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[00:00:00] Sarah: Hello. Welcome back. My name is Sarah Karakian.

[00:00:02] Annette: I am Annette Grant. And together we are–

[00:00:04] Both Annette & Sarah: Thanks for Visiting.

[00:00:05] Sarah: Let’s kick off this episode like we do every week and share one of you. We want you to use our hashtag, #STR Share Sunday, but we want you to enter to be considered to be shared here on the podcast, on our Instagram account, and to our entire email list by going to strshare.com and telling us about your short-term rental there.

[00:00:24] That way, we can’t– you don’t get lost in the shuffle. Instagram’s been changing some things, and a lot of you are getting lost there. So we want to make sure we have your Instagram handles so we can share you here in the podcast.

[00:00:33] Annette, who are we sharing this week?

[00:00:35] Annette: We are sharing @_avian_lakearrowhead. Again, @the _avian_lakearrowhead. And I have three things I want to point out about this amazing, amazing A-frame. Number one, they have drone footage. That is so cool. If you have a property drone worthy or drool worthy, please– man, they’ve been repurposing it over and over again, different angles.

[00:01:01] I think that is definitely worth the investment. Plus, it’s really cool. Secondarily, their outside area, they have a wraparound deck, and they have made just moment after moment, after moment, and their outdoor seating pops of color, rug, pillows, greenery. It’s just like you want to spend as much time outside as possible, especially in the summer months.

[00:01:22] So just kudos to them if you’re looking for some deck inspiration. And then last but not least, they have, I’ll call it a musical moment. They have this music corner in the home, which is really where well done. They have a record player with vinyl that you can listen to. They have an old school Marshall speaker, but you can attach it to Bluetooth.

[00:01:41] So you still have that old school look, but you can listen to your tunes. And then last but not least, they leave a guitar for guests. And I just thought that was such a nice touch. And I love that music moment. So well done. Thanks for coming to strshare.com.

[00:01:56] Sarah, let’s get on to the show with a dynamic duo.

[00:02:00] Sarah: Yes, we have fellow business partners that we interviewed today, but have no fear. We did a really nice job of everyone sharing the mic. So the interview is going to be super enjoyable to listen to, but I don’t know if you guys know what a hostel is. And if you don’t, stay tuned. But when you hear that word hostel, you may not think it has a place on the Thanks for Visiting podcast.

[00:02:23] Because we’re all about hospitality here and being designed forward and really thinking about the guest, well, these two gentlemen, Michael and Nate, have turned the hostel concept on its head, and they’ve got two hostels. They’ve owned them and operated over the past three years, and they’ve already won an award in 2024, this year, for the number one small hostel in North America by Hostelworld which is their OTA. So they currently own and operate these two hostels in Hawaii, which you hear what they do with their guests.

[00:02:55] It’s really cool. And then, of course, Annette and I have so many questions about cleanliness because if they are sharing bedrooms and bathrooms and kitchens, how do they keep that under control, and how the heck do you make money on such an inexpensive nightly stay? So we ask all the important questions. So this is a really cool episode to tune into.

[00:03:14] Michael: Mike and Nate, the Hostel Guys, welcome to the show. We are so excited to have another dynamic duo on the podcast with us today, but we’ll have to make sure that we’re clear with who’s speaking when so that it’s a really great conversation. Everyone can follow along. But we are excited to hear from you. What were you guys doing before you met, and how did that meeting lead to where you guys are today with the whole hostel business? Take us back.

[00:03:42] Nathan: Yeah, absolutely. So Mike and I were colleagues for 10 years. I believe that great partnerships are found when you can have some aligned strengths, but also where you connect with people where you’re like, wow, we’ve got really similar passions. But at the same time, we have some strengths in different areas that complement each other really well.

[00:04:07] And so, yeah, Mike and I were colleagues. We were in performance-based sales. I was a leader. I recruited Mike from San Diego to come out here to Maui and to help sell resort ownership. And that’s where our journey really began. I realized very early that Mike was extremely driven. He had goals.

[00:04:29] He was coming from San Diego and was really passionate guy. And I’m like, okay, this is the type of person that we want to build our team around. And he joined us. And we had tremendous success together. And as we got to know each other over the years, we recognize that each of us was on our own journey of really investing in real estate.

[00:04:50] And both of us had the dream of leaving W-2s behind and having freedom in our life. And so a lot of these values really aligned. And so did our complementary strengths. And we decided we wanted to do something big together.

[00:05:04] But I’ll let Mike fill in the gaps there where– he started short term rentals on Maui, and it really changed the trajectory of where we are right now. So I’ll let him take over from here.

[00:05:24] Michael: Yeah. Oh, thanks, Nate. I appreciate that lovely introduction. It’s been great working with you as well, man. But definitely, you’re accurate in the fact that we have a lot of alignment in our interests, our goals, our values, but we also have these complementary skills.

[00:05:38] And as Nathan was describing, I was recruited by Nathan to come out to Maui. I thought I’d come out for a year. My intention was to earn enough money to start purchasing some real estate. And at that time, I had the trajectory that I thought I wanted to purchase apartment buildings. At that time, I didn’t have a tremendous amount of money or resources.

[00:05:56] So I thought, okay, well, maybe if I can start with single-family homes, then I can scale up to apartment buildings. And I wasn’t exactly sure how to connect all the pieces, but the goal was to start to just make some money and then be able to buy real estate, which I was able to do rather quickly thanks to the tutelage, the amazing mentorship from Nathan.

[00:06:15] I did very well with the W-2 job. And although I really enjoyed my time there, it really was a means to an end to me. My passion was not necessarily sales or not necessarily even making a lot of money. Really, I was driven to want to get into real estate.

[00:06:30] I started purchasing single-family homes. I bought three homes relatively quickly because at this point in time– I’m going to go back. This was around 2012. So we’re still coming out of the great recession, and so there was a lot of value there.

