Rental Arbitrage -how to do airbnb without BUYING

91 Replies

Lots of people have asked me how to start doing a "Rental Arbitrage" in STR (short term rentals - Airbnb is most popular but VRBO is another way).

Rental arbitrage is you as the investor rents a home and becomes the tenant.    But the sole purpose of renting is to then sublease the home on Airbnb or VRBO or corporate rentals.  

Here are the key rules of Rental Arbitrage:

1) You need to MAKE money/profit. Typical target for most Rental arbitrage investors is $1000 NOI (net operating income = revenue - expenses). Do your research to make sure you can make a profit. This is not easy work to find a property, lease a property, furnish the property, and manage it. You better not come up with a calculation that comes out to be less than $1000/month NOI or you may actually LOSE money.

2)  You need to make sure everything is LEGIT/ABOVE BOARD/TRANSPARENT.   You cannot hide the fact that the sole purpose for you to rent the home is to sublease.   The owner must know from the beginning and in fact you need to include it in your lease agreement that the home is going to be subleased and that the owner agrees to allow this to happen.  

3) City, county, local, HOA regulations must support what you are doing. You cannot go blindly into doing a rental arbitrage without knowing the restrictions. HOA is the trickiest. Typically the restrictive HOAs are condos, new construction communities.

4)  Cost of furnishing needs to be factored into your calculations.    Cost of furnishing is not limited to the cost of furniture but labor costs to furnish home can be high.   Typical costs can vary widely depending on where you get your furniture, labor cost, etc.   Remember your own labor cost. 

Typically a 2 bedroom home can be furnished between $3000-8000.    Remember the home is empty and filling it with all the amenities including (all kitchenware, bedding, etc..) are not cheap.

5) Extra expenses include - Utilities, Garbage, Internet, Streaming (Netflix, SlingTV, do NOT get cable).  

Tricks and TIps - Best TV for STR = Roku TCL 4K TVs - as low as $250-350 per TV.

Watch for my next post:   How to approach a Landlord to rent to you!

Great post! Totally NOT a dead end job, as it is creating a business, which real estate investing basically is as well. When done right it can be outsourced and somewhat passive.

Appreciate your post! We are getting our first rental arbitrage unit this week :) Hoping it all goes well. Risk is definitely mitigated though because we have an 8 month lease instead of a year, with the owner wanting us to extend it we decide we want to. Excited!

Great post with good insights, Joe!

How do you overcome the objection from a landlord that a STR would create more problems for the owners than a regular rental would. i.e.- there would be more traffic and there is a permit to obtain from the County. Do you obtain this permit in your name, or does it have to be in the property owner's name?

Thanks so much for your insights in this rental arbitrage concept!

Hey folks

I am looking at a STR Arbitrage deal. The landlord is all on board, the place is super quaint..we were about to sign on the dotted line when we got held up with insurance concerns. The building has four LTR, a hair salon, and the unit I want to use for STR. I have reached out to Proper and CBIZ...shot down by both. Does anyone know of an insurance company that would insure such an arrangement? FWIW, the landlord's existing insurer unofficially said they would cancel his entire policy if they found out he there was a STR operating there.

Any thoughts/ideas from the group would be so appreciated!

All the best,

Karen

I would say to look for a rental arbitrage elsewhere, Karen. No need to put the owner at risk of getting his insurance policy cancelled, if the insurance company finds out that there is a STR there.

Or worse, if there is a disaster and the owner calls his insurance company to get money for the problem and the insurance company comes out to assess the building and finds that there is a STR being run, then denies coverage. The owner might ask you to pay for a $20,000 bathroom faucet or mold remediation problem!

There are probably other units to do an arbitrage with that are less complicated. 

I'm wanting to buy a duplex and use both sides as a vacation rental. I posted a faux add on Craigslist just to guage a response. I didn't even get a call. Any tips on how to market your vacation rental? I have done some flips and have some normal rentals and a rent to own, so in have some experience..

Try marketing your STR to the contractors working at the refinery in El Dorado. I'm making a killing with 23 STRs in Coffeyville renting them to contractors working at CVR Energy.

Holly Frontier owns the refinery in El Dorado, plus the refinery in Tulsa.  It only makes sense for them to buy the refinery in Coffeyville because it's right in the middle.  They have the cash flow to do it.

The more I look into this "business" the more I like it.  However, the numbers appear much more attractive for the ultra high-end airbnb.   For example, a penthouse suite in Chicago renting for $4k -$6k a month, needing $20,000 in furnishings, but seems to get no less than 50% occupancy at $1,000 a night...sure, it's a lot more upfront and quite a commitment to rent such a place, but the revenue is so much larger...

Originally posted by @Patrick Britton :

The more I look into this "business" the more I like it.  However, the numbers appear much more attractive for the ultra high-end airbnb.   For example, a penthouse suite in Chicago renting for $4k -$6k a month, needing $20,000 in furnishings, but seems to get no less than 50% occupancy at $1,000 a night...sure, it's a lot more upfront and quite a commitment to rent such a place, but the revenue is so much larger...

 and in the SF bay area.. I am sure Seattle it would work and Portland..  get them right by the big hospitals and universities.. 

Quick mortgage note, because there is a probability greater than zero that someone reading this thread is going to apply for a mortgage with me at some point in the future. :P

The below only applies if you wish for a mortgage underwriter to consider the STR income.

