People struggle to make the numbers work in today’s market, but this episode’s guest will provide his insights on why developing properties is the best way. Chris Seveney brings the host of The Good Endeavor Short-Term Rental Show, Mark McDaniel, to take us into short-term rental markets. Developing your property with better amenities will increase your property’s value, but that will require work, and you have to stay in front of the line to do so. Mark also talks about his property management company, where he brings the good endeavor in doing short-term rentals. So stay tuned to find out more with Mark McDaniel!
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Navigating Today’s Short Term Rental Markets With Mark McDaniel
I’m great. I appreciate you having me.
No problem. Thanks for coming on. How was your weekend?
The weekend was great. We had lots of kids’ activities. We went to the Dallas Cowboys-Carolina Panthers game. We had a lot of fun and a lot of family are coming into town.
Let’s jump right in. Why don’t you tell people what you’ve got going on now in your business? What are you working on?
We do a lot of investing. As a little background, we got into the short-term rental game through many other real estate endeavors. I tried those. I didn’t love them as much. I got into the short-term rental game. We’ve even had our hand in car washes and stuff like that. It’s going great. Our primary business is in the Smoky Mountains of Tennessee, which is the most visited national park in the country and 75% of the United States can drive there in a day. With about 12 to 15 million people a year going through that area, we think it’s a good long-term vacation rental investment spot. We’ve invested a lot ourselves and we’ve also started to take on and have quite a few vacation rental properties that other people own. We’re managing them for them.
You’ve got the investments and now you’re managing the short-term rentals. I know property management or managing short-term rentals can be challenging. Is it all as cut out to be or is it ultra-challenging? I’m curious. How is that side of the business?
As long as you see the light at the end of the tunnel, a lot can be solved with processes. Good people and processes are everything. Our whole goal, we like to say we want to be a blessing to the guest and the owner. These guests are saving up all year to go on this vacation. They want to walk in and they want the microwave working. They don’t want there to be dirt in the creases of the house.
We like to tell them that we want them to be a millionaire for the weekend. We want to treat them like that. The owner wants a return on their investment. They want somebody who can empathize with them from where they’re coming from. We’re investors so we get it that when you spend big bucks on a house like this, it’s a lot to hand it to a stranger and ask them to manage it for you. That’s a big leap of faith.
We get it. We empathize with that. We know they want a return and we know they want it better than they gave it to us. It’s not always successful, but we try very hard at it. It’s a hard thing to do. A lot of people try to get in and they immediately get back out of property management, but with the right people and processes, anything can be accomplished.
I want to rewind it a little bit. You mentioned you’ve done assets in real estate, but you got the short-term rentals now. When did you start buying your short-term rentals in the Smokies?
A follow-up question I was going to ask as part of that is I hear people who are buying or trying to buy now in the Smokies or bought a year ago are struggling to make the numbers work. You probably bought a property in 2016. It’s probably doubled or tripled in price but in this day’s value, it might not be the greatest short-term rental investment potentially. Is that true from what I’m hearing from other people who try and buy now in the Smokies for a short-term rental? It will be a lot more challenging to make the numbers work.
It’s a little more nuanced. Generally, you could say yes like hopping on the caboose as it’s going over the cliff. If you have a run-of-the-mill property, it’s like anything. If you’re 1 of 4,000, then it’s going to be hard to make a living. If you’re 1 of 1 or 1 of 10, it’s a lot easier. If you have an older place that was built a few years ago that has very few amenities and now that the pricing is super high, it’s going to be hard to make your investment back.
If you have a top of the property with tons of amenities, then you can still do pretty well even though the prices are high. The best way for us is to develop properties. The price of building materials has come down, especially lumber. Not all building materials, but a lot of building material prices have come down and the prices remain high. Also, the cap rates remain low. We can build and get instant equity. The downside is you have to wait for 9 to 15 months. I would say for the most part, the unicorn years are over.
I used to term or coin the phrase of a lot of real estate investors were shooting fish in the barrel because you could buy any asset and you’re going to make money on it essentially for a good period. I think most people agree that those times are over. You’ve got the short-term rental business and stuff. Acquiring these assets, did you use your funds? Did you raise money to acquire these assets? How did that work?
