Short-term rentals are an asset class many passive investors have not yet invested in. This emerging asset class presents unique opportunities, deal structures, and deal structures. Join Jim Pfeifer as he talks to serial entrepreneur, real estate developer, and experiential hospitality expert Richard Fertig about the asset class everyone is talking about, but few are investing in: short-term rentals. Richard is the Founder of Stomp Capital LLC and Short Term Rental University. Listen in as Richard talks about learning how to look for the best alternative assets, staying away from the crowded trades, and having the mindset that missing out is okay, but losing money is not. He explains how obstacles can be opportunities and by going through them, you can often maximize your success. Discover the short-term rentals asset class today!
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Short-Term Rentals: Turning Obstacles Into Opportunities with Richard Fertig
I’m excited to have Richard Fertig with me. He is the Founder of Stomp Capital and the Founder of Short Term Rental University. We will be talking about short-term rentals in this episode. Richard, welcome to the show.
Thank you so much. I’m excited to be here.
I’m excited, too. The way we usually start is for you to tell your journey, how you got into finance to real estate, and then how you finally landed in short-term rentals.
It’s all one and the same. It starts with my personal identity. I view myself very much as an investor. My investment thesis started the short-term rental exploration a couple of years ago. Let me share with you my background, why I consider myself an investor, and then lead into why I discovered the short-term rental emerging asset class. We can then talk about why it’s the right place to be.
I graduated from Cornell in 1991. At the time, I had skipped a grade, so I decided to go skiing for a year and get 100 days of fresh powder under my belt. I very much value life experiences. I also think that in those life experiences, you get creativity and excitement. You live in this peak state environment. Even back then, I always valued experiences. I did something about it.
When I finished that, I went to work at the Chicago Board of Trade as a clerk. What’s interesting about clerking, and then ultimately, a trader, is that as a market maker, we make two-sided markets. I don’t care what the asset is. I don’t care whether I’m buying or selling. It creates a great discipline for both risk management and making two-sided markets. It means that at any given point in time, I will buy this asset at X, and I will sell it at Y. It’s different from the way most investors think, where generally speaking, they are loan-biased and loan-only. I had the discipline ingrained in me to manage risks, and you must also sell. I enjoy that.
I became a trader faster than anyone else at my firm. Within 45 days, I was running principal capital and making risk-on trades and also risk-off trades. I very much enjoyed that but didn’t enjoy the physicality of the trading pits. It’s a brutal environment. In fact, they don’t even exist anymore. I wanted to continue finance, trading, and creating profitable trades but from an office-type environment.
I went to business school. I was fortunate enough to graduate from the Wharton School at the University of Pennsylvania in 1998. I had multiple routes and opportunities. I was, at the time, an intern at Swiss Bank at their O’Connor group, which is the pre-eminent derivative shop. We were working on exotic derivatives.
[bctt tweet=”If you can consistently have equity-like returns with bond-like volatility over time, you win.” via=”no”]
While that was super interesting, I also had an offer from The Blackstone Group to join. I was the first associate hired into what was known as the Blackstone Alternative Asset program. That was $1.1 billion of the founders’ capital. Pete Peterson, Steve Schwarzman, and some of their partners wanted to have the following outcome, which was equity-like returns with bond-like volatility.
Back then, it sounded too good to be true. For any investors that are reading, that’s like the Holy Grail. If you can do that consistently over time, you win. By way of exploration and example, that same group that I joined in 1998 with $1.1 billion is now north of $70 billion. It’s the largest alternative asset fund-to-funds platform. There was a lot of institutional interest in that sort of investment in methodology. We did quite well.
I was recruited a couple of years later by the Ramius Capital Group. They wanted to do the same investment and take advantage of that same opportunity. I joined them. I was the fourth employee. The founders there were Peter Cohen, ex-CEO of Shearson Lehman Brothers. I worked directly for Tom Strauss, who is ex-President of Salomon Brothers. They had $110 million of their capital. Over the next eight years, I ultimately rose to become Co-Head of Investments in the Fund to Funds Group.
We had about 55 people reporting to me. I have a lot of experience finding alternative assets and differentiated strategies, not crowded trades. The reason that we do that is the following. Most people take a look at what’s working. They have all the back data and project simply that what worked in the past will work in the future. We had a slightly different approach where we think that’s very dangerous. Unless you have very strong, compelling reason to believe that the past is going to continue to repeat itself, we believe that cycles are evident and valuations matter.
Consequently, we try and find uncrowded trades where capital isn’t yet flowing. We have a forward-looking investment thesis about what the world will look like in 1 year, 3 years, and 5 years. Our basic premise to managing risk is that if we get to these asset classes, opportunities or trades before others do and we are right, then they too will find it, will start to bid it up, and we ride the appreciation wave up. Consequently, we are doing exactly what we are attempting to do, which is to have low risk and high returns. When trades start to become crowded, we are selling into that and finding the next uncrowded trade.
All of that is to say we have a slightly different view of the world. We try and find opportunities earlier than others. We try and avoid crowded trades because, in our experience, generally, they mean revert. People that get in late could lose money. A lot of the things have been working extremely well, and I will be the first to admit that I completely missed it. I didn’t like multifamily for an extended time. It was largely because of the amount of institutional capital flowing into the space and the compressed cap rates. That has gone on longer than I would’ve anticipated. I’m the first to say that I was wrong and/or missed that.
