What to charge STR arbitrageurs?
Real Estate Agent · San Diego, CA · Member since 2018 · 29 posts · 9 votes
What to charge STR arbitrageurs?
Most Popular Reply
Rental Property Investor · Oklahoma City · Member since 2021 · 108 posts · 103 votes
3yQuote from @Emery Jensen:
I’m looking at some options to bring in more rental income for some clients while reducing some risk. What are some typical rates one would charge an arbitrageur looking to rent a space out for AirBnb. Let’s say for example a 3/1 bath in a desirable area of San Diego.
I’d love to hear your thoughts/suggestions.
Don’t listen to these other guys they know nothing about arbitrage, and they often just bring negatively and useless comments to the forums speaking on anything and everything in stuff they’ve never done. It totally depends on the operator. So I would screen them and take a look at some of the other work they’re doing. A good operator that is experienced you have no need to charge a premium on rent above what you’d normally charge a long term tenant.
Think about some of these benefits. The STR operator is going to keep your home in immaculate condition at all times. They have to in order to keep renting it out. Whereas a normal tenant doesn't always do so. The STR operator will also typically handle all minor repairs whereas a normal tenant wouldn't, they'd be calling you up. The STR operator will have your property professionally cleaned on a weekly basis.
So think of it this way, why would an STR operator be more prone to risk than a LTR? You literally have a professional renting from you as opposed to who knows who.
Also don’t just assume that there’s tons of cash flow involved for this arbitrager. A lot of us do deals with only $1000k profit per month. Arbitragers have their own expenses to worry about such as thousands of dollars for furniture.
Worst case if you have concerns take 2x the deposit from them, but there’s no need to charge a premium rent.
64 Replies
- Phoenix Arizona · Member since 2017 · 65 posts · 70 votes3y
I'm an arbitrager in Phoneix. There seem to be some heated opinions and I find myself disagreeing with all parties. If you want to reach out to me, I'd be happy to give you my '2 cents'
Most risks of Arbitrage can be mitigated with a strong lease.
- Lender · Austin, TX · Member since 2022 · 223 posts · 244 votes3y
Charge high end long term market rents and then take 15-20% of profits, but screen your operator first. If they have little or no experience, charge 25% of profits, minimum. After all, you own the property, you assume a bulk of the risk, and you should be compensated for such!
- Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes3y
Lease your property, triple net, where the management company pays for RE taxes, insurance and interior property maintenance. The lease can be long term with incremental lease income increases every few years. Management company furnishes the property.
- 3yJohn UnderwoodPro MemberInvestor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
Quote from @Todd Goedeke:
Lease your property, triple net, where the management company pays for RE taxes, insurance and interior property maintenance. The lease can be long term with incremental lease income increases every few years. Management company furnishes the property.
I hadn't thought of a triple Net lease, but that is a great idea as this is a commercial endeavor.
- Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes3y
@Emery Jensen I agree a lease gives lots of protection and eliminates business risk for the property owner.
There is no reason to share in management risk in how a property performs as a passive investor. Let the management company have the rewards and risks of managing a STVR business. The passive investor can lock in net ROI( CoC) returns of 20%+ with a lease.
- Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes3y
@John Underwood as STVRs are a business, leases are 95% of the time, the rule of thumb with property business owners.
From the passive RE investor, property owner, perspective why would I rent or share in business revenue or expenses? That s not a passive investment. As an investor, many times with retirement account money, I need a passive investment locking in guaranteed net returns absent of success or failure of management. The triple net lease gives the investor that security.
Note also, management company pays for all furnishings.Typical lease income terms allow a property owner to lock in 20% ConC, or ROI, from lease income. STVR investments should be a cash flow play for returns not based on appreciation potential. " a bird in the hand is worth more than two in the bush".
If you run the numbers , take a $300k value property ,leasing ,with triple net terms, at $30k/year, with a mortgage at 6%, 20% down payment, yields the investor 20%+ per year. - Real Estate Broker · New York, NY · Member since 2020 · 2k+ posts · 1k+ votes3y
Hey @Emery Jensen- if I'm in the position of the landlord, I'd probably charge slightly higher market rent to the arbitrageur because that would compensate me for the increased use of the living spaces - and still leave enough meat on the bones for them to justify their management of the overall property.
