What we learned buying a house as a short term rental

2022/02/11

Summary

This is what we learned when we decided to escape from the City into nature, set to the backdrop of a worldwide pandemic. We ended up buying a second home on the slopes of the Sierras, in a place called Twain Harte, not very far from Sonora (less famously) and Yosemite national park (more famously). It was not a part of a master plan, rather a way to escape the confines of the City and get that mostly for free. So it is not necessarily a route you may be inclined to take. However, even if you are considering buying property in a rural area for profit, you may benefit from some of our findings and realizations.

Before

It is fair to say that we have been infatuated with California’s nature since a long time ago. Even before our daughter was born (some 8.5 years ago at the time of this writing), we spent quite a bit of time outdoors, hiking, skiing, swimming and enjoying the outdoors. And afterwards, after taking some time to snuggle with the little one, we returned to our regularly scheduled camping trips. Among other places, we settled into a mild pattern of spending our 4th of July vacations at a campground near Angels Camp, in California’s Calaveras county. Angels Camp is within some 40 minutes drive of Twain Harte, and we were vaguely familiar with the area, and knew that we liked the time spent there.

Fast forwarding to 2020, as many of our fellow residents of the San Francisco Bay Area, we found ourselves trying to negotiate life in the pandemic world. In San Francisco in particular, this was the time of restricted movement, lockdown and figuring out how to get by. We were privileged to be able to work at home. This meant we were able to stay fairly insulated from the outside world, and mostly didn’t lack anything in particular. But after a few months this situation started to get to us. Our 4th of July campsite reservation was canceled due to health concerns. We felt we wanted a change of scenery after spending many weeks essentially indoors. My partner spent evenings and nights trying to find a place where we could go back into nature while keeping distance from other people. AirBnB seemed like a very appropriate way to achieve this goal, and I don’t quite know how exactly we got to Twain Harte.

Once there, we did have a blast. We stayed at a beautiful mountain house with a stunning canyon view from the wall-wide window and deck. My partner and our daughter decided this is a place we wanted to come back to. They made the argument that, if we agree to rent the house once in a while to short-term visitors, we could spend a lot of time living there, and make the house cost-neutral to us. While this wasn’t exactly following our multifamily investment plan, the consequences of which you may have seen in some of the other short articles I wrote, a free house was a very appealing proposition. So, in September 2020, we found and closed on a vacation home for our family.

The plan: we will try to make the house cost-neutral by renting it out occasionally so that on average we come out slightly ahead. Our baseline was not actually zero cash flow, but rather even somewhat negative cash flow. We thought that if we didn’t buy this house, we’d probably have spent quite some money on hotels or AirBnB if we traveled. So that meant that even if our house ended up being slightly cash flow negative, we’d still be better off than not having it.

Finding a property

Finding a property in August of 2020 was a frenzy. A lot of us just learned that we will be working from home for an indefinite amount of time and the houses we were seeing were going like hotcakes. We were spending hours each day looking for one more unpicked gem that we could close on before every last one has been auctioned off.

So at some point we found a house we liked. As experienced investors, we reached out to the listing agent directly and offered to them to be a dual representative (i.e. an agent for both the buyer and the seller), in exchange for a reduced commission.

A small detour, the residential real estate sales commission is usually a total of 5% to 6%. Percentages tend to go down as the overall property value increases. In our price range, 6% is still the norm. The flow of commission in real estate is as follows: the seller pays their selling broker the full amount of commission. The selling broker agrees to share a part of their 6% with the buying broker, and the association of realtors encourages that the commission be split evenly between the selling and the buying brokerages. And most of the time it is split evenly. From there, each brokerage takes a cut, which could be anywhere from 10% to 90%, and the remainder goes into the hands of the buyer and seller agents.

One particular thing to note is, that the buyer does not have a say in how much of the commission goes to the buyer’s brokerage: this is completely up to the listing agreement signed between the seller and the selling broker. This in turn means that as a buyer you can’t save money if you decide to represent yourself. So, if you are not experienced do get an agent to represent you as a buyer. You only stand to gain with expert help.

So, for us it made sense to let the seller agent know that we’re experienced house buyers and are happy to remove one person from the transaction if they’d work with us for a reduced commission. The agent’s response surprised me, they have obviously said this before. They said, if I’m going to do twice the work, then it is fair to get twice the commission.

