EPISODES
Episode 41.
Jonathan Klunk, CEO at Key Source Properties and Founding Partner & Realtor at Six Degrees Real Estate.
Look, I’m naturally a hotel person, but I have used short term rentals a few times. You know, you find unique, off the wall properties, places for large groups. It’s fun. They absolutely serve a massive need in the lodging space and in the real estate investor. I like to cash flow properties like a King Space. Stay tuned for this two episode series on short term rentals. I’m doton Elliott. This is the real estate of things. You’re listening to the real estate of things podcast. Jonathan, thank you so much for joining, my friend, very welcome. So, Jonathan Clunk, for everybody, you wear a bunch of different hats. You are the CEO of key source properties. We’re gonna dive into the short term rental business. Incredibly excited to talk about that. We’re uh, we have some exciting things cooking at my day job at Lehman and capital around short term rentals, and so it’s it’s just all the more timely that you and I connected, uh, so we can kind of unpack so much around the short terminal space. And then, in addition to that and many other things, are one of the founding partners at six degrees real estate. So you, my friend, are in the real estate world through and through. How in the world did you land in this beautiful micro cause of yes, so it was very much organic growth, you know, the way that every good side hustle kind of turns into your main hustle. Um, that’s exactly how this started. My background is in technology sales, um. So I worked for some major fortune companies, Um, and I was on the business sales side of the House that Um we were introduced my husband I to short terminals right around two thousand and fifteen. We stayed in our first one down in Nashville, Tennessee. I was absolutely fascinated. You know, it was like Zillo on crack, how you could not only look inside of people’s houses and be nosy, but then you could also satisfy that curiosity by staying there. I mean I had so many questions. I just I thought it was amazing and just didn’t understand it all at the same time. Um. So we we utilized the platform and we were at a position in our real estate investing careers where the timing was absolutely right for us to take a leap of faith and try something like this. I had no idea what the Louisville, Kentucky Tourism Market Look like if people even knew about this APP Um, I had no idea what, you know, market saturation penetration was like. So we just took a risk, furnished a property, listed it for Derby of two thousand and fifteen, because that’s, you know, of course, when everybody is coming to Louisville and we’re on our best behavior entertaining the world. So it booked. You know, all of May booked, all of June booked and it just…
…kept growing and growing and it grew so much that we bought another house in North Carolina solely for the purpose of doing short term rentals there and using it whenever we wanted to, so an actual vacation property, um. So that’s how we got into the business. and then are we organically grew just by talking to people about the success that we were having and they too were tired of being long term landlords on year to year releases and dealing with property damage and things, and they too wanted an alternative where they could potentially make more money and have more control over their properties. So, as words spread, we were doing consulting, but the consulting quickly turned into management when they realized how in consuming it was and intensive it was to be a good host to make the money that you want to make. So that’s how our um or are, I guess, kind of just our investments turned into a side hustle and then organic growth of that causes us to need to leave our jobs and fully invest time, energy, effort and money into this business and into growing it, and we’re very glad that we did. But we were new to the industry. The technology wasn’t there to help us automated. Everything was hands on. We were designing it from the ground up because there wasn’t a playbook in play yet for a business like this. Yeah, that’s that’s such a wonderful organic story. Like you weren’t searching out a real estate opportunity. You were just going to Nashville and landed in this little airbnb thing and fast forward seven years later, here you are. That’s that’s, uh, such a wonderful, beautiful story. It’s not looking for anything. You happened upon it and it’s turned into like that. Went from side hustle to you’re the guy. Now you’re the you’re the Derby city short term guys. So so so, talk to me about I’m I guess one thing. We talked about barriers to entry, right and and I guess I think of I’m let’s talk about property management. That’s a big piece. You mentioned property management, right. Uh, it sounds like that has to be one of the more challenging or frustrating differences between long term, stable least properties and short term rentals. Is Short term means you’re turning over a property very frequently and what like. Do you have any off hand metrics like how, like just across your portfolio or maybe the area Louisville, like what? How frequently does the property get turned and what does that process look like? And how do you go by way of making a decision on and I you know, the wife and I are going to jump in. Is it like, you know, I got my dogs. That the other like how how do we figure out kind of the sweet spot for self managing and market out of market? I’m throwing a million different things. I hope I had a lot of Catherine this morning, a…
