This is an LFI episode and LFI is now part of PassivePockets.
I’m excited to have Sief Khafagi with me. He’s the Founder of Techvestor, a company that helps people passively invest in short-term rentals with a focus on higher cashflow and lifestyle by design. Sief, welcome to the show.
Thanks for having me, Jim. I’m excited. I had the pleasure of meeting Chad over at the Best Ever Conference a little while ago. We had time to catch up.
I’m glad you met Chad and a little bit of the Left Field flavor. The way we start out this show is I’d like to hear about your financial journey. How did you get into real estate? How did you find STRs? How did you start Techvestor? What’s the whole point of it? If you can give us your overview, that would be fantastic.
Like many people living in California, I was making a decent amount of money working in tech. I spent a couple of years working at Facebook. My rent at the time was $1,300 in a house full of other techies without much expenses and making a decent income, and I looked to offset some taxes. Naturally, real estate was away and I became an LP in a few deals and saw the benefit of real estate. In my job, while I was at Facebook, we traveled quite a bit to open up new offices as we were scaling. It was one of the biggest times of infrastructure growth for Facebook. The growth quarter over quarter and headcount were massive.
When you open up a new office, it’s not like you’re in that city for a day and interviewing a few people. It’s, “Where are these people going to sleep? Where are they going to eat? Where are their kids going to go to school?” You’re opening up a new office, a place where you have to attract a lot of great talent. We’d stay in a few Airbnbs from time to time and can’t tell you how many times those Airbnbs were a pretty poor experience, to begin with.
I’d eventually meet Sabrina, who’s my cofounder as well as Sam Silverman, who’s our third general partner. We came together and we all had these bad experiences with Airbnb over the years. We’ve had great ones too, don’t get me wrong, but we’re like, “Why has no one scaled this as an asset class?” We started as a software company that would help other people find short-term rentals. People love the product but it wasn’t sticky enough for the software. You find a product or property and you no longer need the software.
We’ve pivoted into maybe it needs to be operating software, but no one wants to do the work of operating short-term rentals anyway. That’s why a lot of them hire property managers. As we learn more and more about the industry and how to own and operated our own in the past, what we learned is that property managers are incentivized by revenue and not profits. The second problem is homeowners are emotionally attached to their homes, in terms of the decisions that they want that home to operate in, the design, and how it ran.
[bctt tweet=”Property managers are incentivized by revenue and not profits.” via=”no”]
We pivoted and some of our early clients were on an early Zoom and were doing a case study call. Everyone was pointing to everyone’s other property as if the grass was greener on the other side. What they were describing was syndication. They were describing, “I wish I owned a little bit of that one and that one, and a portfolio-wide one.” We said, “Why don’t we roll them all together into a portfolio? We’ll run and operate it, and then drive the path of returns.” Every single one of them loved it. They all signed up for it. We then went viral in the slot community or some other community.
Within the next 30 days, we raised our first $7 million. That first year, we’d go on to raise a little over $37 million from investors. That’s when we felt like we had hit a nerve regarding what we were intending to do, which is offer a passive opportunity to invest in short-term rentals. We’d go on to operate and build our operating company, scale, and drive revenue. In short, that’s the journey of coming together for Techvestor in the beginning.
That’s super interesting how it got started. I’m always interested in that, but the fact that you had this path and it’s like how Left Field Investors got started. It wasn’t intentional. We knew we wanted to be in real estate and be passive investors, but how do we get that all formulated? It just happened. It sounds like it’s the same for you. That’s how you came up with the idea for Techvestor. Talk a little bit about how Techvestor works as far as how the properties get in there, who finds them, and the overall view. I then want to dive into STRs as an asset class. Let’s start with what’s the setup for Techvestor.
As with most other syndications, with us, you can invest and we do the rest as the saying goes. That’s trademarked. In short, you can invest with as little as a $25,000 check or through several partners of ours who work with us. We find, identify, design, operate, and disposition that property. When you invest, you’re a shareholder in not one property but a portfolio of them across markets, towns, seasons, and geographies. That’s important with the seasonality of short-term rentals.
As you might imagine, there are high seasons and low seasons and it’s important that we have that blended case. We have a propco/opco model which means you’re investing in an LLC where you’re a partner and getting all the same tax benefits of direct ownership and pass-through benefits and cashflow and equity growth. Our operating company is vertically integrated with property management and revenue management. It’s the leading infrastructure for short-term rentals.