Missing is okay. What’s not okay is losing money. I will never forget Steve Schwarzman on the first day of the job when he said, “You are helping us run $1.1 billion of our own capital.” He also underscored, “Do not lose money.” Compounding works very well. As long as you have your principal intact, you can continue to compound. Once you start losing money, it’s very hard to break even. You have to make up for the losses.
Missing an opportunity is not a big deal. Losing money is a very big deal. Consequently, we missed the multifamily run in favor of what I consider to be a much more creative risk-adjusted return in the short-term rental space. The basic premise there is that we are buying properties that are on comps. It’s what Mr. and Mrs. Jones paid for their house across the street. Yet, it’s an essence of business that’s generating 2X to 3X, which is what we are seeing versus a twelve-month lease. The reason there is that they can see the risk is mispriced. There’s more demand, less vacancy, and higher rates than people fear.
We are getting paid handsomely to take the other side of the trade, which ties in nicely to what I said earlier as a market maker. I don’t care whether I’m buying or selling. I will take the other side of the trade if the money is good enough. In this particular case, we are making 2 and a half to 3 times more than a long-term lease. We think we are at the very early stages as almost no institutional capital has come into the space. We anticipate we are positioning our investors in stock capital ahead of the big wave of money that will come into it. By way of example, my prior employer, The Blackstone Group, is one of the largest single-family home renters via Invitation Homes. A few years ago, that wasn’t a true statement.
Things can change quickly. The reason they change quickly, the impetus, is that compressed cap rates in one asset class forced them to look for more yield somewhere else. They either have obligations to their pensions, LPs or anything else. We are positioned very intelligently and taking advantage of this opportunity long before the masses. We intend to ride the wave as more institutional capital comes in. I’m an investor first. We have a contrarian approach to investing. We believe that it lowers our risk and maximizes our return. We pull people, tell the story, and show what’s happening. More often than not, we are correct, and exactly what we anticipate happens.
That’s a great start. To make sure everyone understands we are all talking about the same things here, you mentioned alternative assets. Can you talk about what you mean by alternative assets? You have a history in all kinds of different markets. Different people have different words for things. Can we get some clarity on that?
Yes. Alternative assets, what we did at The Blackstone Group and at Ramius Capital, was anything that was not public. An LP investment in a private equity firm is an alternative asset. Venture capital is an alternative. We would look at things like convertibles, commodities, and things that were not mainstream in terms of how people expressed views of the world.
You talked about uncrowded trades. I like that term. How do you find an uncrowded trade? The short-term rental is a great example of that. I’m not saying you are moving on to the next thing yet but eventually, Airbnb and STRs are going to get crowded. How do you find that uncrowded trade, and how do you know when you have found it?
The way that we start our investment methodology is by a top-down view of the world. Most investors that I’ve met start with a bottom-up selection. Let’s use a building. When they find a building and they like it, they underwrite it and say, “Here’s what it generated NOI-wise in the past. I anticipate it will do it again next year,” in many cases, people increase those projections, “It will grow at 3% a year. If it did that in the past, it’s going to do not only that but it’s going to be better in the future.” Some people try and add some value to it and make it even more.
The average investor starts with the bottom-up selection. We start with a top-down view of the world. What that means is we take a look at megatrends. Let me share some that would work for the short-term rental hypothesis, which is to work from anywhere. We’ve anticipated that people would be remote working. I’ve worked remotely for more than a decade. COVID wasn’t the cause for working from home. It was just the accelerant. That trend was something that we had identified earlier. We still believe it’s in the early days.
People that are building campuses like Apple, and great employers, like Goldman Sachs, are struggling to get high-quality employees back in the office because nobody wants to commute. It’s not so much that they dislike the office but nobody likes to commute. Consequently, we think work from home continues to express a very viable investment thesis. We start with what the world is going to look like in the future, whether it’s 1 year, 3 years or 5 years out. We don’t have much more visibility than that. What we try and do is express that view like, “What does it change? What does that mean? What happens?”
[bctt tweet=”COVID wasn’t the cause for working from home; it was just the accelerant.” via=”no”]
Another asset class that I don’t invest in but maybe some of your readers do, is industrial. You would say, “I want to have warehouses near Metro areas because of the advent of Amazon and all this overnight delivery. These industrial warehouses outside of Metro areas are likely mispriced because they are not filled with Amazon Prime. If I’m right that more people are going to take advantage of that, these warehouses would be ideal.” You start to figure out ways to express your view of the world.
The other thing that I spend a fair amount of time on is looking at where institutional capital is flowing. You can see how much they are buying in multifamily and industrial. You can see what the supply looks like. There’s a tipping point. When there’s more demand than there is supply, prices start going up. If you are early in that prices going up, it might still be a good trade.
If you are getting to the place where cap rates are super compressed, and you are at 5%, 4% or 3%, and I’m the first to say I was wrong about multifamily. It went far more compressed than I would’ve anticipated. The dynamic that I searched for is reversed. In my personal opinion, you are taking a high risk for a low reward. We seek the exact opposite, which is low risk for high reward. It can be measured. It is quantitative. Art is in being able to express these forward-looking views and then monetize them.
That’s interesting. You mentioned institutional capital. When are you seeing that come into short-term rentals? Short-term rentals are clearly becoming more popular. In 2021, we were looking around for opportunities to invest as passive investors in syndications. It’s very hard to find anybody who is doing that. There are more and more operators that are pivoting to this. It’s not too late, I don’t think but when does the institutional capital come in? How long does it take to start those cap rates compressing?