…lot of caffeine in this morning. But UH yeah, so so chop all the property management piece. How how do you go about deciding what the what the best set up is for you sure. Well, you know it’s very different if you have between one and five properties Um and or maybe trying to self manage or even use a property manager. Or if you’re like us and at our our height before the pandemic, you know, we had seventy five properties that we were managing and we were the fifth largest city in Louisville by number of beds. So these operations you’re going to run similarly, but very differently Um, for example. Number One, there is a lot of technology out there to help the smaller operators to automate a lot of the main processes. When somebody books with you on Airbnb, it downloads directly into your calendar. It’s going to block other platform calendars so you don’t get double bookings, and it immediately will send them a welcome message letting them know when they’re going to get their checking instructions. Were so glad reach out with any questions. All of that’s automated, so you no longer have to stop what you’re doing and contact the guests as soon as something comes in. Additionally, that’s going to show in your dashboard. So if you’re curious about the success of you know this month versus next month, month over month. It’s going to have all the reports and things in there that savvy real estate investors love. So that side of the business has very much changed since we entered it in two thousand and fifteen and had none of that Um now, needless to say, I still use my own spreadsheets because nobody can give me that the exact data that I’m looking for the exact way that I need to see it. You know, they’re probably some people out there listening here is nodding their heads because they’re that type Um. But, like so metrics, what we look at is across our portfolio we probably have a sixty five percent occupancy rate, and that takes into account right now, where we’re at a hundred percent, or sometimes uh ent, only because we don’t allow night’s days and eventually you’re gonna get little one nights in between each of your reservations that you’re dying to fill. But we will not change our business model because those are always the troubled guests, one night’s days. So we’re running about a hundred percent occupancy right now, with the average nightly stay being about three nights. So you can see that every three days we’re able to go into that property make sure everything looks great smells great, which is what all investors would love to do with their real estate. But number two, we also have to make sure our cleaners show up, that they get every single little hair out of there and not leave any behind and then go and do that laundry too. So if you don’t stay on top of that, that’s going to add up. So you know, if you’re a single operator, then you’re gonna want to have good cleaning companies. Three sets of linen’s, you know, something to be on the beds, something that’s being laundered and then something that’s sitting on the shelf that is going to be ready to go. But definitely don’t do the cleaning unless you really love cleaning, because that will be probably something very short lived, something definitely to outsource us in your business, for sure. Yeah,…
…the cleaning piece sounds like a nightmare. It’s really the first part of short term rentals. I mean even in our facebook support groups for owners like the one here in Louisville, and that is the number one question. WHO has a cleaner? Uh, they’re always going through cleaners. And here is an expert piece of advice, especially for the perfectionists who are out there. When you are looking for a cleaner, you want somebody who is consistent and who shows up. You do not want just the best cleaner, because it is difficult, if not impossible, to find everything that you’re looking for in one person, except that they’re human. They will make mistakes. But give a lot more credit to the people who show up when they’re supposed to and do the job so that your guests don’t show up to a dirty place, versus the people who kind of leave a sock under a bed occasionally their hair might fall out, you know, into the sheets or something like that. Just be realistic about that, please, or you will blow through a lot of cleaners. that. That’s a very grounded piece of advice, right. I think about on the lending side of the fence, like consistency and execution is a big piece. You have, you have price, which is very important, you have leverage, but like, can you actually deliver and execute? Because at the end of the day, like I as an investor, you have timeline you have to meet and if you’re running one or hundreds of Airbnbs, uh, you have a timeline as well. Like if you have you’re running at that high occupancy level. Uh, you don’t have a lot of room for errors and trying to get a cleaner to come in, like hey, my my cleaner today couldn’t make it and I need somebody today because I have people coming tomorrow. It sounds like you might be blocking off your night to go clean if you can’t find anybody. It has happened quite a bit early on in our in our career, we were cleaning a lot on Sunday’s. Sundays the biggest checkout date and it’s the day that we find that most people don’t want to work, even if they aren’t religious, even if you know, Um, they have nothing else going on. Sunday just seems to be the day to kind of chill for a minute and that is the biggest checkout date across the board. That’s when most trips end and people are headed home to then go to work on Monday. So some people block their Monday’s off on the calendar so that they don’t have that check in check out on the same day. Um, that’s really gonna save you. Monday is usually not a high money earner and from an occupancy standpoint, except in really busy seasons, it’s not a popular day for people to be coming into town. Got It. That was that’s on the question list. So the most unpopular day, if you had to pick one, is Monday in terms of just general activity in Ow just Monday, Tuesday, Wednesday. Yeah, the first part of the week, unless somebody has a convention, unless people are wanting to take advantage of maybe some lower discount rates because they don’t have specific…