It would also be a good idea to figure out who would pay expenses if any major appliances or repair work was needed.
- Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes3y
@Michael Baum learn about leasing if you want to see how business is transacted everyday in the commercial property world. It’s nothing new and has been successful for many professionals who want a passive investment in RE. STVRs are a business in itself not a passive investment unless you lease your property.
- Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes3y
@Wilson Vanhook to eliminate risk for a property owner a triple net lease is far better than working with a rental arbitrager. A triple net lease gives the property owner far greater peace of mind legally.
- Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes3y
@Tyler Solomon why would you recommend as a lender renting and sharing profits vs a triple net lease for a property owner? Passive RE investors don t want business risk from STVRs. They want guaranteed cash flow from deep pocket managers.
- Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes3y
@Bill B. get educated about triple net leases for STVR property. It’s what professional hospitality managers have in place with property owners.
- 3yJoe S.Pro MemberInvestor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votesHow would someone find an operator to do this?
Quote from @Todd Goedeke:
Lease your property, triple net, where the management company pays for RE taxes, insurance and interior property maintenance. The lease can be long term with incremental lease income increases every few years. Management company furnishes the property.
- 3yJohn UnderwoodPro MemberInvestor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
Quote from @Joe S.:
How would someone find an operator to do this?Quote from @Todd Goedeke:
Lease your property, triple net, where the management company pays for RE taxes, insurance and interior property maintenance. The lease can be long term with incremental lease income increases every few years. Management company furnishes the property.
There are plenty of millenials with no money and not much experience that want the opportunity to get a job doing arbitrage. Once they get some experience they will learn it is better to let your money work for you than to work for it.
Until they figure it out they will just be offended when all the experienced people explain how arbitrage is a bad idea.
- 3yJoe S.Pro MemberInvestor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
Quote from @James Hamling:
@Emery Jensen seems like your getting a whole lot of opinions, and not much for ANSWERS.
As a person who CREATES STR-A, is actually actively doing this, I will share some of my operation.
First point, I NEVER do anything on a % basis. I find that an idiotic notion, to be blunt about it.
First item is a STR-A Operator MUST make it worth our while, it's just that simple. So (a) they must exceed what we can expect in Standard LTR Rents, because that's our existing option. And while WIlson is working hard to "sell" that SubTo pitch that a LTR tenant will mess the place up oh-so-bad, reality is thats 2% occurrence risk, meaning 98% the other way.
So most often I expect 120% market rents. Now, here is the important stuff, TERMS.
I give a 3yr lease to start, with right to renew up to 10yr if all goes good. This is for the STR Operator benefit because they need time to profit because as mentioned, there big investment is upfront with furnishings and getting the ad built, marketed, building a following and interest in the property. What I require is strict terms that STR Operator (corporate tenant) is liable for all standard maintenance to include appliances. Also, must carry an umbrella insurance policy covering full replacement cost value of entire property. That STR Operator (corporate tenant) is liable for all there sublet tenants actions and activities.
Terms are a very important aspect so many miss focusing on the $$$$. In short things are written like a quazi NNN lease. Also, a very important aspect, I need to see the STR-A Operator has something of risk to us, as in something I can take, attach, etc. if things go south. If a person has no $, thinks this is there "golden ticket" sorry bud, not gonna happen with me. I need to see you have $, a business, other properties, things I can sick my legion of atty's after to securitize and make myself whole if need be. Yup, welcome to reality, it's not all hugs and fairy farts.
Now, for when things go bad.......
Yes, I have lot's of teeth in my lease, big, razor sharp, nasty teeth to it. Yeah, in any default, I do have power to eviscerate that corporate tenant. The point is I don't want to have to, so they best reach out and do all the gymnastics possible to keep things friendly, or I will use it, it's just that simple.
I tell all, I can be your best friend or worst nightmare, the choice is yours.