We are starting to see some cap rates compressed in the crowded part of the short-term rental space. What I mean by that is that we view the investment opportunity in a variety of different flavors. In ice cream, you’ve got vanilla, chocolate, and strawberry. It’s all ice cream but expressed differently. The average person that’s investing in the short-term rental space is looking at backward-looking data available on AirDNA. They are all buying the exact same thing. For instance, the Smoky Mountains cabins in Gatlinburg, the best in Florida, and all the usual suspects are crowded.
Consequently, we have no interests. We have no bid. We are not invested there. We are looking for the undiscovered gems and opportunities that nobody else is investing in. To circle back to your original question, there’s almost no institutional capital in this space at all. We continue to have a dialogue with small family offices and some institutional investors who are interested, following, and learning more. They don’t know how to enter for two primary reasons. One is that it is operationally challenging.
With that said, when there’s enough money at work, The Blackstone Group and others figure out those operational challenges much like they did when they started Invitation Homes. The operational challenge isn’t enough to keep them out. The thing that keeps them out is regulatory risk. There’s not enough scale. What we are doing at Stomp Capital is addressing both of those.
We take, in our opinion, de minimis to zero-zoning risk. We are building an institutional portfolio that will be somewhere around $350 million of equity with conservative leverage. That should bring us to about $1 billion, which is the entry point for an institutional investor because much less than that doesn’t move the needle and it’s not worth it.
Their biggest challenge is to allocate the amount of money that they have. It’s a good problem to have but it’s a problem nonetheless. They wouldn’t be interested in taking Stomp out at $50 million because it’s de minimis. It’s a rounding error. Why bother? At $500 million, it becomes a little more interesting. At $1 billion, it’s something meaningful as a starting point. They will start to invest, in my personal opinion, when there are portfolios that are interesting, performing well, and are the size that moves the needle on their balance sheet.
I would be remiss to suggest if I didn’t suggest that I anticipate we will be the first fund of that size and of that institutional quality. We are building this for an exit to my former employer, Starwood Capital or somebody like them that says, “Short-term rentals are eating traditional lodging and hospitality market share every single day. Why don’t the hotels do it themselves?” That’s due to culture. The established never disrupt themselves. The incumbent is never the disruptor. It’s the people that come into the space, and that’s because of the culture.
If you run a traditional hospitality asset and there’s a problem, the solution involves labor. You go and hire somebody else. You cross-train or do whatever but you throw labor and capital at it. In the short-term rental space, we have to be more proactive, not reactive. We have to think forward. The way that we do it at Stomp is the future of short-term rental investing, which we niche down.
We know who is coming, why they are coming, and what they want to do, and don’t want to do. We provide all these à la carte amenities that they can add or not add. They pay for what they want. They don’t pay for what they don’t want. We have a centralized concierge. We create a custom-made boutique resort experience in our short-term rentals, which the average short-term rental hosts don’t do at all. They will have to learn to do it to keep up.
That’s a lot of information. It’s great. I want to get to your business model but first, you mentioned there were operational challenges to some of the institutional capital and others getting into this. Can you address what some of those challenges are?
Let me take a step back. I launched the Short Term Rental University YouTube channel. Anybody who’s reading this should go there. I’ve got 6-plus years of videos, 500-plus videos, and 5 million minutes watched. We have all sorts of stuff that I can’t believe we created but it’s there. You can listen to my forecast, predictions, hypotheses, and theses. You can decide whether or not I was right or wrong. It’s all there. The challenges are not in doing what I call STR 2.0. They are in doing STR 3.0.
to have your readers understand what that is, let’s take a minute here and give you a little bit of history. When Airbnb launched a decade ago, and that’s the timeframe that we are talking about. I have been doing this for several years, and I thought it was an incredibly interesting opportunity at the time. When they launched, STR 1.0 was you list anything on Airbnb and do well. The reason was there was no supply. They didn’t have enough inventory, and there was a ton of demand. You could be the worst host in the world and did well.
Since it was working so well, more money came into the space. We got to where we are, which I will call STR 2.0. People started taking it seriously. Hosts realized there was real money here. People started leaving jobs. There are probably dozens, if not hundreds, of people that left W-2 jobs where they weren’t happy to pursue short-term rental hosting as their full-time endeavor and doing quite well at it.
[bctt tweet=”The challenge of short-term rental hosting is to take a soulless generic property and develop it into something unique.” via=”no”]
They are quite talented. They are super hosts. The place is clean. The place is ready. They send you check-in instructions. They give you the bare minimum. That’s not that challenging either for the host or the institution. They can do that. The challenge becomes when you start to do these value-added services where you are creating hospitality. You are taking a soulless, empty but clean, generic property and trying to develop something that’s unique, exciting, and people are thrilled about. The reason you want to do that is so that people start to talk about it, share it with their friends, and give you five-star reviews.
The business economics of it is when you have something that people are excited and passionate about, you have pricing power. You become a price setter as opposed to a price taker. As more people enter the space and there’s more supply, we, at Stomp, and the people that follow some of the methodology and teachings, rise above that. We continue to command premiums even though the rest of the marketplace is competing amongst themselves.
You also mentioned the risks of STR. One of the things that people talk about is the regulations. You mentioned that you buy places where you are not going to have an HOA cause an issue or a city ordinance. Can you talk about some of the regulatory risks and perhaps an uncertain economy? Is that going to affect things? Can you talk about some of the risks?