I’ve never raised money. I’ve considered it but I’ve never done that. I’ve had partners on some deals. I’ve got a partner in our management company but it was all of our own money. If you go back to 2015, I was a partner in an IT company that we sold and I got full-time into real estate after that.
When you got started buying that first rental, you probably looked back and shook your head on some things that you’ve seen or done. Do you have any a-ha moments from some of those first assets that you may have had that the people reading if they were looking to get or have a short-term rental, they need to be careful for?
First of all, if I go back to 2016, I wish I would have held those properties. The old real estate saying is, “The best time to buy real estate is 25 years ago. The second-best time is right now,” but I’ve bought and flipped some. Through that time, I’ve also used probably about 7 or 8 property management companies before we decided to build our own. There are a ton of things that I’ve learned over time. A lot of it is the design of it.
Many folks get into short-term rentals and they spend every last dollar acquiring the products and not saving any money to make it look great and spend money on good pictures and great amenities. However, it’s the pictures, the quality of the furniture, and the amenities that make these properties go. Even if you do have an older property, if you add paint, improve your amenities, put in nice new furniture, and maybe create a wall in every one of your bedrooms that’s interesting and that’s not just tongue and groove or not just drywall.
It might have wallpaper on it or might have pain on that particular wall or some design. The idea is to create something that people don’t experience at home. I tell everybody that when you think of short-term rentals, think of boutique hotels. Think of a cool-looking boutique hotel. Is it something you would want to live in every day? Probably not. Is it something you want to visit and feels cool to be on a vacation? Absolutely.
I never thought about that. That’s pretty cool. The comment you made about the photos, the furniture, and stuff like that blows my mind as somebody who doesn’t own a short-term rental, but I do look to stay in them sometimes. You’ll go to the photos and now they’re snapped with an iPhone 7 that has horrible picture quality or poor lighting. It wasn’t cleaned up. You always see the jokes on the internet where somebody left something on the counter or something whether it’s drug paraphernalia or something that probably shouldn’t have been there.
The photos to me are a no-brainer, but one of the things you mentioned that I thought is intriguing is that whole boutique of, “I live in a traditional colonial-style home, but I don’t mind staying as something pretty cool, chic, and modern. If you get to stay in a place like that, it’s not a place I probably want to live but a place to stay for a week or a long weekend. It’s a great idea.
It’s so true. To comment on the photos, everybody was rewarded in 2021 and 2022 for owning a short-term rental. When you get into a market where you can pitch a tent out on whatever acreage you got and it rents just because you own it, that was the precedence. Now, the old Buffett saying, “When you go out of the water and the tide goes in, you know who’s wearing their shorts and who’s not,” that’s what’s going on now.
I was at a conference and there was an investor there who had about 10 to 12 short-term rentals. The majority of them they bought last year. A lot of them were in Texas, Florida, and some in the Smokies. When they bought them, they you know were providing some cashflow but after vacancy rates have slowly gone back to normal, then taxes and insurance, they’re running a huge negative with their business right now in trying to understand, “What’s the best exit?”
Somebody who is sitting next to them says, “Sell everything if you can’t make money based off of what you have now.” Taxes and insurance aren’t going down anytime soon. Vacancies are going to normalize. You base it off of 2021 numbers when people had more flexibility with work or travel. You hope they go back up again and rents go back up again, but can’t keep bleeding $5,000 to $10,000 a month and find it to be sustainable unless you’ve got deep pockets.
There was this thing over the past few years called the short-term rental loophole. It was a way to get bonus depreciation from a tax standpoint. Many people got into the business for tax reasons alone and they don’t know short-term rentals from spit. You can take one of those properties and make it great again. You can make a drab property into something great and desirable to stay in. However, if you don’t know the business and you only got into it for tax reasons. You were going to buy this property and expect somebody else to take care of it for you and not consult with you or do anything like that. It’s an active thing. You have to be active. It’s not a passive investment at all.
For me personally, I’m opposed to short-term rentals as a business for me. The reason why is there’s nothing wrong with the asset. I’m buying myself a job. Whether I have to manage it myself or put it on Airbnb or VRBO, and have a property manager, I still have to manage that person. At one point in time, I had a short-term rental in the DC area about two hours west of us in the Shenandoah Mountains. We looked at having it be a short from rental and this was back in 2014.