There IS risk in doing STR-A. Risk is how will that specific operator operate, and not just for this month or year but years to come. So yes, I expect ABOVE market rents, because your getting the property AND the sublet right to, ideally, sublet for profit. BOTH have $ value, so yes I expect compensation for BOTH.
I also place an annual rent increase right into the lease. Property taxes, insurance etc., all of that keep going up so static means losses. Again think NNN Lease.
When i got into leasing STR-A I didn't reinvent the wheel, I looked to who's doing something most similar and successfully and that was how every Walgreens operates. I took a page from that book and adapted it for this.
As for my "opinions" on STR-A, I have none. I am a REI Professional, it's how I pay my bills, put food on the table, pay kids lunch money etc., failure is not an option. So that phases over to my tenants, failure-is-not-an-option. I quantify risk into an equation, I quantify opportunity into an equation, I quantify EVERYTHING into a math equation.
Real Estate Investment is, at it's core, a math game. Stick to the math, it's when people get lost into emotion that things go bad.
How did you find such an operator to lease your property, James?
- 3yMichael BaumPro MemberOlympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
Hey @Todd Goedeke, I know quite a bit about NNN leasing but I don't really think it applies here. The number of individuals doing arbitrage with zero experience and zero money far outweigh professional companies with a track record.
I like the involvement of STRs so it is easy for me to keep doing it. The return is great as well for us.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Quote from @Joe S.:
Quote from @James Hamling:
@Emery Jensen seems like your getting a whole lot of opinions, and not much for ANSWERS.
As a person who CREATES STR-A, is actually actively doing this, I will share some of my operation.
First point, I NEVER do anything on a % basis. I find that an idiotic notion, to be blunt about it.
First item is a STR-A Operator MUST make it worth our while, it's just that simple. So (a) they must exceed what we can expect in Standard LTR Rents, because that's our existing option. And while WIlson is working hard to "sell" that SubTo pitch that a LTR tenant will mess the place up oh-so-bad, reality is thats 2% occurrence risk, meaning 98% the other way.
So most often I expect 120% market rents. Now, here is the important stuff, TERMS.
I give a 3yr lease to start, with right to renew up to 10yr if all goes good. This is for the STR Operator benefit because they need time to profit because as mentioned, there big investment is upfront with furnishings and getting the ad built, marketed, building a following and interest in the property. What I require is strict terms that STR Operator (corporate tenant) is liable for all standard maintenance to include appliances. Also, must carry an umbrella insurance policy covering full replacement cost value of entire property. That STR Operator (corporate tenant) is liable for all there sublet tenants actions and activities.
Terms are a very important aspect so many miss focusing on the $$$$. In short things are written like a quazi NNN lease. Also, a very important aspect, I need to see the STR-A Operator has something of risk to us, as in something I can take, attach, etc. if things go south. If a person has no $, thinks this is there "golden ticket" sorry bud, not gonna happen with me. I need to see you have $, a business, other properties, things I can sick my legion of atty's after to securitize and make myself whole if need be. Yup, welcome to reality, it's not all hugs and fairy farts.
Now, for when things go bad.......
Yes, I have lot's of teeth in my lease, big, razor sharp, nasty teeth to it. Yeah, in any default, I do have power to eviscerate that corporate tenant. The point is I don't want to have to, so they best reach out and do all the gymnastics possible to keep things friendly, or I will use it, it's just that simple.
I tell all, I can be your best friend or worst nightmare, the choice is yours.
There IS risk in doing STR-A. Risk is how will that specific operator operate, and not just for this month or year but years to come. So yes, I expect ABOVE market rents, because your getting the property AND the sublet right to, ideally, sublet for profit. BOTH have $ value, so yes I expect compensation for BOTH.
I also place an annual rent increase right into the lease. Property taxes, insurance etc., all of that keep going up so static means losses. Again think NNN Lease.
When i got into leasing STR-A I didn't reinvent the wheel, I looked to who's doing something most similar and successfully and that was how every Walgreens operates. I took a page from that book and adapted it for this.
As for my "opinions" on STR-A, I have none. I am a REI Professional, it's how I pay my bills, put food on the table, pay kids lunch money etc., failure is not an option. So that phases over to my tenants, failure-is-not-an-option. I quantify risk into an equation, I quantify opportunity into an equation, I quantify EVERYTHING into a math equation.
