Arbitrage lease agreement template

[Pandu Chimata]

Hello team, Greetings!

If some one has short term arbitrage rental lease agreement template, can they share it, please? 
I am contemplating on the idea of renting to an investor. 

[Ke Nan Wang]

I have three long term rental rented out as an arbitrage. I sent my normal residential lease agreement to my attorney and he modified it to implement the following:

1. This is a commercial lease and it's governed by the non-residential landlord and tenant laws. Subletting is allowed for STR guest only.

2. 3 year lease with a built-in 3.5% increase on rent each year. They would want this anyway to get their furniture expenses back and guarantee a profitable period. 

3. Lessee is responsible for any maintenance less than $500 per occurrence. Lessee is responsible for all STR taxes. Need to obtain appropriate licenses to run the business and obtain the appropriate insurance with $2M liability. I would recommend have the lessee supply their own washer/dryer because STR will take a huge toll on this appliance if they wash sheets onsite.

4. If Lessee default on the lease, they have 24 hour to remove their personal belongings inside the premise or the Lessor will take procession of their belongings (furniture and decors) 

Then the rest is pretty much the same as my residential lease. 

[John Underwood]

Quote from @Ke Nan Wang:

I have three long term rental rented out as an arbitrage. I sent my normal residential lease agreement to my attorney and he modified it to implement the following:

1. This is a commercial lease and it's governed by the non-residential landlord and tenant laws. Subletting is allowed for STR guest only.

2. 3 year lease with a built-in 3.5% increase on rent each year. They would want this anyway to get their furniture expenses back and guarantee a profitable period. 

3. Lessee is responsible for any maintenance less than $500 per occurrence. Lessee is responsible for all STR taxes. Need to obtain appropriate licenses to run the business and obtain the appropriate insurance with $2M liability. I would recommend have the lessee supply their own washer/dryer because STR will take a huge toll on this appliance if they wash sheets onsite.

4. If Lessee default on the lease, they have 24 hour to remove their personal belongings inside the premise or the Lessor will take procession of their belongings (furniture and decors) 

Then the rest is pretty much the same as my residential lease. 

 This looks really good to add to a typical LTR lease.

[Michael Baum]

Are STRs allowed where your place is @Pandu Chimata? I would make sure before I went forward. There are lots of areas of restrictions around SoCal.

[Pandu Chimata]

Quote from @Michael Baum:

Are STRs allowed where your place is @Pandu Chimata? I would make sure before I went forward. There are lots of areas of restrictions around SoCal.

Thank you for asking. Yes. In fact I already secured a permit. 

[Michael Baum]

Ahhh ok @Pandu Chimata. Very cool.

Maybe this isn't a big deal, but with you holding the STR permit, you would be on the hook for anything that happens and not the arbitrager.

If you noticed on line item 3 in @Ke Nan Wangs excellent post, he has the arbitrager getting the licenses. That might not be possible as most licenses I have seen require the owner of the property to hold them, but it is an interesting clause.

I would also want a copy of the insurance just to make sure. I might even call my insurer and see what it would cost to add a rider for STRs just in case. I am not a trusting person. :)

Also, have you vetted this person? Do they have enough $$$ in reserve for any issues that crop up? Remember, arbitrage isn't investing, they are creating a job for themselves and many arbitrage folks don't have 2 nickels to rub together.

Finally, have you ever though of just doing it yourself?

[Pandu Chimata]

Quote from @Ke Nan Wang:

I have three long term rental rented out as an arbitrage. I sent my normal residential lease agreement to my attorney and he modified it to implement the following:

1. This is a commercial lease and it's governed by the non-residential landlord and tenant laws. Subletting is allowed for STR guest only.

2. 3 year lease with a built-in 3.5% increase on rent each year. They would want this anyway to get their furniture expenses back and guarantee a profitable period. 

3. Lessee is responsible for any maintenance less than $500 per occurrence. Lessee is responsible for all STR taxes. Need to obtain appropriate licenses to run the business and obtain the appropriate insurance with $2M liability. I would recommend have the lessee supply their own washer/dryer because STR will take a huge toll on this appliance if they wash sheets onsite.

