Quote from @Dan H.:
Quote from @James Hamling:
They have a job but no upside of appreciation, equity pay down, tax benefits, etc. At the end of lease the LL can in effect take away all the effort they have put in building the STR business by not renewing the lease. Can they find another unit to arbitrage? Will the furnishings work elsewhere?
To answer specific to the Arbitrager benefits, because there is many, I will answer that here.
Let's take a $400k property that, for example, let's say done correctly averages $7k monthly as STR.
So the STR-Host "could" do arbitrage with me, and for that they bring up-front to secure property on average as little as $7,500, and are looking at $3k monthly. Or maybe I give them first month at $0, 2nd at $1,500, and 3rd is at full rate and going forward.
Now they also need on average $30k to furnish, prep, market and launch that STR. There out of pocket is around $40k to have an operating STR.
Now long term benefits: They have a 3yr lease to start, with all rents locked in and known for that term, they know exactly what there monthly expense is yr1, yr2 etc.. At end of yr 3 we re-evaluate, and they have baked right in a right to renew 10 years! Terms detail that, in short-short version, as long as all is going well and no issues. And with that rents set and known going forward making for 13 years of utilization potential under contract.
Now if things go pear-shape, yeah, they can pack up furnishings and roll it forward to next one.
Now, let's look at if they try to do everything solo.
To acquire property they need to come up with $80k-$100k minimum just to secure property. And now that $30k on top of it all. Now looking at $110-$140k to get started. Literally 3X+ the costs vs arbitrage. Or, what that means in Opportunity Cost is for the same $ they can do either 1 STR or 3, a choice between that $ getting $7k monthly revenue or $21k.
Which seems better ROI on spending ~$120k, getting $7k monthly revenue or $21k????
Next, what if 21 months into it everything goes pear-shape and the property simply won't perform as a STR? Or better yet, the regulations change and they are now BANNED from STR in that property? If they bought it, now they are F'd aren't they. They have well over $100k tied up into a property they can't do their business of STR with, it's a big problem. With arbitrage, it's a conversation, lease is terminated early, they clean place up and out, and move onto the next. Total cost is maybe 2 months rent, $6k vs a $140k+ problem. Again, seems a no-brainer to me.
The benefits for an arbitrager are significant mitigation of performance risk, and significant empowerment to scale.
To put this in perspective look up "the" dividend king-of-kings, a little stock called "O". Read the business profile and find they own all the CVS and Walgreen pharmacies', among just a couple names. No, not the business's, just the property. They lease to them. And it's a win-win for everyone. "O" empowers those companies to use their capital to scale, and operate, vs secure the infrastructure to scale and operate. It's a win-win.
STR-Arbitrage is doing the exact same thing, for the exact same purpose, on a different asset class for a different operation.
And if I could do the same with Hilton or Radisson, you better believe I'd be doing it in a heartbeat. And who knowns, maybe someday my post on BP will be about my newest arbitrage tenant with Hilton or Radisson.
Point is, STR is a hospitality business. It's long been the standard for business's to lease infrastructure, just go look at any mall anywhere. Why people, yet again, think STR is some mutant of a thing so immune from the rules and standards of business is beyond me, it's just a micro-hotel, it's not all that different a thing.