Absolutely. It’s important because we start with risk management. It doesn’t matter what the outsize return is. We measure the risk first. By way of example, if you go to a casino, play roulette, and it’s 36 to 1, chances are you are going to lose everything unless you get lucky and then hit it on the first one and walk away. We don’t care what the outsize returns look like as much as we care about managing the downside risk. It goes back to what Steve Schwarzman said to me, which was, “Don’t lose money.”
The risks are prevalent. You need to understand what they are and what risks you are willing to take. We don’t take any regulatory risk. One thing that many people do entering this space accidentally is to take a look and try and determine what the regulations are. If there are no rules prohibiting it, they mistakenly think that it’s legal. That couldn’t be further from the truth. That means it’s yet to be legislated. We seek and teach people to invest in only places where it is, in fact, legal.
I take two steps further than that as well. One is we like to have places that tax short-term rental. We believe the communities that benefit from short-term rental are going to have a harder time unwinding the regulations or changing the regulations because they become dependent on them. Those short-term rental lodging taxes might pay for road improvement, schools, lighting or community centers. Almost no communities are running at a surplus. Consequently, if they were to change the regulatory regime around short-term rentals, they are, in essence, taking money out of their own coffer when they don’t have enough in the first place. It’s not foolproof but it’s a great starting point.
The other thing is that we look for places where we are not seeing trends of changing patterns. If it was legal, they put in place permits, then changed the number of permits, and then made it so you could only do it for a few years. Things, where people are starting to change the regulatory regime indicate that if they wanted, they might get it stricter or more highly regulated. For us, we are running a business here. Real estate is a long-term investment. Think of it as a 30-year mortgage on most real estate. If you don’t have a 30-year runway, then what are you doing?
To your point, we recommend that people don’t invest in HOAs. HOAs are very quick to make decisions based on who’s on the board at a point in time and what their outlook is. That’s not a way to run a business. We do have investments personally and also in the fund that does have HOAs but let me share with you how we think about it. One short-term rental that I invest in that has an HOA, I sit on the board, so I have a say.
The other HOA that we have in Stomp Capital, we own and manage the entire HOA. It’s highly unlikely that I’m going to regulate it and make it illegal. I feel comfortable investing in those situations. To the average person buying a condo with an HOA, I recommend that you don’t do that. In certain instances, we’ve gone so far as to work with the community, different lawyers, engineers, and so forth to write new zoning and make it legal. We will be a very active and proactive investor to secure our rights and our investment.
You talked briefly about debt. What kind of debt and leverage can you get on these? These are usually single-family homes. I know you bought a hotel. I want to talk about that in a minute. Are you getting commercial debt? Are you getting personal loans? How does that work?
The average person getting started in the short-term rental space might take a personal loan for a vacation house or an investment property. Once you get past 4 or 5, even traditional lenders don’t believe that you need a fifth vacation rental, so they shy away. That was more important and prevalent earlier on in the short-term rental environment.
You ask how we find the uncrowded trades. We look at how easy it is to access capital. We are like, “Can I go and get a bank loan or not?” If we can’t, instead of shying away from it, we spend more time on it like, “That’s good. That means that if we can’t get a loan, no one else can either.” That’s not a crowded trade. You are like, “Is it harder or easier to get insurance?” “They don’t insure short-term rentals,” we don’t view that as a roadblock or an obstacle. We view it as an opportunity. That’s great. Once everything is easy, and anybody can do this, that indicates to us that it’s crowded. That’s another example of how we view these opportunities as contrarians.
As it relates to the debt environment, putting aside the credit situation that we are in and the recession that’s looming, let’s talk about how a couple of months ago, we were starting to see DSCR-based loans. Those are Debt Service Coverage Ratio loans where they are not underwriting the individual buying them. You don’t have to give tax returns. You don’t have to provide income or a W-2. They are underwriting the asset much like multifamily. They are underwriting the cashflow.
What’s interesting about that, and these are the little data points that we monitor and share with others, they didn’t do it before because of vacancy and unknown pricing, where we started this conversation. Like, “How can I underwrite this? I’m a lender at a very conservative bank, and we like our money back. How am I possibly going to underwrite this risky short-term rental if I don’t know how many nights it’s going to be rented and I also don’t know what price? It’s hard for me to underwrite that.” They are like, “Sorry, sir. You can’t take a loan.”
What they are realizing is, and I shared this with you earlier, the amount of debt service coverage ratio in the short-term rental market is 2X to 3X a twelve-month lease. The vacancy risk is mispriced. The ADR or the price that they rent for is misunderstood. In reality, if a $1,000 studio apartment on a twelve-month lease was put on Airbnb, what we are seeing here on September 1st of, 2022 is if you know what you are doing, you are generating about 2 and a half to 3 times that. That’s $2,500 to $3,000 a month for that same studio or one-bedroom repurposed, not into a long-term lease but rather a short-term lease.
The lenders are starting to wake up and say, “I have a safer loan because there’s three times more cashflow. All I need for this guy to repay my debt is cashflow.” More cashflow is less risky, not riskier. We have DSCR-based loans. Interestingly, very soon, we are going to have non-recourse loans similar to multifamily. Few banks are doing this, and few lenders are doing it but there are some. That’s a step in the right direction. Once everybody can get non-recourse debt based on DSCR like you can in multifamily, that’s an indication to us that the best is perhaps behind, and going forward isn’t going to be as good.
