This week’s PhREI post is from Ian Cook of Carpe Diem MD. He is going to tell us if self-managing is worth the time and effort. Selenid and I self manage our properties so let’s see if we are doing the right thing!
Insider Look: Deal Analysis of Investment Property #3
One of the most common questions I get is why would you want to self-manage? The other big hitters are; is self-managing worth it? Don’t you make enough in medicine why “waste” your time with short-term rentals? How hard is it? And the list goes on. I will try and answer all these questions below.
Why would you want to self-manage?
Well, that question has two answers.
The first answer is that no one will care about your property more than you. By self-managing you will be aware of what is going on at your property. You will receive direct feed back from your guests, cleaning crew, and handyman and be able to address problems as they arise.
That may sound like a hassle but in reality this is huge for your short-term rental property. Addressing problems directly with your guests as an owner, not some nameless property manager, will decrease your risk of poor reviews and that will pay for itself. We have found that direct communication has been a very positive experience and has resulted in positive reviews.
The second answer is that there are significant tax advantages available to those who self manage. These advantages include being able to claim bonus depreciation and deduct losses against your w-2 income. (click here to learn more)
This is something usually reserved for those that qualify for (REPS) real estate professional status (read more here) but short-term rental properties are in a special category… Those that are willing to self-manage can access this tax advantage.
Is it worth it?
The answer to this question is a personal call… Lauren and I think it is worth it for multiple reasons.
First, it is about more than money
If you use your property, then self-managing actually allows you to know more about what is going on at your unit. In addition, it is a personally rewarding experience to provide an awesome experience for your guests.
Second, it is financially beneficial
By self-managing you will save 15-40% of your gross rental income by avoiding property management fees.
For example, if your gross rental income is $100,000 per year then you will save $15,000-$40,000 per year in property management fees. That may not be worth it to some but for others that makes a big difference.
Third, the tax benefits can be massive
There are some criteria that you will need to pass to take advantage of these benefits.
- You will need to spend 100 hours self-managing your property and spend more time managing your property than anyone else. (IRS link, Material Participation)
- The average length of a guests stay will need to be 7 days or less
- Your personal use days will need to be 14 days or less or 10% or less of the nightly bookings (ex. 300 nights of rentals allows for 30 nights of personal use) (check out this article to learn more)
If you meet all these criteria then your Short-term rental is a business not a passive real estate rental and your losses, like any other business, can then be deducted against your non-passive income (w-2, 1099, etc)
To maximize your tax savings in your first year of self-managing you can perform a cost segregation study combined with bonus depreciation and claim that loss against your income. (read more here) That loss can result in major savings depending on your tax bracket.
For example, if your short-term rental purchase price was $400,000 and after performing a cost segregation study you were able to claim 100% bonus deprecation for 25% of the purchase price you could claim a $100,000 loss.
This will allow you to decrease your taxable income by $100,000…. At the top Federal tax bracket of 37% you will save $37,000.
$37,000/100 hours = $370/hour.
That is not a bad hourly rate for self-managing your own short-term rental. I know some physicians make more than that but it is still a very respectable rate.
So, if you combine the $37,000 tax savings and the $40,000 (40%) property management fee savings you will save $77,000 by self-managing this property, or
$77,000/100hours = $770/hour.
Now, to be fair a $400,000 property in today’s market will have a gross rental income in the $60,000/year range depending on the market…
$60,000 x 40% = $24,000 (self-managing savings) + $37,000 (tax savings) = $61,000 savings by self managing…. Still pretty good.
$61,000/100 hours: $610/hour pretty good.
Don’t you make enough in medicine why “waste” your time with short-term rentals?
Well, I think the above example demonstrates that self-managing is definitely not a “waste” of time in terms of financial benefits.
Now, some physicians can make the argument that their time is better spent working more shifts and spending more time building their practice.
This may be true and there is nothing wrong with that approach. Self-managing is not for everyone and that is ok.
For those that are interested in self-managing I think the benefits are more than just financial.
The first benefit is that investing, owning, and self-managing short-term rental properties provides a purpose and goal outside of Medicine. In addition, this goal has financial benefits independent of Medicine and stocks which helps diversify your portfolio.
I think it is absolutely crucial for our long-term mental well being to have a focus and goal outside of Medicine. This is different than a hobby.
Hobbies are great and important to foster but hobbies often do not require firm commitments or responsibilities. You can drop a hobby. But you can’t ignore your STR and that is a good thing because it promotes a sense of purpose outside of Medicine.
You can find this “purpose” in other ways but Lauren and I enjoy short-term rental investing. The reason I think this is so important is that as Physicians we often completely intertwine our sense of self with our profession.
This is a double-edged sword.
It can result in dedication and great patient care but it can also lead to devastation and loss of self if we can no longer practice due to trauma, injury or even retirement.
Therefore, it is absolutely crucial that as Physicians we devote the time and effort to develop our sense of self and purpose in and outside of medicine. STR investing is not the only vehicle to find purpose outside of Medicine, there are infinite options.
How hard is it?
Not as hard as you think…
The biggest limiting belief of short-term rental investing is “I don’t have time to self-manage”.
That may be true for a small percentage of our colleagues but in general it all comes down to teams, systems and automation.
The key is developing a local team consisting of a cleaning crew and handyman. Next, you will need a system to handle bookings and automate the process as much as possible. Lastly, connect your home with wifi enabled smart devices and surveillance to allow you to self manage from a distance. You can do this…
Short-term rental investing and self-managing is not for everyone and that is ok.
However, if you are willing to self-manage I think the benefits are far more than financial.
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2 thoughts on “Is Self-Managing Worth the Time and Effort?”
I have a STR in Delray Beach , Fl. Is it still possible to claim you work 100 hours and you put in the most hours of your team even if you use a manager ?
Hey Steven, yes you can still claim hours even with a manager as you are overseeing and supervising their work and “managing” the manager.
Check out Ian Cook’s (Carpe Diem MD) course of STRs for more info!