Real Estate Investment is, at it's core, a math game. Stick to the math, it's when people get lost into emotion that things go bad.
How did you find such an operator to lease your property, James?
It actually all started out as happen stance really. Prior to the epic fever-pitch interest in STR, i had started touching into STR's noting they had "matured" and were clearly here to stay. But I hovered around the edges because running a hospitality business is not my "jam".
I then got this LTR and was in pre-listing stages. Plain exterior, great location, amazing interior space.
I got this call from a prospective tenant asking if I'd consider leasing it out on a nightly basis. I won't mention what passed through my mind but let's say something on level of rubber bed sheets, lol. But, she pressed, and seemed really nice. She explained to me the plight of a problem she had with her elderly fathers memory care center, how visitations was more like a prison visit. And into how this would most likely be the last time the entire family could see him, ever, and there just wasn't facilities for such. Then she threw $ at me, my Achilles heel, lol. $500 per night.
This spurred a whole call to action and I got hard at work digging like a little tic into this, and what I found blew my mind. In a matter of days I had multiple facilities happy to promote and refer business, all confirming the massive demand and a great relief at having such to reference.
But came the stagging and operating and that's where i hit the brick wall. For me, learning how to furnish a place to my standards, I might as well had taken on trying to learn Chinese. I have a perfectionist streak in me, and I could not be comfortable with things being so far below my own standards.
So this brought in the JV aspect, to Arbitrage it out. If I couldn't do it right, well, do what you do best and hire the best to do the rest. When I looked into services, wow, it was insane, they wanted stupid % of Rev., I couldn't do it, no skin in the game and they want up to 40%, no way, that's a partner so I might as well just have a partner right. So I put out some feelers and I found many interested persons, many, seems like near to nobody is creating STR-A's. I landed on a small operator who had one currently running and he was doing things right. Great ratings, I just liked how he was doing it all.
So, we put things together, I drew on NNN Commercial lease's for foundation of program I built out, and next thing we had a done deal.
The best part was, we projected a 6 month ramp up time too profitability for the STR Operator. We hit net-0 in about 2 weeks from launch! We considered it a happy fluke. But then it kept going. Next month rev hit our projected FULL profitability mark. And the next month blew the doors off our highest hopes. That property produces, steadily, more then 150% revenues projected, and has an insane occupancy rate and following. Booking going out more then a year! It's a flipping cash-cow!
That whole experience was the catalyst that i was onto something. I was doing great, getting well over LTR market rents, had amazing terms looking a lot like NNN terms so, lol, yeah McLoving that right, great $ and terms, that doesn't happen. AND my tenant is also winning in epic fashion. I had to run with it.
So I have been slowly building that up. Cross checking properties by STR viability, screening potential STR-A operators, pre-veting those I'd like to work with etc..
It's not something I do on mass scale, and I have 0 interest to ever do such. This is like the Special Forces of REI, epic high impact, small select teams. It's just how I choose to go about it, small volume with very high quality, vs other way around.
I have another I was just wrapping up today until I got a LTR tenant who, just tonight, lol, well he found my Achilles heel also and just threw $ at it. Offering to raise rate and pre-pay a year. So, back to hunting the next. Hard to turn down $50k just thrown at ya like that, and honestly there is sooo much opportunity out there, I bet I will have another before X-mas.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Quote from @Michael Baum:
Hey @Todd Goedeke, I know quite a bit about NNN leasing but I don't really think it applies here. The number of individuals doing arbitrage with zero experience and zero money far outweigh professional companies with a track record.
I like the involvement of STRs so it is easy for me to keep doing it. The return is great as well for us.
As a person doing STR-A, I don't know a single other person/entity doing it in a professional manner like myself, literally nobody. It's given me a pause if I think on it too much, but someone was the first with a jet too. Or a bicycle, or or or. So I just keep to my thing and let everyone else sort themselves out.
One driver could be how much people are making schlepping PM service for STR.
