Are Your Short Term Rental Statistics REAL? And What's A Pro Forma? | The STRR Podcast #60

Are the numbers you're seeing true? Should you believe them? And what about these pro forma things? You see those with a lot of big properties. What the heck is a pro forma and should we trust them? That's what we're going to talk about this week. We're going to break down some stats and some information that you will want to check twice. Let's dive right in. Welcome to Short Term Rental Riches. Quick actionable ideas to help you along your real estate investment journey, but with a specific focus on short term rentals. Welcome back to the Short Term Rental Riches podcast. Here we are another week and another topic related to real estate. As always, but again, this time in a sort of roundabout way. This is going to help us with our due diligence when we're looking for properties, but also just some basic things that we will want to consider and to take into account when, when we're hearing information about maybe a potential market or maybe a potential property or maybe a potential real estate investor that has an offering. We're talking about stats this week and numbers and whether we should believe all of this. A lot of it comes from the news, A lot of it comes from email offerings that we see or property reports. Maybe one of the more valuable classes I had when I was doing my MBA was a class where all we did was break down news to find out where their faults were. It was like a critical thinking class, critical analysis class of information and stats that we were exposed to just in day to day life. And it really helped me to think about information that I see differently. So we're going to go over a couple examples, just common day examples I'm sure you've seen on product labels that, that you probably want to think twice about or think, wow, that sounds really good. We'll talk about this constant wave of news and how that's kind of changed how we can more effectively evaluate data. So we know maybe if it's a pro forma for a property, if it actually makes sense. And we're going to talk about what the heck is a pro forma. That's something I worked with a lot when I was a broker and really any commercial property, five or more units or apartment building, shopping center, any sort of commercial property, you're almost always going to see a pro forma. So we'll talk about that. And also some signs to keep an eye out on that could mean the data you're seeing is not that good. So let's just jump right in. I'm sure you guys remember Seeing Colgate, for example, you go to the store and you buy a box or a tube of toothpaste and it says 80% of dentists recommend Colgate. Well, is that really, like, credible info? It sounds good, right? Oh, wow. You know, most, most dentists think this is great toothpaste. Well, what if those dentists also recommended other toothpaste options? Which they did in this example, Colgate got sued for that because that, that data meant nothing. They could have recommended five options all the same way. So it doesn't really mean anything. You might have seen back in the day, Reebok came out with a shoe that was. Reebok said that these new shoes would tone your hamstrings and calves up to 11% harder than traditional shoes and tone your butt up to 28% more than normal athletic shoes. That's a bunch of, that's a bunch of baloney too. And they got sued for that one. So we see this stuff all of the time. And especially with the massive amount of news and information that comes in, a lot of times we don't think twice about it. You know, there's been tons of statistics going around with COVID and I don't want to downplay Covid in any way, but some of these statistics we gotta think about. For example, if, you know, let's say a city has been doing really well, they didn't have any cases, a smaller city maybe only has like, you know, 5,000 people in it. And then one person gets Covid and six months later, five people have Covid. Well, a news article could come out and say cases of COVID in so and so City increase 500% because it went from 1 to 5. Right. 500% increase. Well, if we don't have any more info about that news article or that city, or if we don't know what that sample size is, then we're going to be somewhat shocked. Right? We have to be really careful when we see percentage increases in news data or in property evaluations or whatever it is, we need to know what it's increasing from. If we don't know the sample size, the percentages can be very misleading. I was reading a book earlier this year called Antifragile by Nassim Taleb. I think hopefully I pronounced his last name right. But he's talking about how news used to inform us about important things. When something happened, it showed up. And so it wasn't always, you know, a one page article about so and so. Sometimes it was, you know, a hundred words so and so. Happened or this changed. But for news companies to survive today, in 2020 or whenever you're listening to this in real time, they need a constant flow of news. It doesn't change. So even if they don't have something credible, well, a lot of it, unfortunately, is going to be kind of filler, right? Or they're going to regurgitate something they saw somewhere else. So the amount of information coming at us is just increasing exponentially. And we just want to double check that the info we're hearing is credible. And there's a few ways we can do that, or at least some things that we can look out for. First of all, we need to know who's writing the article, who's publishing the info, or if this is a real estate investment, who is the company that's providing the data and where is it coming from? So that would be the authority of the article. We also need to know when it was dated. You know, we might see some information about a market, real estate market, maybe it's a year old, but they don't have the date on there. So that's something really important, really easy that we want to be conscious of. And what is the purpose of the news article or the evaluation on the property? Well, if it's a property and they're selling it, most of the time, the purpose is to get you to buy it, right. Or to get someone interested in the property that so that they can sell it. That is their purpose. A lot of news articles or documentaries, their purpose is to persuade you that one way of thinking is right versus the other, or one product's better than the other. And so their data might be a little biased. So we want to check the authority who's writing it, who created the content, the date, what the purpose was, and then also the coverage. If we bring this back to a real estate investment and they're talking about a particular city, for example, or maybe they're talking about a neighborhood that's doing really well, but