[00:06:44] But towards 2013 and even 2014, the opportunities to buy the single-family homes at a great rate dried up because things started appreciating. But what that gave me the opportunity to do was to take the three homes that I was able to purchase at a discount, and when they appreciated, I was able to ultimately have enough cashflow to get involved into commercial real estate with Nathan.

[00:07:07] I skipped one step, so let me go back. I bought these three homes and, as I said, prices were appreciating and so it no longer became an option to buy more of those for me. And so living in Maui, I discovered, I observed, wow, there’s this market for short-term rentals. So what’s this about? And I went and looked at a home that was for sale that happened to be a short-term rental.

[00:07:33] And the guy was actually operating under the radar. In fact, here in Maui, there are strict rules and regulations, but for some time, they actually weren’t being enforced. They were in place, but people were just doing it. And it was, if no one complained, then so be it.

[00:07:48] So this guy had been operating this home as a short-term rental and wanted out. I ended up purchasing it with the intention to continue short-term renting it, but instead of doing it under the radar, I went above board and invested in the process to obtain the permit, but it was a bit of a gamble.

[00:08:04] Here in Maui, it’s a long process. Takes about a year, year and a half to go through this permitting process. So we bought this home. At the time, this was 2015, it was a million home, which in Maui these days is relatively a steal. But at that time, and that was a lot of money, buying a million-dollar home. It was like, holy mackerel. That’s a big step.

[00:08:24] But went for it, bought this home, put about a year of my time and my wife’s time. She helped me a lot with this and getting this permit. We secured it and then almost immediately when we opened it up for bookings. It was like, whoa. We were just solidly booked from then on out. We basically had almost no vacancy.

[00:08:42] So I was like, oh my goodness, this is the ticket here. Forget apartment buildings for now. Forget it buying any more single-family homes. How do we get another short-term rental? And at that point in time, you could purchase one and you could only have one per person. So I can have one in my name and one of my wife’s name.

[00:08:58] And so this next time around, we started looking at some other homes, and there was one for sale, but it was $2 million. And I was like, oh my God, that seems like a big, huge, scary number. Fortunately, the circumstances were in our favor. The owner of the property was looking to sell quickly because he was going through a divorce.

[00:09:18] In fact, it’s public information, but the owner was Mick Fleetwood from the band Fleetwood Mac. It’s this gorgeous luxury home. It was incredible. It was like, wow, way out of my league. But I said, all right, let’s negotiate this. He was looking to sell. Long story short, I ended up getting for 1.6 million, which is still tons of money.

[00:09:35] And I was like, oh my gosh, this is crazy. Cashed all my chips in, was able to buy the second one, and now I’ve got two, what you could describe as luxury vacation rentals. And like the first one, they just started pouring in cash. It was incredible. So I was able to step away from my W-2 job not long after that.

[00:09:52] And basically be, I guess, retired at 38 years old and being able to just enjoy the dream life in Maui, and I thought that was incredible, but I’m not really driven just to sit around and do nothing. And I really wanted to go back to something that involved going bigger in real estate and having a big vision for real estate.

[00:10:14] And that brings me back to Nathan, because we knew that we wanted to do something together. And even though I was one foot out the door with being able to step away from the W-2 before I did, Nathan and I were still collaborating, thinking like, hey, how can we team up? What can we do?

[00:10:29] And we started to look into, hey, how can we buy short-term rentals together? Because they’re awesome. I love them. I would buy as many as I could here in Maui, but you just can’t any longer. Shortly before I stepped away from my W-2 job, they basically put an end. They do not allow any more permits.

[00:10:45] So I have two, and they’re gold. The only problem is if I ever were to sell the home, the permits don’t transfer. So we’re starting to see that the county is recognizing like, okay, through just attrition people sell their homes. They get older or whatever.

[00:11:02] There’s less and less and less of them. And so what we have has become more and more valuable. But unfortunately it’s not scalable. So it’s not something that Nathan and I could partner up on and go and buy more of these, at least here on the Hawaiian islands. And so we were thinking like, okay, well, what else can we do? And I’m going to pass it back to Nathan to describe ultimately where we went from there.

[00:11:21] Nathan: Yeah, this was a difficult process for me because I’ve watched Mike go through all of this and recognizing that that’s it. Too late to the show, doing that comparison. But I think the reason that we wanted to partner is because we both had a vision to– growth really drives me. And so I didn’t want to just do something to do something. We wanted to do something big. We wanted to go and really have an impact and have something that we could dig into and test all of the characteristics that had gotten us to where we were.

[00:11:58] Annette: Yeah, why the why the hostel? Is there a ton of market? You’re talking short-term rentals, but is there a lot of market information here? Right now we can go to AirDNA. There’s a lot of places like PriceLabs that we can look at this information. I’m just thinking, if I had to do due diligence or I was interested in a hostel right now, is the data out there for you to look at? And how did you come to that, like, this is the ticket?

[00:12:25] Michael: By accident. I won’t need to tell the story, but it was absolutely hostel guys, by me.

[00:12:30] Nathan: No, we’re not.

[00:12:31] Michael: Totally accident.

[00:12:32] Nathan: I’ve never stayed in a hostel. I didn’t even know what a hostel was, but we were going to go and purchase apartment buildings and scale. And what we recognized was, okay, well, we’re out here in Hawaii, man, to go and purchase an apartment building for our first one in Columbus, Ohio, or wherever it was.

[00:12:51] We’re like, that’s scary for us. So let’s start here. And the first property that we inquired about to consider purchasing, we didn’t end up looking at it because it was under contract, but as we talked to the real estate agent, there was this comment in the notes that said it was partially being run as a hostel.

[00:13:11] And we’re like, huh? Hostel? What is this? And as soon as we ask that question, this real estate agent felt it. He’s like, oh, these guys are creative. They’re outside-the-box thinkers. And he went all in on recognizing, wow, he found out that Mike was running short-term rentals, and he’s like, man, this is what they need to do.