4. If Lessee default on the lease, they have 24 hour to remove their personal belongings inside the premise or the Lessor will take procession of their belongings (furniture and decors) 

Then the rest is pretty much the same as my residential lease. 

 Thank you this makes lot of sense. 

[Pandu Chimata]

Quote from @Michael Baum:

Ahhh ok @Pandu Chimata. Very cool.

Maybe this isn't a big deal, but with you holding the STR permit, you would be on the hook for anything that happens and not the arbitrager.

If you noticed on line item 3 in @Ke Nan Wangs excellent post, he has the arbitrager getting the licenses. That might not be possible as most licenses I have seen require the owner of the property to hold them, but it is an interesting clause.

I would also want a copy of the insurance just to make sure. I might even call my insurer and see what it would cost to add a rider for STRs just in case. I am not a trusting person. :)

Also, have you vetted this person? Do they have enough $$$ in reserve for any issues that crop up? Remember, arbitrage isn't investing, they are creating a job for themselves and many arbitrage folks don't have 2 nickels to rub together.

Finally, have you ever though of just doing it yourself?

Yes, the person is vetted, referenced by another investor who has been working with this person for few years. 

Yes, I did think about doing myself, that's the reason I took the permit. In fact,  I do have one Airbnb that have been managing since 3 years but that is in a different city. For this one, considering the area, I prefer someone to do it, instead of myself. 

Thank you for asking. 

[Lisa Marie]

Do you, the property owner, obtain the STR insurance or do you make the arbitrager do it? As the owner, you want to be the recipient of the policy payout if there is damage to the house, but the arbitrager needs to be covered for the liability (the property owner needs to be covered as well). Would it be easier if the property owner buys the insurance and put the arbitrager on the policy in the same way as you would for a Property Manager? Obviously the insurance premium will have to be included in the rent.

[Sarah Kensinger]

Quote from @Lisa Marie:

Do you, the property owner, obtain the STR insurance or do you make the arbitrager do it? As the owner, you want to be the recipient of the policy payout if there is damage to the house, but the arbitrager needs to be covered for the liability (the property owner needs to be covered as well). Would it be easier if the property owner buys the insurance and put the arbitrager on the policy in the same way as you would for a Property Manager? Obviously the insurance premium will have to be included in the rent.

I have never done this myself but from what I've heard others say the owner would have STR homeowners' insurance. Then the person leasing from the owner would have their own STR arbitrage insurance. As of a year or so ago Proper Insurance was the only company that offered Rental Arbitrage insurance for a leasee, which includes liability. They are one of the most comprehensive insurance companies for a STR, so it probably wouldn't hurt for the homeowner to require that particular company and policy. 

[Pandu Chimata]

Quote from @Sarah Kensinger:

Quote from @Lisa Marie:

Do you, the property owner, obtain the STR insurance or do you make the arbitrager do it? As the owner, you want to be the recipient of the policy payout if there is damage to the house, but the arbitrager needs to be covered for the liability (the property owner needs to be covered as well). Would it be easier if the property owner buys the insurance and put the arbitrager on the policy in the same way as you would for a Property Manager? Obviously the insurance premium will have to be included in the rent.

I have never done this myself but from what I've heard others say the owner would have STR homeowners' insurance. Then the person leasing from the owner would have their own STR arbitrage insurance. As of a year or so ago Proper Insurance was the only company that offered Rental Arbitrage insurance for a leasee, which includes liability. They are one of the most comprehensive insurance companies for a STR, so it probably wouldn't hurt for the homeowner to require that particular company and policy. 

I, as a owner, am actually taking an insurance. Foremost is the another company that does STR coverage. I am using Foremost for my another STR house as well, which I manage.

Good point about having the renter to obtain his own STR arbitrage insurance.

