This week’s guest is T.J. Clark, interviewed by Aaron Norris. T.J. is part of TurnKey Rentals. Prior to co-founding them, he was the president and CEO of Limos.com, which became the largest online marketplace for limo and car service. It expanded globally and launched partnerships with companies like Orbitz, Sabre, Concur, Delta Airlines, LiveNation and OpenTable. Prior to that, T.J. was V.P of Operations at IAC/InterActiveCorp, which included over 85 internet brands with 20 million visitors per day. Sites there included Expedia, Hotels.com, Ticketmaster, LendingTree and Match.com. He was also part of Hotwire.com on their startup team back in 2000.
As far as TurnKey Rentals goes, they are one of the largest full-service property management companies in the U.S. It is also one of the fastest growing start-up companies in Austin, Texas and has raised more than $20 million in funding. Original investors include the likes of Expedia, Zillow, Hotwire, Glassdoor, and Homeaway. TurnKey was founded to make the problems and pain points of renting vacation homes go away. Most importantly, they make sure there are no surprises for guests and owners. Aaron had stayed at a property a few weeks before in Palm Springs and had a good experience partly because of the technology and his company.
Episode Highlights
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- What is the reason for the big increase in vacation rentals?
- Are classified ads becoming a thing of the past?
- What regulations are being put in place on these rentals, and what cities are we seeing this take place?
- What kind of vacation properties does the majority of people prefer?
- Which groups and demographics are attracted to specific online markets (Airbnb, HomeAway, VRBO)?
- How will the growth in technology play a role in the increased vacation rentals?
- What are the biggest markets for vacation rentals?
Episode Notes
Aaron started by listing headlines from the last five months having to do with vacation rentals. These are: “We Will Work with New York to Protect Affordable Housing,” “Judge Puts San Francisco Vacation Rentals Lot on Hold,” “Palm Springs Vacation Rentals Crackdown is Long Overdue,” “Anaheim School District Voices Opposition to Vacation Rentals,” and “Anaheim City Council Bans Short-Term Vacation Rentals.” Vacation rentals are nothing new. We have had bed and breakfast places around for 100s of years as well as timeshares all the way up to a decade ago. Second-home buyers would go into some desirable beach or ski location. They have disposable income, and they would buy a second home or a cabin. They would rent it to vacationers when they were not using the homes.
More recently what you have seen is people who were once advertising those rentals through word of mouth and local property managers, real estate agents, or classified ads are becoming less. You are essentially seeing the downfall of classified ads across all categories, and it has been replaced with marketplaces online. Instead of people buying a used drill for their house by going to a classified ad, they are going to eBay. Airbnb and HomeAway have essentially become the same thing to vacation rentals. You have seen them become very widely available online. The demand is really there, and it makes the ability for homeowners to get into the process of renting much easier than it was in the old days.
You now see vacation rentals popping up all over the place because it is very easy to go online, ad your photos, add your rates, and make real money on what is for most people one of the most valuable assets on which they are sitting. This is something with which they can make actual returns quickly. Now you see that in metros people are doing this more than ever before, which is a big part of the reason why you have neighbors and city councils looking at the issue. What is surprising is in areas like Palm Springs, a traditional vacation rental market, their home and real estate values are largely affected by short-term renting but they are still facing opposition.
Technology has been a huge driver behind this. Aaron asked if the growth has been so explosive that it has brought technology to the forefront, or are there bad players and behavior. Aaron wondered why this is happening right now. TJ said it is a little bit of this. He said one of the main arguments you will hear against vacation rentals is that they are noisy, overcrowded, produce a garbage that is not taken care of, or there are extra parking burdens. These have been statistically shown to be happening in a very small number of cases. In Austin, Texas there was regulation posed on vacation rentals. The city did a study, and out of 1200 licensed vacation rentals only four were found to be second homes that were noted by the code department to have repeated violations for any type of code. It was 4 out of 1200 that was cited as a major reason why this new regulation had to be put in place.
This does not make sense when you have laws that have been on the books for decades on those three things and can be easily enforced against four bad apples. It is important to be good neighbors and follow the law, and those folks who were operating should have been doing that. However, you find in long-term rentals that the incidents of those things happening have been far greater. Some of the rules Palm Springs just came down with are really onerous. TJ said these are interesting, and there are flavors of what Palm Springs is doing happening all across the U.S. There are jurisdictions that are trying to figure out how to deal with this issue, and TJ thinks they are not dealing with it very creatively. It is not recognizing how this is a type of travel that is very popular and not going away.