- 3yJoe S.Pro MemberInvestor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
Quote from @James Hamling:
Quote from @Joe S.:
Quote from @James Hamling:
@Emery Jensen seems like your getting a whole lot of opinions, and not much for ANSWERS.
As a person who CREATES STR-A, is actually actively doing this, I will share some of my operation.
First point, I NEVER do anything on a % basis. I find that an idiotic notion, to be blunt about it.
First item is a STR-A Operator MUST make it worth our while, it's just that simple. So (a) they must exceed what we can expect in Standard LTR Rents, because that's our existing option. And while WIlson is working hard to "sell" that SubTo pitch that a LTR tenant will mess the place up oh-so-bad, reality is thats 2% occurrence risk, meaning 98% the other way.
So most often I expect 120% market rents. Now, here is the important stuff, TERMS.
I give a 3yr lease to start, with right to renew up to 10yr if all goes good. This is for the STR Operator benefit because they need time to profit because as mentioned, there big investment is upfront with furnishings and getting the ad built, marketed, building a following and interest in the property. What I require is strict terms that STR Operator (corporate tenant) is liable for all standard maintenance to include appliances. Also, must carry an umbrella insurance policy covering full replacement cost value of entire property. That STR Operator (corporate tenant) is liable for all there sublet tenants actions and activities.
Terms are a very important aspect so many miss focusing on the $$$$. In short things are written like a quazi NNN lease. Also, a very important aspect, I need to see the STR-A Operator has something of risk to us, as in something I can take, attach, etc. if things go south. If a person has no $, thinks this is there "golden ticket" sorry bud, not gonna happen with me. I need to see you have $, a business, other properties, things I can sick my legion of atty's after to securitize and make myself whole if need be. Yup, welcome to reality, it's not all hugs and fairy farts.
Now, for when things go bad.......
Yes, I have lot's of teeth in my lease, big, razor sharp, nasty teeth to it. Yeah, in any default, I do have power to eviscerate that corporate tenant. The point is I don't want to have to, so they best reach out and do all the gymnastics possible to keep things friendly, or I will use it, it's just that simple.
I tell all, I can be your best friend or worst nightmare, the choice is yours.
There IS risk in doing STR-A. Risk is how will that specific operator operate, and not just for this month or year but years to come. So yes, I expect ABOVE market rents, because your getting the property AND the sublet right to, ideally, sublet for profit. BOTH have $ value, so yes I expect compensation for BOTH.
I also place an annual rent increase right into the lease. Property taxes, insurance etc., all of that keep going up so static means losses. Again think NNN Lease.
When i got into leasing STR-A I didn't reinvent the wheel, I looked to who's doing something most similar and successfully and that was how every Walgreens operates. I took a page from that book and adapted it for this.
As for my "opinions" on STR-A, I have none. I am a REI Professional, it's how I pay my bills, put food on the table, pay kids lunch money etc., failure is not an option. So that phases over to my tenants, failure-is-not-an-option. I quantify risk into an equation, I quantify opportunity into an equation, I quantify EVERYTHING into a math equation.
Real Estate Investment is, at it's core, a math game. Stick to the math, it's when people get lost into emotion that things go bad.
How did you find such an operator to lease your property, James?
It actually all started out as happen stance really. Prior to the epic fever-pitch interest in STR, i had started touching into STR's noting they had "matured" and were clearly here to stay. But I hovered around the edges because running a hospitality business is not my "jam".
I then got this LTR and was in pre-listing stages. Plain exterior, great location, amazing interior space.
I got this call from a prospective tenant asking if I'd consider leasing it out on a nightly basis. I won't mention what passed through my mind but let's say something on level of rubber bed sheets, lol. But, she pressed, and seemed really nice. She explained to me the plight of a problem she had with her elderly fathers memory care center, how visitations was more like a prison visit. And into how this would most likely be the last time the entire family could see him, ever, and there just wasn't facilities for such. Then she threw $ at me, my Achilles heel, lol. $500 per night.
This spurred a whole call to action and I got hard at work digging like a little tic into this, and what I found blew my mind. In a matter of days I had multiple facilities happy to promote and refer business, all confirming the massive demand and a great relief at having such to reference.