Ironically, when we first started, we assumed we would hire out and focus on the acquisition software that we have to identify the property and hire out all the big boys, and give them all the work. We tried, but they couldn’t keep up with our scale and demand for the quality of the product. In fact, they would eventually pivot and not offer those services anymore. We were forced to build our own operating company in order to serve our property company and our investor base. That was an exciting time for us. It’s proved out well now. We drive about 71% more revenue than the comparable properties in our market.
That’s a little bit of the platform. It’s a little bit about what you get. We sent out quarterly distributions. We’ve never had a capital call. In fact, in our dock, we can never ask you for one. That’s important for people to think about in this world. Our debt is all fixed for 10 years to 30 years on average depending on each property. We never force sellers on a five-year hold. It’s a cashflow play where everything we do is optimized for yield as our number one strategy and following up with that is going to be equity growth, but we’re predominantly optimizing for cash growth.
That was a good overview of how you operate. I have some specific questions I’d like to dig into that, but first I want to step back and talk about short-term rentals as an asset class. There are a few asset classes out there that are new and forming. STRs are one of those that have been difficult to figure out how to do it passively. Can you talk about short-term rentals as an asset class, why investors should consider having some of that in their portfolio, and then how it can be done effectively in a passive way with the different properties?
The reason why one should consider adding it is if you’re a fan of passive income and investing in the future of what we would call an emerging asset class, this is up for consideration in most portfolios. What we see in our thesis, our investment strategy revolves around drivable destinations from major metros. We’re taking advantage of what a permanent change in behavior post-pandemic is, which is not only remote work but flexible living, lifestyle, and traveling.
The data suggests that the best time to invest is pre-institutional demand. You saw this with single families, which have been all the rage over the last couple of years. You saw this with built-to-rent, storage in the ‘90s. We believe history rhymes in many ways. For us, especially with the conversations that we’ve had with institutions, they like this asset class because of the cashflow that it spits off compared to the other asset classes that they invest in.
[bctt tweet=”The best time to invest is pre-institutional demand.” via=”no”]
They don’t want to go do the work because it doesn’t make sense for them to do that. They want to spend $500 million buying them, stabilize, operate them in-house, and generate that yield, but it doesn’t make sense for them to put in that sweat equity to build it which is exactly what we do. We’re manufacturing that equity gain and alpha between our LPs and eventually that disposition to investors. All those being said, there’s clear demand on both the retail and institutional levels. It’s hard to do at scale.
If you want to go buy 100 short-term rentals, you couldn’t do it. You couldn’t go there, invest, and buy 100 anywhere. It would take you a long amount of time. To then do it passively, for us, it was about building technology. We have an incredibly talented team, and in my opinion, the best team in the space to run and operate. Everyone is from Pacaso to D.R. Horton to ex-tech. You want to be able to trust the operator to drive a specific strategy, which is cashflow growth.
I touched on this, but the third most important thing that we look at in this investment is oftentimes property management companies and owners traditionally are not incentivized the same way. Property management companies want to drive top-line revenue. Owners want profitability. Those are not the same thing and there’s no vertically integrated solution out there now, outside of our own. That’s why we built our operating company and it’s one of several reasons that we did. Those are a lot of reasons why we’re incredibly excited about this, in addition to the technology and advancements that we have.
Talk about vertical integration. How does property management work? I get how a property manager goes to a 200-unit apartment and manages the property. I even understand if you have ten properties in Columbus, Ohio, and how a property manager would manage those. Are you looking at more vacation stuff or are you looking at business travel? The other question is how do you manage all these properties? I assume they’re in very different places.
We’re in 10 to 12 markets off the top of my head and several going live soon. We are in both destination markets like beaches, mountains, and towns. We are also in major metros like Scottsdale or at least what I call a major metro. We’re not in Los Angeles, San Francisco, or New York. It wouldn’t make sense to invest there anyway. There’s a regulatory risk of investing there as well.
Technology is the first thing, how you manage very well. Airbnb is built to be for self-made check-in. There’s technology on the doors, noise sensors, and all those types of things. There are cameras. It’s inherently part of the STR culture to automatically check yourself in. There’s no one waiting there for you. We build local teams. For us, it makes a lot of sense to do what we do because we have scale.
In Scottsdale, if I own 30 homes, I own the entire infrastructure. I can hire the best cleaners and give them consistent work. I can do it at a cheaper cost than anyone else because those cleaners are cleaning our homes. If we’re occupied 70% of the month, that’s 21 nights out of 1 month times 30 homes. They’re getting 600 nights of that month booked of which the average stay is 3 days, that’s 200 cleans and turns in that month. Not many other people can give them that element of scale, but it gives us the opportunity to hire the best, retain the best vendors, and have the best relationships.