[Sarah Kensinger]

Quote from @Pandu Chimata:

Quote from @Sarah Kensinger:

Quote from @Lisa Marie:

Do you, the property owner, obtain the STR insurance or do you make the arbitrager do it? As the owner, you want to be the recipient of the policy payout if there is damage to the house, but the arbitrager needs to be covered for the liability (the property owner needs to be covered as well). Would it be easier if the property owner buys the insurance and put the arbitrager on the policy in the same way as you would for a Property Manager? Obviously the insurance premium will have to be included in the rent.

I have never done this myself but from what I've heard others say the owner would have STR homeowners' insurance. Then the person leasing from the owner would have their own STR arbitrage insurance. As of a year or so ago Proper Insurance was the only company that offered Rental Arbitrage insurance for a leasee, which includes liability. They are one of the most comprehensive insurance companies for a STR, so it probably wouldn't hurt for the homeowner to require that particular company and policy. 

I, as a owner, am actually taking an insurance. Foremost is the another company that does STR coverage. I am using Foremost for my another STR house as well, which I manage.

Good point about having the renter to obtain his own STR arbitrage insurance.

We checked into Foremost a while back and they also seemed like a good company. It's really important for the person doing arbitrage to get the right insurance and they are hard to get covered.

[Pandu Chimata]

Quote from @Sarah Kensinger:

Quote from @Pandu Chimata:

Quote from @Sarah Kensinger:

Quote from @Lisa Marie:

Do you, the property owner, obtain the STR insurance or do you make the arbitrager do it? As the owner, you want to be the recipient of the policy payout if there is damage to the house, but the arbitrager needs to be covered for the liability (the property owner needs to be covered as well). Would it be easier if the property owner buys the insurance and put the arbitrager on the policy in the same way as you would for a Property Manager? Obviously the insurance premium will have to be included in the rent.

I have never done this myself but from what I've heard others say the owner would have STR homeowners' insurance. Then the person leasing from the owner would have their own STR arbitrage insurance. As of a year or so ago Proper Insurance was the only company that offered Rental Arbitrage insurance for a leasee, which includes liability. They are one of the most comprehensive insurance companies for a STR, so it probably wouldn't hurt for the homeowner to require that particular company and policy. 

I, as a owner, am actually taking an insurance. Foremost is the another company that does STR coverage. I am using Foremost for my another STR house as well, which I manage.

Good point about having the renter to obtain his own STR arbitrage insurance.

We checked into Foremost a while back and they also seemed like a good company. It's really important for the person doing arbitrage to get the right insurance and they are hard to get covered.

 Is there a company that you suggest that can cover the insurance for the person who is renting it?

[Sarah Kensinger]

Quote from @Pandu Chimata:

Quote from @Sarah Kensinger:

Quote from @Pandu Chimata:

Quote from @Sarah Kensinger:

Quote from @Lisa Marie:

Do you, the property owner, obtain the STR insurance or do you make the arbitrager do it? As the owner, you want to be the recipient of the policy payout if there is damage to the house, but the arbitrager needs to be covered for the liability (the property owner needs to be covered as well). Would it be easier if the property owner buys the insurance and put the arbitrager on the policy in the same way as you would for a Property Manager? Obviously the insurance premium will have to be included in the rent.

I have never done this myself but from what I've heard others say the owner would have STR homeowners' insurance. Then the person leasing from the owner would have their own STR arbitrage insurance. As of a year or so ago Proper Insurance was the only company that offered Rental Arbitrage insurance for a leasee, which includes liability. They are one of the most comprehensive insurance companies for a STR, so it probably wouldn't hurt for the homeowner to require that particular company and policy. 

I, as a owner, am actually taking an insurance. Foremost is the another company that does STR coverage. I am using Foremost for my another STR house as well, which I manage.

Good point about having the renter to obtain his own STR arbitrage insurance.

We checked into Foremost a while back and they also seemed like a good company. It's really important for the person doing arbitrage to get the right insurance and they are hard to get covered.

 Is there a company that you suggest that can cover the insurance for the person who is renting it?

So long as policies haven't changed, Proper Insurance is the only company I know of that would cover a leasee who is doing arbitrage.