But came the stagging and operating and that's where i hit the brick wall. For me, learning how to furnish a place to my standards, I might as well had taken on trying to learn Chinese. I have a perfectionist streak in me, and I could not be comfortable with things being so far below my own standards.
So this brought in the JV aspect, to Arbitrage it out. If I couldn't do it right, well, do what you do best and hire the best to do the rest. When I looked into services, wow, it was insane, they wanted stupid % of Rev., I couldn't do it, no skin in the game and they want up to 40%, no way, that's a partner so I might as well just have a partner right. So I put out some feelers and I found many interested persons, many, seems like near to nobody is creating STR-A's. I landed on a small operator who had one currently running and he was doing things right. Great ratings, I just liked how he was doing it all.
So, we put things together, I drew on NNN Commercial lease's for foundation of program I built out, and next thing we had a done deal.
The best part was, we projected a 6 month ramp up time too profitability for the STR Operator. We hit net-0 in about 2 weeks from launch! We considered it a happy fluke. But then it kept going. Next month rev hit our projected FULL profitability mark. And the next month blew the doors off our highest hopes. That property produces, steadily, more then 150% revenues projected, and has an insane occupancy rate and following. Booking going out more then a year! It's a flipping cash-cow!
That whole experience was the catalyst that i was onto something. I was doing great, getting well over LTR market rents, had amazing terms looking a lot like NNN terms so, lol, yeah McLoving that right, great $ and terms, that doesn't happen. AND my tenant is also winning in epic fashion. I had to run with it.
So I have been slowly building that up. Cross checking properties by STR viability, screening potential STR-A operators, pre-veting those I'd like to work with etc..
It's not something I do on mass scale, and I have 0 interest to ever do such. This is like the Special Forces of REI, epic high impact, small select teams. It's just how I choose to go about it, small volume with very high quality, vs other way around.
I have another I was just wrapping up today until I got a LTR tenant who, just tonight, lol, well he found my Achilles heel also and just threw $ at it. Offering to raise rate and pre-pay a year. So, back to hunting the next. Hard to turn down $50k just thrown at ya like that, and honestly there is sooo much opportunity out there, I bet I will have another before X-mas.
Well, congratulations on your success with that. I have a really big nice house six bedroom three bath slightly outside of San Antonio. The challenge I see is furnishing the thing. If I could find someone to do an agreement similar to what you’re speaking of, I would probably jump on it.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Quote from @Joe S.:
Quote from @James Hamling:
Quote from @Joe S.:
Quote from @James Hamling:
@Emery Jensen seems like your getting a whole lot of opinions, and not much for ANSWERS.
As a person who CREATES STR-A, is actually actively doing this, I will share some of my operation.
First point, I NEVER do anything on a % basis. I find that an idiotic notion, to be blunt about it.
First item is a STR-A Operator MUST make it worth our while, it's just that simple. So (a) they must exceed what we can expect in Standard LTR Rents, because that's our existing option. And while WIlson is working hard to "sell" that SubTo pitch that a LTR tenant will mess the place up oh-so-bad, reality is thats 2% occurrence risk, meaning 98% the other way.
So most often I expect 120% market rents. Now, here is the important stuff, TERMS.
I give a 3yr lease to start, with right to renew up to 10yr if all goes good. This is for the STR Operator benefit because they need time to profit because as mentioned, there big investment is upfront with furnishings and getting the ad built, marketed, building a following and interest in the property. What I require is strict terms that STR Operator (corporate tenant) is liable for all standard maintenance to include appliances. Also, must carry an umbrella insurance policy covering full replacement cost value of entire property. That STR Operator (corporate tenant) is liable for all there sublet tenants actions and activities.
Terms are a very important aspect so many miss focusing on the $$$$. In short things are written like a quazi NNN lease. Also, a very important aspect, I need to see the STR-A Operator has something of risk to us, as in something I can take, attach, etc. if things go south. If a person has no $, thinks this is there "golden ticket" sorry bud, not gonna happen with me. I need to see you have $, a business, other properties, things I can sick my legion of atty's after to securitize and make myself whole if need be. Yup, welcome to reality, it's not all hugs and fairy farts.
