Not sure if forming a REIT is optimal or if managing specific individual's investments would be better, but the gist of my situation is:

- In 2 months, my good friend will be receiving a 10 figure acquisition of his company, provided SEC doesn't discover any monopoly issues (they won't, it's a small acquisition relative to the field size). He's CEO and a lot of the execs, including him, are being replaced or retiring. I will essentially have access, through my friend, to about 7-10 individuals with 8 figures in the bank looking for new investments.

- I've been running an Airbnb business for the last 4 years. We buy properties in zip codes that appear to be profitable via various data sets I've purchased (I have purchase price to rental income [gross airbnb revenue] ratios per zip code in the US), furnish them and turn them into vacation rentals. We have in-field teams in each city that manage each of our listings, and an online management that handles all communication for 3%. It's all very automated. Currently we only have 9 listings, but our ROI on pure cashflow (not including appreciation) has been pretty absurd. For properties we put 25% down, the average return has been around 32%. For cash buys, around 12-15%. If I exclude the money going into principal on the 25% down properties as an expense, it gets closer to 38-40%.

- I'm likely running above expectation, and as each city gets more saturated with more VRs my income will decrease, however I still have other cities I haven't purchased in/tapped into and I think even 10% would be appealing to the average investor. All of our listings are 5-stars, we respond 24/7 within 1-hour and we use some neat pricing algorithm software so this likely contributes to our over performance. I also recognize that there is legislation in the works to ban/regulate/tax Airbnbs in many cities (e.g. Santa Monica, SF, NYC) - fortunately we're not in any those. Personally I believe Airbnb/VRBO/Flipkey is too big to stop unless the city hires dedicated staff to monitor and regulate, but if a ban did occur then the REIT/LLC/whatever I end up doing would take a hit and I would either sell/move to another city or put in a long term tenant for less return.

My question is: what is the best strategy to get these execs to invest with me?

Option A) Form a separate LLC with each investor with a min investment amount, and acquire some type of asset loan with higher interest for each LLC to leverage into more properties?

Option B) Know close to nothing about this, but form an REIT to handle all investments. This option seems more easily scalable.

Option C) ???

I also forgot to mention that the CEO bought two properties through me exactly 1 year ago and we did 15.8% our first year together. I approached him with this idea a few days ago when I learned about the acquisition and he seemed open to it.

I just want to clarify that I am not attached to a REIT as the flowthrough structure I'd like to go with here. Based on some reading I've done today, it actually seems like an extremely poor choice. REITs have very specific rules and regulations on distributing out profits, minimum number of investors, concentrated ownership (there can't be any), etc. The insurance plans required are absurd, and I'd have to distribute >90% of my taxable income. Seems overtly complicated.

I'm thinking the best strategy would be to form a single LLC as I'd have significantly stronger borrowing power vs separate LLCs with each investor.

Where would I find a consultant that would be best for the type of advice I need here?

Tax/RE attorney.

IMO be careful at trying to expand too quickly. Sounds like you are hoping for a very large bump in size.

The problem with Airbnb is that they're only semi-legal IMO. Most countries/cities have regulations with respect to running a hotel and Airbnb basically just ignores the law but there haven't really been too many issues so far. But that could all change very quickly.

Same thing with Uber.

I know that there are some people who have complained about people running an Airbnb hotel in their neighbourhood. They don't like the fact that there's always new people in their neighbourhood, some of whom might be loud and like to party. If you buy a house in a nice neighbourhood, you might not want to essentially be living next door to an unregulated hotel. It's basically violating zoning laws and a bunch of other things.

1) There will never be a national Airbnb ban, only (potentially) city-wide. So the idea that "something legal will come up and I will not be able to continue doing this" is not possible on such a grand scale - only locally. I intend to be in 20 cities, we're already in 4, 2 of which are legal, the other 2 are on the way. So if one of my cities suddenly banned Airbnb outright and then dedicated the salaries/resources to prosecute/ticket illegal Airbnbs, 1/20th of my cashflow would take a small hit while I either move out of that city or turn them into LTRs.