Again, we decided that it was way too much work. We even had somebody local who would take care of it so we just went to a year rental on it because it’s like, “I only have to deal with this person once every year to see whether I want to renew.” We had upgraded the entire place so it didn’t have any issues with anything on the inside or the property itself. One thing people have to realize is with the short-term rentals, I view it more as an operating company than just owning a single-family rental where you’re going to sign somebody up for a twelve-month lease even if you have a property manager. I am curious about your opinion if you agree or disagree.
That’s the way the IRS looks at it too. They look at it as an active business. It’s not like a long-term rental where the IRS uses that as a passive business. This is viewed as an active business and that’s where this whole loophole thing came in. An active business with real estate on the side is how the IRS looks at it and I do too. If you’re choosing the self-manage, if you want to spend time with your family and friends is generally Friday night and Saturday night, that’s when 90% of problems happen. That’s when you get the calls or the text or the door doesn’t lock, open, or what have you.
Also, very few property management companies are good. To be able to trust them or they will just call you and say, “How do you want us to handle this?” You don’t want people doing that. We’re trying to be the easy button. We’re trying to be an on-ramp. We’re trying to give great returns and consult. If you bring us a drab property, we’re probably not going to take it unless you’re willing to invest more money in it because everybody’s going to be disappointed in that relationship.
Is that why you started the property management side, that component because you got frustrated with everybody else you’re working with and we’re like, “I know I could with 20% effort do this 200% better.”
You’re exactly right. That’s exactly why. It was either I’ll walk in my property, it’s filthy, or the stove is not working. I’m like, “I’ve entrusted you to manage this multi-million dollar property and it’s not even working,” or the revenue wasn’t good. It’s something along the way. Maybe it says something more about my character. We went through quite a few and we got to the one-yard line of acquiring a property management company.
It was going to be a Herculean effort and a culture change of, “We’re going to move forward heavily on Facebook marketing and Google AdWords.” It’s way more than just putting it on Airbnb and VRBO and letting them allow that to come in. We decided that on the backs of our own property start our own property management company and then we’re getting great numbers. Through word of mouth, it’s been slowly growing since then.
It’s always that anybody who runs a business understands the push-pull of, “What do you have in-house?” versus, “What do you outsource?” With us being in the mortgage note space, there was a point in time when I got frustrated with a lot of servicing companies. I had a brainchild idea to start a loan servicing company that ended up after about two years. I didn’t have time to manage it anymore. I also had some conflicts of interest involved in it. I got out of that and sold my interest back to my partner, but now I joke with him every day, “I don’t miss it one bit.”
It’s always that push-pull of what to do and what not to do, especially with property management. Do you do it or do you not do it? It also depends on where you’re at in your life and how you value your time. As you mentioned, you’ve got multiple assets. When you have multiple assets, it’s a little easier in the sense that you can spread work out more. It will be a little more efficient. It’s the people who’ve got 1 or 2 assets that I find questionable whether it’s worth all that time and effort sometimes.
That’s a great point. When you’re talking with owners of these short-term rentals, you’re like, “Is it the chicken or the egg?” Do you wait till income comes in before you invest or do you invest and then let income come in? It’s the same way with the property management. We’re in the process of developing a wedding venue and we see it a lot like it is. It’s a short-term rental. It’s a lot more touch.
It’s super high touch dealing with the potential bridezillas, but we love the hospitality business and it doesn’t take that much more to be that much better. 10% more effort can make 100% more difference. We like that. We feel like we were born to serve and this is what we like doing. However, when you’re a businessman, it has a ton of appeal for investors because you take care of everything. You’ve got a compelling case.10% more effort can make 100% more difference. Click To Tweet
If you need a contact, I met a guy who buys a lot of assets and turns them into wedding venues and stuff like that. I know somebody and that’s their only business model. They had done it in Florida and Maryland. I’d be happy to connect you with them just to share ideas or anything along those lines. He’s a very intense person like myself. Make sure to plan a good 30-plus minutes for that phone call. It won’t be a fifteen-minute phone call.
I would appreciate that.
