I'm quitting Rental Arbitrage after 4 years...here's what I learned

Well..everyone's story is different. I started Airbnb arbitrage 4 years ago and here's why I'm quitting the arbitrage business.

I'm quitting because I don't need to do it anymore! I used rental arbitrage to scale from $10k in my pocket to nine arbitrage properties in less than 2 1/2 years and then used that cash flow and profit to hire a full time operations manager, build a STR property management business with a partner and work with investors to purchase properties out of state.. We manage 7 STR properties and just bought 2 single family homes and a tiny home. All that will be rented out on Airbnb! Not to mention our existing airbnb arbitrage portfolio ;

I say all this because, for me.. rental arbitrage was a stepping stone to building a business in real estate. And while it might not be attractive to all real estate investors, I believe it can be a fantastic way to start to build experience, build profit/cash flow and establish yourself as a STR professional in your market and then use that to build a co-hosting/management business and work with investors that want to you use their knowledge and expertise to partner on projects.

Point is, don't believe everything everyone says about what is "bad" and what is "good". I know people making $20k+ months couch flipping and investing in vending machines. Don't knock the hustle, just knock the operator. Become great at what you do and you can make any vehicle a success. We will do over $750k this year in revenue form our Airbnb portfolio and that's because I took a leap of faith in myself to start an Airbnb arbitrage business 4 years ago.

Congrats, Jake. Different strokes for different folks.

1 Reply

Nathan GesnerBusiness Member

Moderator

Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

2y

Quote from @Cody Z.:

If you hang around ducks, you'll hear them say "quack" a lot. Try expanding your sphere of influence.

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4 Reply

Jake Mercer

OP

Investor · Raleigh, NC · Member since 2020 · 61 posts · 92 votes

2y

Quote from @John Underwood:

So are you quitting Arbitrage or are you hiring someone else to manage your Arbitrage properties?

We started a management company to manage our current arbitrage units and now we manage other client's properties. Arbitrage to management to acquisition seems to be a good path if you're starting out without a lot of capital.

1 Reply

Jake Mercer

OP

Investor · Raleigh, NC · Member since 2020 · 61 posts · 92 votes

2y

Quote from @Nathan Gesner:

Quote from @Cody Z.:

If you hang around ducks, you'll hear them say "quack" a lot. Try expanding your sphere of influence.

I love that! Yeah it seems to be the "doom and gloom" around YouTube and a few posts on here as well. Thanks for commenting : )

1 Reply

Hunter Purnell

Real Estate Agent · Wellington, FL · Member since 2019 · 33 posts · 19 votes

2y

Congratulations. Great way to get started. Risky but if done correctly as it looks like you did its an "infinite ROI". I'm curious how many STR's do you think 1 employee can manage?

1 Reply

Nathan GesnerBusiness Member

Moderator

Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

2y

Quote from @Jake Mercer:

You will hear YouTubers say certain things because they want to increase watch time or sign you up for their secret training. They have to use "hooks" to keep you.

BP is free. Most of us are doing this because we love real estate investing and want to help others grow with no expectations of a financial return, therefore our information is more reliable.

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Dan Thomas

Rental Property Investor · Bow, NH · Member since 2016 · 216 posts · 185 votes

2y

@Jake Mercer

Cool story man. Out of curiosity what will 750k NET for you annually. My str (owner operated) nets 12-15% of gross depending on yearly expenses. I would imagine arbitrage would come with less overhead (before starting companies and hiring folks) just wondering how your experience compares to owning.

0 Reply

Cody Z.

Real Estate Agent · Belmar, NJ · Member since 2017 · 370 posts · 200 votes

2y

Quote from @Nathan Gesner:

Quote from @Cody Z.:

I respectfully disagree with you. I don’t think it’s just a “sphere” issue or echo chamber.

STR's have become more and more oversaturated over the last three years. Guests have more choices due to this over saturation so it's harder for Hosts to stand out. Additionally, budgets have tightened since a lot of the free money dried up and the fast rising inflation has caught up with consumers causing continued downward pressure on prices and occupancy. In addition, property prices and higher mortgage rates have squeezed margins due to higher monthly carrying costs. There just simply isn't as much money to be made for the average Host in 2024.

This increased competition, lower rates and occupancy, overly optimistic underwriting and lower travel demand post COVID travel boom does warrant a reasonable label such as “Airbnbbust”.

TLDR

The environment has fundamentally changed and operators have had to do a lot more than simply list a property to profit heftily. It’s become a different game, in my opinion.

I’m not suggesting all people should quit, but some might consider it if they don’t want it be in the hospitality business or work hard to make great cash flow.