2) I believe the vacation rental industry will have a similar story to Uber - it is such a large machine that it can't really be stopped. Ultimately it will just be legalized and taxed or nobody in city X will care. Most large cities have thousands of listings, none of which share their address online (you often just see a bubble or a pinpoint) - how is a local govt really going to prosecute them? There are also many different sites (VRBO, Homeaway, Airbnb, Flipkey to name a few), if one magically gets shutdown I would experience a minuscule traffic hit. Also, there are in fact many cities where running a VR is technically illegal currently yet the local govt doesn't have the resources to prosecute. I believe Santa Monica and NYC are the first cities to hire staff dedicated to prosecuting and ticketing.

3) Again, the sentiment among people in the industry is that given the many benefits of having VRs in a city, local municipalities will ultimately just legalize and tax it. I have to pay a 11.5% transient occupancy tax and small permit fee to operate in one of my cities. An economic impact study was conducted in one of my cities that showed:

In 2013, approximately 100,000 visitors to the CITY area stayed in private home rentals. These visitors made a substantial contribution to the CITY metro area economy. They generated a total economic impact of $174.8 million, comprised of $99.8 million in direct spending and $74.9 million in secondary spending. Visitor spending also resulted in the creation or support of nearly 2,200 full-and part-time jobs. These jobs are expected to create a total of $56.1 million in additional earnings for residents of the CITY area.
Visitor spending is also estimated to generate a total of $10.8 million in tax revenue for state and local governments. Of that total, roughly $6.1 million will go to the State of CITY, and $4.7 million will be claimed by local governments in the CITY area.

4) Lastly, I don't believe these are "high risk" investments. In the .1% chance something drastic occurred and all 4 above-mentioned sites were shutdown, I could turn them into STRs or sell and return the money to investors minus maybe 15K per property. Some of these city's appear to have 7-9% LTR cap rate.

We currently have 9 and I'd be looking to get another 20. Does that seem unreasonable and if so why?

Perhaps look into a Reg D 504/505/506 offering and definitely consult an attorney. (no legal advice here)

I'm curious about the business model. How are you financing the homes? And how do you plan to finance the next 20 homes (if at all)?

What does your in-field team look like? Do you have staff on payroll in each city?

Regulatory risks aside, I would be very concerned about how this business model works in a down economy. And I am skeptical on the backup plan to just convert them to rentals - surely you won't get close to your target yield. Heck I wouldn't be surprised if you cash flow negative if leveraged. What are typical numbers for purchase price, vacation rental income, and residential market rents for your houses?

bolded is what i think can be a real future issue/driving factor in possible bans (less likely) /new introduced future legislation (most likely) for Airbnb in cities across the US. Right now were in such an infant state of people running airbnb hotels from their houses/condos that its hard to grasp what consequences this will have for future airbnbers.

all it takes is a small group of local residents/neighbors that live in a particular popular neighborhood that you are looking to get into complain to their local government about safety/noise/ worsening of the "neighborhood" feel ect that comes with strangers constantly entering/leaving their neighborhood for a change to be made (i assume the stats you purchased highlight specific zip codes that are most attractive to enter into). i know for a fact this is currently going on in several high end touristy areas in the OC area beach cities with regards to STR's.

while its hard to predict what changes will be mandated by local govts in the future, i would be more worried about what local governing boards/HOA's ect decide to do if these apply to your prospective properties in new cities as these governing boards can act/change policies much more efficiently/quickly than govt.

specifically, i own 2 condos in la that i'm currently doing the LTR path (my HOA strictly monitors STR's and STR's are strictly prohibited in the CC&R's) and from what i understand most condo developments all around LA have either banned Airbnb types altogether, or are currently in the process of doing so (I'm close w/ ppl on the boards of several of these buildings in the dtla area and from what i understand most of them are in the process of re-writing/editing CC&R's that basically make it terrible to STR if you get caught). something like if you are caught you are liable to forfeit a certain % of the profit you made since you started (don't know how they will enforce this, but prob a good idea to not get into lawsuits with HOA's/governing boards when you are clearly in direct violation of the rules).

i would also be concerned as an investor about the potential loss in cash flow if/when you have to sell or convert STR's into LTR's if legislation forces you to in certain cities. certainly your numbers are good or even great now for the last few years doing the airbnb route, but a change in govt policy can literally cut your cash flow by 50% for each property if you have to convert to LTR's.

what happens during a down economy when you have 20+ properties w/ mortgages where you relied heavily on much higher cash flows using airbnb to covers your expenses and then several of your area sites are shut down? how can you cover these expenses when the value of each falls 10-20+% so selling is out of the question and the conversion to LTR route yields 40-50% less cash flow than originally calculated?