Now, for when things go bad.......
Yes, I have lot's of teeth in my lease, big, razor sharp, nasty teeth to it. Yeah, in any default, I do have power to eviscerate that corporate tenant. The point is I don't want to have to, so they best reach out and do all the gymnastics possible to keep things friendly, or I will use it, it's just that simple.
I tell all, I can be your best friend or worst nightmare, the choice is yours.
There IS risk in doing STR-A. Risk is how will that specific operator operate, and not just for this month or year but years to come. So yes, I expect ABOVE market rents, because your getting the property AND the sublet right to, ideally, sublet for profit. BOTH have $ value, so yes I expect compensation for BOTH.
I also place an annual rent increase right into the lease. Property taxes, insurance etc., all of that keep going up so static means losses. Again think NNN Lease.
When i got into leasing STR-A I didn't reinvent the wheel, I looked to who's doing something most similar and successfully and that was how every Walgreens operates. I took a page from that book and adapted it for this.
As for my "opinions" on STR-A, I have none. I am a REI Professional, it's how I pay my bills, put food on the table, pay kids lunch money etc., failure is not an option. So that phases over to my tenants, failure-is-not-an-option. I quantify risk into an equation, I quantify opportunity into an equation, I quantify EVERYTHING into a math equation.
Real Estate Investment is, at it's core, a math game. Stick to the math, it's when people get lost into emotion that things go bad.
How did you find such an operator to lease your property, James?
It actually all started out as happen stance really. Prior to the epic fever-pitch interest in STR, i had started touching into STR's noting they had "matured" and were clearly here to stay. But I hovered around the edges because running a hospitality business is not my "jam".
I then got this LTR and was in pre-listing stages. Plain exterior, great location, amazing interior space.
I got this call from a prospective tenant asking if I'd consider leasing it out on a nightly basis. I won't mention what passed through my mind but let's say something on level of rubber bed sheets, lol. But, she pressed, and seemed really nice. She explained to me the plight of a problem she had with her elderly fathers memory care center, how visitations was more like a prison visit. And into how this would most likely be the last time the entire family could see him, ever, and there just wasn't facilities for such. Then she threw $ at me, my Achilles heel, lol. $500 per night.
This spurred a whole call to action and I got hard at work digging like a little tic into this, and what I found blew my mind. In a matter of days I had multiple facilities happy to promote and refer business, all confirming the massive demand and a great relief at having such to reference.
But came the stagging and operating and that's where i hit the brick wall. For me, learning how to furnish a place to my standards, I might as well had taken on trying to learn Chinese. I have a perfectionist streak in me, and I could not be comfortable with things being so far below my own standards.
So this brought in the JV aspect, to Arbitrage it out. If I couldn't do it right, well, do what you do best and hire the best to do the rest. When I looked into services, wow, it was insane, they wanted stupid % of Rev., I couldn't do it, no skin in the game and they want up to 40%, no way, that's a partner so I might as well just have a partner right. So I put out some feelers and I found many interested persons, many, seems like near to nobody is creating STR-A's. I landed on a small operator who had one currently running and he was doing things right. Great ratings, I just liked how he was doing it all.
So, we put things together, I drew on NNN Commercial lease's for foundation of program I built out, and next thing we had a done deal.
The best part was, we projected a 6 month ramp up time too profitability for the STR Operator. We hit net-0 in about 2 weeks from launch! We considered it a happy fluke. But then it kept going. Next month rev hit our projected FULL profitability mark. And the next month blew the doors off our highest hopes. That property produces, steadily, more then 150% revenues projected, and has an insane occupancy rate and following. Booking going out more then a year! It's a flipping cash-cow!
That whole experience was the catalyst that i was onto something. I was doing great, getting well over LTR market rents, had amazing terms looking a lot like NNN terms so, lol, yeah McLoving that right, great $ and terms, that doesn't happen. AND my tenant is also winning in epic fashion. I had to run with it.
So I have been slowly building that up. Cross checking properties by STR viability, screening potential STR-A operators, pre-veting those I'd like to work with etc..
