Is STR Arbitrage still a good opportunity?
Specialist · Los Angeles, CA · Member since 2020 · 91 posts · 53 votes
For those doing it or who have already started, is AirBnB arbitrage still something worth pursuing? Is the opportunity still there for new people?
I used to see AirBnB arbitrage on social media a lot. At one point, I saw more of it than wholesaling. I just did a quick google search and I saw A LOT of opinions about it. Both from the property owner and the actual arbitrager. Good and bad opinions. I thought I'd better go to a source I trust more, the Bigger Pockets community.
@Anibal Mijangos - Rental arbitrage is a great business wherever you can find below-market rental units and favorable STR regulations in strong Airbnb markets. It takes work but it can be lucrative. @Monica Mejia, @Christian Ehlers and @Eric Yu offer balanced perspectives here.
I have built a successful 30+ unit rental arbitrage business between San Francisco and San Jose over 5 years. I walked away from a successul 20-year career as an HR Director in Silicon Valley to do this full fime and I have nearly replaced my corporate income. I work hard but I spend twice as much time with my daughters every day. I can increase my income when I need to by renting another unit, or increase my free time by hiring out more of the on-site property set-up and maintenance work.
Here‘s what has made my business successful in addition to finding below-market rents in strong Airbnb markets: 1. Add value to the landlord and the unit. 1A. Find outdated units and add great rental value with paint, new light fixtures, smart locks, etc. 1B. Offer mom and pop landlords a headache-free tenancy including Free Maintenance for all minor repairs. In 5 years, I have secured leases with 30-40% of the landlords I have offered this to.
2. If you are in an expensive market like the Bay Area, target units in cheaper (but still safe) areas. Most out of town renters don’t know the difference between Palo Alto (Stanford/expensive!) and San Bruno (SFO Airport/reasonable rents). I have kept my rental costs and risk down and margins higher by doing this.
3. Bonus: Find homes that can be easily divided into 2 units (e.g. main house upstairs with separate downstairs area including bedroom, bathoom, wet bar and separate entrance). These places are gold mines!
Good luck!
@Anibal Mijangos - Rental arbitrage is a great business wherever you can find below-market rental units and favorable STR regulations in strong Airbnb markets. It takes work but it can be lucrative. @Monica Mejia, @Christian Ehlers and @Eric Yu offer balanced perspectives here.
I have built a successful 30+ unit rental arbitrage business between San Francisco and San Jose over 5 years. I walked away from a successul 20-year career as an HR Director in Silicon Valley to do this full fime and I have nearly replaced my corporate income. I work hard but I spend twice as much time with my daughters every day. I can increase my income when I need to by renting another unit, or increase my free time by hiring out more of the on-site property set-up and maintenance work.
Here‘s what has made my business successful in addition to finding below-market rents in strong Airbnb markets: 1. Add value to the landlord and the unit. 1A. Find outdated units and add great rental value with paint, new light fixtures, smart locks, etc. 1B. Offer mom and pop landlords a headache-free tenancy including Free Maintenance for all minor repairs. In 5 years, I have secured leases with 30-40% of the landlords I have offered this to.
2. If you are in an expensive market like the Bay Area, target units in cheaper (but still safe) areas. Most out of town renters don’t know the difference between Palo Alto (Stanford/expensive!) and San Bruno (SFO Airport/reasonable rents). I have kept my rental costs and risk down and margins higher by doing this.
3. Bonus: Find homes that can be easily divided into 2 units (e.g. main house upstairs with separate downstairs area including bedroom, bathoom, wet bar and separate entrance). These places are gold mines!
Good luck!
Such a great breakdown, Thanks Ethan for sharing. We're in the SF Bay Area with a few rentals, then other parts of CA and out of state. We're just thinking about a rental arbitrage opportunity in the same building where we own a unit of our own. Not sure how to approach the owner who has it listed for a great LTR rental price. But we do have a track record of success in the area and a unit that is completely remodeled and modern. If the owner has a PM handling the renting any suggestions on approaching them with the opportunity for a 2-3 year lease?
Well if it is being PM that conversation is a bit different vs talking to the Owner. I will say this a lot of PM hate STR or don't understand it still. If the PM is open to STR the conversation is pretty easy. Ethan touched on the points you basically want to solve their problem and present yourself as a great solution. You want a minimum 2 year lease but shoot for 3 years with concessions. You want to be able make money if you need to pivot to MTR so keep that in mind.
Well if it is being PM that conversation is a bit different vs talking to the Owner. I will say this a lot of PM hate STR or don't understand it still. If the PM is open to STR the conversation is pretty easy. Ethan touched on the points you basically want to solve their problem and present yourself as a great solution. You want a minimum 2 year lease but shoot for 3 years with concessions. You want to be able make money if you need to pivot to MTR so keep that in mind.
If you are thinking of doing it in Los Angeles, it is likely a pass.
The City of Los Angeles has put in strict rules on what kind of properties can be used for STR and for how many days. If you go into a different market and the laws change, you are stuck with a lease with someone who may not want to cancel it (not to say you couldn't have a clause in there).
The main problem I have with this strategy is you are missing out some of the key wealth building factors that come with real estate. Out of the four ways to build wealth with real estate, you are only getting cash flow. You are not getting appreciation, tax benefits, or loan buy down.