[bctt tweet=”Once everything is really easy and anybody can do it, it becomes a crowded trade.” via=”no”]
I love how you talk about obstacles are opportunities. When something is difficult, other people are going to go find something else. They don’t want the hard thing. If you go after the hard thing, a lot of times, that provides you an opportunity to go somewhere where nobody else is, and that’s where the money is.
I couldn’t agree more. I like to say the following. Most people look at individual assets, and then to price them, take a look at comps like, “Show me what the building across the street did. Show me what this business did. Whatever it is, show me the comp set.” When you have a comp set, that means you have competition. A lot of the things that we do doesn’t have any comps. They are forward-looking.
The fact that there are no comps means that it’s much less crowded. The average person isn’t going to invest in that, and yet, we have confidence and conviction in what it is that we are doing. We are making forward-looking projections and meeting our own hurdles. We love the fact that there are no comps because that means there’s no competition.
Speaking of no competition, how did you decide specifically to tailor the business to, I don’t know if you call it upscale but experiences? I’ve seen some of those properties. It’s amazing that the activities are part of the experience. You’ve branded this. Talk about what that niche is that you found. How did you decide to do that, and then how are you executing it? The way you are doing short-term rental is not what we normally think of as short-term rental. It’s a step above.
One of the things that I always teach people in Short Term Rental University to do is to build it for themselves. If you’ve always wanted a lake house, go get your lake house and put it on Airbnb. During the off-season or if it’s not rented, you increase your quality of life. Going back to experience and peak state, your quality of life is enhanced, and you are making some money.
Everything that we are doing at Stomp Capital is something that I like personally. My bet is that other people will like it too. We have been proven correct so far. The things that we are doing have a huge audience, maybe not in size but in passion. These experiences light people up. If we can delight people and get them to feel alive, whether it’s through kiting, surfing, skiing or anything like that and create these memorable experiences, there are going to be raving fans. They are going to be telling other friends. They are going to give us five-star reviews. In short, they make our job easier.
If we are generic and we don’t light anybody up and just provide lodging, we are going to get competed down. There are going to be more people doing that generic approach. It becomes a race to the bottom. They would be like, “I will do it for $100 a night. I will do it for $98. I will do it for $96.” All of a sudden, nobody is making any money.
I live in Jackson Hole, Wyoming. I’m a passionate skier. I’m trying to improve my surfing. I’m trying to get better at kiteboarding. I love being outdoors, being in the water, and that adrenaline rush. All of that stuff gets me excited. If you think about finding an affinity group, whether it’s stamp collecting, birdwatching or kite surfing, it doesn’t matter what it is. Niche down and appeal to a very specific group. Know who is coming and what they are doing. Build for that, you market that, and create these relationships and loyalty with people as other big brands do.
If you try and get me to switch from Apple to Samsung, it’s not happening. You could give me the Samsung for free and charge me ten times more for my iPhone but I’m still going to buy the iPhone. You have to know who your target audience is. You niche down and create a brand around it, which I have been teaching everybody as well.
The average person in short-term rentals is buying a mishmash of whatever and wherever it is. Worse, they are buying all in the exact same location because they take comfort from the fact that it’s working on 123 Main Street in Iowa. They are going to get the place across the street or the place down the block. They fool themselves into believing that there are operating efficiencies and that remote hosting is hard. What they are really doing is doubling or tripling down on risk and not diversifying at all.
The opposite is true. You should be creating a diversified portfolio that has some consistency and similarity. Create a brand around it so that the person who is into birdwatching can go watch birds in the fall or the spring in different locations. You, yourself, have to be a birdwatcher to know that. You can’t research it and pretend to be an expert. If you are an avid bird watcher, then go pick your favorite places. Have eight different short-term rentals around the world for different birds or seasons.
You can see how maybe a binocular company, the Audubon Society or somebody would say, “This is spectacular. This person rolled up the eight best places to go watch birds migrate, this, that, and the other.” You’ve created some brand equity, real value, and the opportunity to exit. Whereas if you buy everything in one central location or with no rhyme or reason because the backward-looking data looked good, what do you have? You have a collection of individual assets that have no greater value. The point here is to create a portfolio where the whole has more value than the sum of the parts.
That’s interesting. The question is, do you have people who go to your one location, have that great experience, and then go to one of your other properties in a different location? Has that been happening?
That’s the opportunity. We are so early in this opportunity that what we are doing is building to short-term rentals. We’ve all heard about build-to-rent. That’s very popular. We take it one step further. We are developers, and for about half of the portfolio, we develop build-to-short-term rent properties. The way that you build a short-term rental property is different from a traditional home. It can be resold as a traditional home. It’s got the same zoning and so forth. Since we know who is coming and what they are doing there, we build for that.
We have our flagship property at Edgecamp Sporting Club in the Outer Banks of North Carolina, which has a tremendous opportunity set for corporate retreats. There are multiple sitting areas. The BMW Company was having a corporate offsite. They could have sales in this sitting area or this living room and have marketing in this other one. They could do their exercises and then can convene in a larger area. We build these things as opposed to retrofitting.
When we buy assets that are already existing, like the South Hampton Hotel, 62 key hotel, we will gut-renovate the interiors. We are working with incredible designers like Jonathan Adler to come in and put it on brand. We are working with incredible branding agencies to create a brand that ties them all together. We are so early in all this.