They are trying to impose bans. One of them is in Palm Springs where they are restricting the number of days for single-family housing and not allowing certain things at all for multi-family housing. None of them are going to the core of the issue, which is that it is important to be good neighbors and pay taxes. We need to come up with a framework where we can enforce that and guests have chosen this as a way to travel. This is a big deal.
This is probably the most pronounced trend in travel in decades. Travelers are now preferring to stay in unique and private accommodations more than ever. One in three U.S. travelers has used a private accommodation or vacation rental back in 2015. When this was measured back in 2010, only 1 in 10 travelers had used it. This is a big deal and is not going away any time soon. Aaron asked about the size of the industry, which TJ said it is a huge category. Number one is there are about 7 million vacation rentals across the U.S. and Europe, and this does not include timeshares. About half of those are 3 ½ million and in the U.S. Of those, about 1 ½-2 million are listed in HomeAway and VRBO.
The average revenue that an owner will generate on VRBO is about $29,000 a year for rent, which is great because they can stay in the rental and use it for their own vacations. They can then rent it and make good income otherwise. This is how they think about the numbers on that side of the equation. In terms of overall dollars, they believe the dollars spent in the U.S. is $80 billion per year and growing. It accounts for 20% of the worldwide revenue of the lodging industry and growing. It represents 36% of the room nights in the entire industry across the world. This is expected to go to more than half in the next two years by some analysts. Half of the lodging going on in the world will be private accommodations in the next two years.
The Norris Group has been studying a lot for a report they are presenting in February, and they are researching a lot about virtual reality. There is a lot of talk about sitting in our houses in California and virtually being able to transport to a different location without having to be there. Aaron said it is about the experience. He does not think travel is going to stop, but rather it will be more important. Aaron asked TJ his thoughts on why people are choosing these unique experiences and a home instead of a hotel. TJ said it is really being driven by a younger traveler who is more digital and has more hotel-like expectations in the way they travel as far as checking out and having reliability in their stay. They want to have an authentic, unique experience.
If you are going to most metros, the hotel offerings are boxy and centric to the downtown. They offer no real individuality or authentic experience of what it is like to live in the town. TJ heard an interesting quote from a young traveler who said when they go travel with their friends and hear someone stayed in a hotel, they feel sorry for them. If you want to stay in a unique neighborhood, that is a very interesting experience for people.
It was also interesting that a new Airbnb study highlighted that these private accommodations are a positive force in the black and Latino neighborhoods. This is because hotels do not exist in those neighborhoods. You have local owners of black and Latino descent who are benefitting from income they can make on their homes in those neighborhoods. The neighborhoods themselves along with the store and shop owners are benefitting by having folks stay, and the guests want to stay there.
Aaron asked why they are so bad at telling that story and getting so hammered in the media. TJ Clark said certain forces are against growth. Local neighborhood associations want nothing like this to happen in their neighborhood or any type of development. There are affordable housing advocates who have their hopes set on this, but a recent Zillow study just came out that highlighted how short-term rentals have very little to no impact on housing affordability. This has been a long-term issue that has been facing the cities, and they have chosen to not deal with it effectively. Now they are essentially blaming it on short-term rentals, which account for less than 1% of the overall housing stock. If you ask the economists who were surveyed by Zillow, it has no meaningful impact and is a red herring. These are really the voices.
The third factor is the hotel industry, which is largely unionized. If you want to talk about one category being affected by short-term rentals, it is the hotel industry’s ability to gouge on peak events such as popular holidays and occasions when they can double or triple hotel night rates. Locals who put their houses into inventory on Airbnb or HomeAway are able to increase supply. This brings rates way down, and this is really hurting the hotels. This is something they do not like.
Aaron said he is one of those people who wants the same experience as everyone. On his last two trips he used Airbnb. One was for his best friend getting married, and they were able to get a nice house in Big Bear for the bachelor party. If they had to replicate the number of rooms that they had with the house, it probably would have been double the cost if they stayed at a hotel. Right before Christmas he and his friends decided to do an extended stay in Palm Springs instead of giving birthday presents. This time if he had to recreate the experience at a hotel, it likely would have been more than double because of hotel rates.
