Carlos Velásquez · Medium· 8 min read · Image Source: InstagrramFOTOGRAFIN — Pixabay.com
In May of 2013, a housemate moved out of our Russian Hill flat in San Francisco. With my other housemate’s job taking him out of the country for months at a time, the flat would have felt empty were it not for my girlfriend of less than a year practically moving in.
Since becoming the master tenant several years prior, I defaulted to Craiglist to find housemates. But this time, my girlfriend was around to chime in and recommended listing the vacant room on Airbnb, a home-sharing platform I had read good and bad things about but had no direct experience using. “Who would want to rent a room in an outdated S.F. flat when there are much nicer listings?” I questioned her. “For the right price,” she assured me, “any space can be rented.” “But what if we get robbed?” I asked. “My mother has never been robbed,” she responded. “In fact, she’s met nicer, more interesting people than any of your housemates…”
My girlfriend’s mom, you see, became an Airbnb host in her S.F./East Bay home while my girlfriend traveled throughout South America in 2011–2012. By functioning as her mother’s remote Airbnb booking agent, my girlfriend learned the price discovery process for optimizing short-term rentals (short-term rental restrictions were not enforced in S.F./ Bay Area pre-2014). I ultimately found their Airbnb hosting experience compelling. I was ready to experiment. I asked the owner (who was in the process of selling the building) for permission to rent the vacant room on Airbnb; to my surprise, he approved!
The S.F. Russian Hill Airbnb Experiment
My girlfriend laid out the plans for, ahem, “our” flat’s Airbnb listing.
- Set the initial price lower than all available Airbnb listings in Russian Hill/surrounding neighborhoods.
- Guests would leave reviews reflecting the relative value of our listing.
- We would gradually increase the listing’s daily price until the booking rate plateaued.
My girlfriend reminded me, “You live in one of the most touristy neighborhoods. It’ll get booked.”
Location, Location, Location
Russian Hill is one of the S.F.’s quintessential neighborhoods. We lived on a street lined with leafy trees whose canopy hovers over the Cable Cars as they rumble by. Lombard Street, “the world’s crookedest street,” is four blocks from where we lived. From the Hyde/Lombard intersection, tourists take in a panoramic view of the S.F. Bay, including Alcatraz, Coit Tower, and the Bay Bridge. (If you’ve seen pictures of S.F. tourists clinging off the sides of a Cable Car, chances are someone shot them within a six-block radius of our old flat.)
Trial & Error
Heeding my girlfriends’ advice, I listed the vacant room at $55/day at the start of June 2013. It was booked immediately. I increased the price to $60/day, then to $65…$80…$100. A month into our Russian Hill Airbnb experiment, the room was consistently booked at $115/day and covered more than the flat’s monthly rent. I was shocked. Within weeks, my preconception of the S.F residential rental market had undergone a paradigm shift in the best sense possible.
The “Lightbulb” Moment
Walking down Van Ness Avenue one windy Sunday afternoon on my way to the S.F. Civic Center BART (i.e., the subway) station, a sign on the sidewalk caught my attention:
“Studio For Sale: $399k…HOA dues $435/month.”
It displayed pictures of a brand-new-looking 400 square foot studio with shiny laminated wooden floors and a modern sunlit kitchen.“What might the monthly cost of purchasing this studio with a 20% downpayment be?” I wondered. I pulled out my phone and googled:
- “30-year mortgage on a $320k loan”: ~$1,550/month
- “SF property tax rate”: ~1.2%/annually
My back of the envelop calculation of owning a $399k studio was $2,385/month: [1.2% property tax on $399k ~$4800 year, or ~$400/month + $435/month in HOAs + a $1,550/month mortgage.]
I was earning over $3,000/month Airbnbing one room in a flat that hadn’t been renovated in over 30 years. By comparison, the condo in the pictures I was staring at was located in a modern building that included deeded parking to boot!
When I got back home that night, I verified my monthly cost calculations. I added $150/month for utilities and another $50/month to cover insurance costs, bringing the total cost to $2,585/month. “If I Airbnbed the studio, the break-even daily price would be $86/day”, I told myself. I went to sleep thinking, “I could earn 25% less than I was earning Airnbing a dingy room…and still make the numbers work!” (I ignored the tax implications, which would have made the numbers pencil out even more favorably.)
Two months and numerous studio viewings later, I entered into a contract for a studio in the same building complex of the initial listing I had stumbled upon, one floor above the studio whose pictures I had seen on the sidewalk sign. I bought the studio for $435k (S.F. real estates prices had started to creep up). The realtor handed me the keys to the studio in October of 2013, on the brink of the S.F. housing boom.