Well, we didn’t feel like we had a lot of leverage there, and were a bit lazy to find another agent at that point, so we said OK and decided to have dual representation then and there.

Later we will find out that the agent actually had another person from the same office act as our representative. Which is completely OK, but slightly shady. Oh well. Anyways, we were quick to go on a tour of the property. At that time, for some reason nobody wanted the house, even as others were being sold left and right around it.

Touring the property

We went to see the property the very next chance we got. I can’t quite remember whether we have actually made an offer before or after the tour. In any case, we were prepared that the house may need significant work to make it livable, as it had been somewhat neglected by the previous owners. They used it as a second home for about a month each year while their children were little, and had no use for it once the kids grew up and didn’t want to hang around in the mountains anymore.

The tour showed that the house was in a bit better condition than the MLS photos suggested. The house was a two-level cottage with a graded roof, a 2-car garage and a two-level back deck. The property had a big unfenced back yard opening up with quite a wooded area. During the tour I noticed that one of the deck pillars was sagging and took note. This probably meant that the deck needed major repairs, and we could use that as a negotiating point if it should come to that. The agent noted that the house had public water, and not a well, which is not all that common once you venture into rural California. Turns out, also, that the area has better Internet service than in our neck of San Francisco. My partner noted the dated carpet and outmoded wall coloring, so we made a mental note to update that when able.

Inspection was unsurprising, and turned up the deck issue, various smaller issues in the interior that needed fixing, broken doors and such etc. We had an estimate for the deck repair and decided to ask for a $50k discount to get everything wrapped up. The agent tried to persuade us to let the current owners fix anything that was not working, but our position has always been that we’d rather do the work ourselves. Otherwise it is hard to guarantee that the work would have been done to our standards.

The seller refused, and we could not find common ground on the negotiation, so we decided to let our agent know that we wanted out of the contract and want our earnest money deposit back.

To our surprise, the agent called back and said that they were able to talk the seller into giving us a $25k discount instead of the $50k we wanted, and we agreed to accept the result.

Surprise

So we closed on the property, and started getting ready to move in. My partner spent some time with the various utilities companies to get everything set up in our name. And discovered something unexpected: it turned out that no utility company serviced waste water: our house was most likely equipped with a septic tank. And if you remember, our agent has told us that it is connected to public utilities. We then went back to the transfer disclosure statement, to see that the septic tank has not been disclosed at all! We were worried that we had been sold a house with a septic tank in disrepair, which is an issue that could cost many tens of thousands of dollars to fix. So we booked a quick chat with a real estate lawyer to regroup and see what can be done. They advised us that we might have a case for contract rescission, but that we’d need to go into arbitration first and it could be a long, long time before the issue could be reversed. They advised to first try to resolve the issue amicably, and see from there. So we call our agent and explain to them. And they realize that they had messed up because this is a material fact that can definitely affect the outcome of our deliberation, and that an arbitration case is brewing.

Luckily, they were able to convince the seller (probably because they were ready to sue as well) to pay for the septic tank inspection. And the report came back clean, so we said we were satisfied with the results and finally we were the happy owners of a second home in the mountains.

In retrospect, we should have recognized a house without public sewers. A telltale sign is very simple: if there are no manholes in the street around the house, there is no public sewage. As for the septic tank, it is buried into the ground, and without knowing exactly where it is, you would not be able to recognize it.

A few notes about septic tanks. We found out that having them is not such a big deal maintenance wise. At least in the USA, the septic tanks are enzyme reactors, which do not require constant pumping to keep operational: you really need to inspect them once a year and clean them up every few years, but that’s basically it. The septic tank is home to bacteria that digest human and other waste, with heavy materials sinking to the bottom, light materials rising to the top, with gray water in the middle. The gray water is then leached into the surrounding soil using a network of capillaries called the leach field.

Deck

Just as the inspection report had said, the deck needed repairs. However, this turned out to be quite uneventful for us in particular: we found a deck repair crew, gave them around $24,000 and they gave us a repaired deck in a span of 4 to 5 days or so.