  • If you own it, it goes on Schedule E.
  • If you do not own it, it goes on Schedule C. You are a property manager. 
  • If you decide to get fancy and make a business entity (meaning it wont be on E or C), there's a good chance you will be resetting your "2 years of self employment" to zero. So if you're going to do it, either do it sooner rather than later OR go ahead and get that mortgage before you do so.

@ Derek Blades, Craigslist is not a good place to advertise your STR. You need to place a test posting on Airbnb, but say it will be ready soon. People that are actually looking to book a STR does not use Craigslist. That is what I notice anyway when I had a listing on Airbnb and also listed on Craigslist for a few weeks. I never got an inquiry from Craigslist.

This post has been removed.

Originally posted by @Joe Kim :

Lots of people have asked me how to start doing a "Rental Arbitrage" in STR (short term rentals - Airbnb is most popular but VRBO is another way).

Rental arbitrage is you as the investor rents a home and becomes the tenant.    But the sole purpose of renting is to then sublease the home on Airbnb or VRBO or corporate rentals.  

Here are the key rules of Rental Arbitrage:

1) You need to MAKE money/profit. Typical target for most Rental arbitrage investors is $1000 NOI (net operating income = revenue - expenses). Do your research to make sure you can make a profit. This is not easy work to find a property, lease a property, furnish the property, and manage it. You better not come up with a calculation that comes out to be less than $1000/month NOI or you may actually LOSE money.

2)  You need to make sure everything is LEGIT/ABOVE BOARD/TRANSPARENT.   You cannot hide the fact that the sole purpose for you to rent the home is to sublease.   The owner must know from the beginning and in fact you need to include it in your lease agreement that the home is going to be subleased and that the owner agrees to allow this to happen.  

3) City, county, local, HOA regulations must support what you are doing. You cannot go blindly into doing a rental arbitrage without knowing the restrictions. HOA is the trickiest. Typically the restrictive HOAs are condos, new construction communities.

4)  Cost of furnishing needs to be factored into your calculations.    Cost of furnishing is not limited to the cost of furniture but labor costs to furnish home can be high.   Typical costs can vary widely depending on where you get your furniture, labor cost, etc.   Remember your own labor cost. 

Typically a 2 bedroom home can be furnished between $3000-8000.    Remember the home is empty and filling it with all the amenities including (all kitchenware, bedding, etc..) are not cheap.

5) Extra expenses include - Utilities, Garbage, Internet, Streaming (Netflix, SlingTV, do NOT get cable).  

Tricks and TIps - Best TV for STR = Roku TCL 4K TVs - as low as $250-350 per TV.

Watch for my next post:   How to approach a Landlord to rent to you!

 Great article,

Yea a lot of people are concerned about what the landlord will say about them renting the property on Airbnb. Well you need to make your intentions clear from the beginning. The landlord will be your partner in this business but you've got to make it clear to them as to why it's a good deal for them. Knowing how to do this is key!

Rented.Com

Originally posted by @Greg Junge :

@Joe Kim

I'm actually an owner and investor that would like to rent my short-term rental house to someone with this rental arbitrage model. I'm in the Phoenix area, and only know a handful of people that do this, but if anybody knows a connection or to that is willing to rent a house that is fully renovated and furnished, please let me know.

Thanks,

Greg

Originally posted by @Ken Latchers :

"Typically a 2 bedroom home can be furnished between $3000-8000"

Fantasy

 I must live in a fantasy world.  My STRs are furnished from estate auctions.  What I don't buy at auction, I buy at Wal Mart (linens, cookware, utensils, etc).

Washer $75.

Dryer $75.

Stove $100.

Fridge $100.

2 recliners $50.

Tables and lamps $50.

Dining table and chairs $50.

2 bedroom suites $300.

2 old style televisions, free.

That's $800.

Probably spend $400 at Wal Mart for soft goods.

Finally my biggest single expense is the Smart TV for the living room, $250.

My tenants work 10-12 hours a day, 6-7 days a week.  They just need a place to drink beer, cook food, do laundry, take a shower and sleep; in that order.

Originally posted by @Paul Sandhu :
Originally posted by @Ken Latchers:

"Typically a 2 bedroom home can be furnished between $3000-8000"

Fantasy

 I must live in a fantasy world.  My STRs are furnished from estate auctions.  What I don't buy at auction, I buy at Wal Mart (linens, cookware, utensils, etc).

Washer $75.

Dryer $75.

Stove $100.

Fridge $100.

2 recliners $50.

Tables and lamps $50.

Dining table and chairs $50.

2 bedroom suites $300.

2 old style televisions, free.

That's $800.

Probably spend $400 at Wal Mart for soft goods.

Finally my biggest single expense is the Smart TV for the living room, $250.

My tenants work 10-12 hours a day, 6-7 days a week.  They just need a place to drink beer, cook food, do laundry, take a shower and sleep; in that order.

 What do you do about mattresses? I assume your $150 bedrm suites don’t come with a good quality mattress?

In general, for everyone on here - is there a recommended mattress? I know a lot of people recommend the Roku TCL 4k TVs for like $250-$350, which seems like a great buy. I’m wondering if people on here have a recommended mattress that is also high quality yet reasonably priced like that TV

Originally posted by @Paul T. :

@Eric P. Can't you get mattresses on Wayfair for pretty cheap?

 Thanks, gonna look into that. Also, does anyone use memory foam mattresses in VRs? I’ve never stayed in a hotel or Airbnb that has memory foam - I think I’d be pretty annoyed if I did. Aren’t they meant to contour to the sleeper (hence the word memory) which doesn’t work too well when the sleeper changes every night?

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