[Lisa Marie]

Resurrecting this thread.

@Pandu Chimata, @Ke Nan Wang, @Sarah Kensinger, do you guys have a recommendation on an attorney who has experiences with STR arbitrage? My husband and I own a STR rental property but we are tired of having to manage the PM and still getting a mediocre performance. We have been discussing doing an STR arbitrage deal with an experienced and successful STR investor.

We have agreed on all the terms and conditions, and addressed all the possible scenarios - who is paying for what, and what happens if one party wants to terminate the contract, and etc. We have a document that's written in plain English, now we need to each hire an attorney to review the document and translate it into legalese. I know we could just hire a run-of-the-mill real estate attorney, who will just take a LTR contract and add a couple of paragraphs to fit this application. It's probably ok, but I am hoping that if we are paying the money anyway, it will be nice to have an attorney who has worked on other STR arbitrage contracts so that he/she may point out scenarios that we haven't addressed and help us fine tune the contract even more.

Appreciate any recommendation or insight you may have.

[Ke Nan Wang]

Quote from @Lisa Marie:

Resurrecting this thread.

@Pandu Chimata, @Ke Nan Wang, @Sarah Kensinger, do you guys have a recommendation on an attorney who has experiences with STR arbitrage? My husband and I own a STR rental property but we are tired of having to manage the PM and still getting a mediocre performance. We have been discussing doing an STR arbitrage deal with an experienced and successful STR investor.

We have agreed on all the terms and conditions, and addressed all the possible scenarios - who is paying for what, and what happens if one party wants to terminate the contract, and etc. We have a document that's written in plain English, now we need to each hire an attorney to review the document and translate it into legalese. I know we could just hire a run-of-the-mill real estate attorney, who will just take a LTR contract and add a couple of paragraphs to fit this application. It's probably ok, but I am hoping that if we are paying the money anyway, it will be nice to have an attorney who has worked on other STR arbitrage contracts so that he/she may point out scenarios that we haven't addressed and help us fine tune the contract even more.

Appreciate any recommendation or insight you may have.

Attorneys are usually bill by hours so the less they work and still achieve the same result the better. 

I don’t have a go to attorney for this. The one I did, I used one who came high recommended from a friend. I felt he did an okay job and charged me a lot so I took it for what’s worth and basically just using it as my standard form and never looked back. Most of the negotiation items are in filling the blanks anyway. I say the attorney’s contributions are the broad clauses they put at the end of the contract to have the clients covered in all scenarios. Some of those you didn’t even think of. That would be the most values attorney could provide. All in all, I don’t see the need to nerd this out with a specialty attorney. 

[Sarah Kensinger]

Quote from @Lisa Marie:

Resurrecting this thread.

@Pandu Chimata, @Ke Nan Wang, @Sarah Kensinger, do you guys have a recommendation on an attorney who has experiences with STR arbitrage? My husband and I own a STR rental property but we are tired of having to manage the PM and still getting a mediocre performance. We have been discussing doing an STR arbitrage deal with an experienced and successful STR investor.

We have agreed on all the terms and conditions, and addressed all the possible scenarios - who is paying for what, and what happens if one party wants to terminate the contract, and etc. We have a document that's written in plain English, now we need to each hire an attorney to review the document and translate it into legalese. I know we could just hire a run-of-the-mill real estate attorney, who will just take a LTR contract and add a couple of paragraphs to fit this application. It's probably ok, but I am hoping that if we are paying the money anyway, it will be nice to have an attorney who has worked on other STR arbitrage contracts so that he/she may point out scenarios that we haven't addressed and help us fine tune the contract even more.

Appreciate any recommendation or insight you may have.

I have been trying to reach out to people and think of someone who might know of an attorney that is experienced in rental arbitrage. Unfortunately, I'm coming up empty handed and the group we are members of, only looks at contracts for members. I'm not too sure where to point you. :(
Do you have a person lined up already to do STR arbitrage for your property?

[Lisa Marie]

@Ke Nan Wang,  appreciate your input.  I guess we will go with a regular real estate attorney.

