Partnering with Madame Popp: Luxury Airbnbs as Wealth Building for W2 Earners

So, taking a detour from my usual musings around working in tech — but not straying too far from the partnership theme! — I thought in the spirit of a new evolution in my realm of passions, I would touch on something both personal and professional.

Madame Popp and I looked into investing in real estate starting late in 2023, and pulled the trigger on our first deal in 2024. Our thinking is since we are both W2 employees that wanted to build a second income stream. On top of that, we also felt this itch to explore alternative paths to ‘success,’ ones different from the traditional ones our parents — and society writ large — told us to pursue. Indeed, both of us grew up believing that success was the fruit of a long series of laborious steps: work hard in school, get good grades, attend a good university, get a good paying job, buy a house… And for a while, that journey was fine for us, until we had our daughter, Isabelle. We realized that despite the intellectual rewards of our jobs, we wanted something else. In fact, we wanted to build something that we could be proud of — that we could call our own — and that we could pass on to Isabelle.

After looking at different real estate asset classes — multifamily, long term single family, self-storage — we ended up focusing on luxury airbnbs, which we define as differentiated, 6+ bedroom short term rental properties located in regional vacation markets. We focused on airbnbs because they marry (hah!) our respective passions. Madame Popp has always felt a calling to design, art, creativity; and as you’ve seen with my previous posts, I’ve been called to combine entrepreneurship and business development with endeavors that build meaningful human relationships and memories. We realized we could partner together and build hospitality experiences for people that would be meaningful for them and wealth building for us. Our end goal is to build small boutique hotel-esque compounds geared towards families looking to create fun memories for themselves and their children.

You can imagine what detractors would say. If our goal was to build wealth outside our jobs, why real estate when buying ETFs is more passive? What if there’s a repeat of the 2008 crash and we lose all our equity? Isn’t the airbnb market oversaturated?

For the sake of transparency — and for this author to process his own calculus for going down this path — we’ve shared our strategy below:

Why you should… they say

Real estate is a well documented wealth vehicle. There’s a reason 90% of millionaires built their wealth from real estate. It’s one of the best asset classes where an investor can take advantage of leverage to buy assets that appreciate and simultaneously act as a hedge against inflation. Often overlooked, however, is the fact that when you rent out your property, your tenants pay down your mortgage — so you get the double benefit of having your clients buy into the equity all white it also appreciates in tandem (double bubble!).

The second benefit — one particularly attractive to high earning W2 workers — is tied to the ability to reduce your tax bill by taking advantage of depreciation and other deductions. While home owners are capped by how many write-offs they can take off their main residence (for instance SALT deductions are capped at 10%), as an Airbnb investor, those caps don’t exist. Indeed, there are certain provisions in our tax code that actually incentivize ownership and investment in short term rentals, as they get categorized as active businesses. These qualify for larger write offs — including but not limited to bonus depreciation, interest payments deductions, insurance, furnishing (we’ll explore each of these in a separate post) that when combined can offset the majority if not all of your income. Take our asheville property as an example. We bought it for $785,000, and when we did a cost segregation study, $245,000 qualified for bonus depreciation. The Tax Cuts and Job Act of 2017 allows us to count 60% of the $245k — $147k — against our active income. Since we are at the 30% federal income tax bracket, we’ve effectively received a $44k refund from the IRS — which also happens to be 40% of the down payment for the property we bought. This boosts both the long ROI of our investment and the cash on cash return.

And we saved the best advantage for last: if you buy the right property in the right location, you can actually cash flow. We’ll explore some of the key metrics to evaluate if your business investment has a high ROI, but Airbnbs, when done right, can actually help you retire from your W2 by living off the subsequent cash flow. When I was working for Google, I saw rounds of layoffs after layoff affect some of the highest performing team members in our org. It was then and there that I felt the compelling need to diversity my active income with other income streams. Earning cash flow from an asset that both appreciates and reduces my tax bill seemed like a solid investment strategy.

