Today, I review our short term and long term rental portfolio, including the evidence that the Broken Bow vacation rental bubble has burst.
Anno Darwinii is the quarterly update on the growth of our real estate empire.
Allow me to reintroduce… this series
Anno Darwinii is a made-up Latin word that loosely means “Year of the Darwinian.” It’s how I refer to the quarterly update series that I started at the very beginning of my real estate investment journey in 2018.
I use this series to give myself (and my readers) an in-depth view into the events affecting the growth of my real estate empire. At turns triumphant and tragic, it reflects the often sinusoidal patterns of real life investing.
Here’s a link to all of the Anno Darwinii posts over the last 5 years: Anno Darwinii Archives
Things have evolved
The last edition of my Anno Darwinii series was about a year ago: Earnings Evolution | Anno Darwinii 4.0
In it, I discussed some headwinds faced by the real estate portfolio. Specifically, there were notable rises in the property insurance and property taxes for my portfolio. This put stress on the cashflow from my properties.
Also, I discussed data from my short-term rental portfolio that reflected the larger national “Airbnb Bust,” which was a phenomenon of lower daily rates and increased competition seen by short term rental owners in many areas of the country.
But then I took a break from this series for the last year. This was mainly for two reasons.
First, there were so many changes happening in the real estate sector that I wasn’t sure at times what to make of them. Were the problems I was experiencing a result of my poor decisions, or was it a result of market trends? (Turns out, it was a bit of both.)
Also, I was enmeshed in a major effort over the last year which culminated in the launch of Cereus Real Estate. The effort was multi-pronged and included an intensive mentorship in the analysis of apartment buildings. Since its launch in early 2024, I’ve spoken to dozens of potential investors, many of whom have deployed capital into our first real estate syndication deal, The Hampton Meadows, which is a 360 unit property in Des Moines, Iowa. Want to hear about it? Make sure to join Cereus!
Read more here: Update on Cereus Real Estate
But amidst all the excitement around Cereus Real Estate, my personal portfolio hasn’t gone away. It’s been chugging along and there have been some notable developments.
Tax benefits are a major perk of real estate investing
I’ll start off with some good news related to the tax benefits of real estate.
Despite the challenges related to the short-term rentals I mentioned above, the tax benefits are certainly real. Deductions related to my short-term rentals almost completely canceled out our federal tax liability for 2022. In the end, we ended up paying about $30,000 in federal income taxes in 2022 on a gross income of around $675,000 for the year. Based on our pre-real estate total tax rate of about 35%, this represents a real cash savings of about $206,250!
(Due to our move to Memphis and my transition to locum tenens, I earned physician income for only 9 months of the year.)
This is obviously a huge win and a real-life illustration of the way that investing in a tax-efficient asset can speed your financial growth. We used the tax savings to help fund our transition to life in Memphis, pay down debt, and to fund renovations related to our apartment buildings.
Check out these posts to understand how these tax savings were possible:
- Cancelling Out My 2022 Federal Taxes As a Physician Real Estate Investor
- Amazing Tax Deductions From Your Short Term Rental
- Real Estate Professional Status: A Tax Shelter For Your Day Job?
Remember, these tax savings do have “strings” attached to the savings in the form of depreciation recapture. This is essentially related to the fact that depreciation decreases your basis, which increases your taxable profits when you sell a property.
Read this to learn about options to avoid depreciation recapture: 3 Ways to Avoid Depreciation Recapture Tax on Rental Property.
Palm Springs is back online
After a big void in our short-term rental income in early to mid 2023 due to permitting woes in Palm Springs, that rental finally came back online in the fall of 2023. From September 2023 to April of 2024, our Palm Springs STR brought in $73,000 of revenue. This was enough for it to be a profitable rental after accounting for the mortgage, property taxes, and all the other sizable fees related to running a STR.
Rental activity (and rates) go down over the summer, but I am hoping for another big fall and winter season.
Palm Springs has enacted yet more regulation that limits the number of rental permits per neighborhood. This will limit the supply of short-term rentals in the city over time, which therefore makes our house even more of a scarce commodity.
This article goes over many of the various strict regulations in Palm Springs that govern short term rentals: Palm Springs Short Term Rental Regulations: An Insider’s Guide.
Our kids often ask when we’re going to visit Palm Springs. We all have a lot of fond memories of renovating the house together in the pandemic. Alas, it’s a bit out of the way now since we no longer live in Los Angeles, so I don’t know when we’ll be back.
When it comes to our other short-term rental, it’s a bit of a different story.
The Broken Bow bubble has popped
In early 2022, I wrote this post about purchasing a short-term rental in Broken Bow, OK. At that time, Broken Bow was one of the hottest short term rental markets in the country, commanding high nightly rates and occupancy. Since then, market conditions there have changed dramatically.
Specifically, three factors have conspired to increase competition and decrease rental rates:
- Increased cabin supply from rampant construction
- Decreased renters from economic conditions
- Decreased rental rates from the Airbnb bust
Lack of regulations can be fun because it allows for quick responses to business opportunities. Broken Bow has very few regulations and permits required to build a home, which allows for rapid construction.