We glossed over this a little bit, but you were not in real estate or anything. You’re in IT. You sold the company or part of a company sale and so forth. Hopefully, you did pretty well with that and then got into real estate. Was the decision that you made of, “I’m going to sell my company and get into real estate,” or was it that somebody was interested in your company who made an offer and you’re like, “I got to figure out what I got to do for the rest of my life?” How did that play out?
My partners and I decided to go the investment bank route and ask them to market it for us. We decided to sell it. We got it going with the best offer. Personally, from a real estate standpoint, I live in an area where there happens to be tons of real estate investors. I looked at the economics of it. It’s a great four-legged stool. You get tax depreciation. You get appreciation over time or an actual value. You get cashflow and you get principal pay down. It made a lot of sense to me. After managing 50 employees, it was an employee-less business. It had a lot of appeal when we first started investing in real estate because that was when I was using property managers. Now, we’re building back up with employees again and it’s super rewarding but that time off was nice.
Every gray hair on my head is from managing large swaths of people. For the people who are reading, property management is one of the hardest businesses to manage people in because there is typically high turnover. The people who do the work, it’s like being the holder if you’re a football fan. You are the placeholder for the field goal kicker. You get zero credit when things go the way they should but the moment something goes wrong, 60,000 people will point the finger at you that you screwed something up. It’s unfortunate about that property management business, but it’s also a little bit the reality.
As we start to wrap things up, Mark, one of the questions I like to ask people is this. You’ve been successful in the last several years in your business. You continue to grow your business. Where do you want to take your business in the next 2 or 3 years? Do you want to continue to grow it? Do you want to potentially sell this business and start something else? What are you thinking at this point?
I love that question. I love to start with the end in mind and back into it from a day-to-day routine. We want to continue to grow the business except be very picky about how we grow this business. We don’t want to take any property or any owner for that matter. As you said, managing gray hairs on your head, we think of these owners as partners and hopefully, they think of us more than just a vendor.
We want to try to get to about 100 properties. We feel that’s going to generate a great business. If somebody wants to buy us, that’s not the goal. The goal is to create a great culture and a great place for people to work and keep acquiring properties. We’re always looking at other asset classes as well. We’re in car washes. We’re looking to be in wedding venues. I love what you’re doing.
We’ve even looked at franchise development rights in a couple of states and developing a franchise throughout a couple of states. We’ve looked at a lot of different things, but ultimately, we’re open-handed. What I love about any kind of business is to set goals, but I really love the process of getting there. Those are always the stories that you look back on.
I heard a podcast the other day. Whether you decide to be an employee, an entrepreneur, or an investor, it’s going to suck no matter which path you choose. You might as well choose the highest risk-reward or the best asymmetrical bet that you can do. We spend a lot of time analyzing what the best asymmetrical bets we can do.
When people ask the question, “What’s the best way to increase your net worth or do this or that?” I always jokingly reply, “Be born into it.”
Let somebody else do the work.
That’s when you don’t start with the headaches. Whether you’re an investor, you’re active, you’re an entrepreneur, or you work a W-2, life is hard.
Life is hard no matter what.Life is hard no matter what. Click To Tweet
You’re going to have bad days and the bigger the goals you have, the harder it’s going to be to get there so it’s going to be more challenging. Mark, if people want to reach out to you, what’s the best way?
Mark, thanks for coming on. Thank you, everyone, for reading this episode. Make sure to leave us your rating and review on your favorite listings station. Thank you all and thanks, Mark.
About Mark McDaniel
As fellow college graduates, Stay Simpli partners, Mark McDaniel and Andrew Strohofer dreamt of creating a business together in the Smokies.
“With successful careers in medical devices and technology behind us, our vacation business first took shape as we invested in mountain cabins in Gatlinburg and Pigeon Forge.
We had been investing for a few years in real estate here and worked with several rental management companies. Our experience told us we could do better and it was the start of our adventure into vacation property management.
We understand what it means to go above and beyond for our clients because we have both built businesses in our respective spaces. When we weren’t able to find what we were looking for in short-term rental management, we decided to start StaySimpli.
Our goal is always to serve and exceed your expectations; delivering the best Smokies experience and creating places that feel like home and where you’ll want to return to.”
We look forward to welcoming you soon to a cozy Stay Simpli mountain cabin.