…days they need to travel. Um, then that seems to be, at least in our market, kind of the least travel days makes sense. Makes Sense. One thing you brought up was kind of the entry and spin up air DNA. You and I have chatted about air DNA a little bit prior. Talk to me about they have. You’re telling me about a pretty cool rating system they have where they’ll grade. Is it they’ll grade east of entry into a market? Yes, Um, it’s my understanding that they base their grade that they give to a particular city based on the complexity or the intensity of the regulation. Um. So before Louisville passed any sort of ordinances, um, that pertained to short term rentals, we had an a plus rating. Since then, you know, it’s gone down to about a B minus, maybe C plus right now. It’s been a while since I’ve checked it m but that’s just essentially. How easy is it for you to find illegally operating short terminal property in the market? What does the growth look like? You’re over year? How many properties are being added to AIRBNB? So they probably kind of you know, change that metric over time, but it’s a good indicator, especially if you know nothing about the market and don’t have any resources there. Yeah, that’s great, especially I don’t know, you’re taking a plunge into you know, what is there. There are a lot of stable pieces of this. There are also some volatile different pieces, and the regulation pieces a big side of it. Like we deal with that. That’s one of the big challenges on the lending side is, you know, if you’re if you’re writing thirty year debt, you’re making a lot of assumptions right. You have some known variables now, but you can only see so far out in the future. So what does three, five, ten, twenty thirty years down the road look? And regulations like local ordinances are changing all the time. We’re in Greenville, South Carolina, are headquarters and there’s been kind of new shortage of you know, I won’t, won’t put a positive or negative swing to it, but no shortage of changes and new regulations around it and enforcement, just in any market, seems to be scattered. UH, nobody wants to touch it. No, nobody wants to touch it. Um. And you know, luckily for you, on the thirty year notes side, you know most people only keep those, what about seven years before they trade and then for something else. So you know, not too big of a leap there, UM, but certainly you know there are a lot of factors whenever you look at lending on short term rentals because you know, let’s just say somebody’s buying a property that’s already up and running and has a great P and l Um a, you don’t take those reviews with you unless somebody is handing their account over to you in full. You cannot transfer that, um AIRBNB listing over to make V R B o you can, Airbnb you can’t. So reviews go away, UM, your your hosting abilities go away. So when you’re starting with zero, if you’re a poor opera rader,…
…you’re not going to be able to replicate that profit and loss that somebody who was on it who stayed on it, who went above and beyond for their guests. So you have like varying operators at the same property who will get different results. It’s not just finding a single tenant and vetting them and it’s consistent income every month Um. So you know then maybe somebody was using not using a property manager. Somebody does. There goes twenty to thirty percent of your gross revenue right off the top from that P and L. So, especially if you know whenever you’re going into a new market, the scariest thing is if you’re running your pro former numbers off of short terminal numbers that you expect to receive. Then let’s say that you’re not approved for it or those ordinances do change and you can no longer operate if you can’t make the same amount that you need to in a traditional property management. Since then, this isn’t now not the same investment that you once thought it was. So the laws and ordinances and understanding that and making sure they don’t change or h o a days aren’t changing their laws and restrictions as well. Those are all key to operating a strong business. Yeah, it is. I think overall, the sentiment from from any angle from a regulatory standpoint, from a capital market standpoint. I’m from a real estate investor standpoint. Like it’s more in the the jump up in level of comfort is happening very quickly. Absolutely so, because it’s proving itself every day to be, you know, a great, great money maker for a lot of the operators, especially when you’re in, you know, excellent markets like, you know, Watercolor Florida, when you’re on anything that’s coastal mountains, ski resorts, Ski towns, places like that, and those cities change all the time. I love watching the trends of where people go. Right now, one of the big ones is above us in southern Indiana. It’s called Brown County and it’s the small, this little place, but they have a great local arts scene, they have breweries popping up and so people are now investing in that for short term rentals. Um even looking to do like a windstream parks and R v Parks and and things like that. So it’s really changing the landscape of travel as well and people are taking this application Um not, you know, outside of the traditional single family house or duplex in moving it into these fun unique experiences. Um and the hotel industry is really trying to keep up because they’re starting to design future properties, especially resort style properties, to look like short term rental communities, because that’s what people are starting to to love so much when they travel. Yeah, I I’ve always been a hotel person, but I’ve stayed in some AIRBNB S and the couple of instances I can think of, like why did I go airbnb versus hotel? Groups? Right, if you have a big group and everybody together, I think like just any group outing right,…