It starts with a lot of great technology. We have general managers on our team. We have eyes on our properties, but a lot of this is done virtually. Everything that can happen behind the computer screen like pricing, revenue management, and guest communication, we handle it in-house, and for anything that needs a hammer to be hammered in or cleaned, you hire the best local contractors to do those on a 1099 basis.
The cleaning seems easier to me because it’s regular. You know when something needs to be cleaned and someone’s checking out. You know that in advance because you know when they’re leaving. If something breaks down like the TV doesn’t work, the toilet floods, or something like that, how do you manage that? You have to have people on standby that are ready to go at any time, but you might not need them for months, and then all of a sudden, you need them for hours in a day. How do you manage that with technology?
That’s where scale matters. If you go back to the example of having 30 properties in Scottsdale, the chances of that happening on a daily basis are a lot higher than if it was to happen if you own one property. That’s where that infrastructure begins. Speaking of technology, we built our own property management infrastructure that allows our guests to submit tickets and call and text us 24/7. If those things happen, they get automatically funneled in within a five-minute response time and we have a solution coming to them, in some capacity.
If it’s something that’s outside of our hands or their hands, then we make it right. There are things that are outside of our hands at times, like weather permits and those types of things. We typically are checking those things also during cleans. A turn in the STR industry is not just, “Clean the place.” It’s silverware there. You got to reset everything for the next guest like turning the TV on or the internet working. All of these types of things are naturally checked through in dozens and dozens above a length of a checklist that goes down at every single turn and it’s ironed out.
The cool thing too is that three months after the property launches, things get quite quiet because most of the things that go wrong happen within those first 90 days because you catch them. You catch them and you’re like, “Okay. That was missed somewhere. We got to improve that.” Therefore, you create a solution. Our property management team is robust enough to handle that.
I have a bunch of questions that I’m getting lost in. The scaling seems like the most important part of this because you got to get to the point where you have all of those properties. Do you have separate funds? Do you go out and get 30 properties, offer that as syndication, do it again with another 30, and operate all of those under Techvestor? Is that the scale? How do you avoid co-mingling funds from one deal into the next, while also getting to that scale? Scale is one of the most important parts of this. Is that accurate?
Yes. Now, we’re on our second fund. There’s no co-mingling because the money goes towards the assets like servicing those assets and everything. We have property-level accounting in very hard separate ways between funds. We’re on our second fund and actively accepting capital for that one from accredited investors. The benefit is that scale gets easier over time because of that same infrastructure that you built for fund one. Remember propco/opco model, so there are no funds being used from the same propcos. Everything is operated through our opco, which now through separate funds, those costs are absorbed across multiple ways and the risk of scale goes down over time.
Now, fund 2 is leaning on the success and scale of Fund 1. Fund 3 is leaning on the success of Fund 1 and Fund 2. It allows us that ability to not depend on having 1 or 2 properties and starting from scratch every single time. Not to mention, we become a first-person aggregator of data. In Scottsdale, on average, we have six tickets a month for this type of problem because we’ve seen it happen for a few years. Therefore, we know how to address it. When you’re starting out, you’re more so catching up than ever staying in advance of those types of things. Everything we do is data-driven and tracked on our property management side.
How do you find properties? Are you finding already existing Airbnbs, buying them from the mom-and-pop that has 1 or 2 locations, or are you finding new property, not new newly built but properties that aren’t Airbnbs yet, and converting them?
Ninety-nine percent of the time, we’re buying not existing short-term rentals. They have been a long-term rental. They’ve been someone’s home. We’re buying them on the open market and are converting them to short-term rentals. That’s my design. The reason for that is our strategy is very simple on the financial side. We believe single-family homes are mispriced assets. That’s because we see their revenue of them as a short-term rental while the world does not.
I can buy a single-family home for $500,000 based on its comps and appraisals, or what the house next door sold for. As a long-term rental that’s going to generate $50,000 a year in rent, because that’s what the rents will tell you. I can buy it at $500,000 and generate $125,000 on it as a short-term rental and then sell that as a mini-business as part of a portfolio or individually based on that property’s revenue because both of us can sit here and agree that two properties sitting side by side that look identical but one is doing $125,000 in revenue and one is doing $50,000 are not treated the same. One is significantly worth more than the other.
