One way to scale your Airbnb business is to purchase more properties. But acquiring a short term rental property can be an extremely time-consuming process, especially if you don’t have a lot of capital on hand. If you're not interested in rental arbitrage or becoming an Airbnb property manager, your only path to scaling is buying more.
Real estate investment follows one premise: buying what you can as quickly as you can. Because most people don’t have millions of dollars on hand, they probably get a new unit every few years. Saving for a down payment and getting a mortgage can be pretty capital-intensive.
Fortunately, there is another way to acquire a short-term rental property faster without requiring as much capital upfront.
This unconventional method is called the land contract (or owner/seller financing) strategy.
What is a Land Contract for a Short Term Rental Property?
A land contract is similar to a mortgage. The difference is that you make payments to the short term rental property owner instead of a lender or a bank. This involves buying units privately and dealing directly with owner-investors.
In essence, the short term rental property title is held by the owner until the final payment is made. It usually goes into escrow while you continue making payments to the seller.
Because a land contract is between the property owner and you, it can work almost anywhere. It's essentially just an agreement between the seller and buyer. This gives you more flexibility in negotiating terms, since there are very few rules when dealing directly with owners (which is the main reason why the land contract helps you acquire more properties faster).
More negotiating power
If a seller has his property on the market for $100,000 for 7 months without any buyers, you can give a cash offer of $60,000 or a term offer, where you pay the $100,000 but want it on your terms – $0 down and a balance of sale over 60 months (i.e. equal installment payments).
You can always negotiate these cash and term offers, but you typically don’t want to carry the equal installment payments over 5 years.
You should also try to negotiate for a 90-day gap from the day you sign the land contract to the first installment payment. These 90 days gives you time to renovate the property, take photos, and list it online. Ideally, you can get the short term rental property online within 30-45 days, so you can start making money to pay off the upcoming installment payment. If successful, you can own the property debt-free within 3-5 years.
When acquiring a property, you want to be as upfront and transparent as possible with the seller (i.e. tell them that you’re going to use the unit as a short term rental property). It’s always ideal if the seller understands what you’re doing and supports it.
You can even set up the land contract such that any late payments will result in default and allow the owner to take back their property. This can sound a bit extreme, but it does wonders for giving the seller peace of mind. It can also help negotiate down any sellers that ask for a large down payment or interest payments.
For instance, if a seller wants a 50% down payment, you can say something along the lines of:
“I’m investing money into the property. I'll renovate it while it’s still yours.”
“I’m increasing the property value. If I default, you get the property back in better condition than it was before.”
You want to communicate to them that they have security and that they’re taking on little to no risk.
Identifying the Right Seller
Real estate owners who are aware of land contracts, typically request interest payments or large down payments (which can sometimes be up to 50%). These owners inflate the price of their property, which is obviously not ideal, but it’s a common practice. This is totally fine because property owners who offer land contracts are just giving the market more options.
I recommend finding sellers yourself and educating them on how a land contract is another way to sell their property. For a lot of owners with vacant properties, they often don’t know what to do besides deeply discounting their properties if they haven’t been able to sell the property in years.
You want to look for owner-investors who don’t live in the same market as the unit they’re trying to sell. These are typically people who live out-of-state or out-of-country and don’t really pay attention to the property (i.e. someone who doesn’t really need to sell but wants to sell). You want sellers that are emotionally unattached to their properties. They are just looking for solutions to get their cash from their property and move on.
Ideally, you want to reach out to sellers whose unit is vacant. That means the property is nothing but a burden to them. However, that doesn’t mean that it’s a total dealbreaker if there’s a tenant. You will just have to have the tenant move out, which can take time and be a hassle to get your short term rental property going.
Finding and Contacting Sellers
Two great places to find sellers are Craigslist and Zillow. Craigslist is often a last resort for people looking to sell their properties, so you’ll definitely find some quality listings there.
When on Craigslist and Zillow, you want to look for larger properties (i.e. properties with 4+ bedrooms that are 5 minutes away from the downtown area). This will tell you how many For Sale By Owner properties there are. For instance, if Craigslist and Zillow have 3-4 and 5-6 such properties, respectively, then there’s maybe upwards of 10 people looking to sell their properties.
When reaching out, you want to introduce yourself, explain how you acquire properties, and ask them if this is something that might interest them. You can probably write a template message that you send to all potential prospects.
Identifying the Right Property
When considering what properties to acquire, you want to look for properties that have a large number of bedrooms (especially if you’re on Airbnb), since this will help you stand out and get found.
The two-bedroom condo market in Chicago has hundreds of similar listings. This makes it incredibly hard to stand out. That’s why you want to focus on acquiring properties with at least four bedrooms.
Beyond the number of bedrooms, you can also look for how easy it would be to create more space within the short term rental property. If there’s a large living room or dining room, you can convert part of it into another bedroom.
In group settings, regardless if it’s personal or professional, people want to have the ability to retreat into their own spaces. For instance, if a few coworkers are staying in the same place for a business trip, they’re going to want their own space, especially since they spent the entire day working with each other.
Case Study: Understanding Your Market
In order to identify what property to acquire and how to leverage it, you have to understand your market.
- Who’s coming to your market?
- What kinds of properties work?
Markets differ based on country, state, and even city. Don't assume anything. Do your research.
For instance, in the Dominican Republic, there are a lot of 1-2 bedroom condos. It's a very saturated market. This tells us right away that there are very few housing options for large groups traveling together.
Because people are looking for solutions for group vacations, you can consider clustering, where you rent out a group of three or so condos right next to each other. While it’s not one big property, it’s three neighboring properties that allow guests to be together and have their own space, if needed.
To illustrate a potential if-then model, let’s assume you own a 9-unit building with 3 units per floor.
You first list the entire building as a cost-effective alternative to staying at a resort. This will attract larger groups of people.
If no one books the entire property, you can start listing floor by floor (i.e. 3-unit clusters) a year out. If it remains unbooked 60 days out, you can list by 2-unit clusters. And, if you still have vacancies 30 days out, you can list each unit separately (i.e. 3 singles per floor).
However, using an if-then model can put you at risk for double-bookings, so make sure you’re using a property management system (or something similar) to prevent this.
The great thing about clusters in the Dominican Republic is that you can often charge a much higher price for them. Because of the supply and demand of the market, there are very few comparable options available.
If you make $300/night renting out 3 singles at $100/night, you can probably charge $400-500/night for a single cluster of 3-units. This increase in price reflects the added value of being so close together, where guests are in 3 neighboring units in the same complex.
Be Strategic About Your Short-Term Rental Property
Overall, the land contract method is good for someone who wants to own their short-term rental property. It's quicker and comes with less downsides than the traditional real estate investment approach.