It's not something I do on mass scale, and I have 0 interest to ever do such. This is like the Special Forces of REI, epic high impact, small select teams. It's just how I choose to go about it, small volume with very high quality, vs other way around.
I have another I was just wrapping up today until I got a LTR tenant who, just tonight, lol, well he found my Achilles heel also and just threw $ at it. Offering to raise rate and pre-pay a year. So, back to hunting the next. Hard to turn down $50k just thrown at ya like that, and honestly there is sooo much opportunity out there, I bet I will have another before X-mas.
Well, congratulations on your success with that. I have a really big nice house six bedroom three bath slightly outside of San Antonio. The challenge I see is furnishing the thing. If I could find someone to do an agreement similar to what you’re speaking of, I would probably jump on it.
Go on AirBnB, look up who's doing it in that area in a way that you like. Probably the best, and easiest, way to scout. Call em up.
The "right" way to do a STR Arbitrage isn't anything jazzy, it's just splitting the functions into there 2 core, and very different components; the property investor, the hospitality investor. I am a freaking genius in REI, but the last person you want trying to help a check-in or any kind of hospitality at all, uh-uh not me, I am a horrible bell-hop and not an interior decorator who can say what picture to go where. If I was to design furnishes, it would be leather and dogs playing poker, with some John Wayne pics, lol.
It's about keeping in ones lane, and JV'ing. Why so many think strategic partnerships can't work is beyond me.
- Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes3y
@Joe S. finding an experienced operator who leases properties can be done by: 1. Start a forum on Bigger Pockets, 2. Attend a STVR conference 3. Look at videos of STVR properties online( You Tube, Instagram, Pinterest) managed by operators, 4. Contact custodians/plan providers of Solo401ks and IRAs who allow for STVR properties to be held in their plans. They can give you names of operators they know of working with retirement fund investors.5. Contact RE tax attorneys who draw up leases for STVRs.
- Real Estate Agent · San Diego, CA · Member since 2018 · 29 posts · 9 votes3y
@Wilson Vanhook Love it! I appreciate you playing devils advocate. You mention some very great points.
- Real Estate Agent · San Diego, CA · Member since 2018 · 29 posts · 9 votes3y
@James Hamling beautiful, this is super helpful. Thank you!
- 3yDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
try splitting it with the owners.
Logical Property Management4.9458 Reviews - Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes3y
Quote from @Wilson Vanhook:
Quote from @Bill B.:
The STR operator as mentioned is a huge risk for the landlord. If they get pinched for money or the local laws change outlawing STR, or requiring owner occupied. That operator will bail. You'll be collecting zero additional rent.
Are you going to bother to screen that operator? After all they aren’t going to be there and the people who are there you don’t have the right to screen. Maybe if you had a low end property and couldn’t find any decent LTR tenants. If you could collect a double deposit and 50-100% additional rent to cover your additional risk. Especially if you were a new landlord with nothing to lose.
Remember, thee are people without the financial wherewithal to buy their own properties so you’re not getting reimbursed when things go wrong. Especially in San Diego? You need a HUGE upside.
So the way to keep these people that aren't in the financial position to buy their own properties from missing rent is to charge them 2x the rent? Why are they an additional risk? If they get pinched for money they won't make their payments you say, but you're acting like this doesn't happen ALL THE TIME with missed rents for LTR tenants. Of course there will always be some sort of risk for people not making their rent, but it isn't increased with STR operators.
Just need to screen the arbitrager and see their previous work. Ask them a lot of questions and see how knowledgable they are. I'm not saying let any random person come do arbitrage, but somebody qualified I see 0 issue and in fact I'd take them over a normal tenant any day.
Just wanted to jump in and say you're 10000000% right. I was going to reply to the OP, then reply to some of the others, but all your replies were exactly what I'd say so I'll just quote yours and say 'well done'
(and I'm replying as an owner -- not an STR operator. But I have about 70 units leased to STR operators. Way better than LTR tenants. And if things go south, way easier to evict) - Real Estate Agent · Southern California · Member since 2019 · 681 posts · 281 votes3y
@Emery Jensen i would say a 20% premium
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