are a little bit more landlord-friendly conservative states. There are some states out there that took the opposite approach, Arizona is one of them, where the governor actually signed something into a contract that says it is highly discouraged and illegal for cities and municipalities within the state of Arizona to highly regulate short-term rentals.
Their stance is like "Hey, we want to encourage tourism. It helps stimulate our local economy, our local businesses, etc." You want to start to focus on markets like that or go into vacation towns that have had vacation rentals for decades and decades before Airbnb and Vrbo was ever a thing. Those are other areas that are safe bets. But the ways to mitigate the risk if the regulations were to change, one, you can always fall back to midterm stays. Short-term rentals are defined in most cities around the country as anything less than 30 days. If the regulations do change, you can always fall back to 30-day or greater stays in furnish, which is a growing demand as this whole work from home notion becomes more and more prevalent.
I've heard a lot of different numbers out there but we had Neal Bawa on our show not too long ago. He threw out the number 22 million Americans roughly. 22 million Americans are adopting this new way of life to where they are no longer going back to the office, they prefer to work remotely and do the whole digital nomad thing. They're bouncing around and living in different cities around the world, and they're not moving their furniture with them. I think there's a growing demand for that, should the regulations change? Brian Chesky, the CEO of Airbnb, recently in an interview said, "People are no longer staying in short-term rentals, they're living in short-term rentals." I feel very bullish on this asset class, I feel like it's still the first setting of short-term rentals.
Ash Patel: I would also imagine in downtown Phoenix, city centers where you can find cheaper housing, there's a lot of short-term rentals and they would be the first to regulate. $3 million homes in Scottsdale are probably not going to get regulated.
Rich Somers: Yeah, because you're not really taking a lot of housing off of the market for a potential renter in that price point. Is that why you're alluding to that?
Ash Patel: Yeah. How many people are going to crowd million-dollar-plus homes and how many millionaires are going to complain, "Hey, we can't find a deal because all these short-term rental guys are driving up prices."
Rich Somers: Right. That's a good point and that's another reason why this housing market has been on fire over the last couple of years, that a lot of people don't even mention, it's the short-term rental industry.
Ash Patel: Rich is that a negated community, the $3 million property?
Rich Somers: It is not. It's a community without an HOA so we typically want to stay away from properties that have HOAs.
Ash Patel: Yeah, that's a challenge. You are going to draw a lot of attention there. Awesome. What's the biggest lesson you've learned or the hardest lesson you've learned with short-term rentals?
Rich Somers: I think it was early on when I got into my first few short-term rentals. I didn't have the same tools my disposable that we use today such as AirDNA. Today we use AirDNA, we have a national subscription so we can pull up any zip code in the world that has short-term rentals and we can see exactly what those properties are making. We can see the seasonality, we can see the occupancy, and we can see a lot of different stuff. But when I first got into it, I was really just guessing and I was taking a risk, I was speculating a little bit. But sometimes without risk, there's no growth. I think that was the biggest challenge for me early on is not having all the available information to my disposal. Now we do.
Ash Patel: Rich, getting investors on multifamily versus short-term rentals. Can you dive into that a little bit?
Rich Somers: Yeah. I think there are a lot of similarities and then there are some differences. Some of the similarities are networking to meet investors, that's all really going to be the same. An investor that has the capacity to invest as a limited partner in a syndication typically has the capacity and wherewithal to be able to buy a short-term rental under FortuneCribs, and get a loan and that sort of thing. Some of the differences are, as a limited partner in a syndication, you're investing in an LLC, typically, that owns a property or maybe owns a few different properties. Now, with this model under FortuneCribs, the investors actually own 100% of the deal, they get 100% of the tax benefits, they get 100% of the loan pay down, they get 100% of the long-term appreciation, and they get 100% of the cash flow after all the expense. That's really the main difference.
Ash Patel: They get 100% of the cash flow after expenses. How do you guys make money?
Rich Somers: We take a split on the gross monthly revenue. Typically, it's about 25% of all gross monthly revenue that comes in. The design furnish and all that sort of stuff, we don't make any money on that. It's really just on the gross revenue and on the operational side is where we make our money. Essentially, we're kind of partners with the investor, although they own 100% of the deal so we don't get the benefit in the long-term upside, just on the monthly cash flow upside.
Ash Patel: I get it, man. I could see how that can be very attractive to investors. What is your best real estate investing advice ever?
Rich Somers: Don't run out of money with any project that you get into, especially these value-add deals where you're going to have a dip in occupancy, you never want to run out of money. In our first 32-unit deal, we made a lot of mistakes, we ran very, very low on money. The pandemic drops shortly after that, we had a lot of vacant units, and we had some serious heart-to-heart talks. But just know, if you do run out of money, there are always outs and always solutions that you can arrive at. In that deal, we actually just went full cycle on, we sold it about a month ago and we 3X the value of the property in just 25 months.
Ash Patel: What was your solution when you guys ran out of money?
Rich Somers: That's a great question. We were able to secure a non-secured private second mortgage on the property which gave us the funds to complete our business plan really.
Ash Patel: This was during the pandemic?
Rich Somers: Right when the pandemic dropped.
Ash Patel: Good for you guys for being resourceful. That's incredible.
Rich Somers: Absolutely. There's always a solution for everything. I think success is never a straight line.
Ash Patel: Yeah. Rich, are you ready for the Best Ever lightning round?
Rich Somers: Let's do it.
Ash Patel: Let's do it. Rich, what's the Best Ever book you recently read?
Rich Somers: The E-Myth Revisited by Michael Gerber. I just read it recently. Wow, that book has changed a lot of stuff in my life. For the listeners out there, it talks about working on your business and not being a worker bee in your business, knowing the value of your time.
Ash Patel: Rich, what's the Best Ever way you'd like to give back?
Rich Somers: One of the things I'd like to do here in San Diego is volunteer with a program called Big Brothers Big Sisters, they have them in big cities across the country. I was matched, a few years ago, with a nine-year-old boy named Isaac. He comes from a little bit rougher background, his father's not in the picture, and we get to hang out one or two times a month and go do fun stuff. He's almost 12 now, a good kid.
Ash Patel: Rich, how can the Best Ever listeners reach out to you?
Rich Somers: You can find me on social, Instagram handle is @rich_somers, I'm pretty active on social media. Fun check out our podcast, it's The Multifamily Takeoff. If you want to learn more about FortuneCribs and buy a short-term rental, it's fortunecribs.com. If you want to check out our syndication company and our fund that we'll be launching in a couple of months, you can check us out on pac3capital.com.
Ash Patel: Rich, I got to thank you for sharing your story with us today. Mark Cuban recently said, "You can try a lot of different things, you can move on if you don't enjoy something because you only have to be right one time." I'm glad you found your one right time, coming from the immigrant upbringing, selling cars, air traffic controller, and now you're killing it in real estate, man. Thank you for sharing your story with us.
Rich Somers: Ash thank you so much for the kind words, man. I enjoyed this conversation. It's been a pleasure.
Ash Patel: Yeah. Best Ever listeners, thank you so much for joining us as well. If you enjoyed this episode, please leave us a five-star review and share the podcast with someone you think can benefit from it. Please also follow, subscribe, and have a Best Ever day.
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