Rental Arbitrage -how to do airbnb without BUYING

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Rental Arbitrage -how to do airbnb without BUYING

Joe Kim
Rental Property Investor · SF Bay Area, CA · Member since 2014 · 352 posts · 543 votes

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!

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Mel Hignell
Property Manager · Portland, OR · Member since 2018 · 46 posts · 108 votes
7y

@Paul Sandhu while this may be enough for the particular traveler you’re renting to, this is nowhere near enough to furnish a house that the typical airbnb traveler has come to expect.

We have a list of 185 items that go into each rentals we design, many of them multiple times. Promoting the “spend as little as possible now and just deliver what they need” model is a money waster. We recommend people do it once and do it right. Travelers deserve—and expect—to be comfortable in their space. An unhappy traveler may leave a negative review, which has a direct impact on profit and listing standing.

For those who want to do this seriously, don’t cheap out on the furnishings. Buy quality so you’re not replacing every year. Buy white, cotton linens you can bleach (skip the polyester, it doesn’t breathe). Buy duvet covers you can launder with each flip. Don’t skimp on the mattress - everyone in the world wants a good night’s sleep.

A well-furnished/designed home makes more money, always.

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  • Peter Sanchez
    Real Estate Investor · Washington, DC · Member since 2014 · 236 posts · 328 votes
    7y
    Originally posted by @Mindy Jensen:
    Originally posted by @Eric P.:
    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?

    It conforms to whatever is on the bed at that time, so it conforms to YOUR body when you are laying there, pops back into (flat) shape. They're actually quite comfortable.

    I think they are very comfortable, but they hold heat in.  It's probably fine for people who feel cold all the time, but I don't like it. 

    0Reply
  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    7y
    Originally posted by @Peter Sanchez:
    Originally posted by @Mindy Jensen:
    Originally posted by @Eric P.:
    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?

    It conforms to whatever is on the bed at that time, so it conforms to YOUR body when you are laying there, pops back into (flat) shape. They're actually quite comfortable.

    I think they are very comfortable, but they hold heat in.  It's probably fine for people who feel cold all the time, but I don't like it. 

    This is true. I'm cold all the time so I love it. 

    [email protected]Podcast Guest on Show #261
    BiggerPockets
    1Reply
  • Ken Latchers
    Hatfield, PA · Member since 2012 · 1k+ posts · 629 votes
    7y
    My definition of furnishing a 2 bedroom includes prepping it. Floors, painting, repairs, needed improvements, etc. As I described earlier. Unexpected rot, water infiltration, faucets, Dishwashers and a lot of other stuff. 


    I have 6 units I worked on. I passed $70,000 already and I did the used furniture, garage sales, Craigslist workers, etc as much as possible 

    And not sure if your clientele expect "nice" if they are roughnecks off Craigslist. 

    Airbnb types are expecting NICE. 

    People here are essentially talking as if grab house off the market, throw furniture in, and you are ready to arb. They generally need a lot of work after acquiring and I am not talking upscale. 

    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.

    1Reply
  • Account Closed
    Specialist · Denver, CO · Member since 2018 · 40 posts · 35 votes
    7y

    Did you see the news about "Lyric"?  Airbnb just invested $160 million in this company that is doing rental arbitrage.  Sondor and StayAlfred are two other well-backed arbitrage startups.  I have been doing furnished monthly rentals for over 20 years and I can appreciate the potential income.  I would just advise that you spend time monthly watching business travel trends and watch as this type of rental option is getting more crowded so that you don't get caught with rentals that sit empty.  

    3Reply
  • Paul T.
    Investor · Fairfax, VA · Member since 2017 · 57 posts · 22 votes
    7y

    @Account ClosedWow, didn't realize big players were doing this too! Thanks for the heads up! What else are you doing to watch this market?

    0Reply
  • Account Closed
    Specialist · Denver, CO · Member since 2018 · 40 posts · 35 votes
    7y

    Watching this market is my full-time job :)  I watch trends from the user group as well as the supply group.  There are a lot of changes happening in the market.  As a former President for the Corporate Housing providers association and having spent 8 years conducting and writing the CHBO annual corporate housing real estate report, you can say I am a data geek.  Over the years 40% of the occupants who stay in corporate housing are connected with a corporate relocation so that is an important industry to watch.  I also track the extended stay lodging industry as a basis for supply data.

    4Reply
  • Dieggo Goncalves
    New to Real Estate · Marietta, GA · Member since 2018 · 169 posts · 40 votes
    7y
    That sounds very interesting! What are some sources for news about the industry?