I six twelve people, uh, in a lot of cases, depending on what is going on, that suits much better than breaking up everybody into hotel rooms. And then I haven’t pulled the trigger on this, but just like wild uniqueness in properties, right, like you see all around even uh in northern Georgia, western North Carolina, there’s some really cool, uh unique to the area homes. And then you go, you know, everybody can think of the worldwide scope of Airbnb and some wild airbnbs that are out there’s like there’s a uniqueness play to it. So I think another beautiful pieces that it fills the gap Um that you know, you don’t think of as a gap, but it just provides a maybe a different, different type of product as opposed to a run in the mill hotel. You know, you go to, you know, each brand is similar, regardless of where the property is. Right, if you go to a just go down the Marriott line, like if you go to a Moxie or u the rits in Atlanta, which is close to us, like there’s a similar field to going to, you know, same flagship properties in other cities and AIRBNB breaks it up and gives you a little more uh, and we’re a unique optionality. So absolutely thinking through living, like living like a local or staying like a local. Um is something that that we’ve always said. It takes people into neighborhoods as well that don’t have hotels. Some of the most popular areas in Louisville, like Old Louisville. We have a couple of bed and breakfasts, but we don’t have any hotels. Um, the highlands doesn’t have any hotels, but now there are, you know, hundreds of short term rentals, so people can actually stay in these communities and it isn’t uncommon for people to fall so in love with an area by not staying in a hotel but kind of getting back into the neighborhoods and seeing things they wouldn’t otherwise see. That it makes them want to move there. I mean we’ve had this happened on more than one occasion that people relocated to Louisville because they just had enough with, you know, the hustle and bustle of L A and they come here and they see that it’s it’s nice, it’s it’s a big small town, it’s slower paced and that really influenced their decision to move here, by being able to stay in in a short terminal property just versus a hotel downtown in a very touristy area that isn’t as appealing from a cultural standpoint. That is so true. I was out, uh, this is probably twenties, seventeen. I was out in Phoenix ahead of I am in West, which is a big conference for us as a company. Was Out there with a couple of CO workers a few days before we went out. I think we flew out Friday, so we had the weekend just to hang out and we got an AIRBNB and yeah, I can remember a lot of you know. We were in a walkable area and my will started turning, like I could I could it out…
…here, uh, and then that that’s December when that conference is, and then I learned that it’s a, you know, a hundred and ninety degrees out there from May through September. So that quickly fell off my list. But that’s that’s exactly what snow kids are though. You know, people go to Florida when it’s snowing in the north and then whenever it hits ninety, they hundred, they go back up north and then they rent out the house for the people who want to go down there and experience that. So you get the best of both worlds when you design it right. This is true. This is very true. All Right, Jonathan, do not go anywhere, please. I wanna. I want to spend some more time. We’re gonna crack through another episode. I want to dive into Louisville. I want to see if you own any horses. Don’t answer the question yet. Save it for the next episode. All right. If you made any money at the last Derby, I saw a music video with Drake and Jack Harlowe in it, so they were there having a good time. We have a lot to unpack in next episode, but, Jonathan, thank you so much. For joining me on this one. Your spectacular speak with about short term rental is my friend. Thank you. Thank you for having me. Thanks everybody for listening. Take care. Tune in next week to hear Jonathan and I keep going on at it. Thanks. Are you a real estate investor looking for the right lender that can finance all your deals and help you scale? Lima one capital has the best suite of loan products in the industry bar none. Whether that’s fix and flips, fix and holds, building new construction or buying rental properties. They have incredible financing solutions for it all. A reliable, common sense lender is one of the most important parts of your investment team, and that’s exactly what you get with Lima one. Let Lima one capital show you how they’ve helped thousands of real estate investor scale and increase their wealth. CHECK OUT LIMA ONE DOT COM or call eight hundred to five nine zero five nine five to speak with a consultant and preparation for your next project. Thank you for joining us today on the real estate of things podcast. Subscribe and tune in weekly for new content from the industry’s best. While we continue to unpack the nuances of this dynamic market. Follow US across social media for additional insights and analysis on the topics covered in each episode, and remember to rate, review and share the show.
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