The deck was sagging because one of its pillars started sinking, probably due to the many years of enduring the weight (and then the melt) of unhandled snowfall. Since the sagging deck was attached to the house at one end, as it sank, it was pulling the entire house along. This is why it was important to fix it right away, however much it cost.

Heating and cooling

The original house came without any cooling. This wasn’t a big issue to prior owners as they occupied the house for a few weeks only. But even at 4400 feet, the Californian sun can cause the temperatures to rise into the high 90s and even the 100s during the peak of summer. And once the house gets warm, it is not very pleasant to stay inside.

We decided to install a split system air conditioning. The split system uses separate air conditioning units in each room, in contrast to the central air conditioning, which uses one centralized system. This allowed us to have each room controlled separately, which ultimately probably also aided the comfort of our short term rental guests, but also our own. In retrospect, this was a good idea.

Furniture

We got all the furniture from Craigslist. My partner spent a few days making deals with various people on Craigslist in the Bay Area and arranging for pickup times. We rented a storage, and one weekend I rented a small van and spent two days driving around the San Francisco Bay Area collecting various pieces of furniture, most of them for free. We got enough furniture to equip 3 bedrooms, the living room and the kitchen.

We originally wanted to rent a U-Haul, but they dropped the ball massively when we appeared to pick the van up. The van was simply not available at all for us. We first thought of giving up on the move for the week, but decided to give it one last chance and called up the nearest Penske. It turns out that they had an idle large truck with a hydraulic loading deck that they were willing to rent to us at $350 a day, instead of the regular $5000 a day. I am still not sure why they did this but they did, so we had a van to do the move.

We also got a vertical piano for free, which was quite an adventure to bring from San Francisco to the mountain, given that only one of the three people we had contracted to help us move all the furniture actually showed up on the moving day.

So my partner and I ended up moving the furniture to the mountain, including unloading and placing the piano at the final destination.

Electricity

We had to replace the electrical panel, for two reasons.

First was that the panel was a fire hazard since it was made by a since-defunct company which went under when it was found out that their circuit breakers worked only 25% of the time. The second was that for a mountain house it is absolutely necessary to have a generator inlet.

We did a number of other electrical improvements on the property. We installed LED lights throughout. LED lights tend to use 10 times less power than their incandescent counterparts, so this was a good thing to do. We replaced the neon lights with LED retrofits, which also helps keep electricity expenses at bay.

We placed an aquanta smart monitor on the water heater, allowing us to turn the water heating on or off remotely, or have it adjust to the use, saving some money as result.

I also had an Emporia power consumption monitor installed into the panel by a licensed electrician.

We added smart thermostats in each of the 4 rooms where the split system AC units are operating, so that we could schedule them turning on or off at will, and especially so that we can turn them off and on remotely when there is no need for them.

I installed the Nest learning thermostat to control the millivolt propane stove on the lower level. Living in the mountains it is critical to have a second mode of heating that is not electricity. In our case, we have a propane heater (and a propane tank in the yard too), which can start and run without any electricity. But it still needed some smart controls, so I put a Nest learning thermostat as the primary controller. This is not how Nest is supposed to be used, so I had to adapt it a bit, and also had to tie an old-time bi-metal thermostat in parallel, because Nest can not control devices if it itself is not powered. Even though it has a battery, it won’t regulate temperature without external power. This is not a good predicament for a mountain house, where you must have a reliable way to heat the space up if the temperature dips well below freezing and the house is empty. Leaving the house freezing cold could cause the water to ice up in the pipes, expand, and damage the plumbing.

Internet

No short term rental is complete without fast and reliable WiFi internet. This is basically table stakes. Luckily it was easy to install. We put in Nest WiFi router with one additional mesh routing station, a gigabit cable modem and a 100 Mbit/s internet connection. This is not blazing fast by today’s measures but turns out to be quite enough for everyday office work and your run off the mill internet consumption.

Remodel

We ended up doing dozens of medium and small things on the house

Conclusion

Hopefully this recount gives you an idea what buying a mountain house looks like. Unfortunately it’s been more than a year since we did all the work that I am describing here and I find myself surprised at how much of it I have forgotten already. I’ll try to add more of what I remember over time, though the more time passes, the smaller the chance that it actually happens. Oh, well.