    Thanks in advance.


    Originally posted by @Account Closed:

    Watching this market is my full-time job :)  I watch trends from the user group as well as the supply group.  There are a lot of changes happening in the market.  As a former President for the Corporate Housing providers association and having spent 8 years conducting and writing the CHBO annual corporate housing real estate report, you can say I am a data geek.  Over the years 40% of the occupants who stay in corporate housing are connected with a corporate relocation so that is an important industry to watch.  I also track the extended stay lodging industry as a basis for supply data.

    0Reply
  • Mel Hignell
    Property Manager · Portland, OR · Member since 2018 · 46 posts · 108 votes
    7y

    @Paul Sandhu while this may be enough for the particular traveler you’re renting to, this is nowhere near enough to furnish a house that the typical airbnb traveler has come to expect.

    We have a list of 185 items that go into each rentals we design, many of them multiple times. Promoting the “spend as little as possible now and just deliver what they need” model is a money waster. We recommend people do it once and do it right. Travelers deserve—and expect—to be comfortable in their space. An unhappy traveler may leave a negative review, which has a direct impact on profit and listing standing.

    For those who want to do this seriously, don’t cheap out on the furnishings. Buy quality so you’re not replacing every year. Buy white, cotton linens you can bleach (skip the polyester, it doesn’t breathe). Buy duvet covers you can launder with each flip. Don’t skimp on the mattress - everyone in the world wants a good night’s sleep.

    A well-furnished/designed home makes more money, always.

    10Reply
  • Account Closed
    Investor · United States · Member since 2018 · 565 posts · 356 votes
    7y
    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 post! I'm glad to not be the only one representing the rental arbitrage model.

    A NOI of $1,000 is a great goal to aim for. You may very well be above this but this is a good base target especially when you're getting started.

    You are spot on about being transparent with your landlord and other team members. You don't want to do this behind someone's back, that will only lead to problems. If someone isn't into the business model then move on and find someone who is. of course knowing how to sell it can change this problem.

    I agree to not skip out on good amenities. People won't necessarily notice if you have them but they will notice if you don't have them. 

    1Reply
  • Dieggo Goncalves
    New to Real Estate · Marietta, GA · Member since 2018 · 169 posts · 40 votes
    7y
    I completely agree with you. 
    "Buy quality so you’re not replacing every year" "everyone in the world wants a good night’s sleep."
    100%.
    Could you please share the list of items?

    Thanks in advance.

    Dieggo Goncalves


    Originally posted by @Mel Hignell:

    @Paul Sandhu while this may be enough for the particular traveler you’re renting to, this is nowhere near enough to furnish a house that the typical airbnb traveler has come to expect.

    We have a list of 185 items that go into each rentals we design, many of them multiple times. Promoting the “spend as little as possible now and just deliver what they need” model is a money waster. We recommend people do it once and do it right. Travelers deserve—and expect—to be comfortable in their space. An unhappy traveler may leave a negative review, which has a direct impact on profit and listing standing.

    For those who want to do this seriously, don’t cheap out on the furnishings. Buy quality so you’re not replacing every year. Buy white, cotton linens you can bleach (skip the polyester, it doesn’t breathe). Buy duvet covers you can launder with each flip. Don’t skimp on the mattress - everyone in the world wants a good night’s sleep.

    A well-furnished/designed home makes more money, always.

    0Reply
  • Paul Sandhu
    Investor · The worst town to live in, KS · Member since 2016 · 4k+ posts · 4k+ votes
    7y

    @Mel Hignell Let's see pictures of what you have.  Here's my ad from 2 days ago.  Notice there are 2 vacancies listed, everything else is rented.  I have no complaints that my houses are not furnished enough.  I would dare say that my biggest house is probably furnished more than your own residence.  Does it have a jacuzzi, gas and charcoal grill, 2 washers, 3 dryers, 4 HDTVs and a kegorator?

    Craigslist ad

    0Reply
  • Mel Hignell
    Property Manager · Portland, OR · Member since 2018 · 46 posts · 108 votes
    7y

    Hi, Dieggo! 

    Thank you, kindly. 

