Rental Arbitrage for Short-Term and Mid-Term Rental

[Christopher Murphy]

Good morning all!

First off, I am 24 in the DFW, TX area. My interests in real estate are house hacking, creative financing (Subject To, Seller Financing), short-term rental, and rental arbitrage. I have a baseball coaching business and love all sports. The reason I say that is we of course are all trying to network so if you share any of those interests or my age and trying to get into the real estate game or already have that head start, let's please connect! Now to the point of my post:

I was looking for my first house hack using traditional 5% owner-occupied loan. Started searching in August and had a 3 bed, 2.5 bath condo under contract in December. Unfortunately, deal fell through due to financing relating to the HOA (learned a lot about working with lenders from this upsetting experience). I offered several more times, but prices and demand continued to rise particularly at my pricepoint ($220K). I have been holding onto my W2 job to try to get a traditional financing deal closed, but my time has elapsed. I am going to quit my W2 to pursue my baseball business, but really want to continue pursing my real estate goal. This will force me to consider other strategies without the ability to get a bank loan.

The ones that interest me are rental arbitrage. I feel like it is a strategy that is rather new and has less competitive. Least risk and no prerequisites/requirements needed. Greatest reason for interest is I have one friend in my area who is also interested in this and I have another connection that is looking to partner on higher pricepoint vacation rental deals. Feel like there is still the bubble where legislation on vacation rentals hasn't been enforced in many areas so might be a good window of opportunity to learn the short-term game.

I hope from this experience, this will lead me into my next interest which is creative financing (seller financing/subject to), where I can actually acquire and own properties, but this time without the need of traditional financing and a W2 income. After acquiring a house-hack for myself through this strategy, I hope I am able to continue to scale in acquisitions this way and use my knowledge of short-term rental through rental arbitrage to gain lucrative income from these additional properties.

Basically, I am hoping for as much feedback as possible on my vision/strategy from those who have experience. I have much to learn, but my main concern is with the economy looking bearish, I imagine vacationing will go down. With vacationing going down, I imagine the short-term rental business will pull back. I have other concerns about my market (DFW, Texas) as a location for this. Although, I do have someone in my network who has great success with rental arbitrage in the area. Seriously, any feedback is appreciated. Thank you so much, and please feel free to connect!

Best,

Chris Murphy

@icoachbaseball

[Andrew Garcia]

Hi @Christopher Murphy, first, thank you for the bio. I love when people share a little personality. I, too, am a young guy but I am on the lending side of the business. 

With that being said, I agree with you, many lenders are terrible. Since you are quitting your current W2, you should look into DSCR options for future real estate endeavors. It does have a higher interest rate but it has far fewer restrictions.

There are a few issues with rental arbitrage:

1. Many landlords do not allow it.

2. Many jurisdictions do not allow it.

3. Your landlord or jurisdiction may allow it now but may change their mind at any point.

4. Lack of equity growth.

5. Uncertainty. You might not make enough to cover rent for one month and need to come out of pocket or an STR tenant might cause damage to the property that causes you lots of money.

As long as you plan for these and are prepared for the risks, you should be fine with this strategy.

Seller financing is a better long-term play since you get equity growth, stronger certainty when it comes to legislation, no uncertainty with landlords, etc. 

You seem like you are well on your way to a real estate empire. Would love to connect!

[Michael Baum]

Hey @Christopher Murphy, just do a search. Arbitrage comes up 3-5 times a week with everyone asking the exact same questions. 

[Christopher Murphy]

Quote from @Andrew Garcia:

Hi @Christopher Murphy, first, thank you for the bio. I love when people share a little personality. I, too, am a young guy but I am on the lending side of the business. 

With that being said, I agree with you, many lenders are terrible. Since you are quitting your current W2, you should look into DSCR options for future real estate endeavors. It does have a higher interest rate but it has far fewer restrictions.

There are a few issues with rental arbitrage:

1. Many landlords do not allow it.

2. Many jurisdictions do not allow it.

3. Your landlord or jurisdiction may allow it now but may change their mind at any point.

4. Lack of equity growth.

5. Uncertainty. You might not make enough to cover rent for one month and need to come out of pocket or an STR tenant might cause damage to the property that causes you lots of money.

As long as you plan for these and are prepared for the risks, you should be fine with this strategy.

Seller financing is a better long-term play since you get equity growth, stronger certainty when it comes to legislation, no uncertainty with landlords, etc. 

You seem like you are well on your way to a real estate empire. Would love to connect!

Andrew, thanks so much for the feedback, man. You really did a good job breaking down the concerns, many of which I haven't given enough thought to. I will look into these further. I do not know much about DSCR either, you have given me something to become more familiar with, thanks for the recommendation.

I'll shoot you a connection request. Feel free to message me on BP or Instagram is likely a better place to get ahold of my quicker. Thanks again.

[Christopher Murphy]

Quote from @Michael Baum:

Hey @Christopher Murphy, just do a search. Arbitrage comes up 3-5 times a week with everyone asking the exact same questions. 

 My apologies. I will do more research in the forums before inquiring.

[Jonathan Dempsey]

Quote from @Andrew Garcia:

Hi @Christopher Murphy, first, thank you for the bio. I love when people share a little personality. I, too, am a young guy but I am on the lending side of the business. 

With that being said, I agree with you, many lenders are terrible. Since you are quitting your current W2, you should look into DSCR options for future real estate endeavors. It does have a higher interest rate but it has far fewer restrictions.

There are a few issues with rental arbitrage:

1. Many landlords do not allow it.

2. Many jurisdictions do not allow it.

3. Your landlord or jurisdiction may allow it now but may change their mind at any point.

4. Lack of equity growth.

5. Uncertainty. You might not make enough to cover rent for one month and need to come out of pocket or an STR tenant might cause damage to the property that causes you lots of money.

As long as you plan for these and are prepared for the risks, you should be fine with this strategy.

Seller financing is a better long-term play since you get equity growth, stronger certainty when it comes to legislation, no uncertainty with landlords, etc. 

You seem like you are well on your way to a real estate empire. Would love to connect!

 What Andrew listed out here is exactly what I was thinking.  Arbitrage is more hyped up than it out to be by the "gurus".   I believe the market for arbitrage slowed down and became oversaturated.   There are still opportunities, even then they lack the benefits of ownership.  Seller financing is the recipe to make a would-be arbitrage more attractive.

I encourage you to find a way to get into your first purchase.  It will change your life!

[Matt M.]

I have never met, had a conversation with, or saw a post here from an investor that would allow arbitrage.  Do your homework, and good luck finding an investor that would rent you a house to do as you you please 

[Cameron G.]

Quote from @Matt M.:

I have never met, had a conversation with, or saw a post here from an investor that would allow arbitrage.  Do your homework, and good luck finding an investor that would rent you a house to do as you you please 

 I reached out to some and about 20% of them said they were fine with it. You just have to frame it as a win win, which it is.