That’s a huge reason why we don’t buy existing short-term rentals. The few that we have, have been opportunistic. A fun little case study on this one is we bought an existing short-term rental that had three tracking years of about $140,000 a year in revenue. It hadn’t gone up or gone down too much. We came in, did our design, operations, or thing in short and it wrapped up its first year cleared $210,00. You’re like, “What’s the difference?”
That’s exactly why we believe in this industry because 99% of the time competing against mom-and-pops, people who don’t understand design, hospitality, operations, and management, and that’s fine. You don’t expect them to. They have a full-time job, families, and all these types of things or it’s their second home where they’re not looking at it like a business. That’s where we come in and we generate these great returns because we’re looking at it and operating it in a completely different way.
That’s super interesting because you found a niche with competitive advantage or arbitrage situation where you’re buying something that’s priced as a single-family home based on comps, but then you buy it and you put a completely different use to it that has nothing to do with how you bought it. Usually, when you find something like that, you want to jump in and capitalize on it.
There’s a huge amount of money to be made but then eventually that advantage goes away. It seems like, in this space, that advantage maybe won’t go away because people are always going to be buying single-family homes on comps because mostly, they buy them to live in, so you’re always going to have this advantage. Is that correct?
That’s correct. To be fair to even ourselves, someone else could have that same advantage as we do. It’s a market advantage for what we do. What makes us different is our speed, our ability to scale, our technology, our team, our vertically integrated operating model, and naturally, it’s first to market. If we’re doing this, and we can go do 35, 50, or 75 homes a quarter, we’re naturally going to aggregate a larger portfolio that will sell for a larger multiple than the guy who’s doing 1 every 6 months. There are advantages in the market that are available.
It’s an open market where anyone can go do this, but the question is can you build enough of an infrastructure of scale toward the economies of scale start to benefit you? That’s where we’re in. That’s the whole benefit of syndication. In fact, one would argue that the benefit of the Left Field itself is the aggregation of information and capital. You guys negotiate better terms in general for your investors because you’re investing as a community. All of those same mentalities are the same exact mentalities we implore as well.
You mentioned as one of the first advantages you had is speed. The speed at what? Is it at closing the deal when you find a house? Can you talk about the process? What do you mean by speed and then also how do you find these properties?
I’ll start from the top. Speed on capital or access to capital, speed on renovation and design, and speed on launching and optimizing them. When we first started, if you go back to the story, we started as a software company. What was that software? Our software allows us to underwrite over 100,000 properties in 1 month. We’re market mapping over 257 local markets. As soon as the property is in MLS, we know about it within fifteen seconds. We know about it in terms of the data that we believe it’ll yield in the short-term rental. We can underwrite it in several different ways. 94% of the time the deal sucks.
We’re not high buyers, we’re a real estate company that builds technology, not a technology company that does real estate. Our head of acquisition can sit there and window shop the best possible properties to buy. We already have local markets. We also understand real estate supply. I’m going to use Scottsdale as an example. In Scottsdale, there are typically about 2 or 3 submarkets within the major Scottsdale metro that we buy predominantly in. Four bedrooms are larger homes with pools on a certain acreage of a size that has to have certain characteristics in the home with certain amenities according to data that allows us to drive the most revenue.
That speed of understanding and having access to that information allows us to drive significant value to investors and shareholders because we know what to buy and where to buy it and execute it. Not only are we gathering this data directly ourselves, but Scott Shatford and Jamie Lane are both from AirDNA. They both sit on our board. We have great access to data and partners who provide significant levels of information to us as well among others.
Those are big reasons why we move quickly and know what to buy. We also become aggregators of data ourselves. If we own 30 in Scottsdale, I can tell you what’s doing well and what’s not doing well. I can tell you why they’re doing well and why they’re not doing well and we can replicate it. No one else has access to our data.
Tell me about your acquisition person. They get up in the morning and there are two properties that hit all your metrics, they look at them and say, “Yes. This is it. These are great properties.” Do you go visit them or do you buy it and hope everything was right in the MLS? It’s probably more than that but do you visit the properties and walk through them before you buy them?
We vet all data. To be clear, we’re never eye-buying or making decisions off on what our software tells us to do. If that software tells us, “This data looks good,” Taylor, who’s our head of acquisitions will sit down and manually underwrite it and vet it. He’ll make sure it’s zoned accurately and permitting isn’t going to be a problem. There are things that software can’t vet for. We’ll look at Google Street View. We have significant agent relationships in these markets that will go get videos and all these things.