[bctt tweet=”Niche down and appeal to a very specific group. Know who’s coming, what they’re doing, and build for that.” via=”no”]
We have yet to do exactly what you said but I’m highly confident that in 1 year or 2 years from now, you will ask me the same question, and I will say, “We had a surfer that was down in our Costa Rica property that we said, ‘Have you ever tried kite surfing?’” When they were interested in it, then they came to the Outer Banks property and said, “You do this and this. Do you also ski? Come visit us in Wyoming or Idaho,” or wherever we ended up buying another ski area. That’s the whole point. It’s about cross-selling or cross-promotion and then also owning the relationship.
We do about 70% of direct bookings in some of our places. We are not reliant on Airbnb, Vrbo or the traditional platforms because then, you are a cog in their machine. We want to own the relationships. The easiest way to think about that is the difference between being an Amazon reseller where the buyer is completely anonymous. You don’t even get their email versus having a Shopify store where I can send it to you and say, “Do you like this product? You might like that product. Did you know we announced this launch?” That’s the goal.
You mentioned the hotel. I’m interested in that. A hotel is, by definition, a short-term rental but it’s a hotel. When you think of Airbnb, Vrbo or short-term rentals, you are thinking of a single-family home, and maybe even a large one like you built in North Carolina. How does a hotel fit into what you are doing? Someone is not going to rent out the whole place. It’s not a home. Tell me what you think about that. It’s intriguing.
Here’s a way that we’ve expressed the short-term rental opportunity set, taking advantage of the regulatory risk. Let’s tell a little story about the Hamptons, which is where I happen to be sitting. We have a corporate offsite starting after Labor Day 2022. We have our branding team coming. We have our design team. My entire team is going to be on location. We are going to start to renovate this project.
In the Hamptons, there’s very little lodging. There are a lot of single-family homes, and short-term rentals are illegal. There are few hotels, so consequently, there is a ton of demand for overnight lodging but little inventory or supply of overnight lodging. What we’ve done is we’ve gone up the zoning quality. Instead of waiting for them to make short-term rentals legal for single-family homes, we’ve purchased grandfathered short-term rental zoning that will never change. The county needs this lodging.
They approve of what it is that we are doing, so we’ve bought short-term rental zoning that’s legal and likely forever in perpetuity without any future competition because they will not build another hotel here. The first thing that we did was buy the zoning. The second question, which is more relevant to what you were getting at is, “How do we make this into a short-term rental?” The reality is going back to what I shared earlier. Most hospitality and hotels throw labor at problems.
You have somebody at the front desk to check you in. When somebody has an issue, they pick up the phone. You answer and send somebody over there. It’s all about being reactive and having people on staff that are able to be there when an issue arises. The short-term rental approach to hospitality is quite the opposite. We know who is coming and what they are doing. We can enable self-check-in. What we have at Stomp Capital is a centralized concierge.
We can have the phone answered wherever in the middle of the country, and they can help you, whether you are in the Outer Banks or South Hampton, or Nosara, Costa Rica. We have one general manager or property manager that can come and facilitate but we don’t have ten people standing around waiting for the phone to ring. We are anticipatory. We try and design everything so that it’s comfortable and intuitive. It’s almost like you have been there before, and everything works.
That’s interesting because that could change how hotels work in the future. Since we are able to automate so much, and I didn’t think of this until you said it, what do you need someone standing there at the desk waiting if someone has a problem? They are not doing much.
They are not doing much, and we know because we run the existing asset. We bought this asset. It’s operating and cashflowing. It’s very accretive. We love the cashflow. We continue to run and operate the business while we meet with the teams and so on. In a year or two, it will be on brand and different. In the meantime, it’s a cashflowing hotel, which we appreciate very much and so do our investors.
The reality of it is that there’s a low likelihood that the hospitality industry does it themselves because their culture is to throw labor at it. You need somebody to come, disrupt it, and say, “I’ve never done this before.” If I was going to start from scratch and had these automated locks and the central concierge, and I am a frequent traveler myself, so I know what I like, what I would share with you is that there’s a time and place for full service.
I love a 5-star, 4 seasons experience as much as anyone else but I don’t love it every single time. I don’t either want to pay for it every single time or there are instances where they are in my way. I don’t need to say hello twelve times entering and exiting the hotel. That doesn’t benefit me particularly. There are times when I want it, and I want to feel like I’m being pampered and taken care of. Most often, I want to enter and exit and maybe be left alone.
Better yet, in the STR 3.0 world, I want to be surrounded by a community of people that have similar interests as mine. As I come and go, I’m saying hi to this new person that I met who also is a bird watcher or a kiter. We are all doing the same thing. That takes on its own separate energy, whereas, in hotels, it’s anonymous. They don’t care who comes. They don’t know who is coming. They don’t know why they are coming. You enter and exit. You say hello to the elevator, concierge, valet, and front desk person, and then it’s not necessary anymore.
If I’m a passive investor, we do multifamily and all kinds of other asset classes. We focus on the sponsor and operator and vet them to make sure that we are comfortable with them. That’s maybe 75% or 80% of the analysis, and then the last 20% is analyzing the market and the deal. If someone was going to invest in STR with Stomp or with anyone, how should passive investors vet the operators? Most of them are going to be new because it’s a new asset class. How do I analyze the deal to know, “This is what I want to get into.”