[00:13:34] And he started sending us all this information on hostels in Asia, and hostels here. And then it planted the seed. It started the vision. Look, it didn’t go perfectly. There was very little market information, like you’re saying, but we just knew that we also have a passion for experiences and people, and coming from a sales background in the resort industry, the reason that we sold what we did is because we believed deeply in the experiences of people.

[00:14:01] Annette: Were you guys selling timeshares? You call it resort. I don’t know. You guys have a nice nomenclature, but was it timeshares essentially?

[00:14:09] Nathan: Yes, it was timeshares. We were selling timeshares.

[00:14:11] Annette: See, you guys are good sales– because what is it? A resort? You guys even have, what have you been calling it this whole time?

[00:14:17] Nathan: Well, resort ownership.

[00:14:18] Annette: Resort ownership. No, I’m here for it. I’m here for it. But AKA timeshare. Got it.

[00:14:23] Nathan: Fractional ownership, timeshare. But yeah, at the end of the day, we were selling timeshare at different properties, different places. But yeah, we recognize that the value of how people value their experiences. So there was this passion side for, okay, if we can combine these two things, we understand what people want in their life.

[00:14:46] If you go onto our hostel website, you’ll see that in our mission, it involves fulfilling the six human emotional needs, and it doesn’t matter if it’s a short-term rental. It doesn’t matter if it’s a hostel. It doesn’t matter if it’s a hotel. It doesn’t matter what it is. If you’re going to be involved in that understanding that if you can fulfill people’s human emotional needs that you’re going to be successful.

[00:15:10] And so we recognized in this business model, although there was very little information out there that we knew what people value and that that’s what we were going to focus on. And like I said, it didn’t go perfectly because the first property that we purchased before COVID, we were going to convert into a hostel, and we ran into every challenge that you could.

[00:15:30] We learned the hard way about a lot of things, but ultimately, we learned through that experience and we purchased an existing hostel during COVID, and probably people said that we were crazy. We’re going to look at shared accommodation purchasing during COVID while we were completely shut down.

[00:15:50] Annette: Or genius, because did you get a deal?

[00:15:52] Nathan: We did get a deal.

[00:15:54] Sarah: Real quick, because they’re not huge in the US, and a majority of our listeners are in the US, basic explanation, what is a hostel, and what makes it different than a short-term rental and a hotel or motel?

[00:16:07] Michael: Yeah. Okay, the idea that most people have a hostel is that they’re dingy, low budget places to stay for as cheap as possible. Fair. I think that there are a lot of those. However, I had some experience staying in hostels in my early 20s, both in Europe and in New Zealand, and I was really impressed that what they’ve been able to do out there is leaps and bounds ahead of what many of the hostels are like here in the US.

[00:16:32] And there are great operators here in the US, don’t get me wrong. There really are some good ones. But when we started researching ourselves, okay, well, what is exactly a hostel? We started looking at some of the big brands in Europe to just take our cue from them.

[00:16:46] So we were really inspired by– there’s a brand called Generator, and there’s also another one called Freehand and is here in the US. Now, Generator is this huge company, this huge hostel brand. I don’t know how many billions of dollars they’re worth. You could look it up, but they’re ginormous. And what they’re really good at is being designed forward.

[00:17:05] They’re not just a cheap place to stay. They’re these incredible experiences. They’re experiential lodging. They have really nice lobbies and really fancy decor. But at the end of the day, what a hostel is is shared accommodations. So instead of putting people into a private room with their own bathroom, the upside from a hostel is you can put many different guests in the same room in bunk beds, and then they can share that accommodation.

[00:17:37] And so although the sleeping accommodations can be somewhat basic, the lobby area, you can really make nice and make people want to really be there, and that’s really what I think we’ve done, is we’ve taken our inspiration from Generator, where it’s not just a cheap place to stay. It really is the place they want to stay because it’s social. It’s an experience.

[00:17:58] If you look at our hostel and the way we’ve designed it, it’s nothing like what you would imagine a hostel being. And it’s beautiful. It’s got the pool table and foosball on a stage and this big, beautiful artwork. It’s just gorgeous. But when you look at our Instagram page, for example, Howzit Hostels, it’s not just that it’s a nice place that looks really fancy.

[00:18:19] You can tell the energy of people coming together. So the essence of a hostel is that it’s a shared space where people come together instead of going to Maui where you might be able to get a great deal, even on an Airbnb, have a nice place on a budget, but you’re going to go there and enjoy the beach the space in private.

[00:18:40] Michael: You might be on the beach alone, and that might be what you’re craving. But if you’re someone who’s maybe in our target demographic, 20 to 35 years old, you might want to go to Maui and not be alone. You might want to meet others. And what we do is we really curate this experience to where we have social events pretty much every single night.

[00:18:57] There’s something going on. It might be karaoke night. It could be trivia night. It could be margarita night. When I look at the Instagram page– actually, I’ve never been there past 6:00 PM, so I don’t really know what’s going on over there, but what I could tell is they’re having a blast.

[00:19:10] These [Inaudible] youth, I’ve seen these, I think it’s called a conga line or whatever, and they’re just cruising around the whole lobby, and they’re listening to music. And it’s not a place that you go to if you just want privacy. It’s a place you want to meet others. You want to share an experience.

[00:19:24] We have a 15-passenger van, so every single day we load up the van and we take them together to some of the best places on the Island for free. We take them snorkeling. We take them on this, it’s called the road to Hana, which is this incredible journey throughout this lush rainforest jungle, and they go together.

[00:19:42] And so these folks that are staying with us, they’re not necessarily obsessed with like, okay, well, what’s the linen count on the bed sheet? They’re more concerned with like, okay, who am I going to meet? Where am I going to go? How much fun am I going to have? And I think that we’ve curated an environment that is awesome for that.

[00:19:58] Annette: I accidentally had a wonderful experience at Freehand a week ago. I was in New York City and I was walking and I was like, hey, I need to stop into a hotel lobby. I had a call I had to take. I didn’t even know it was a hostel.