And when/if these changes come, a big Airbnb company like the one you are describing will be an easy target. If you're just one person renting out your primary residence when you go on vacation twice a year, that's less likely to draw attention. If you're a big company, generating millions in revenue per year, that owns multiple properties that are used solely for Airbnb all year round, you become a target.

Anyways, that's one of my main concerns (not that I really know anything about this business). That's not to say that the business is a bad idea, but this is something you should be aware of. If the money is as good as you say it is, it might still be worth the risk. You might be able to make enough money within the next couple of years to justify the risk and still make it profitable even if changes occur at some stage down the road.

Asset loans for the next twenty but I'm waiting on IR quotes/more info from some lenders. Anyone have experience with this?

Ideally 500k min investment/5 mil total from investors. If this works it might be scalable à la https://www.betterment.com/

No payroll. Cleaners/backup cleaners, handymen/backup handymen, etc in each city are paid by the job. Auto-notified by my 3% company of cleans/when issues arise.

Most of my properties are ~250-300K with expected LTRs around $1,600-1,900/mo so I wouldn't be cash flow negative in the event of a STR ban but it'd be close.

Again, in the 4 cities I'm in, two are completely legal/permitted and I pay transient occupancy taxes, the other 2 are very close. The STR community is HUGE. We've had hundreds show up for city council meetings. So far our opposition has only been local wealthy homeowners who were unlucky with a party-Airbnb in their neighborhood. Almost all HOAs/condo associations are against STRs and we don't buy there/don't promote violating anyone's bylaws. We're only buying in cities where it's legal or close to legal.

Cstevens, the big cities you referenced would never be profitable as STRs nor LTRs. Purchase price to income ratios in LA/OC/NYC/SF etc are unappealing. Conversely, these are the only cities that can afford to hire the amount of staff required (4+) to prosecute and ticket illegal STRs. The local municipalities in my target cities hiring these same staff? Highly unlikely.

Another interesting aspect of STRs is I don't experience occupancy rate issues - it gets better year after year as each new 5-star review boosts SEO and I get return visitors. What's the average vacancy for LTRs over 4 years? I'd imagine 2-3 months?

So far it seems people are stuck on future potential legal issues - over the last 5 years the only two cities to outright ban Airbnb are Santa Monica and NYC so we're talking about a slim probability event of which the overall net effect on the expectation of this business is minuscule.

How do typical REITs handle liquidity concerns? i.e. if I receive 5 mil and investor A wants his 500k back.

Also what's their fee structure? I was thinking 20% of profits with a bonus if target X is achieved.

Given how strong dollar is right now and most certainly less probability of future legal concerns, I'm considering international cities as well.

i don't know much about the timeline in terms of reaching 5-star review status on airbnb, but won't occupancy be an issue when starting up with the additional 20+ properties? your current properties have been on airbnb for 4 years with prob hundreds of visitors/reviews that improve occupancy/exposure year after year, however were your numbers always this appealing when starting out (excluding the property bought 1 yr ago)?

I'm not familiar with REITs but for private placements, which I think is a better option for you, there are usually minimum lockup provisions of a couple years at least, as well as restrictions on selling interests. In my experience the general partner and/or existing shareholders will get a ROFR.

You could structure it so you get a management fee plus a % of profits over a hurdle rate, or a lower % with no hurdle. It all depends on what you can get your investors to agree to.

I'm curious, what is your timeline and exit strategy? One disadvantage is that unless massive scale is reached, it would be hard to sell this as an income stream. You would most likely be forced to sell the individual properties at a retail level.

Again no legal advice.

20 how fast?

Reasons:

There are only so many good properties. If you have capital you have pressure to deploy it. This can lead to stretching your standards and buying properties that aren't quite good enough.

There are going to be hiccups when you change the structure of the situation. Better for those to be small and not large.

etc.

Another thing to keep in mind here is that AirBnb operators haven't yet experienced a recession or significant downturn in short term rental demand. Make sure you are able to handle a few months of reduced occupancy rates should one occur.

Just a heads up to OP.

Paris introduced? or is trying to introduce a commie tax on AirBNB renters. 5% of each days rent goes to the government because of the negative impact on hotels.

Can I asked where you purchased this for and price? I've been looking for something like this.