    Our list has been hand tailored over the eight years I’ve been designing vacation rentals, and is one of the most valuable items in the company. While I’m not able to share it at this time, i do recommend starting a list of the items in your home and placing value to each based on common pricing. The big stuff (sofas, tables, chairs, beds) are the easy items to account for and make up just a portion of the budget. It’s the small things—every potato peeler, cheese grater, curtain, painting, throw blanket, Qtip, Bluetooth stereo, wine glass, rug) that makes up a vast majority of money spent, and is the type of item that sets a rental apart. Due to the influx of rentals on the market, now, those of us who cater to the traveler’s experience, and budget for yearly upgrades, too—are who continue to make money in the slow times, which even international cities (we have a house in the mission district of San Francisco) now face. 

    We also encourage people to keep in mind that time truly is money in this industry: the faster you're on the market the greater your ROI. As a for instance, our team is able to take an empty one-bedroom house to a full-blown rental, including initial clean and photos, in ten days or less. This is a massive value add, so make a plan and stick to it. You don't want to be two months down the road and still shopping for towels, which we've seen happen every time someone who hasn't designed hundreds of rentals says "I can do it for less". I've never seen it happen, but am happy to help guide a bit in the hopes someone will.

    Good luck!  

    3Reply
  • Mel Hignell
    Property Manager · Portland, OR · Member since 2018 · 46 posts · 108 votes
    7y

    @Paul Sandhu.

    Yes, in my opinion my homes have more amenities than any other I’ve been to, and as someone who is service-based, I wouldn’t have it any other way. People often make the mistake of saying “well nobody is complaining so it’s all good.” Except there’s a quantifiable return on investment to doing it better, especially as the market becomes more saturated.

    Here are a couple photos of one of my personal rentals in Portland.

    https://imgur.com/gallery/gVQ3pdY

    https://imgur.com/gallery/eKDoy1a

    https://imgur.com/a/MFLhV5i

    https://imgur.com/gallery/ROvvxIg

    https://imgur.com/gallery/6ICkF7S

    I’m sure you’ll agree it looks comfortable.

    And keep in mind, vacancy rates can work against you. If you’re filling too quickly, it’s because your pricing is too low. Your highest weekly rate is what I charge nightly during peak season, and I would never, ever set a rate that doesn’t fluctuate with seasonality, holidays, day of week, etc.

    I’m not here to say you’re doing anything wrong. I’m here to help those who want to get into this business do everything they can to keep the everyday traveler’s opinion of vacation rentals high, to the monetary benefit of all of us.

    5Reply
  • Ken Latchers
    Hatfield, PA · Member since 2012 · 1k+ posts · 629 votes
    7y
    I totally agree. Paul has a very specialized Market that in my opinion has nothing to do with the general Airbnb Market

    above I am fighting the concept that you can equip and furnish an Airbnb for a couple thousand dollars. I do the garage sales and the used furniture stores and the sales at Lowes or elsewhere but everything I pick is in decent condition and it looks pretty nice

    I have no idea why people think of $75 refrigerator and $20 dresser that looks the part makes you a true competitor in the short term rental market

    in most parts of the country, a Goodwill bachelor pad will earn the reviews and revenue it deserves

    Originally posted by @Mel Hignell:

    @Paul Sandhu.

    Yes, in my opinion my homes have more amenities than any other I’ve been to, and as someone who is service-based, I wouldn’t have it any other way. People often make the mistake of saying “well nobody is complaining so it’s all good.” Except there’s a quantifiable return on investment to doing it better, especially as the market becomes more saturated.

    https:// to say you’re doing anything wrong. I’m here to help those who want to get into this business do everything they can to keep the everyday traveler’s opinion of vacation rentals high, to the monetary benefit of all of us.

    3Reply
  • Paul T.
    Investor · Fairfax, VA · Member since 2017 · 57 posts · 22 votes
    7y

    Can anyone share more insight into how to estimate expenses for this model? How much of a spread between what you rent from the owner and what you make from the short-term rental should you seek to be safe?

    I have an opportunity to rent a SFH for $2k/month and I project airbnb income to be about $4k/month conservatively. I am seeing $200-$400+ per night and 15-20 nights per month in my comparables. $200/night is for an older house and crappy decor/bad listing pictures and description, and this house I am dealing with is new and very nice.

    I am working on estimating how much utilities and maintenance will cost. But I don't know how much insurance, airbnb commission, consumables (soaps, paper towels, etc.) will cost. 

    0Reply
  • Penny Griffus
    MI (michigan) · Member since 2019 · 9 posts · 4 votes
    7y

    Do you all manage your own property bookings or pay a company such as Evolve?  It seems it would be nice to have it all set with a company but would take a large chunk of profit.