[00:20:13] And I stayed because the vibe was amazing. The design was amazing. They had this cool coffee shop and everybody in there was like, hey, I’m just going to stay here and continue on. So that’s interesting that I didn’t even know. I just thought it was this really cool hotel, and it was actually a hostel.

[00:20:27] You just described the activity at the hostel, but can you give us the bed bath count and bedroom count? So you said you bought a pre-existing hostel. Was it built as a hostel? Because I’m just thinking of Sarah and I wanted to– we’re at the one of the largest college towns in America. If we wanted to do something like a hostel, what does your building look like, and when you purchase it as a hostel, did they build it from the ground up? Can you give us the schematics of the building?

[00:20:57] Nathan: Yeah, Michael, how about you take that one?

[00:20:58] Michael: Oh, you want me to take it? Oh, okay. I thought you would take this because Nathan is extremely good at room configuration, revenue management. There is a bit of an art and science here because we bought an existing hostel. It was being operated by a gentleman who had owned it for 20, 25 years.

[00:21:18] And he was your stereotypical, like, this is the cheapest place to stay, and this is why people want to stay there. So he wasn’t really doing a lot to create atmosphere experience. And when we went into the property, it has two floors. The second floor was where all the bedrooms are.

[00:21:35] So mostly shared accommodations, a few privates, but all shared bathrooms. And then downstairs, for the most part was just this empty space with 14-foot ceilings. And at one point it was a restaurant. So it had restrooms in there, but he was using it as storage. And when we walked in there, we were instantly like, oh my gosh, this space here would be perfect as a common area.

[00:22:01] What is going on? And so we started talking to him about that. And he didn’t outright say this, but I got the sense that like for him to invest the money to make that space nice, he didn’t he quite get like, well, where would the return on investment be? I’m already booked.

[00:22:16] People are staying in my place. It’s cheap. They stay there. It’s full. Why spend any more money to make it nice. So, eh, just leave it the way it is. But we were like, whoa. So back to your question, yes, was an existing hostel. That is for you guys if you’re looking at like, hey, college town. Maybe we could open a hostel.

[00:22:32] In our buy box, our priority of what we would be purchasing if we go to look at another, number one, absolutely an existing hostel. If we can purchase one that is not being run as efficiently as it could, it’s got a lot of deferred maintenance and needs some investment just to bring it up to another level, that would be our first priority.

[00:22:53] Number two, you can purchase an existing hotel. We’re talking maybe a small boutique hotel or anything really that is already pre-zoned for hospitality. And then number 3, what we’re looking for is this is more of a hypothesis. We haven’t done this yet, but we feel like there’s a real opportunity here, is empty office spaces, roughly between 5,000 to 20,000 square feet in urban locations.

[00:23:21] And I emphasize urban because in order for the hostel model to work, we need volume of travelers. And that’s not to say that other hostels can’t operate in a different way, but for our model and what we’re looking to hit from a revenue perspective and to be able to afford to pay for our team and our staff and all the people that make the experience what it is, we have to have a certain amount of revenue. And for that to hit, we have to have enough volume.

[00:23:46] So typically, that occurs in places where people are more likely to visit. So it doesn’t have to be urban. It could be the Caribbean, of course, Hawaii, but anywhere that is a high demand location, and typically that is urban areas. So that’s a third option that we’re exploring.

[00:24:00] And we are definitely interested in seeing– because we feel like, hey, these buildings, you can buy for next to nothing right now, because a lot of them are vacant, and developers that would otherwise convert them into residential housing or perhaps a hotel are reluctant because of the utility infrastructure. But in a hostel with shared restrooms and a shared kitchen, you don’t have to run independent plumbing to each and every room. A typical office might have a corridor with offices on the side. That’s perfect for a hostel. Put in some–

[00:24:28] Annette: What’s the square footage? What’s the square footage of your current hostel, the original one, the first one that you bought?

[00:24:34] Nathan: Yeah. The original one that we call our prototype, that’s the Howzit Hostels here on Maui, and it’s 6,600 square feet.

[00:24:41] Annette: And how many people do you sleep there?

[00:24:43] Michael: We can sleep up to about 70 people.

[00:24:45] Annette: And what is it per– is it per night reservation? I’m assuming.

[00:24:49] Nathan: Yeah, there’s different bed types. We have several different bed types. So you could be in a four-bed mixed dorm where it’s mixed gender, and it sleeps four, two bunks stacked. So sleeps four. You can have a female four, so female solo travelers are a huge area of organic growth in the hospitality industry. And so we provide female only dorms. Then we have a mixed eight dorm where it’s exactly what it is, eight.

[00:25:23] Annette: Is that a lower price point?

[00:25:24] Nathan: Yeah. So the mixed eight is going to be the lowest price point. We utilize AI-generated pricing model, which allows it to fluctuate. So a female four may go down to $52 a night and may go up to $90 a night, depending upon just where we’re at in supply versus demand in the market.

[00:25:45] Annette: Is a top bunk cheaper than a bottom bunk? I want to know that.

[00:25:48] Nathan: They’re not. Now, some hostels do it that way. We don’t. We don’t. But that’s a good question.

[00:25:54] Annette: I’d pay more to be on the bottom, just putting it out there if you want to put that–

[00:25:57] Sarah: I don’t want people seeing me sleep, so I might pay more to be up top. Don’t look at me drooling.

[00:26:01] Annette: Is there a single room or no?

[00:26:04] Nathan: We have private rooms, so yes.

[00:26:07] Annette: You can drool all over yourself in there.

[00:26:09] Nathan: There’s rooms that have a queen, and then there’s rooms that sleep up to four, but they are their own private room.

[00:26:16] Annette: Okay. And I’m just thinking of all the hosts listening to this. So if you have all of these bedrooms, when a rental reservation comes in, does each bed have a number and you assign them to the number of the bed? What are your door codes like? How does someone get into their mixed four and know what bed they’re in? What does that look like on the back end?