The fun thing here is once you’ve walked the Clearwater property 35 times or generally in that market, you know what you’re looking for. Also, our agents know exactly what we’re looking for because we’re volume buyers with them. While we do have boots on the ground in every market, we do visit them either virtually and use technology or in person before we buy them. We’re not buying them blind off of software.
What’s the debt on these? How much leverage do you use? Is it per property? How do you do that? Explain what the debt process is.
Our debt is one of our biggest competitive advantages. First and foremost, we’re using a DSCR product. That stands for Debt Service Coverage Ratio. More importantly, each property is its own loan. We have no cross-collateralization. The reason that’s important is as the analogy says, “We can lose a pinky and we’ll be fine.” No one wants to lose a pinky but if we ever did lose a pinky, we would be okay.
We’re using anywhere from 70 to 80 LTV, in that general range. We’re spending a good amount of money on renovation and design. We’re adding a ton of value. Our average DSCR is about 3X. That’s compared to multi and those types of things. More importantly, we have strategic debt terms with our partners where they’re underwriting our homes as short-term rentals.
Properties with DSCR for us that would not underwrite for someone else because they don’t have our institutional track record and type-backing. They haven’t proven themselves as operators in this space. Not to mention we get a little bit of a preference on rate and those types of things on the same type of deal that you would go get from the same type of lender. All of those things being said, those are competitive advantages that our LPs benefit from as being investors in the fund without any of the liability of taking out the debt.
It’s a fixed rate, that’s good.
100% of our debt is fixed for at least a decade or longer. You might ask, “Why do you care about ten years more when it’s projected to be a five-year hold?” The short answer is we never want to be forced sellers. Our best-case scenario is a 2 1/2 to 3X realistic scenario over a five-year period in terms of our equity multiple. Our bear case scenario is a ten-year hold where we generate 11 to 14 IRR because we end up operating for cashflow. We sell based on values, not revenue. We’re talking about bear case, which is exactly how single-families trade now. We generate an 11 to 14 IRR. If you ask me, I’m okay with that as a bear case. If that’s our bear case then it’s relative to whatever’s going on in the world.
What’s the projected upside on this? You said you’re on fund 2 or 3. Let’s say you do 5 or 6 funds. Are you going to package all those up and sell them for $500 million to an institutional player? Is that the goal? If so, do the investors get the upside as well?
We don’t know if people will buy funds collectively and aggregate, but that’s certainly an opportunity. Each time we launch a new fund and portfolio, it strengthens the entire narrative and journey for everybody. It’s a great thing. In fact, we see a lot of repeat investors and funds over. The idea is to sell based on revenue. Sell some exit cap rate and someone will value it based on revenue because that’s how revenue-generating business and revenue-generating real estate is sold.
What is the upside and does the investor participate if you sell to a REIT, institutional, or something like that?
We underwrite for an average of somewhere in that 8% to 12% average year on year, especially at full stabilization. We’re looking at generally that 2X equity multiple over time. Our LPs are generating the upside. We have anywhere between an 8 pref and 9 pref for the most part across our funds and some split on promote depending on their check size, but they benefit in everything whether it’s the cashflow, tax benefits, or equity upside. Investors have shares in everything.
I’d like to like to switch a little bit and talk more about it from the investor perspective because we compare everything to multifamily because that’s what most of us start on. In multifamily, we know how to vet the operator and analyze the investment. How does an investor vet Techvestor? What question should we be asking an operator of Airbnb properties or short-term rentals? We’ve talked a lot about that and proven it already, but when we vet an operator, what do we ask in this asset class?
We have a saying internally and it goes, “Team, technology, and traction.” The reason those three are critical here is that when you’re investing in, at least with us, short-term rentals, it’s an emerging asset class that’s not as mature as multifamily. We can all agree to that. The first thing you want to look at is, “Is this team capable?” Real estate is not hard. It’s operators who make bad decisions oftentimes, whether it’s taking out bad debt or making poor decisions.
[bctt tweet=”Real estate is not hard; it’s operators who make bad decisions.” via=”no”]
Our team is incredibly strong. Our head of asset management comes from Pacaso and our head of operations comes from D.R. Horton, ex-Facebook, ex-Apple, ex-Uber, and all of these types of things. We’ve built proprietary advantages. The second thing is looking at technology because that’s our unfair advantage or one of our unfair advantages. You want to ask yourself, if you’re investing in this, you have to believe in short-term rentals and in the future of where this is going to go, but you also have to understand that, “What does this operator do or have that another operator cannot get?”