This was great for investors responding to the business opportunity that existed in Broken Bow a couple of years ago. But it also led to a rapid increase in the available cabins in the area. In fact, the number of cabins for rent quadrupled over the last 5 years, according to this article by the NY Times.
Now with the economy arguably on shakier ground due to higher interest rates and inflation, there is a combination of lower demand and higher supply. This has led to a definite cooling of the vacation rental market in Broken Bow.
What I’m seeing in Broken Bow
Nightly rates are down, which makes it tougher for cabin owners to turn a profit on their investments. I underwrote my investment at an average nightly rate of $650 based on the prior 12 months of AirDNA data. Currently, average nightly rates are closer to $420-450, which is about 30% lower than before.
When it comes to my cabin, it’s still renting, but due to the competition and lower rates, it’s operating at a loss of around $2000-4000 a month.
What’s more, I think the cabin is currently worth about $200,000 less than when I purchased it, based on recent comparative sales. Since most people are buying cabins in Broken Bow as an investment, higher borrowing costs and lower rental rates directly impact the value of the cabins.
What should we do?
There are two options moving forwards:
- Wait for conditions to improve
- Cut my losses and sell the property at a loss
Between the two options, I’ve decided to stick it out for the time being as I consider a sale later this year. The income from the rest of my portfolio can subsidize this cabin for now, but of course it’s not an ideal situation.
I view this as a cautionary tale about short term rentals and real estate in vacation destinations. It’s much more volatile than other types of real estate!
Also, it’s a great real-life example of a real estate bubble. It’s generally thought to be impossible to know that you’re in a bubble until it pops, but it’s pretty clear to me that the Broken Bow market has popped.
Our Long Term Multifamily Real Estate
Our long-term multifamily portfolio is a bright light in this update. With rentals spread across the country from California to Indiana, I have 26 units of long term multifamily. It’s a combination of single-family homes, duplexes, and small apartment buildings (plus an empty lot).
I’ve finished most of the capital-intensive renovations I need to do for the buildings, so I have focused more on keeping my units rented and my tenants happy.
I did have an interesting situation for our SoCal units, which turned over in January. After some renovations and upgrades, I attempted to rent out the property myself (from Memphis). While the smaller unit rented out quickly with tons of interest, the larger (more expensive property) remained unoccupied. Especially for the larger unit, the rental process was both incredibly time consuming and ultimately ineffective. So in April, I hired a real estate agent. He found a great tenant within 2 weeks.
Now with our SoCal units fully occupied, we’re enjoying overall high occupancy and steady cash flow across the portfolio. It’s been a big contrast to our short term portfolio.
Lessons in volatility, vacancy, and vacation rentals
In general, my experience as a real estate investor over the past year has strengthened my commitment to long term rental real estate. My short term rentals both delivered massive tax savings, but they have also given me a lesson in volatility.
Currently, the negative cashflow from the short term rentals is dragging down the returns from my overall real estate portfolio.
As I learn more about real estate investing, I’ve come to appreciate the importance of minimizing vacancy. It’s one of the biggest factors to increase revenue. This has led to an increased emphasis on both tenant retention and marketing to help reduce the length of vacancy related to unit turnover. Also, I’ve come to appreciate the help of professional real estate agents to help find tenants!
The STRs take up a huge amount of my attention and time, mostly related to the increased maintenance needs of vacation rentals and the need for excellent customer relations. I’ve tried to mitigate this with an experiment in using property management, but so far it hasn’t met my standards.
Overall, I’m looking forward to decreasing my exposure to short term rentals over the next year. This will allow me to recommit my attention to long term real estate, both in Cereus Real Estate via syndication offerings and in my own portfolio.
Conclusion
I hope this is a good catch up regarding my real estate investment portfolio.
Overall, I feel that my long-term portfolio is performing well. On the other hand, my short-term rentals are consuming a large amount of my time, attention, and capital.
At the time of their purchase, the data I used to analyze the short term rentals was correct. However, I understand now that the world of vacation rentals can change very quickly. While I’ve enjoyed immense tax savings from the STRs, I don’t think I would buy them again if I could do it over again.
The worst performer out of all my properties is my Broken Bow cabin. It’s a great property and well loved by guests, but the Broken Bow vacation rental bubble has clearly burst.
If I could go back in time, I’d take all that time and capital and put it into buying more long term rentals or syndications.
On the other hand, I’m really enjoying my experience building Cereus Real Estate. I love talking to investors about the benefits of long term real estate investments. Given my own experience over the past five years, I’ve come to appreciate the stability and economies of scale of larger volume assets like apartment buildings.
I look forward to growing Cereus in the months and years to come into a premier conduit of investment capital to help investors achieve their dreams of financial freedom.
Daniel Shin, MD
The Darwinian Doctor
Experience the financial benefits of real estate without dealing with the headache!
Want to support the blog?
- Join our investor club at Cereus Real Estate
- Visit my Recommendations page
- Check out my wife’s food blog: Eat Dessert First
- Stay at our luxury short term rentals
- Check out my TikTok channel
- Follow me on Instagram
- Follow me on YouTube
- Contact me with questions