[00:26:37] Michael: So we have a software system. It’s specifically made for hostels. And so just like any hotel would have a room configuration and they would assign people, ours are just assigned to individual beds. So as reservations come in, based on the category, they’re going to get a bed in that category.

[00:26:54] So it’s pretty seamless. As far as door codes, we utilize technology to where the guests are automatically emailed their door code that is specific to them. So these locks are privacy locks. That door code is unique to them. And it starts when their check in time begins, and it no longer is active as soon as their checkout time is over.

[00:27:15] But in terms of safety and security, I think it’s important to also note, we went into this knowing like, okay, that was going to be paramount for us. We wanted to make sure that our guests felt safe at all times. So we do have 24/7 reception. If anything ever happens, someone for some reason can’t get into the room, there’s always someone there at reception on site ready to help.

[00:27:34] Annette: That’s awesome. The gentleman that owned it before, did he have 24/7 reception? Is that a big differentiator?

[00:27:39] Michael: No.

[00:27:39] Annette: I think that’s a big reason you charge more.

[00:27:42] Nathan: No. Yeah. Yeah, absolutely not. In fact, he had four hours of check in time.

[00:27:49] Annette: Got you. Like, get here now or you’re out.

[00:27:52] Nathan: Yes.

[00:27:53] Sarah: So talk to me about revenue in terms of, okay, so that guy who was bottom of the barrel, no security guy, using his extra space as storage, but there’s beds and it’s cheap place to stay, at what point do you add these amenities, these trips to Hana, maybe the coworking space in the lobby or a hangout place, margarita nights?

[00:28:11] At what point are you crazy profitable, but you still keep the price per night low for the traveler expectation, or is the traveler expectation changing? How does that work with your profit margins too?

[00:28:25] Nathan: Yeah. So this was a process for us. Remember, we knew very little about this, we constantly have people that say, when they look at our design, when they look at the money we spent on things, they’re like, you guys aren’t hostel people. And we’re like, well, we’re not, but I think that that’s provided us a benefit.

[00:28:45] We’ve come into this looking at, okay, well, number one, what’s our standard. Mike is an unbelievable self- learner. He’s constantly reading books. And the timing of him reading a book called Delivering Happiness, which was from the founder and CEO of Zappos, we read that book and what we got out of it was really at the end of the day, if we could go and create those wow moments, but for a hostel, if we could go in and just obsess over the guest journey in everything that we did as we were creating this brand, then we would learn.

[00:29:23] But let’s start there. Let’s start with the guest. And so we started doing very little things in the beginning. Like, well, hostels are known just to be the cheapest place, but what if we were to go and three days prior to somebody showing up, we send them an Aloha call? We have our reception call them up and say, .”Aloha, we’re excited that you’re coming. Is there anything we can do for you?”

[00:29:44] And so we really started going, okay, well, as we implement these things and as we go and build out this new lobby space– remember this lobby space was being used as storage. So we were able to do this renovation as we had guests coming and going. So it didn’t impact the rooms.

[00:30:06] And so we were just learning like, look, if we make the investment into the guest first and their guest experience, then we can start to add things on. Then we’ll find out if we’re profitable. And because we attacked it in that way with our own individual standards, looking at what we really looked at, the Generators of the world and what they were doing, being designed forward, within two and a half years, we were awarded for that.

[00:30:30] And we received the best small hostel in North America by Hostelworld. So we knew, okay, we’re on the right path. And we were learning about the question that you started, with is, well, where do you really know if you’re profitable? Where do you know what you can do and how far you can go? And frankly, in the beginning, we didn’t know, but we had our own standards.

[00:30:51] And we knew that as being non-hostel people, that if we went and changed the dynamic, look, our price points, our ADR has doubled since we’ve taken over. Occupancy has maintained. His occupancy was 95%, but he was just he was selling a room or a bed for 32 bucks. And so our revenue and our profitability has close to tripled since we took over.

[00:31:18] Sarah: It sounds like you’re letting the market speak for itself. You’re, yes, throwing spaghetti on the wall through what means a lot to both you and Mike, but also being thoughtful and I’m sure tracking it along the way. But really, it’s almost like you’re creating a new market space, somewhere between the bad rap hostels and the low-end motels. You’re creating your own marketplace. Do you feel that’s true?

[00:31:41] Nathan: Well, I would say that it’s even further than that. I would say that when we look at our demographic, if you look at a youthful demographic, number one, they’ve come up with a very different stigma. The stigma of Western of the United States and shared accommodations, for them, they’ve grown up in this world of Uber and of whole living spaces.

[00:32:03] And it’s like the things that are in their mind are very different. And because they’re constantly looking at social media and on their phones, they have a deep need for community and connection. And we actually have people that will pay more to stay with us than to stay in what you just called a low-budget hotel. Because we offer so much more.

[00:32:24] The experience that they’re going to leave with is much more than going and being like, all right, this is the cheapest place. And I could go and stay in this studio here and have this by myself. They’re doing it because they want to connect. And they will pay more than what they’re paying somewhere else for the lowest price that exists.

[00:32:46] Annette: Do you list on Airbnb?

[00:32:47] Sarah: That’s my next question. Where do you list?

[00:32:50] Nathan: We do.

[00:32:50] Annette: Yeah. How do you do that? How do you explain that in the description? And how does that booking come through that it’s just the bed?

[00:32:56] Michael: Look, one of the advantages now of having a team is these guys are taking care of this stuff. So we said, hey, we need to get on Airbnb. And we just assigned it to our management team and they figured it out. Now what I know, and I might not be totally accurate in this, but from what I understand is Airbnb allows you to list hotel.

[00:33:12] They actually have a separate way to register within their platform. And instead of the guest paying the Airbnb booking fee like you would booking a short-term rental, the host or us in this case, a hotel or a hostel pays that fee to Airbnb and the guest doesn’t even know about that or have to. So for them, the transaction is very similar to just booking on any other OTA.

[00:33:35] Annette: Okay. And then have you seen an uptick? Has that been great for your business? Because how else would people find the hostel? Are people Googling Hostel Maui?