We’ve talked about scale, technology, our level of talent, our first-level aggregator of data, advisors with us, and our last point of traction, this operator has proven it. Track record is oftentimes a great leading indicator of future success. In our first fund, we raised $37 million. We had 8 exits for between a 5.5% and 6.5% cap already, even though we underwrite between a 6% and 8% cap. When you factor in all of those things and then you look at the dynamic landscape of, “If I want to invest in short-term rentals, what are my options?” You can do it yourself or you can invest passively in an operator like ourselves.
When you look at DIY, you’re like maybe it’s not the best thing for you and then you look at the operators that you can go invest in, I encourage you to go find an operator with our track record, our team, and our technology. Therefore, we’ve minimized the risk as far as we can. We’ve built a vertically integrated operating company. We’ve shared all these things and we’re always happy to share our financials and all the information on how we’re performing. When you’re vetting us or if you’re looking to vet us, I encourage you to ask all these questions.
We focus on education first. This is an asset class that we spend a lot more time in education than anything else because there are a lot of questions. You look at a question like seasonality. We have to explain to investors that compared to multi, your quarterly check doesn’t look the same every quarter because we drive revenue in different seasons at different places. We have a high season and a low season. You get much larger returns in one quarter and a lot lower sometimes. Is that something you’re okay with? All these are things that I would encourage people to ask.
We’ve vetted the operator and now, we’re analyzing the investment. One of the common things when we’re investing in a fund with multifamily or something like that, we don’t know the assets that are in it either, but at least, we would know, “They’re all going to be multifamily type assets in certain markets.”
Here, it’s a little bit harder to figure out. There’s not a whole lot of analysis that we can do because we don’t know where you’re buying the properties or what properties you’re going to buy. Is there a standard property type that you shoot for? How do we go figuring out, “Is this an investment for me?” How do I dig into the numbers or pro formas? Is it like, “They seem like they know what they’re doing, let’s jump in?”
Definitely not. What you’re asking is, “Do we have a generic buy box of things that we look for?” The short answer is yes. Generally, we’re buying larger homes, that’s four bedrooms and larger because we don’t compete with hotels. We want homes with amenities for larger groups. They drive better revenue and we’re never in a race to zero on price, which is where hotels are.
Secondly, you want to look at the price to rent. We aim for an 18% to 22% price-to-rent ratio. If I’m buying a $500,000 home, I want it to do roughly $100,000 in revenue or better. We already know some of our core markets so you’re not investing totally blind. We know we’re buying in X, Y, and Z, and all of these other markets openly places like Scottsdale, Florida, the Poconos, Memphis, and some other markets. We may open up new markets, but we tell you what we’re buying and where we’re buying it.
The last thing you want to look at is this is a multi-asset blind fund. The advantages of that are there’s a significant upside if you believe in the operation, but you are taking on the risk of not knowing what you’re buying next. Therefore, a lot of your vetting of the operation and the business plan is very important. You have to understand, “They can go execute this. They’ve executed it.” In 2022, we did 80 homes. “They’ve done it not once, not twice, but they’ve bought 80 homes. They’re trending around these numbers and continuing to stabilize.”
Another thing that I find is a leading indicator of being comfortable with the asset class, especially if an operator has a track record, and is asked to see their previous reporting. The reason I say this is good operators report simple, often, and easy-to-understand information. If you can understand it, it gives you an incredible leg up as an investor. In fact, I don’t ever encourage anyone to invest in anything they don’t understand. Seek to understand it on a very basic level.
In our case, they’re buying single-family homes which are comp based on appraisals. “They’re going to sell them based on revenue creating alpha. They’re buying larger homes so they don’t compete with hotels. They’re well-amenitizing their homes. They are professionally run and operated because they have an incredibly good team on their side. They built proprietary technology. They have scalable advantages.” These are all reasons why I can sit there and check a box and be like, “I feel good about this and this asset class.”
I’m a user of Airbnbs. I’ve seen poor and good experiences. AirDNA is the largest aggregator of short-term rental data. You can do some research. We share their data all the time. They’re great friends of ours. You can look at what market data is compared to ours. There are third-party tools that validate the success that we’re having as well.
There aren’t a whole lot of Airbnb programs and syndications out there, but we’ve seen a few. A lot of them offer, “You can go stay in the properties X days a year or discounts,” or anything like that. Is that something you do? If so, do you feel like you have to do it or do you want to do it? For me, I’m doing an investment, I don’t need that benefit. Talk about that if that’s something you do or not do, and why.