Why you shouldn’t do it… they say

The most common counterargument to airbnbs we keep hearing is the phrase: ‘the market is oversaturated’ Indeed it is! That’s actually a good thing. It means that there is sufficient enough demand to sustain a vacation rental business. It’s when markets become too oversaturated then that concern should seep into your reflections of whether it makes sense to buy an airbnb in that specific market. The risk here is how do you identify if a market is at its peak, and oversaturation is about to put downward pressure on average daily rates (and thus the overall long term profitability of your Airbnb).

We believe that reports of the short term market’s oversaturation at best and outright death at worst are grossly exaggerated. The data says opportunity abounds — but it is up to you as an investor to find the right opportunity. By the year 2026, the short-term rental market is expected to reach a valuation of $8.9 billion. Moreover, the vacation rental market is predicted to experience a substantial compound annual growth rate of 19.1% from 2022 to 2032. This growth is driven by factors such as the thriving tourism industry and the growing popularity of vacation rentals as an alternative to hotels (especially for traveling groups). In parallel, perspectives around ‘airbnb saturation,’ and the long term effect of higher interest rates from 2022–2024, actually points to a decreased growth in the supply of short term rentals as well. We consequently hypothesize a decrease in competition, when combined with growing spend on vacation rentals, presents an opportunity for saavy investors if they are able to pick the right markets and assets.

Detractors will also point that oversaturation also prompts policy makers to react; interestingly enough that actually counterintuitively leads to more opportunities in markets where policy markets are actually incentivized to create a level playing field for short term rentals as they are key to keeping tax revenue balanced. Oftentimes detractors of the short term rental asset class will point to Barcelona and New York City’s outright bans of STRs as cautionary tales for aspiring Airbnb investors. This is definitely the largest risk to keep in consideration. It is reductionist to argue that all markets will go the route of NYC and Barcelona. In fact, the NYC experiment is showing its drawbacks — hotel ADRs have skyrocketed and there has been no bloodletting in the increased rents that continue to afflict the city at large. Those that are watching this unfold would hypothesize that eventually a public private partnership model will encourage competition in hospitality between hotel operators and airbnbs hosts, all while balancing the stock of supply available to families looking to buy homes. Yes, regulation is actually welcome — if it creates guardrails for competition and can be tied to increased tax revenue. This topic deserves its own post but in the meantime we think that in the long term, there will continue to be markets where vacation rentals are such a key part of the tax revenue base that local policy makers will implement regulations that try to strike a balance between allowing for short term rentals and homes for local citizens. These are the markets that investors should target as they provide the most opportunity and long term stability.

Personally, we’ve tried to be super specific at picking markets where there’s both a healthy balance of saturation and regulation. Certain markets that we avoid include: suburban / large cities, larger vacation markets (ie Scottsdale) where professional investors have raised high barriers to entry. These are red oceans so to speak: if we would enter into those markets we would be trying to compete against other comparable 6+ bedrooms managed by professional operators. Since we look for both cash flow and appreciation, these markets don’t represent the opportunity that match our investment hypothesis. We’re trying to marry the concept of boutique hotels to intimate yet luxurious staycations across the Midwest, Southwest, and Southeast. We believe that migration patterns bring forth higher income professionals who look to vacation with their families a few times a year to nearby vacation spots. We can cater to them by providing the feel of a hotel but with the privacy of a single family home with amenities that cater to every member of the family.

Questions you should ask yourself

Real estate investing is often flagged as a source of semi-passive income, but the truth of the matter, you get what you put in. Airbnbs take that to the next level as it is more operationally heavy. Are you ready to take that on? For our first Airbnb, for tax purposes we had to capture how many hours we worked on buying, setting up, and managing our Airbnb — and it was easily over 300 hours. Do you have that time, knowing your most serious competition is investing that much if not more?

Buying, setting up, and managing your Airbnb is also an active business. The space has seen an influx of professional operators, so the stakes are higher — but so are the rewards.

Tax advantages, equity appreciation, and cash flow: the three angels of airbnbs are appealing for W2 workers like your author seeking to diversify income streams. The headwinds of increased competition and restrictive policies could certainly discourage wanna be investors, especially when there are less work intensive alternatives. For us, the appeal of getting into the hospitality business makes us willing to put in the time to become professionals at this. It’s a highly personal decision, but at the very least, we hope that the rational economic advantages will balance out the lows we anticipate we’ll have to navigate.