[00:33:45] Michael: Yeah, so all the other OTAs that are out there, whether it’s Expedia or Booking.com and all of the subsidiaries of Expedia, we’re on all those. We’re on Airbnb, but Hostelworld is an OTA that focuses specifically on hostels. And in fact, that’s not just good for us to be listed on there from a adding revenue perspective, but it also attracts the people that know what they’re getting. They’re there to book a hostel.

[00:34:14] Sometimes on other OTAs, we do get folks that are a little bit surprised because they’re still looking for the cheapest thing. And then they don’t quite read all the details and are a little surprised. Like, wait, where am I? So we prefer Hostelworld because we know we get the right guests who want to hang out with others and add to that culture that we’re trying to create.

[00:34:32] Sarah: Is it important for you guys to build your own direct booking site as well? Where’s your stance on that?

[00:34:37] Michael: Yeah, 100%. Of course.

[00:34:43] Nathan: Unequivocally. When I go back to the first reports that I ran, I think that the previous owner was running 18% direct bookings. And if we look today, we’ll vary anywhere from 34 to 37% direct bookings. The first booking that we got when we opened our hostel on a different island, on the island of Hawaii, it actually came from Instagram. Our first reservation came from our social media account.

[00:35:11] Annette: Magical, reaffirming.

[00:35:13] Nathan: That was the mind opener of reaffirming of– yeah, absolutely.

[00:35:18] Annette: What has been most surprising from a hospitality standpoint of owning the hostel? I know, Mike, you have short-term rentals. You both were very familiar with the resort life. What has been most surprising, though, hospitality wise with the hostel? Are they low maintenance? Are they high maintenance?

[00:35:36] Nathan: I’ll give you what’s been most surprising to me. The most surprising thing to me is the community that’s created. We went into this as, we want to do something big in real estate. And then as we got into this, I’ve said it, I don’t know, I come constantly saying it, like, I’ll go on to her Instagram account, I’m just like, holy crap, this is a community that these– for this generation, their experiences– there’s postcards that are sent that are like, we met each other and now we got married.

[00:36:08] Annette: I was going to say, are there Howzit Hostels babies yet?

[00:36:11] Nathan: I’m sure there are.

[00:36:12] Annette: I’m sure are. After margarita night.

[00:36:19] Michael: Yeah. Personally, I didn’t know that I was going to really feel what I feel about what we’re doing and what we’re creating and how much this asset class– and it’s not just hostels because our umbrella company of how the hospitality is going to grow in other areas of hospitality. However, the hostel community is really, really special. It just truly is. People coming together, experiencing things together, the impact that they have on each other, it’s pretty special.

[00:36:52] Annette: Sarah and I call that in the short-term rental world elevated reciprocity. Like, yes, we did this for real estate and for financial gain, but this reciprocity that happens– we’re not there for the wedding or maybe they got their job interview or just their family vacation or they just met their best friend, but just knowing that we’re providing the space for that to happen is invaluable.

[00:37:16] And so I think that’s something that just in this space, hospitality space communally, as we are part of a community too, there is that stuff that we’ll never know all of the impact that has, but I can definitely see that community aspect, especially of a hostel. And being on Maui, of course, is magical in itself, and then meeting some of your best friends out.

[00:37:38] As far as cleanliness, we have to ask this. What if it’s like, hey, my bunkmate is a pig pen or the bathrooms? Do you have a 24/7 cleaning crew? Is there something that they check off the box like, I’ll be respectable? You said something about a communal kitchen and I just got a little ick nervous. How are you handling the cleanliness of all of these beds and all of these different personality types?

[00:38:05] Michael: Yeah.

[00:38:05] Nathan: Mike will roll with this.

[00:38:07] Michael: This is super important to me. I am sometimes a little bit over the top, attention to detail. If I walk in and the pillow is folded the wrong way, I’m like, ah, cringing. So number one, understanding, well, what is it that we want to accomplish? What’s our standard? And then communicating that to the team and then following up and then following up and then following up and then having checklist and then having specific times of the day where someone will go in and check on, well, did we hit the standard?

[00:38:35] And then during our weekly meeting, having our general manager. He has a checklist of things of like, okay, when he does his inspections, where are we hitting the mark and where are we not? And then along the same lines, the reviews are huge for us. Reviews are sacred. So every week we look at the reviews and there’s been times when, yes, we haven’t hit the mark with cleanliness. And if someone leaves us a review, then we go attack it. And we do whatever we need to do to address the issue.

[00:38:57] If it’s someone is not cleaning up the communal kitchen, okay. Well, what can we do to address that? Can we improve signage? Can we address it upfront when they’re checking in to give them a little reminder? But we do have a full-time cleaning– Nathan: Housekeeping manager.

[00:39:11] Michael: Housekeeping manager. That’s right. I’m trying to come up with a name, but yeah. So we have a leader, and then we have supervisors underneath him that assist, but we’ve got– they’re like bees. They go in there every single morning and everyone just attacks the cleaning and they go and they service every single room, every single day, and we do our best to make sure that everything is as tidy as possible.

[00:39:32] But the reality is, too, it’s a hostel, and in a shared environment, you’re going to have people that just aren’t as cleanly as others. And there’s not much we can do other than say, hey, contain your mess to your bed. But what I will say is for the most part, if we can execute the guest experience at a high level, if we can be absolutely obsessed in providing the best experience and our staff is as friendly as possible, then people are going to overlook a lot of the imperfections.

[00:39:58] They’re going to focus on the things that matter most to them, which is the experience. And they’re going to overlook like, oh man, there’s a little bit of dirt over there, or, this kitchen wasn’t as clean, whatever the case may be. Now we try to hit all that, but that’s why I lean on the experience first, and it’s been successful for us.

[00:40:12] Nathan: And I will say, Mike is an unbelievable integrator of processes. And so we looked at, together as a team, every single review that came in. That’s how we really started learning, every review. And we started putting in, our control, out of our control. What can we do?