We do. We call it owner stays. We offer it. The reason we offer it is that there’s no better person that can stay in our Airbnb than one of our investors who will take care of it, have fun with it, and enjoy it naturally. It’s a benefit for everybody. Now, it doesn’t harm the investment because there are no free nights or anything like that. All we’re saying is you can stay in it at market rate, but you can book direct. Therefore, save what you pay on a platform like Airbnb on your side. We save the platform fee on our side. Therefore, it’s the same net income as the investment that we would’ve gotten anyway. There’s no harm to the investment.
Ninety-nine percent of people get incredibly excited when we talk about owner stays because you have this fantasy of using the property. It’s like, “That’s a great perk,” but like the gym, 99% of people don’t use it because they’re not going to Scottsdale or the Poconos. In fact, one of our mantras, and it’s a mantra of a lot of people in the syndication space, is, “Invest where it makes sense or go everywhere else.”
I’m in real estate and I’m an investor in multi, storage, mobile home parks, and short-term rentals, but I don’t own any real estate myself. People ask why and I’m like, “I don’t believe in it now. I believe in owning income-generating assets and in renting or going wherever I want to go.” I want that flexibility because my return on my investment is a lot higher in other places and other ways where I can generate higher alpha than the cost of me renting.
I like the way you do it. I don’t like when they say, “You can stay a week a year and then if you don’t use your benefit, you get this return. If you do, you get that return.” It’s too confusing and then I feel like I have to use it. I like this model a lot better. I want to also go back to what you said that you were a real estate company before a tech company. With your background, you have a focus on tech. How does your experience in tech, Facebook, and all that help Techvestor?
When you look at our team, several of us come from tech. Real estate is a dinosaur of industry in many ways. Airbnb is even way more of a dinosaur industry than we expected. I’m not talking about the platform. I’m talking about how hosts or owners operate their homes and what data tools they have access to. When you think about solving problems, solving a problem for one home at a time isn’t too big of a deal. When you think about owning 80 homes and you’re like, “I’m doing this 80 times because I own 80 homes. How can I implement technology to solve this problem or at least aid me in solving this problem faster, efficiently, and cheaper in whatever the outcome is?”
Given our experience in these fast-growth tech companies in the past, we know how to build certain tools, and not only do we have the technology to do it, but we have the know-how how to solve these problems using technology in terms of how to solve them. Being at Facebook when it was growing super-fast, things were changing evidently very fast.
Sabrina came from Apple where she built the first-generation AirPods. She’ll never tell me, but I can assure you that that first-generation AirPods wasn’t the first thing that they built. I’m sure it went through iteration and sprint after sprint. They’re solving a difficult problem. That’s exactly what we do. We’re solving for scale and once we solve something once, we don’t have to solve it again. We can improve on it, but now, it works and that becomes an unfair advantage to the person who’s doing it manually.
For example, you look at expenses. I can tell you what our expenses are on a trailing seven-day. Typically, books aren’t closed for most people for at least 30 to 45 days. If you’re using a property management company, good luck getting it done in anything less than 2 or 3 months because the property management company’s going to deliver revenue and send your owner statement, and then you’re going to have to go track your property level accounting, which they don’t do because they don’t speak to each other.
You’re then going to need to educate your property management company on how to drive expenses down, but they don’t care to drive your expenses down because they don’t make any money by driving your expenses down. They only make money by driving you more revenue. That entire flywheel doesn’t make sense or work. In our case, because all those systems talk with each other and we have a vertically-integrated team, those systems make sense.
It’s all fascinating. I like this asset class and it seems like you have the tech side figured out, which gives you an advantage on all the other parts. The last question I always ask is what’s a great podcast that you like to listen to?
For a long time, I would listen to Nathan Latka. He runs SaaS Interviews With CEOs, Startups, Founders. They’re 15 to 20-minute bites of basically fire-grilling questions of, “How did you do this? How did this work? What were the problems you had? How did you solve that?” You can listen to 3 episodes on a 1-hour drive or something along those lines. The amount of information and the thinking that happens in your brain starts firing off with your own business. You’re like, “I could do that.” That’s one of my favorite podcasts.
I love podcasts like that, but I have to somewhere to record all of my thoughts at the same time because it gives me so many ideas that I’m constantly sending myself emails as I’m listening. “Don’t forget to ask this. Don’t forget to do this.” That’s a great recommendation. I’ll check that one out. Finally, if people want to get in touch with you, what’s the best way to do that?