@Sarah Kensinger, we have a person already lined up to do this. My husband and I interviewed 3 people who were interested and picked this guy, who we felt most comfortable with. He had 2 successful STR properties himself and he seemed to be an upstanding guy. Money is actually not our #1 priority. We want someone we can trust and can have a long term relationship with. Hopefully he is the right one. Sarah, do you have recommendations on somebody else who may be interested in taking on an arbitrage project? We would be happy to talk to that person just to get to know each other, in case something happens with the current guy. Also, if this arbitrage model works, we may buy another property and do it again, which means we will be looking for another partner.

[Sarah Kensinger]

Quote from @Lisa Marie:

@Ke Nan Wang,  appreciate your input.  I guess we will go with a regular real estate attorney.

@Sarah Kensinger, we have a person already lined up to do this. My husband and I interviewed 3 people who were interested and picked this guy, who we felt most comfortable with. He had 2 successful STR properties himself and he seemed to be an upstanding guy. Money is actually not our #1 priority. We want someone we can trust and can have a long term relationship with. Hopefully he is the right one. Sarah, do you have recommendations on somebody else who may be interested in taking on an arbitrage project? We would be happy to talk to that person just to get to know each other, in case something happens with the current guy. Also, if this arbitrage model works, we may buy another property and do it again, which means we will be looking for another partner.

Yes, as a matter of fact I just might have someone that is interested. Also, the reason I asked is because I wondered if the person lined up to do the STR arbitrage might know of an attorney. Just make sure the attorney wouldn't just be looking out for the renter but you as well.

[Tony Green]

Quote from @Lisa Marie:

@Ke Nan Wang,  appreciate your input.  I guess we will go with a regular real estate attorney.

@Sarah Kensinger, we have a person already lined up to do this. My husband and I interviewed 3 people who were interested and picked this guy, who we felt most comfortable with. He had 2 successful STR properties himself and he seemed to be an upstanding guy. Money is actually not our #1 priority. We want someone we can trust and can have a long term relationship with. Hopefully he is the right one. Sarah, do you have recommendations on somebody else who may be interested in taking on an arbitrage project? We would be happy to talk to that person just to get to know each other, in case something happens with the current guy. Also, if this arbitrage model works, we may buy another property and do it again, which means we will be looking for another partner.

How is your arbitrage agreement working out? Would you mind sharing any of the terms? In other words, is your guy doing all of the STR subleasing and he keeps the spread? Or is it more of a partnership/fee arrangement?

[Lisa Marie]

@Tony Green Yes we signed the contract.  It will take effect in Jan 2024.  The arbitrager pays us a fixed monthly rent and he keeps the spread (or pays out of his own pocket), depending on how well he runs the business.  He will give us 2 free weeks of stay every year -- that's important to us, because we get to enjoy the house and can keep an eye on the condition of the house.  Property-wise, we the landlord are still responsible for the repair or replacement of major items that a typical LTR landlord will be responsible for, such as major kitchen appliances, A/C, hot water heater, and of course anything structural to the house.  He will be responsible for anything else.  It's pretty straight forward if everything goes as planned.  The tricky part is to imagine the scenarios when things may not go as planned and figure out how to protect ourselves. For instance, whichever party wants to terminate the contract in the middle of the year has to pay the other party a hefty penalty.  Also, he plans to invest some of his own money to upgrade/refurbish things.  To protect his investment, we agreed to a multi-year contract.  If we the landlord want to break the contract before the end of the multi-year term, we have to pay him a pro-rated fee to reimburse his investment.  

My feeling is that even though we structured it to be like a regular LTR as much as possible, ultimately this is still a partnership and the two sides have to have a certain level of trust/respect that's beyond a typical landlord/tenant relationship. 

For the right people (landlord who wants hands-free ownership but achieve higher than normal LTR rate, and arbitrager who has the skills and extra bandwidth, AND has confidence in their own ability), I think this kind of arbitrage model is a win-win.  Obviously we won't know how it turns out until a few years from now.