Aaron really thought the hotels were getting in on this. The pool broke at the place he was staying in Palm Springs, and the pool guys came out within an hour. Aaron was able to talk about the state of the industry and what was happening out in Palm Springs. Aaron found out the former mayor had a ton of vacation rentals that were sold to the Marriot. Aaron asked if the hotel industry is now getting into the single-family space. TJ said they are, although they are in the early stages. They have had some traditional resort-type properties and timeshares. These started out as a little bit of a unique animal in the lodging industry, and it took many years before it was legitimized by the big brands.
This is what happened here. You saw hotel brands fighting the private accommodation rental space. If you think about Marriott, they have 33 hotel brands they are trying to go after, every single segment of the lodging space. This includes high-end, economy, leisure, and business. You also have the statistic that in two years as many as 50% of hotel nights might be going through private accommodations, which is something not offered right now. This is a big wakeup call for the industry. You see some more progressive brands acquiring finer homes and offering it as part of their hotels. TJ thinks you will see more of this happening with large property measures across the country.
Going back to the infrastructure, Aaron thought Airbnb was a little more mature with market shares. Aaron asked about the infrastructure in regards to the players who need to be in place. TJ said in the U.S. market space there are four big ones that matter. HomeAway and VRBO are part of the same company that are now owned by Expedia. There is also Airbnb and Booking.com that are with Priceline Company, the largest hotel seller in the world. If you are a homeowner and create a listing in those four channels, we will be reaching about 95% of the guest audiences. It is a very consolidated industry from the guest demand and side of this marketplace equation. You will pretty much pay the same thing through any of those sites since they all charge between a 12-15% commission. This way you only pay when you get a booking.
Between the brands, it seems there is really no difference besides user experience. Aaron asked if there are different age groups using the sites. TJ said on the contrary there actually is a difference, and it is interesting. If you go to things like HomeAway that have more traditional vacation rental inventory, it has more private home inventory. Whole and standalone homes in places like the Florida beaches and Summit County ski markets are more prevalent. You will find an older demographic of homeowners and guests using these portals as well as larger homes and more groups. With Airbnb you will find the younger demographic and smaller homes. Half their inventory is shared, and the other half is private. Booking.com and Tripadvisor are pretty similar to HomeAway in regards to their type of inventory.
One thing TJ thought was very interesting about the space is that it has been extremely innovative in the last five years. You have gone from owners going right into the VRBO and putting up a couple pictures in their home where a guest would make an inquiry to all homes on HomeAway having to be bookable with accurate inventory and rates. This is precisely how Airbnb operates. You have this amazing innovation that has happened on the guest marketing and booking side. TJ’s company looked at the supply and fulfillment side, which is everything that happens after you make the booking.
In this industry there has been very little done in terms of innovation. TJ said this is where he thinks technology plays a huge role. You have the ability to have field management with mobile devices that are widely available at low cost and broadband that is good. This is how you can really innovate in the field space, and you can attack the noise and guest screening in whole new ways. You can do this through decibel sound-monitoring, even just through people ringing the doorbell. You have a really interesting guest screening that can be done to positively identify who you are, for example, when you log into your bank account. You can also manage and monitor your cleaning crews, give them task lists and providing an android tablet that can be a portal into some great guest services. This would really elevate the experience and make your home operate as a good neighbor. This is where TJ thinks in the longer term this will succeed since it generates real revenue for owners and guests really want it.
To close out the discussion on regulations, politics works in cycles. Where local city councils have not done anything about the past five years, they are now overreacting and the pendulum is swinging the other direction. However, this is not going away. Through the use of technology, these issues will be largely sorted out and the regulations will hopefully not be nearly as much of a factor. The problems caused by vacation rentals should not be much of a factor either.
Aaron ended by asking TJ what the biggest markets as well as his favorite markets are for vacation rentals. TJ said for one you should pick out a market to which you want to go. He said his favorite is Nashville for fun, investment, a great community, a great investment, and a great place to stay. For others, they should just pick the place where they love to travel. There are areas where you can find the right balance between a good investment and one that can be profitable. If it is a fun place to stay, other people are going to want to stay there too. You also have to see how much it will cost you to get in as well as the taxes for upkeep. You also need to see which ones are regulatory environments. There are 500 markets on HomeAway that have more than 300 listings in them. There are lots of good places just in the U.S. alone where you can do this.
Tune in next week as Aaron continues his discussion with TJ Clark. For more information on TurnKey rentals and if you are a guest who wants to travel, you can to www.turnkeyvr.com. You will land on a search page where you can find all the rentals in the 33 markets and growing. If you are an owner and want some help in managing rentals, you can acquire this through the pages as well. They can have a local general manager reach out to you.
For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.