[00:40:31] And then he would go and say, all right, team, how can we create processes? So when you were describing that number one, we didn’t start with having a housekeeping manager. They’re now at the site. They are the second most important position that we have under the general manager, is housekeeping manager.

[00:40:46] We recognized that in a hostel and shared space situation, if we can go and crush that part where everybody’s like, we get it all the time, this is the cleanest hostel I’ve ever been in. This is the cleanest hostel I’ve ever been in. But when I go look at the processes that he put in place, we have a communication log that is sent out every single day.

[00:41:05] Every single shift has the amount of times they have to report that they checked in the bathrooms. He just rolled through. Oh, yeah. Well, it’s important to us in the reviews. But when you really go look at the amount of process in detail that’s been put in place, then ultimately, we can all be accountable to each other and say, hey, are we living up to what our expectations and standards are? And it’s there.

[00:41:31] Sarah: This is really cool and really exciting, and if I’m getting as excited as I am listening to your story and all the possibilities and really looking at the way travel is changing, I can imagine everyone listening too is getting excited. But do you think there is a minimum bed count to make a hostel work in your experience?

[00:41:52] And in all the content that you guys consume, do you think someone could do this at a smaller scale and just get started? Or are you thinking 70 people is the smallest you can go?

[00:42:05] Nathan: Okay, so number one, it depends on the person. So Mike and I have a vision to grow, and so therefore we have a specific business model. However, people that have passion for being involved in their business, that’s how a lot of hostels get created to start with. And there’s some unbelievable hostels out there that there is an owner operator that is involved in, hey, I’m going to go in. I’m going to start small. This is a high demand travel destination.

[00:42:35] But when I really do the math and I look at a room, well, that room might rent for $129 or $139, but if I put four bunks in that room at 50 a bunk, now it’s 200. And here’s a way in which it can be more profitable. And so there is absolutely a way to start at a different scale than what we did. But we have a very specific model because we have a vision of ultimately what it is we’re doing and what we want to accomplish, and we want to have a full stack.

[00:43:08] That’s really important to us. So for us, that experience where we have a staff that’s taking people out in the region and a staff that’s 24/7, and to have general managers and housekeeping managers and everything that goes with it, we’re staffed like a hotel. But that’s not how all hostels are, and there’s very successful, unbelievable experiences that people can have if they start small, but they’re going to have to be more involved in the business.

[00:43:35] Annette: Yeah, we just actually went to a happy hour. We were at an event in Austin, and it was at a hostel. And it was a primary res. It was their primary residence that they had turned into a hostel, and the location was out of this world. They were basically the only single-family home in this location with a park and bars and restaurants.

[00:43:56] And that gentleman and his wife, they were there. They wanted to be there. They had traveled the world. It was the experience they wanted to– they have one kid that they wanted to bring up with all of those travelers. And they rearranged their entire house and it scaled for them.

[00:44:10] It was huge because they had 12 people in their single-family homes. You can only imagine, the numbers for them personally on that one property, but it definitely can be done at different levels. And that’s what they were going to like, let’s, I guess, call it more boutique style hostel, a smaller one, but very interesting for sure.

[00:44:30] So I want to know– you were talking about reviews. We’ve all gotten a review that punched us in our gut and made us change something immediately. What was your gut-punch review that pumped the brakes and you literally changed something that day?

[00:44:44] Nathan: Gut-punch review.

[00:44:47] Annette: Well, the one that you’re like, oh my gosh, we have to change this. How did we miss that? Just a stop that made you stop and think and change some things. And we’ve all gotten them.

[00:44:58] Nathan: Yeah. I think in the beginning it was about bathrooms. And it wasn’t just one, but frankly, it was several.

[00:45:09] Annette: Mm-hmm.

[00:45:11] Nathan: It’s like when you go through and we sit down to do our weekly reviews and there’s five or six bathrooms, you go, holy crap. When you really think about, if I’m going to go and book a hostel, the one thing that for me personally would be the cringiest is going in and sharing a bathroom with someone else that I don’t know.

[00:45:32] That to me is the piece. And so we recognized very early, like, oh my gosh, this was the experience that this person had when they went into our bathroom. This is the way that they felt was like, no, that can’t happen. We have to go and create the right processes, around this. But I will also say that the one benefit of the hostel model is that that community typically is a more forgiving community of what their experience is.

[00:45:59] So although it wasn’t a review, that gut punch in the beginning was when we had a storm and all of a sudden ceilings collapsed, plumbing overflowed. We literally had to put three, what are they called, outhouses?

[00:46:16] Annette: Porta potties.

[00:46:17] Nathan: Porta potties. We had to put porta potties in our alley for people to use the bathroom. So you want to talk about, like, when we purchased this, at moments, everything going wrong, all of the deferred maintenance at once, and getting through that, but then learning that, holy crap. The hostel guests were so grateful that we got porta potties. They’re like, you guys are unbelievable. You’ve taken this to the next level. And we’re like, what?

[00:46:41] Sarah: We’ll stick with that.

[00:46:42] Annette: Yeah. Now you’ve got them on speed dial just in case. It’s in your SOPs. Mike’s got it in the SOPs now. We’ve got them there. Oh, gosh.

[00:46:51] Nathan: So bottom line is we’ve come a long way and those ugly reviews in the beginning were really the path to our success.

[00:46:58] Annette: You guys shared this on your onboarding, so hopefully you’ll share it here with everybody. Let’s talk about the numbers really quick. So I want people to understand the scale in your business. If they’re interested in doing a hostel, style setup, maybe in their single-family home or in an urban area, can you just review real quick that you have your ADR, but that overall income and then expenses with your team?

[00:47:20] Nathan: Yeah. So if we just look, our standardized high-level numbers were between our two properties this year. We’ll do about 200,000 a month in revenue, and we have about 35% NOI that comes from that. So just on a high level. Now, next year, we’ll be budgeted higher because our property that we opened middle of March, starting in April on the island of Hawaii, once we get that up and going and really, really humming in, next year our numbers will be significantly more.