They can visit Techvestor.com. They can request an intro call and an invite to learn a little bit more about what we offer. We’re an education-first community. There are a ton of resources there that we’d be happy to share with you. Again, we are only open to accredited investors due to compliance, but we would be more than happy to educate anyone.
Thank you very much. As I said, this was fascinating. I learned a ton. I appreciate you being on the show.
Thanks so much, Jim.
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Airbnb is a super interesting asset class and it’s been a struggle to find how to syndicate this. We’ve talked to a few others and they figured it out as well. Techvestor has it wired in all the tech that they put in it. It’s in their name so that helps. Having a Facebook and an Apple person helps on the tech side, but the real estate first, which I like. They started as LPs and that’s where they gained the experience and figured stuff out. As he was living in Airbnbs as he was working for Facebook, he found the short-term rentals an asset class he was interested in.
I like what he said about, “You want to get in this stuff at pre-institutional,” right before the institutions get in there. I interviewed another Airbnb guy a few months ago and they said the same thing. You want to get in and find these niches before the institutional equity comes in and then you can sell to them and not compete with them. I like that.
I love how you can buy single-family homes based on comps, but you’re not operating a single-family home as a rental to a family or even living in it. You’re operating it as a short-term rental, which means you can maximize revenue, but you’re not buying it as a short-term rental. If you had to buy into the short-term rental and valued it like they do commercial properties on cap rates, then you wouldn’t have that advantage. It’s such a big advantage to be able to buy these single-family homes based on the comps, but then operate it as an Airbnb business and make a ton more money, because you’re effectively getting those properties for much less than the income stream that it’s going to provide you.
If you’re looking at what that income stream provides you, then you could have paid a lot more for it, but you’re getting these cheap. That is the business model. That’s awesome. That difference is never going to go away because you will always have people buying single-family homes to live in and selling them as single-family homes. If you’re buying them for a different purpose, you have a huge advantage. I don’t see that changing. That makes this asset class something that is durable.
I liked how Sief said, “Make sure to see reports.” We say that too with all of our asset classes. When you’re talking to a new sponsor say, “Give me some of the reports you’ve been sending out. “ That’s a great way, you can gauge the quality of the reports and that’ll tell you something about the investment. I liked that he said that. He said, “Everything needs to be simple, often, and easy to understand,” as far as the reports. That was powerful. This is all basic stuff, but it’s true. You don’t want a huge document. You want a one-pager that tells you what’s happening and going on in simple terms, and make it easy to understand. I love that.
One of the last things that he said is he doesn’t own property, other than the real estate that he owns through these various syndications. I love what he said that he owns income-generating assets. A lot of times the real estate guys talk about this. Maybe you don’t need to own your own home. You rent your home and buy assets to rent to other people because you make more money that way. That’s awesome.
Own income-generating assets. I thought that was pretty powerful. Although that is what we do here at Left field Investors and that’s our complete focus, he took it to another level where it sounds like he doesn’t own anything that isn’t managed by somebody else or by his company. Those are all income-producing assets that he’s owning. That’s fantastic. That’s a goal for anybody and everybody.
That was an interesting episode. I love hearing about new asset classes. STRs are growing huge and it’s going to be around for a long time. There are advantages that will stick through regardless of who gets into this market. I’m excited to follow them as they go. That’s it for this time. We’ll catch you next time in the left field.
Important Links
About Sief Khafagi
Sief Khafagi is an ex techie turned real estate investor who has helped thousands diversify into real estate after spending nearly 5 years at Facebook where he built the 2nd largest engineering organization across the world. Today, he’s the founder of Techvestor, which helps accredited real estate investors and busy professionals passively invest in the emerging asset class of short term rentals (aka Airbnbs) with a focus on higher than average cash flows and lifestyle by design. Investors can invest as little as $25,000, get all the benefits like cash flow, tax benefits and more, without doing any of the work.
But this isn’t your average real estate investment company. Techvestor built it’s own proprietary sourcing technology where they can underwrite over 100,000 properties a month and acquire the best ones for their investors. They’re also advised and led by folks from place like AirDNA, Realtor.com, Apple, Facebook and D R Horton. Techvestor is fresh off a $37m first year of funding from investors and is actively raising capital for it’s 2nd portfolio as they become one of the leaders in institutionalizing the asset class of short term rentals.
You’re invited to learn more at techvestor.com.
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