The best business ideas often come to us when we’re trying to solve a personal problem. That’s exactly what led to the development of our new Hughberry Homes short-term rentals (STRs) fund.
In case you missed the announcement in our August 2022 investor update, our big news is that we’ve spent the last year researching opportunities for STRs and building a new fund, Hughberry Homes. As of now, we own two homes in Scottsdale, Arizona for what we originally dubbed our “vacation home rental project.” The terms “STRs” and “vacation homes” are often used interchangeably and refer to the types of homes you can book on sites like Airbnb and VRBO.
I want to share with you the process of developing this new fund, because part of it involves our trip to Tennessee to see King Kong (yes, you read that right).
We’ve had an interest in the Short-Term Rental market for years, but never had enough time to take that interest further, other than conducting some preliminary due diligence.
That all changed at the end of 2021. I had sold a property and made a very nice capital gain of $2.1 Million. This was a perfect time to do a 1031 Exchange, which I knew would save me over $700,000 in a nasty tax bill. Normally, I would buy homes in the Midwest, put those homes into our fund, and do the 1031 Exchange with those homes, but that was not possible; we had a huge list of investors waiting for homes to purchase or exchange from us, and I couldn’t jump in the front of the line.
I wrangled the team for a brainstorming session and that led us to start looking into short-term rentals. Our resident brainiac, Jim Dickson (Director of New Business), dove into the research and data with me. (I work with a lot of smart people, but Jim is a numbers guy, so he’s my go-to when I have a crazy new idea I want to research). Like all 1031 Exchanges, I had to meet the 45-day requirement to identify my replacement property. We ran the numbers for cities in Texas (Dallas/Fort Worth, Austin, Fredericksburg and others); Salt Lake, St. George, Utah; Reno, Las Vegas, and Lake Tahoe, Nevada; Sedona, Arizona; Sevierville, Pigeon Forge, and Gatlinburg, Tennessee; among others.
Tennessee especially showed up frequently as one of the best places to own STRs, so we traveled there to get a firsthand feel of this very popular destination. If you have never been, it is quite the sight to behold! From Gatlinburg up to Pigeon Forge, it is hard to describe; it’s a little like Disneyland on the main road, with one attraction after another.
Let me give you a little taste: One building was a version of the Empire State Building, complete with a huge King Kong perched on the side, holding a plane in his hand. Another building was an upside-down mansion, and one was even a replica of the Titanic ship. I have to say it is spectacular! There’s certainly plenty to see there.
Although the King Kong and a replica Titanic was very cool, it wasn’t quite cool enough for us to go all-in there, however, and folks have asked us why we ended up starting in Arizona instead of the places in Tennessee we visited and enjoyed so much. We were impressed with Tennessee, but found that the whole area relies heavily on tourism. It doesn’t have a strong economic basis beyond that. Tennessee is farther away, and harder to get to, from Reno where I am based. For our other funds, that doesn’t matter as much, but we’re very hands-on in renovating, decorating, and managing the vacation properties and will be traveling to them frequently. In this situation, that proximity does matter for our time and money.
That doesn’t mean we may not be interested in Tennessee in the future, especially as the next place to diversify our STR market, but it didn’t seem like the best to start. Arizona, on the other hand, has a robust economy that includes tourism, but also business and other efforts that make it less likely to suffer during a downturn. That led us to Scottsdale, so we put in a bid on a home there.
With only a few days left to get the properties identified for my 1031 Exchange, we needed to make a decision and decided to purchase two properties in Scottsdale. I will say it wasn’t easy with the market being what it is: for one of the properties we found, we had to bid $100,000 over the listing price to get it, and the second one was at the full listing price. Ugh! That goes against everything I have ever done in real estate, but I was down to the wire with a big looming tax bill to greet me if I didn’t get it done.
However, what I recognized was that even though I felt like I was overpaying for the properties – and could get a better deal if I had the time – the numbers we calculated turned out to be more than acceptable to me as an investment.
That was the “Ah Ha!” moment for me, when the spark of a new fund concept began to kindle. (My team usually braces themselves when this happens.) I said to our team:
if these two properties can achieve reasonable returns, and we can spend more time working the deals, then I think we have something here. At this point, we had easily spent at least 500 hours studying the short-term rentals market. It didn’t make us experts quite yet, but we knew way more than the average bear.
With “what if?” in mind, we started formulating a short-term rental fund. We asked ourselves regularly: What would it look like? Now, six months later (with an additional 1,000 hours of research under our belts), we have the fund ready to go.
So, what’s the status?
Both of our Scottsdale homes are up and running and booking guests on a regular basis. Our team has built out the systems we need to manage them. We learned that the big vacation home operators bring a tremendous amount of sophistication and technology to this industry when it comes to management. You could “mom-and-pop”-manage these kinds of properties yourself if you want, but if you want this type of business to grow, you have to automate as much as possible.
We make use of sophisticated software that helps us automatically adjust pricing both on a daily basis and far into the future. These tools measure the supply and demand, as well as the attractions and events that will affect future pricing. For example, the 2023 Super Bowl will be hosted in Scottsdale, and the software predicts what we should be able to rent for, and for how long, during that time. One of our properties has an average booking rate of $2,200 per night, but during the Super Bowl, we know we’ll be able to charge $5,500 a night – and get it booked for a five-night stay.
The moral of the story? Sometimes a new opportunity arises when you don’t expect it. It’s exciting to innovate like this and we hope you’ll join us. If you’re still thinking: “Greg, I can’t believe you overpaid for property” in Scottsdale, I can tell you that this market has such a strong economic basis that it made me excited to do business in it. Plus, I always want to make sure I have cash-flowing properties. This isn’t a piece of land that I am hoping to build a home on and sell in the near future, and even if the value of the homes goes down, I don’t really care as long as they are cash flowing. Lastly, since I plan to hold onto them for many years, if they do dip in value, that will only be temporary because they always will come back up – and then some!
It’s time for us to plan some fun experiences for our guests, but we probably won’t be adding a King Kong to the side of our homes.