You should do a thorough background check on any sponsor, no matter what the asset class is. We have people that can conduct background checks, criminal checks, and Google checks. Spend as much time as necessary to get comfortable that whoever it is, is ethical and has no skeletons in the closet. That’s very important. The other thing is to take a look at the entity and the structure that they have.
We are SEC-registered. We provide audited financials, which means that there are people monitoring and looking over our shoulders. We have an administrator. We use Juniper Square. It’s our second set of eyes. That’s the first pass. It’s like, “What is the structure? Who is the individual or individuals behind the offering?” Take a look at your alignment.
[bctt tweet=”Going forward, short-term rentals will command some market share and will trade based on net operating income.” via=”no”]
I have more than $10 million co-invested. I’m the single largest investor in the fund. I anticipate and will be for a lengthy period. I’m invested side by side with the investors, so I have a real capital commitment to this. The way that I view this space is that this is what I’m doing with my capital. I’m inviting others who believe in our vision and the opportunity set to co-invest with us. That’s different from many sponsors who are doing it as a job or a profession. Maybe they are raising assets and getting fees. We collect fees, make no mistake about it. We live in a capitalist society, and we don’t apologize. It allows us to get some of the best talents on the planet.
We have the best team I’ve ever worked with. I’ve worked at firms like Blackstone, Ramius, and others. The team that we have at Stomp Capital is, in my personal opinion, superior to any team I’ve ever worked on. They’ve left incredible jobs and incredible opportunities. We pay them commensurate with their skillset. Our goal is to pay them even more as we become even more successful. Find out if your interests are aligned with what the GPs capital commitment is. Personally, a small commitment is a flag either of inexperience that they haven’t generated wealth themselves, or not a belief in the opportunity, or they are just doing this to collect fees.
It’s always interesting to get into a new asset class as an investor. I do chase the shiny object. I tried to invest in some of the boring stuff but it’s always interesting to put some of your capital in new things, speculative things or new interesting asset classes. It seems like this one is poised to take off. Being in on something that is so unique and disruptive is pretty interesting to me.
I hear you on the Shiny Object syndrome. We all suffer from that to a degree but we can intellectually analyze whether this is a shiny object or a real opportunity. Let me give you a couple of thoughts on that. Single-family homes are the largest real estate asset class there is. I went to a professional real estate investment conference where somebody put up a slide on the nine different flavors of real estate investing. It was industrial, retail, commercial, office, multifamily, etc.
Do you know what was missing that wasn’t even on these professional real estate investors? There was not even a line item for short-term rentals. That’s how much market share this is commanding in a professional real estate institutional investor’s mind, which is zero. We can all agree it shouldn’t be zero. Maybe it’s 1%, 5% or 10% over time but zero is the wrong allocation. That’s the first thing I would say.
The second thing I would say is that in every one of those flavors that we talked about, the only thing that matters from a valuation perspective is net operating income. If it’s in better and good shape, you might pay more off of the net operating income but what you are underwriting is the net operating income. Yet, in the single largest asset class in real estate, where there are zero institutional investors, net operating income doesn’t even factor into the valuation whatsoever.
In fact, if you go and ask a broker, “Is this house on Airbnb?” They won’t know or will say, “I don’t think so,” or say, “I don’t know. Let me find out.” It turns out it’s on Airbnb, and the thing made $250,000 but you can still buy it as if it had zero net operating income. That’s mind-blowing. That’s not right. Why would I buy a house at zero net operating income for the exact same dollar amount because it’s across the street versus the one that’s generating $250,000 a year that’s proven and has paid taxes on it? That’s how early we are. It doesn’t take a rocket scientist to connect the dots. Going forward, short-term rentals will command some market share. They will be on the next slide five years forward. That percentage might be 3%, 5% or 10%, and short-term rentals will trade based on net operating income.
That’s gold right there. That’s fantastic. It’s a great way to look at it. I love it. We are over time because this was so interesting. I appreciate that. The last question I ask is, what’s a great podcast that you like to listen to? It could be real estate or otherwise if you are a podcast listener.
I’m not a podcast listener because I’m incredibly busy creating podcasts, other content, and so on. I do believe that when you sent me the question before, you asked about a book. I’m going to share with you a book that I recommend to my kids and everyone who asks. It’s easy to read. It’s a lot of fun. It was written in the early 1900s. It’s about the psychology of investing. It’s as relevant back then as it is now. It’s called Reminiscences of a Stock Operator.
Pick that up and take a look at boom and bust and contrarian investing. When things get hot, that’s when you should be selling. Warren Buffett talks about being greedy when others are fearful. It’s the same concept but this book was written many years ago. It’s still relevant and easy to read. It helps shape investment thinking in a way that you may not read or comprehend if you don’t like investing or reading.
I haven’t heard of that one. My next stop after this is to order that book and check it out. If readers want to get in touch with you or learn more about Stomp Capital, what’s the best way to do that?
The first thing I would ask is if you are on Twitter, follow me @ImRichardFertig. You can then go to StompCapital.com and learn an awful lot about the investment thesis, our properties, and what we are doing. If you fill out a quick form and give us your email, you will get on our distribution list. We’ve got thought pieces that we pen. They are starting to get picked up by the press, and we are being interviewed as thought leaders in this space. The content that we are generating is extremely high-quality and valuable.