[00:47:55] Annette: Awesome.

[00:47:56] Sarah: Before we sign off, is there anything we haven’t asked you that you are just dying to share with everyone about whether it’s your journey, this real estate asset class, where you’re going next? What haven’t we asked you that you want everyone to know about?

[00:48:09] Michael: No, I think you guys have done a nice job. It’s been great chatting with you. I don’t know. I think we’ve covered most it.

[00:48:15] Annette: I have one last question because now that I’m thinking about it, too, I actually feel like I just stayed in a hostel, but it was marketed as a hotel. I was chaperoning a ballerina at an intensive in New York City for a few days, and I had a shared bathroom. I feel like they were watching because it was so immaculate.

[00:48:34] It was like someone go in. They’d clean. Someone go in. They’d clean. It was insane. But I guess my question is, for someone with a hostel, is that a different type of licensing? Are you hotel? What is that?

[00:48:48] Nathan: Hotel. Yeah. And that is a critical piece to understand in our business model. Again, you look at a single-family home in Austin. Are they running that based on a short-term rental?

[00:49:00] Annette: Right. I don’t know about the licensing.

[00:49:03] Nathan: Yeah. And who knows? But for us, that is a key piece.

[00:49:08] Annette: Because you want to be able to always run as a hotel. So if there’s any STR laws or anything.

[00:49:13] Nathan: Absolutely, absolutely. So for us, running the hostel is all about finding the zoning that allows for transient vacation rentals, whether it’s hotel or whatever the different lodging types are that fit our business model, that it’s properly zoned, that it’s not conditional use or special use. That it’s a part of the actual zoning.

[00:49:31] Annette: This was my question before I got off on my hostel experience because of my age. Is there an age limit? Are you seeing all ages come and stay?

[00:49:40] Michael: Yeah.

[00:49:41] Nathan: Yeah. First of all, yes, there is for children. Each hostel space is going to be different. So if we had a larger hostel in Los Angeles, that might change. But for our current business model, where we’re currently at, we don’t have children under 12.

[00:49:59] So that’s one important thing. And then from an age standpoint, we’ve gone back and forth on this, but there are many hostels that will say, if you’re going to stay in a dorm, you need to be 40 or under. You need to be under 40.

[00:50:10] Annette: I missed the mark.

[00:50:12] Nathan: I know.

[00:50:13] Annette: No hostel for me.

[00:50:15] Nathan: Oh, wow. I’m a decade past.

[00:50:18] Annette: No, that’s so great. I love it.

[00:50:20] Nathan: So yes, there are age limits in hostels, and that’s one of the things that, and ultimately that comes down to–

[00:50:26] Annette: I’m going to start an old– hey, you guys want to go in? Let’s start our old folks’ hostel.

[00:50:29] Nathan: We could it.

[00:50:31] Annette: Let’s go.

[00:50:31] Nathan: We could it.

[00:50:32] Annette: Let’s go. Anybody listening out there, let’s start an old folks’ hostel and I’ll be the first guest.

[00:50:37] Michael: If we’re riffing on business ideas, can I just share one with you real quick?

[00:50:40] Annette: Sure. Let’s do it.

[00:50:41] Michael: So I’m of the age right now where I’ve got small children, so I’m not staying in a hostel. No way. Not going to happen. But when we go on vacation and we think about staying in an Airbnb, of course we do. We love it, but then we’re like, we’re by ourselves. And I’ve got these two young kids. It would be great if there was a community, like if someone had, whether it’s a community of Airbnbs or condos, or even just a boutique hotel, but it was catered towards families with children that they could interact like each day.

[00:51:09] The parents could sit by the pool and then the kids are on the playground and they’re all just– it doesn’t take much to entertain my kids. If there’s other children around three, four or five hours goes by and they’re like, bye, dad. I’m hanging out with so and so. If there would be some way to have an adult area that you can hang out and enjoy vacationing as an adult and let your kids play nearby, that would be awesome.

[00:51:29] Annette: Okay. I’m going to go with my old folks’ hostel first.

[00:51:34] Michael: I want someone to watch my kids.

[00:51:36] Nathan: We’ll just change in the old folks’ hostel. We’ll have tons of–

[00:51:41] Annette: Maybe, yeah. We can watch the kids. Yeah, we could let you guys have [Inaudible].

[00:51:44] Sarah: Oh my gosh. Let me reign this back in. Where can our listeners find out more about both of you, what you’re doing?

[00:51:52] Annette: And they tell their younger friends about the hostel to get you some clients.

[00:51:56] Michael: Yeah. So our hostel Instagram page is Howzit Hostels. So @howzithostels. Of course, you can find our website there as well. Our business arm, our investment arm, because ultimately our goal is to scale and to grow, and in order to do so we need to start raising money, you can find us on Instagram, @mikeandnate_thehostelguys. Our website is vortexmaui.com.

[00:52:22] However, we are rebranding. Our website will be Malama Capital. Malama is a Hawaiian word, which means to take care of, to protect, to nurture. So we’re going with a little more of a Hawaiian flair. So malamacapital.com.

[00:52:37] Annette: I like it. That’s great. Because this has been wonderful.

[00:52:42] Sarah: This has been very fun conversation. Thank you so much for being really open and honest. And I know that you’ve got people thinking differently, just as that real estate agent was excited. You guys were thinking differently.

[00:52:55] Annette: That’s something that you guys did talk about though. I want to share that with everybody. Just starting down that path, getting that base hit, starting to look for something is going to open up more doors for you. You guys had no idea that this was going to come your way, but you started taking action.

[00:53:09] Sarah: Yeah, yeah. Well done. Well, with that, I am Sarah Karakaian.

[00:53:12] Annette: I’m Annette Grant. And together we are–

[00:53:15] Both Annette & Sarah: Thanks for Visiting.

[00:53:15] Sarah: Talk to you next time.