2 Reply

Dan Thomas

Rental Property Investor · Bow, NH · Member since 2016 · 216 posts · 185 votes

2y

@Jake Mercer

Yea, clearly this worked out for you but I would be hesitant to suggest that path as an across the board suggestion. You seem to have a lot of DRIVE AND THE ABILITY TO GET THINGS DONE. This may be a loosing proposition for someone looking to get rich quick/do this as a side hustle. That is the message I've received from the arbitrage youtubers..... it's the way to be a millionaire tomorrow without any of your own money..clearly not the case for most.

It will take some one who is scrappy and resilient to make this work. There are other options for folks with limited capital that may be more suited for the average new investor with limited capital. Saving/Partnership/creative financing/ etc.

1 Reply

John UnderwoodPro Member

Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes

2y

Quote from @Jake Mercer:

Quote from @John Underwood:

So are you quitting Arbitrage or are you hiring someone else to manage your Arbitrage properties?

We started a management company to manage our current arbitrage units and now we manage other client's properties. Arbitrage to management to acquisition seems to be a good path if you're starting out without a lot of capital.

Great plan. Make money to aquire your own properties. Ownership is the true path to wealth.

0 Reply

Nathan GesnerBusiness Member

Moderator

Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

2y

Quote from @Cody Z.:

There's a big difference between "dead" and "more difficult than it was four years ago." Long-term rentals are much more difficult today, but that doesn't mean they are dead. Markets swing. What worked yesterday may not work today, but I can guarantee there are people still buying properties and making it work.

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Andrew SteffensBusiness Member

Tampa, FL · Member since 2022 · 3k+ posts · 3k+ votes

2y

First off congratulations on your success.

Success usually is a combination in varying amounts of hard work, good decisions, and a some luck.

When arbitrage comes up on here, as it often does, I am usually "gloom and doom" playing devils advocate because the OP is usually on an emotional high from watching a YouTube video about making 6 figures overnight doing arbitrage.

I started my business in 2016 with a high end arbitrage, then began acquiring my own, and lastly into management. I am growing my personal portfolio and my management portfolio but not actively seeking arbitrage deals. Would I do one if one came up? If it was a slam dunk. I have not seen a good arbitrage deal in FL since COVID.

Best of luck in your future endeavors!

[email protected]813-563-0877

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Cody Z.

Real Estate Agent · Belmar, NJ · Member since 2017 · 370 posts · 200 votes

2y

Of course there are folks making it work, I just don't believe it's the lion's share of investors.

I think the idea of throwing a property on Airbnb with IKEA furniture and little to no plan or research is "dead". You won't survive. This is the expectation that I think a lot of people had when entering the market which is unfortunate.

Great discussion!

1 Reply

Todd Goedeke

Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes

2y

@John Underwood one of the greatest myths of all is that the way to wealth in the STVR business is owning properties. STVRs is a hospitality/ management business . It’s not a business based on RE appreciation. It’s a business based on generating high net cash flow from a property. The building is a means to an end. It’s not the RE making the money ( other than buying/ building at favorable pricing). It’s the business housed inside the building that makes the money. High quality hotel brands are owned by investors and triple net leased to management companies. Investors don t invest for RE speculation they invest for cash flow.

There are thousands of investors who are professionals, small business owners , professional athletes, entertainers , high 6-7 figure incomes who buy RE to benefit from its cash flow. They don t need to speculate on the “ maybe” of RE appreciation when they can earn a passive 17%+ tax free return from their leased STVR property/s.

0 Reply

John UnderwoodPro Member

Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes

2y

Quote from @Todd Goedeke:

@John Underwood one of the greatest myths of all is that the way to wealth in the STVR business is owning properties. STVRs is a hospitality/ management business . It’s not a business based on RE appreciation. It’s a business based on generating high net cash flow from a property. The building is a means to an end. It’s not the RE making the money ( other than buying/ building at favorable pricing). It’s the business housed inside the building that makes the money. High quality hotel brands are owned by investors and triple net leased to management companies. Investors don t invest for RE speculation they invest for cash flow.

There are thousands of investors who are professionals, small business owners , professional athletes, entertainers , high 6-7 figure incomes who buy RE to benefit from its cash flow. They don t need to speculate on the “ maybe” of RE appreciation when they can earn a passive 17%+ tax free return from their leased STVR property/s.

I was speaking of LTR'S.

Absolutely true on them.

0 Reply

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

2y

Quote from @Todd Goedeke:

@John Underwood one of the greatest myths of all is that the way to wealth in the STVR business is owning properties. STVRs is a hospitality/ management business . It’s not a business based on RE appreciation. It’s a business based on generating high net cash flow from a property. The building is a means to an end. It’s not the RE making the money ( other than buying/ building at favorable pricing). It’s the business housed inside the building that makes the money. High quality hotel brands are owned by investors and triple net leased to management companies. Investors don t invest for RE speculation they invest for cash flow.

There are thousands of investors who are professionals, small business owners , professional athletes, entertainers , high 6-7 figure incomes who buy RE to benefit from its cash flow. They don t need to speculate on the “ maybe” of RE appreciation when they can earn a passive 17%+ tax free return from their leased STVR property/s.

