Quote from @Lucas De Carvalho:
Quote from @Dan H.:
Quote from @Lucas De Carvalho:
Terrifying! So many good lessons to be learned here.
I appreciate you sharing this. Stories like this are why landlords get burned out. You did everything you were "supposed" to do - screening, lease terms, proper notice - and still ended up in court dealing with threats and missed rent. Your lessons are spot on, especially #2. Compassion is a liability in this business. The moment you give someone slack, they take the mile. And the Zillow screening point is huge - a simple Google search caught what their "background check" missed. That should never happen. It's hard to believe Zillow didn't catch that.
One thing I've started seeing more landlords explore: instead of renting to traditional tenants, they lease to professional operators who run the property as a furnished rental. Different dynamic entirely. These are business owners who, sign a master lease with you, invest their own capital into the unit, sign longer leases, and treat the property like an asset because their income depends on it. Not saying it's for everyone, but it sidesteps a lot of the tenant drama you're describing. Might be worth diversifying your tenant types.
Hope the magistrate rules in your favor. Keep us posted.
I don't not understand why an owner would agree to let a poorly capitalized tenant STR arbitrage or sublease their property.
- if the owner wants a furnished rental, are they better served using a licensed, insured, experienced, professional manager or letting a poorly capitalized, uninsured amateur manage their property where the owner has the risk but the arbitrator has the upside.
- arbitrators are not aligned at protecting your property. They typically have minimal assets to go after if they place a tenant that causes damage or refuses to vacate.
- the risks to the owner do not seem to justify the upside.
From the arbitrager perspective, I also question if it makes sense.
- STR cash flow is a single source of return and without appreciation, equity pay down, or the tax benefits, their return is limited. I recently discovered did underwriting on a property with projected rent of $120k/year on $485k purchase and the cash flow was modest. The returns achieved ok (still poor for an RE investment) via appreciation, equity paydown down, and the tax benefits. The cash flow alone would not be worth the effort and risk (actually the entire return only makes sense if the owner wanted to use the property and had a value beyond the underwriting (my underwriting showed ROI 17%/year after year 1).
- if it is successful as an STR with significant cash flow, at the end of lease the owner could decide to convert the property to an STR and benefit from the cash flow, appreciation, equity pay down and tax benefits including the STE “loophole”.
Best wishes
Dan, interesting points. You're right to ask why someone would choose one arrangement over another, and honestly it comes down to each investor's goals and how hands-on they want to be. Some landlords want to own, sit back, and collect. Others want to maximize returns and are excited by the math, the ROIs, and the STR cost segregation loophole.
That said, I think you framed the question in a pretty biased way. "Poorly capitalized, uninsured amateur" vs "licensed, insured, experienced professional manager" isn't really a fair comparison. I could flip it: why would an investor trust a property manager who has no skin in the game beyond a monthly fee vs an operator who's invested thousands of their own dollars into making the property succeed? When we bias the framing, we don't fairly weigh the options.
Let me explain why a serious operator is actually aligned with the landlord:
They invest 5-15k of their own cash into furnishings upfront. That's real skin in the game before they make a dollar.
They clean the property to hotel standards at every turnover because their reviews depend on it. A PM has no equivalent incentive.
Their listing reputation is directly tied to how well they maintain your property. Bad reviews hurt their business, not just yours.
They carry their own liability and damage insurance. This isn't optional for anyone running a real operation.
At lease end, all their furniture, systems, and years of reviews are tied to your property. That's a massive incentive to renew. I've seen landlords asking operators to stay even when the deal wasn't amazing for the operator, because the relationship worked.
A property manager, on the other hand, collects a fee whether your property performs well or not. Other than losing a client and maybe a ding to their reputation, they don't have much to lose if things go sideways.
And to your last point about the owner converting to STR themselves at lease end: that's exactly right, and it's a feature not a bug. If the operator proves the property works as an STR, the owner can ask them to switch to a cohost model. Owner keeps 80%+ of revenue, still benefits from cost seg, and the operator already has the systems in place. Win-win.
Obviously this isn't for every landlord or every property. But framing all operators as poorly capitalized amateurs ignores the serious ones who run real businesses, and you lose out on all the upside.
>it comes down to each investor's goals and how hands-on they want to be. Some landlords want to own, sit back, and collect. Others want to maximize returns and are excited by the math, the ROIs, and the STR cost segregation loophole.
What do you think Is more passive a STR with a PM or a self managed LTR? I have quite a few of each and believe the STR with PM is the less work. Note the arbitrager is an LTR who subleases your property to guests not vetted by the owner.
>why would an investor trust a property manager who has no skin in the game beyond a monthly fee vs an operator who's invested thousands of their own dollars into making the property succeed?
Because the PM fee is the PM’s business. The PM fee is based on the revenue of the unit. The PM typically has much more than $10k to $15k invested in that business. For egregious enough PM behavior there can be issues with their licensing. $10k to $15k investment for the arbitrager is very little especially to control an asset worth 100 of thousands. It is far less than the PM has at risk.
>A property manager, on the other hand, collects a fee whether your property performs well or not. Other than losing a client and maybe a ding to their reputation, they don't have much to lose if things go sideways.
Every STR PM I am aware of has their fee based on rentals income (most co-host include cleaning in the income, most PMs do not). No guests equates to no pay for the PM. Virtually all PMs have PMS software (hospitable, streamline, boom (avoid boom like the plague), etc) that has a cost per property. They have licensing and insurance costs. They have OTA setup fees. The PM's ongoing costs per unit are typically significantly higher than the arbitrager.
>They carry their own liability and damage insurance. This isn't optional for anyone running a real operation.
I know one local slightly successful arbitrager (meaning she has a few units). She does not carry any business insurance or any special STR insurance. in addition, she is not achieving returns I would expect for her level of effort, this lady charges for RE mentoring and would have STR insurance on her own asset but does not when she does arbitrage. In 2024 I went to the MTR summit in San Diego. Needless to say there was a lot of interest in me and my local STRs and LTRs. I talked to maybe 2 dozen people who either wanted to co-host or arbitrage some of my units. Without fail, the arbitrager did not know STRs should have different insurance than LTR insurance or renters insurance. they were in general young, eager, motivated but inexperienced. If they were looking for a traditional job, their motivation could be an asset but to manage an asset with the value of my units they were inexperienced and lacking a lot of knowledge that PMs would have. My STRs have per unit values of ~$800k to ~$1.75m. I do agree the arbitragers should have liability and damage insurance as well as STR insurance, but I have found that not to be the case.
>framing all operators as poorly capitalized amateurs ignores the serious ones who run real businesses, and you lose out on all the upside.
If they were not poorly capitalized they would purchase the property to gain the addition profit from the other profit sources or they would get licensed to be able to profit from other owners. They often have to use credit to furnish the unit. The reality is virtually all arbitragers are poorly capitalized. Typically they use arbitrage in hopes of in the future owning their own STR properties. Unfortunately for them, STR cash flow profits are thinner than a few years ago. My view is the difference in cash flow between STR and LTR in many/most cases is compensation for the additional work load of the STR.
In 2020, San Diego city shutdown STRs for much of the year. Arbitragers virtually without fail walked away from their leases and did not have assets to collect for the broken leases. If they were STRs, they likely sat empty without an arbitrager but the arbitragers rented these as LTRs which of course was not banned.
Arbitrage is not an investment but a job. A job with much lower compensation than a few years.
Properties are a high value asset. Why hand over control to an arbitrager when you can hand over control to a licensed, insured, professional PM? To me, there is not enough upside to the owner to warrant the risks of the arbitrager.
best wishes
