Pro tip: If you want to do STR arbitrage, just say so...

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Pro tip: If you want to do STR arbitrage, just say so...

Cody L.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes

Every day I get emails or texts asking if we do "corporate rentals" at our Houston portfolio of multifamily. And 11 times out of 10, what they are really asking is if we allow people to lease our units, then rent them out via STR on Airbnb/VRBO

I just got a new email today that was even more round about....  Email subject was just "LEASING" (yes, all caps), and the body was "Good afternoon! I was curious if you guys are accepting business applicants ?"

If I was going to try to do STR with other peoples units, here is what I'd do:

I'd create a website about my company (if it's new, no problem). Explain who we are, what we do, etc. In my initial email, I'd write up a quick summary of why you can trust me with your unit. I'd explain how I'm capitalized. My level of experience. What I'm willing to do vs. a normal tenant (take care of small work requests on my own? Pay a larger deposit? A bit higher rent?). I'd go over the legit fears that people have with STR ('extra wear and tear', etc.) and how I meditate them.

Then I'd reach out to owners and explain that yes, I'd like to lease your unit as a short term rental.  I'd provide the previously mentioned data.  I'd make myself available for any questions they might have, and I'd push for them to take next steps. 

But don't beat around the bush.  Don't just start out with "do you accept corporate rentals?".   Just come out and make your ask, and be prepared to resolve objections.   This is sales 101 guys... 

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Paul Sandhu
Investor · The worst town to live in, KS · Member since 2016 · 4k+ posts · 4k+ votes
3y
Quote from @Michael Baum:

Like saying "Less than 1 million people are bitten by sharks every year." It is a truthful statement, just not terribly accurate and very misleading.


 I heard this on the radio yesterday.  More people are killed in Australia by tipping over soda machines than by being killed by sharks.  I had a refrigerator fall on top of me as I was going up a ramp with it on a dolly.  A soda machine weighs 5x as much as a fridge, and I can see how a person can be trapped underneath one.

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  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    3y

    Yeah, it seems like this is the main way arbitragers try and make the idea more palatable to owners. It's not lying really, just not very exact.

    Like saying "Less than 1 million people are bitten by sharks every year." It is a truthful statement, just not terribly accurate and very misleading.

    0Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    3y
    Quote from @Cody L.:

    That's why it's a bad idea for Landlord's to allow arbitrage. There are too many amateurs presenting themselves as businesses when they're really just leaches trying to suck money off someone else's investment. 

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  • Cody L.
    OP
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    3y
    Quote from @Nathan Gesner:
    Quote from @Cody L.:

    That's why it's a bad idea for Landlord's to allow arbitrage. There are too many amateurs presenting themselves as businesses when they're really just leaches trying to suck money off someone else's investment. 

    I don't mind if someone wants to do STR.  We have about 50 units leased to people that do STR and it's worked well.  I'm just annoyed at how people who want to do STR present themselves.  Just be up front / cards on the table.

    If someone seems like they know what they're doing, and they put down a deposit, we allow them them to do it.  Our only exception is we don't allow "one off" STR units.  Meaning if I have some 20 unit property, I'm not going to STR a few units with someone.  It's not fair to the other tenants.  But if someone wants to take on a full 20 unit building?  Sure.   Or in a SFH.  Or if I have a property that's made up of separate smaller # of unit buildings, I'll let someone take on a whole group.  

    As long as I'm getting my rent...
    1Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    3y
    Quote from @Cody L.:

    If someone can rent your unit, furnish it, then turn around and still rent it for a profit, why wouldn't you do that yourself? If each unit nets $10,000 a year, you are letting someone else make half a million dollars a year using your property. You can hire a property manager and still be clearing more than $300,000 a year without any additional effort.

    this is why I don't understand why any landlord would allow arbitrage in their property. 


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  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    3y
    Quote from @Nathan Gesner:
    Quote from @Cody L.:

    If someone can rent your unit, furnish it, then turn around and still rent it for a profit, why wouldn't you do that yourself? If each unit nets $10,000 a year, you are letting someone else make half a million dollars a year using your property. You can hire a property manager and still be clearing more than $300,000 a year without any additional effort.

    this is why I don't understand why any landlord would allow arbitrage in their property. 


     A property owner who wants to be a pure investor and not run a real estate business might allow arbitrage in their property.  Further, profitability may not be $10,000 per year per unit, or anywhere near that.  The person who owns an arbitrage company may be able to squeeze extra profit out by utilizing his unique experience, expertise, connections, etc. However, if indeed the profitability is anywhere near the $10k per unit in your example, then that’s a lot of money being “left on the table”.  

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  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    3y
    Quote from @Don Konipol:

    I understand the math. I find it unlikely that someone would arbitrage a rental for $1,000 annual profit. STR typically earns 50% or more than a LTR, so I think $10,000 annually is probably a fair number. Even if it's only $5,000 a year, that's $250,000 the Landlord is giving away.

    It's a free country and people are free to make foolish choices.
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  • Paul Sandhu
    Investor · The worst town to live in, KS · Member since 2016 · 4k+ posts · 4k+ votes
    3y
    Quote from @Michael Baum:

    Like saying "Less than 1 million people are bitten by sharks every year." It is a truthful statement, just not terribly accurate and very misleading.


     I heard this on the radio yesterday.  More people are killed in Australia by tipping over soda machines than by being killed by sharks.  I had a refrigerator fall on top of me as I was going up a ramp with it on a dolly.  A soda machine weighs 5x as much as a fridge, and I can see how a person can be trapped underneath one.