If you are interested, we can set up a one-on-one, have prospective LPs, and learn more. We have a whole team that handles all that. Those are the easiest things. If you want to do it yourself, go check out Short Term Rental University on YouTube. It’s a great place to start. I’m proud of that body of work. You will see me going through a variety of changes. I was in the cocoon, and then I was a butterfly. I’ve got long hair and short hair. You will watch the whole transition.
In short, listen to the ideas, methodology, and concepts and think about whether the stuff that I was saying a couple of years ago is proven true or not. It will help investors recognize that what we are doing here is extremely well-thought-out. It’s compelling to the tune that it’s my single largest investment and likely will continue to increase in size, not decrease. We are so early that I can’t think of a more compelling real estate play or any other play, to be honest.
This has been fascinating. I appreciate your time. Thank you so much for coming to the show. We will follow you and see where you go next. It’s exciting to watch and learn about.
It’s my pleasure. I appreciate you inviting me and the readers’ time. Thank you very much. Please reach out if you have any questions or DM me on Twitter @ImRichardFertig. Thank you.
Thanks.
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That was a really interesting episode with Richard. It started out by how he values life experiences and learned that right out of college. Instead of going and get the job right away, he went and skied a hundred days, and that’s just awesome. It’s great that you were doing this for a reason. We are trying to generate wealth and doing all this. It’s to have life experiences, and that’s what your time freedom and money freedom give you. He’s into that, and that’s cool to hear. I liked how he talked about, “Missing out as okay. Losing money is not.” We get so many deals coming across our desks, and they are all super interesting. Sometimes you have to say missing out is okay.
MC Laubscher said, “The joy of missing out,” the JOMO instead of FOMO. You take pride in, “I didn’t take that opportunity,” and maybe it will be a home run. Maybe it won’t but you don’t need to get into every one of them. The key is don’t lose money but it’s okay to miss out on opportunities. You don’t have to feel like you need to jump into every single one. I thought it was brilliant how he’s looking for Airbnb or short-term rental properties in places that will tax him.
He wants to pay that tax because what that does is it creates an incentive for the community, that the local government wants to keep him and keep his regulations in place. They allow short-term rentals because they are going to become dependent on that tax revenue. He doesn’t mind contributing and paying those taxes because he knows that’s going to make it harder to change the rules and get rid of short-term rentals.
He seeks that out. It’s the same where if he sees a problem with Homeowners Association, Airbnb short-term rentals, people don’t like Homeowners Association, so what does Richard do? He gets on the board or buys all the properties in the Homeowners Association. In effect, he is the Homeowners Association, so that de-risks everything. It’s a brilliant strategy. That leads to the most impactful thing he said, “Obstacles are opportunities.” If there’s an obstacle, most people are going to go towards it, see it, and be like, “I’m moving on to something else because it’s too hard to worry about the zoning or the taxes or whatever the issue is.”
That’s life. Obstacles are going to be there but if you can overcome and get through them, there aren’t going to be as many people on the other side. That means that there are going to be more opportunities for you to accomplish whatever you are looking to accomplish. Richard has a great mindset on a lot of these things. Listening to him, you get a lot of wisdom.
We learned a lot about short-term rentals and how to position assets but more. I’m going to read this a couple of times. You are going to get a lot of things about mindset, how to value life experiences, missing out is okay, and obstacles are opportunities. That’s all gold, all great stuff. I’m definitely going to be paying attention to Richard, see how he grows, watch his assets, and see what happens because it’s certainly an interesting story, and I want to see how it turns out. That was a great show listening to Richard. I really appreciate him being on, and that is all we have. We will see you next time in the Left Field.
Important Links
- Stomp Capital
- Short Term Rental University
- Short Term Rental University – YouTube Channel
- Edgecamp Sporting Club
- Juniper Square
- Reminiscences of a Stock Operator
- @ImRichardFertig – Twitter
About Richard Fertig
From a diverse, multicultural background to a self-made, serial entrepreneur, real estate developer, and experiential hospitality expert, Richard Fertig is the personification of the American Dream. A dynamic business leader with over 30 years of experience, Richard continually finds blue ocean opportunities with asymmetric risk profiles.
Richard is an innovative real estate developer focused primarily on the STR (short-term rental) market, creating branded experiences to delight raving fans with his signature “modern hospitality.”
In 2020, he entered the boutique hotel industry through the acquisition of strategically located assets, including a surf and yoga-inspired hotel in Nosara, Costa Rica, and launched the Edgecamp Sporting Club on the Outer Banks of NC with his flagship 14-bed, 12,000 sq ft, purposefully designed, custom-built clubhouse designed to grow and encourage community. More recently, Richard has added boutique hotels in Palm Springs, CA, and Palm Beach, FL bringing his growing portfolio to 4 world-class locations.
Richard shares his proven short-term rental strategies that continue to resonate with his 70k+ YouTube followers, 50k+ Facebook Group members subscribed to Short Term Rental University, and 16k+ Twitter Followers.
Prior to his entrepreneurial journey, Richard was the Co-Head of Investments at Ramius Capital, a $4+ hedge fund in New York City. Before that, he was an Associate at The Blackstone Group and was one of the first hires for their hedge fund-of-funds business, now one of their largest units. Richard graduated from Cornell University with a Double Major in Psychology and Economics and earned his MBA in Finance from The Wharton School at the University of Pennsylvania.
Richard and his fiance Erika split their time between Jackson Hole, WY, and the Outer Banks, NC, where they live with their two puppies, Jackson and Bo. Richard is an outdoor enthusiast and an avid skier, surfer, and kiteboarder.
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