Pros & Cons of Each STR Strategy

[Sherylyn Holden]

Let's Talk STR Strategies. I've tried them all and have my biases…

I currently own 5 short term rentals. At one point I had 3 additional properties that I ran on the Arbitrage model. And I had 2 more I ran on the cohosting/management model. Here are my pros and cons to each.

Arbitrage

Pros:

• - I had little issues finding owners willing to rent to me and I was up front on my intentions
• - Startup costs were doable. I typically spent about $10-12k to furnish a 3/2
• - Predictable monthly payment
• - A way to test certain neighborhood or markets
• - Faster scaling

Cons:

• - Owner still has final say. They can raise the rent next year.
• - Less customization you can do to the house
• - You are at the mercy of the owner for larger repairs (if they are responsible per your lease). But they don’t have your guests to worry about.
• - First year was mostly a breakeven year after furnishing costs. Typically didn’t see true profit til after 1 year.
• -Hard to sell furniture or business if you need to exit

Management

Pros:

• - Lowest cost to entry and risk to the operator
• - Property owner assumes most risk and I had them purchase the furniture
• - Easier to sell the business once you scale. I’ve heard of many in this space selling to national brands once they build some client base

Cons:

• - Lower potential revenue to operator without scaling
• - At the mercy of the owner for certain repairs and upgrades
• - Lots of competition (typical % splits have started to come down with this). You’re also competing with huge national/regional management firms
• - You are in service. Service to guest and to owners.

Ownership

Pros:

• - You have complete control over design, upgrades, repairs, etc.
• - Highest potential income when factoring in Tax benefits, Home appreciation, Loan Paydown
• - Semi-flexible. You could convert to an LTR or MTR possibly if the numbers work.
• - Creative financing can be used

Cons:

• - Risk - you are locked in to a long term loan. Selling the home if it doesn’t work out could be an option but you could take a loss
• - You are responsible for all repairs
• - Capital intensive

In San Antonio specifically, I think the ownership model is superior. I worry about the arbitrage model with rising rents and insurance costs for STRs. Moreover, it is hard to find a rental home that can stand out. This is my personal opinion but I have seen San Antonio add some barriers to the cohost and abritrage model more (require notarized signatures and approval from owner to get an STR permit) so I wonder what else may come down in future legislation to limit STRs.

City enforcement is no joke. I’ve had city compliance officers knock on my STRs doors while I had guests there for no reason. They are required to investigate any complaint. Even when you do EVERYTHING right with the city they can still crack down on you (you can see my older posts about my crazy ordeal that still makes zero sense with the city - long story short, I lost that battle with them!)

Curious to hear yall's thoughts on which model you think is best!

[John Underwood]

Arbitrage and cohosting are just jobs with no investor component.