Our S.F. Airbnb Listing(s)
The Russian Hill Listing
By November, the S.F. tourist season was over. The inquiries for our Russian Hill listing had petered out. Our Airbnb success in our Russian Hill flat had been entirely tourist-driven. We reverted to renting the vacant room on Craigslist in February of 2014, never to Airbnb it again. (The timing of our Airbnb experiment was fortuitous: that March, the new owner notified all tenants that he prohibited Airbnbing rooms in his building.)
However, the studio I had just purchased was a different story.
The 1st Civic Center Studio Listing
I earned $54k in 2014 and 2015 Airbnbing the studio on a short-term basis (traditional one-year rental leases were going for $2,200 to $2,500 a month, or $26.4K to $30k a year). The average booking price was $148/day. My cap rate was 8.5%, while similar studios rented via one-year leases had cap rates of 2.5% to 3.5%.
After accumulating two years of landlord history — and my studio appraising at $525k in 2016 — I refinanced it, opened up a Home Equity Line of Credit (HELOC), and utilized the HELOC to complete the downpayment of a second studio that same year.
The 2nd Civic Center Studio Listing
By 2016, S.F. and other cities implemented short-term rental restrictions, forcing us to transition to a 30-day minimum Airbnb rental model. From 2016 to 2019, despite the new rental regulations, the studios generated 33% to 50% more than similar (but unfurnished) studios rented passively via traditional one-year leases, bringing my studios’ cap rates 5.6% and 4.7%.
Rents took a hit at the onset of the pandemic but still managed to bring in several hundred dollars more than passively rented studios (we looked up the rental rates for similar studios on Craiglist). We optimize rents and minimize vacancy rates by keeping our thumb on the pulse of the S.F. 30-day minimum rental market (via the frequency of inquiries at varying price points, for instance). All else equal, maintaining a “Super Host” status and having nearly a decade’s worth of reviews gives our listings a competitive advantage.
The Economic Windfall | Takeaways
The two studios’ rental incomes and property appreciation have helped my family (my beautiful girlfriend is now my wife and mother to our precious son) buy our first family home. Notably, the economic windfall started with an observation made by an insightful girlfriend with zero landlord experience who was an early adopter/user (as a host and guest) of Airbnb. Her observation led to a simple recommendation. All I did was consider her recommendation and decide to try something new. Below are some takeaways from our Airbnb experiment.
Takeaways
- Heed the observations of people with varying perspectives: It took someone fresh off a recent travel/sharing economy experience to help me capture the zeitgeist of the moment: the economic potential for Airbnb hosts in a world-class city. As we age, we become increasingly set in our ways — I was stuck finding housemates on Craigslist. The future mother of my child showed me a better way.
- The “unknown” often contains hidden opportunities: Our 2013 Airbnb experiment gave us an early insight into the potential benefits of the burgeoning sharing economy. We would have missed out on financial upside had the unknowns (i.e., the owner’s reaction, the type of guests/reviews/rents we’d receive, etc.) prevented us from exploring the Airbnb rental model.
- Trial-and-error can help one overcome uncertainty: Trial-and-error enabled us to optimize the rents received Airbnbing a room in an old flat that, at face value, appeared to have limited appeal. Trial-and-error later helped us fine-tune our listings’ seasonal pricing strategy and was instrumental in helping us manage the economic uncertainties created by the pandemic. Trial-and-error facilitates the premium we earn over the traditional one-year rental model.
- Create serendipity through experimentation: If not for our Russian Hill Airbnb experiment, we would have missed out on the S.F./Bay Area housing boom. Even my girlfriend (now wife) didn’t foresee our success — she later convinced her mom to sell an underperforming business and buy two studios to list on Airbnb due to the rental success of my studios.
- New ideas can contain untapped synergies: Within three years of our Russian Hill Airbnb experiment, we parlayed the lessons learned to buy two studios (four, if we include the two studios my wife manages, which her mom owns). Each studios’ cap rate surpasses industry standards. We continue to combine the Airbnb rental model with widely understood concepts (i.e., refi-cash out, HELOCs, seasonal pricing strategies, etc.) that create economic synergies for our family.
Author also wrote: Wealth Transfers | 5 Stocks: S&P’s YTD | Inflation Hedges | An 80-Year Life | 13 Rules | N. Taleb’s Minority Rule | Your Inner Voice | Bitcoin’s Volatility | Blockchain Stocks |50 Investment Lessons | Flywheel Effect | Bitcoin: Mental Framework | Crypto Moonshots | 4 Crypto Stocks | Bitcoin: Insurance | Brief History: Money | Spontaneous Order | Ackman’s $2.6B Moonshot | Fragility Inducing Events | Antifragile: Definition | 1% Bitcoin: 99% Cash | COVID-19: Market
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