it's in an overall city that's not doing well. So is this data or is this article, or is this evaluation that we're seeing, is it giving us an accurate picture of, of the whole idea? Just another thing that we want to consider. Now, this next one, man, people are getting really good at, and that's presentation. So when we get data, Instagram, YouTube, people are making amazing videos now. We are on YouTube, by the way. I gotta say, I would like to say that our videos are amazing, but I'm really at this point just recording the podcast and we're putting on there. So it's another avenue. It's a great avenue for learning. And people are getting really good at their YouTube videos. The presentation is really important and it can really sway us too. I mean, if there's a lot of visual aids and if there's a lot of pictures and things like that, and we're seeing it really quickly, it can lead us to believe one thing that might not be completely accurate. We can't spend our whole lifetimes trying to analyze data and do all these things. But if we just consider these simple things, it can help us. A few other things that might be giving us misleading statistics could just be, you know, faulty polling. If someone's producing a report, let's say on the short term rental industry and they're producing statistics about vacation rentals, but they poll inner city short term rentals for data, well then that's not going to match up. They're pulling the wrong crowd. That's one thing that could lead to bad data. Also false correlations. If we use that same example again, the data for vacation rentals is often very different than urban short term rentals. And if we take data from urban rentals and say that it's causing this effect with vacation rentals, well then that's a faulty correlation. And that's, that's not going to help us out either, especially if we're looking for new markets and stuff like that. And then sometimes, you know, when someone does a report, they can purposely seek out a certain group to get the data that they want or biased data, we could say. So now let's, let's break this down more on a real estate basis. I want to get to the pro forma and just how sometimes these are faulty. And I know firsthand because I worked as a broker selling commercial properties and every person that came to buy one of our properties asked for pro forma because the lenders are going to ask for pro forma. It is a projection of what that property can actually do, but it's not, not what the property is actually doing. So when we're evaluating a property, we want to get the actuals, we want to know exactly how much rent came in, exactly how much utilities cost, and then we could compare that with what they could hypothetically do. And that's what we'll find in the pro forma. So if you're doing a renovation on a property and you change it, you know you're expecting to raise the rents 10, 20%. Well then that could go in the Pro forma. And that's what you could give to a lender. Now the lender is going to want to see actuals also. But I remember doing these deals, you know, and depending on the year we're in and how the general real estate market's doing or specific to our, our neighborhood or our local market, there are certain expectations that investors have. A lot of times people use a cap rate. It's a measure of evaluating a property. And, you know, back in the day, back in, like after the 0809 crash, 7,8% cap rate maybe was pretty common. You know, you're getting a much better return on properties because the properties weren't as expensive. Now, a 4 or 5 cap could be good in some markets. And so when brokers or real estate agencies are preparing these pro formas, they know what the market is expecting. So even if a property is not performing at a 5% cap rate per se, maybe they lower the utility costs, maybe they raise the rents a little bit on the pro forma to get them to that number where they want to be. That's exactly how it works with the pro forma. So do not base your purchase decision on off a pro forma. It's not real data. It's hypothetical. I looked up the definition of pro forma, and in Latin, it literally means for the sake of form, basically to fill in the spots and to have it filled out. Hypothetical projections. So don't base your investment decisions off of Proforma. Now, on the flip side, Proforma is helpful for us to evaluate what it could do, but we want to base that off a real data. You know, if we have a good pro forma Excel sheet or, you know, there's lots of rental calculators online, I'm sure you can find for free. Having that template is good because we can fill in those numbers and we can run some hypotheticals. I would always take a conservative hypothetical with your pro forma, and then perhaps one, you know, if everything went as planned, and then maybe assume that it's going to fall or your projections or the actual returns of that property are going to fall somewhere in the middle. Right, so different, different podcasts today. I just wanted to break it down. You know, when I hear data, I'm thinking about it, and the better you are with your math skills too, you can catch a lot of these things. You know, sometimes people tell me something and I'm like, wait a minute, that doesn't. You know, and you kind of crunch the numbers in your head a little bit and you're like, that doesn't make any sen. You know, so, so double check these numbers that you're hearing. If it's a news article or whatever it is, ask yourself, who is authority here? Who's writing this, creating this content? What date was this content created? What's the purpose of this news article I'm seeing? Or this pro forma? Who's it directed at and what's their real purpose behind all of this? What's the coverage? Are they really including all the necessary pieces in this data that they should be to give us an accurate picture of it? How's it presented? Are they doing an excellent job on YouTube with visualization to maybe sway us or convince us of something that's maybe not true? Are there Instagram images and stats? Amazing. Just double check the presentation. Sometimes that can sway us, especially if we're not actually listening to what's being said behind the visual side of it. So consider those things and if you're looking for properties, have a pro forma. Just double check that you know the actuals. Hope you guys are all doing well out there and have a wonderful day. Want to get on the fast track to financial freedom through short term rentals? Well, it all starts with the properties you acquire. But you want to make sure that you acquire the right properties. I want to give you my ebook that will show you how to do just that. There is no charge. It's my gift to you for being one of our subscribers. Just go to restmethods. Com. That's restmethods. Com.