    0Reply
  • Paul Sandhu
    Investor · The worst town to live in, KS · Member since 2016 · 4k+ posts · 4k+ votes
    7y

    I do all the marketing and promotional work.  People contact me directly when they want to book a place.  The only outside party that gets a portion of the rent is Square, whenever someone pays with a credit card.  I don't like Square.  They take several thousand dollars a year from me.  I could buy a fancy Italian shotgun each year for what Square takes.

    0Reply
  • Ken Latchers
    Hatfield, PA · Member since 2012 · 1k+ posts · 629 votes
    7y
    Evolve is not the same as having a property manager.  You were expected to be on the ground and handling the  annoying stuff in person.  They can only deal with the telephone.  They charge you 10%  and they charge your guests  an additional high-percentage.  I consider them a huge waste of time. Not sure what something like evolve does can be handled and automated with something like a property management system such as ownerreservations or smart B&B. Quite cheaper than evolve or similars

    Originally posted by @Penny Griffus:

    Do you all manage your own property bookings or pay a company such as Evolve?  It seems it would be nice to have it all set with a company but would take a large chunk of profit.

    1Reply
  • Jay Poires
    Rental Property Investor · Los Angeles, CA · Member since 2016 · 10 posts · 9 votes
    7y

    @Dieggo Goncalves

    A good way to start a list of items for your potential properties is by simply taking an inventory of your own house making note of the things/areas you can improve upon.

    1Reply
  • Karen ChenaillePro Member
    Real Estate Agent · Sevierville, TN · Member since 2017 · 165 posts · 137 votes
    7y

    @Eric P. I buy Zinnus off Amazon. Guests love them and they are very reasonably priced. You can ship them to the unit to avoid having to move them. I. Some cities Amazon also offers mattress removal.

    1Reply
  • Karen ChenaillePro Member
    Real Estate Agent · Sevierville, TN · Member since 2017 · 165 posts · 137 votes
    7y

    @Ken Latchers. Agree! Try 15-20K.

    0Reply
  • Mel Hignell
    Property Manager · Portland, OR · Member since 2018 · 46 posts · 108 votes
    7y

    @Ken Latchers Evolve is now charging anywhere from 15-20%. Its criminal, tbh.

    My full service guest management firm charges 20-30%, depending on a number of factors.

    The “in the cloud” model is struggling. Turns out people really want to know there is human backup if/when something goes wrong with what will typically be the largest capital investment they make.

    Thank you for your responses on here. It’s a breath of fresh air to see someone who aims to cater to the guest experience, not just the cash. With one comes the other.

    1Reply
  • Kinohi Larey
    Honolulu, HI · Member since 2018 · 17 posts · 18 votes
    7y

    @Penny Griffus It's been going well! We are making very good margins. Of course not as good as some "mentors" online advertise, but still way better than If we were to purchase a property and have a mortgage. Here are some quick numbers for one of our units:

    Our rent: $2,375

    Other variable expenses (internet, toiletries, etc) ~ $120

    Our average income from STR (After service fees, cleaning fees):

    $4,750

    So we're netting over 2k a month. Pretty decent margin if you ask me :)

    1Reply
  • Ken Latchers
    Hatfield, PA · Member since 2012 · 1k+ posts · 629 votes
    7y
    1) you are not netting 2k. You left out vacation rental insurance, you left out things like furnishings and maintenance. Or replacement cost or risk.

    Also, an owner would be making a ton of equity if they owned outright. 

    2) I think this is the kind of strategy  that works better in places with high rent  and High house prices.

    I paid 135000 for 2 Townhomes that grosses 65000 a year. Is a much better deal to own these then to try to sublease. And I get all the profits for the same amount of work. And I build equity and I'm not subject to the whims of landlords or property owners who change your mind or Etc

    Originally posted by @Kinohi Larey:

    @Penny Griffus It's been going well! We are making very good margins. Of course not as good as some "mentors" online advertise, but still way better than If we were to purchase a property and have a mortgage. Here are some quick numbers for one of our units:

    Our rent: $2,375

    Other variable expenses (internet, toiletries, etc) ~ $120

    Our average income from STR (After service fees, cleaning fees):

    $4,750

    So we're netting over 2k a month. Pretty decent margin if you ask me :)

    0Reply
  • Gabriel Farfan
    Investor · Menifee, CA · Member since 2015 · 18 posts · 20 votes
    7y

    What are people doing to minimize the risk of the landlord taking his rental back once your lease ends after all the hard work in year 1?

    2Reply
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