    4Reply
  • Cody L.
    OP
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    3y
    Quote from @Nathan Gesner:
    Quote from @Cody L.:

    If someone can rent your unit, furnish it, then turn around and still rent it for a profit, why wouldn't you do that yourself? If each unit nets $10,000 a year, you are letting someone else make half a million dollars a year using your property. You can hire a property manager and still be clearing more than $300,000 a year without any additional effort.

    this is why I don't understand why any landlord would allow arbitrage in their property. 



    Because I'm not going to do it. I'm not staffed to do it. My team isn't set up for it. They're set up for doing long term tenants that pay $x/month. So if an STR person pays me $x/month and can make money on top of that, why would that bother me? Good for them.

    Think about it this way:  I have a guy that rents a commercial space from me for $3,000/month to run his barber shop.  I'm sure after all non-rent expenses he's making a lot more than $3,000/month.   So why don't I just kick him out and run a barber shop myself and make that money?   Because that's not my business.

    I have 2,000 units.  It's hard enough to keep a team of operations and property managers that can keep that train on the tracks.  Maybe at some point I'll hire someone that just does some STR sub business but that day isn't today or anytime soon.

    3Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    3y
    Quote from @Cody L.:
    Why would it bother you? I can think of a few reasons:

    1. A savvy investor would not push the easy button and throw away so much money. We're talking about significant percentages lost and the only reason is, "I'm too busy right now." People build wealth by making wise decisions with their investments. If your clients knew how much more they could earn, I think they would want to hire a new employee or transfer the properties to a manager equipped to handle the investment and maximize their return.

    2. Increasing the clients' return will increase your return as the property manager. It's simple math. If you have 50 rentals bringing in $3,000 a month (low for a STR) and your fee is 20% (low for a STR), your management fee will bring in $360,000 per year. That's more than enough to justify a new full-time employee, cover all your expenses, and produce a really nice profit. If you added a full-time employe to handle these 50 rentals, that removes 50 units from your existing staff. 

    3. A professional property manager should feel a sense of obligation to do more than maintain status quo. You could look for creative ways to increase your clients' return on investment, increase your income, improve client loyalty, and more. I wouldn't try running a barber shop to increase my client's return, but if I could rent it to a jeweler for $1,000 more a month, you better believe I'd jump on it!

    I can't stress enough that this is your business; I'm just providing some ideas as an outsider. This could be a great opportunity to show your clients the value of hiring a professional that goes above and beyond. It could have the added benefit of reducing workload and growing the business.

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  • Cody L.
    OP
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    3y
    Quote from @Nathan Gesner:
    Quote from @Cody L.:
    Why would it bother you? I can think of a few reasons:

    1. A savvy investor would not push the easy button and throw away so much money. We're talking about significant percentages lost and the only reason is, "I'm too busy right now." People build wealth by making wise decisions with their investments. If your clients knew how much more they could earn, I think they would want to hire a new employee or transfer the properties to a manager equipped to handle the investment and maximize their return.

    2. Increasing the clients' return will increase your return as the property manager. It's simple math. If you have 50 rentals bringing in $3,000 a month (low for a STR) and your fee is 20% (low for a STR), your management fee will bring in $360,000 per year. That's more than enough to justify a new full-time employee, cover all your expenses, and produce a really nice profit. If you added a full-time employe to handle these 50 rentals, that removes 50 units from your existing staff. 

    3. A professional property manager should feel a sense of obligation to do more than maintain status quo. You could look for creative ways to increase your clients' return on investment, increase your income, improve client loyalty, and more. I wouldn't try running a barber shop to increase my client's return, but if I could rent it to a jeweler for $1,000 more a month, you better believe I'd jump on it!

    I can't stress enough that this is your business; I'm just providing some ideas as an outsider. This could be a great opportunity to show your clients the value of hiring a professional that goes above and beyond. It could have the added benefit of reducing workload and growing the business.


    I own these buildings.   I'm not managing for someone else.  My biggest challenge is people.  I'm short property managers.  I'm short maintence.  My operations person is maxed to the gills with work.  I need someone to take on marketing.  Someone to take on a projects manager role.

    If I told my operations manager, who is the glue that holds the team together in Houston (so I can sit in California all day, in shorts, drinking coffee while relaxing on my balcony) that 'hey, I want you to start running business out from our units', I'd have a revolt on our hands.

    Bottom line is this:  We lease our units out to long term renters.  That's our bread and butter.  It's what we're good at.  If someone uses our space to make money that exceeds the amount they pay for ours space, good for them.

    Personally I love my level of workload vs. the income I have coming in.  It's why I've rejected offers from investors who want to partner on deals.  It's why I don't 3rd party manage.  And it's why I don't want to try to run a business out of my units or commercial spaces. 

    1Reply
  • Joshua J Cawthorn
    San Diego · Member since 2019 · 87 posts · 50 votes
    3y
    Quote from @Cody L.:

    But don't beat around the bush.  Don't just start out with "do you accept corporate rentals?".   Just come out and make your ask, and be prepared to resolve objections.   This is sales 101 guys... 


    Absolutely agree that this is just sales or business basics. Open with the request and then follow that request up with why. Business communications start with the most important stuff. Unlike college writing, which actually opens with the fluff and ends with the most important stuff.

    0Reply
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