I suspect this is true of most markets in WI, but not true of most vacation markets.

My STR properties have appreciated over $1m each. Because I have extracted value via refinance, my cash flow is modest. If I make a little cash flow and the property appreciates over $100k/year I am very content (which has been the case in recent years).

Different markets, different approaches. They can all work but it is important to recognize there are differences in markets.

Good luck

0 Reply

Todd Goedeke

Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes

2y

@John Underwood absolutely agree about LTRs being a RE play regarding appreciation .

0 Reply

Todd Goedeke

Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes

2y

@Dan H.no I was not speaking specifically about STVRs in WI. My comments apply to the hospitality business in general.

Very few people buy a business solely in hopes of building that business resides in goes up in value. Investors would fire you if all you could provide is a meager 5% return with no guarantee of appreciation. Buying a property for use as a STVR with little or no positive cash flow is bad business management.

0 Reply

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

2y

Quote from @Todd Goedeke:

@Dan H.no I was not speaking specifically about STVRs in WI. My comments apply to the hospitality business in general.

Very few people buy a business solely in hopes of building that business resides in goes up in value. Investors would fire you if all you could provide is a meager 5% return with no guarantee of appreciation. Buying a property for use as a STVR with little or no positive cash flow is bad business management.

>Buying a property for use as a STVR with little or no positive cash flow is bad business management.

there are entire threads dedicated to cash flow versus appreciation. It is my belief that if we pulled only those with 8 digit and more RE assets, the appreciation wins hands down. I have also never seen an RE syndication offering without an appreciation play.

while mostly my purchases (all but 1) have had some cash flow, my last one was negative cash flow using 50% rule (which was fairly accurate to my detailed underwriting) and goes positive this year but in 2.5 years I have value ~$500k above costs. You can refer to it as bad business management. You can call it what ever you want. I would do it again.

2 of my STRs are in a market that the average STR purchase has not had positive cash flow in many years if using PM. Fortunately, they appreciate 6 digits per year. mine are up 7 digits total and due to extraction of value my cash flow is still not good.

My view is you can have some success with either approach. When starting on the RE journey, you may need the cash flow to pay the bills. At some point most RE investors transition to look at total return. Once they make this transition, the appreciation is where the big returns are achieved. It is also why virtually every RE syndication has an appreciation play. It is the most common way to achieve the returns sought by the LPs.

good luck

0 Reply

Jon Martin

Member since 2022 · 1k+ posts · 1k+ votes

2y

Quote from @Todd Goedeke:

@John Underwood one of the greatest myths of all is that the way to wealth in the STVR business is owning properties. STVRs is a hospitality/ management business . It’s not a business based on RE appreciation. It’s a business based on generating high net cash flow from a property. The building is a means to an end. It’s not the RE making the money ( other than buying/ building at favorable pricing). It’s the business housed inside the building that makes the money. High quality hotel brands are owned by investors and triple net leased to management companies. Investors don t invest for RE speculation they invest for cash flow

I may be in the minority among STR owners but I disagree, at least when it comes to my own strategy. I've found markets that have a good-to-great appreciation runway that also cash flow. My plan to scale up to around 10ish properties, let them grow a bit, sell off the slower cash flow properties and roll that equity into the 3-5 winners. I certainly would not the first to succeed from this strategy.

Lots of business owners buy the property that they operate in, and many failed businesses have come out on top because they sold the building on the backend. Also makes it easier to sell the business (and with greater value) because they have something to leverage in a buyout.

0 Reply

Evan Polaski

Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes

2y

@Dan H. and @Todd Goedeke, I think you are both right.

Dan, as you note, you are buying in high priced areas with high appreciation. The STR model is, potentially, the only way to achieve any net cash flow, even if modest. Going the LTR route could very well result in negative cash flow. As you note, I think this is the slightly higher risk play, but ultimately can lead to MUCH higher overall returns.

Todd, I believe you are talking about the traditional STR play in "middle America". I have seen many STR operators in my market (Cincinnati) post their STR for some absurd price "because we are cash flowing $2,000/mo". They then apply the LTR multiples to that and assume that their single family home should sell for, say, $600k, when every other comparable single family in the area sells for $300-400k.

At the end of the day, STRs are buying single family homes. If single family homes are appreciating in the area, the STR owner will benefit from the appreciation. But, operating a single family home as a STR does not create any appreciation on its own.

And to anyone sharing their successes in STR, please share NET numbers. No-one is successful (outside of occasional tech start-ups) on revenue, especially when you are talking about real estate, a highly leveraged industry, and hospitality, a fairly low margin service industry.

1 Reply

I'm quitting Rental Arbitrage after 4 years...here's what I learned

I'm quitting Rental Arbitrage after 4 years...here's what I learned

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