Airbnb Arbitrage: Renting vs Buying

Account Closed · 2019-04-15T00:07:26-07:00

When people think about starting an Airbnb business one of the first excuses that comes to mind is not having enough capital to buy one or multiple properties. I'm writing this post to dispel the belief that you need to own a property to run a successful Airbnb business and to also prove that renting is more profitable. Buying A PropertyStarting Capital: $25,000Purchase Price: $200,000Down Payment: $20,000 (10% = best case scenario)Furniture & Admin Startup Costs: $3,000P&I, PMI, Taxes, Etc: $1,250/monthBusiness Expenses: $750/monthRevenue: $3,000/monthCashflow: $1,000Rental ArbitrageStaring Capital: $25,000Purchase Price: $0.00Down Payment: $500 security depositAdmin Startup Costs: $1,500 (using a furnished apartment & not including rent)Rent & Utilities: $1,450/monthBusiness Expenses: $750/monthRevenue: $3,000/monthCashflow: $800Total Capital Used: $4,200Leftover Capital: $20,800So as you can see you made a little less with the rental arbitrage model however you also have $20,800 leftover in your pocket. You can now take this capital and do the same thing with 4 more properties each making $800/month cashflow. $800 x 5 = $4,000/month cashflow for the same amount of capital you used to buy ONE property. But not only do you have more upside you have less "potential" downside. What happens if the property you bought isn't performing? what if the neighborhood goes south? what if your AC blows out or your roof needs to be repaired? With rental arbitrage you get all the upside without the downside of owning a huge liability. A smart thing to do would be to have an escape clause in your rental agreements that allows you to plan for unexpected problems with the performance of your property so you don't get trapped. To be honest the numbers on the rental example are a little higher than normal. You could actually acquire a new rental property for much less than that by finding motivated owners and negotiating better terms. You might be able to get into a new property for $500 if you know how to cut and slice the deal the right way.Thanks!

John UnderwoodPro Member

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

7y

@Account Closed The problem with the rental model is that the owner has control over the situation in that they can decide to stop renting and possibly start doing an STR if they think you are making too much money.

The plus side to the rental model is that if they change the laws to prohibit STR at least you don't own the house and mortgage long term.

I got my VRBO up and running for pretty inexpensively by finding good used furniture and then replacing it with profits once I was up and running.

I am also getting much more than 3k a month as my lake house rents for top dollar and VRBO connects me with the people that can afford to pay and stay at a nice Lake front house for their vacation.

7 Reply

Paul Sandhu

Investor · The worst town to live in, KS · Member since 2016 · 4k+ posts · 4k+ votes

7y

We pay cash for our STRs, we own them outright before the utilities are even turned on. The downside for renting a property to Airbnb is that if occupancy is less than expected, you are still on the hook for the lease payment. When you own them free and clear, the only things that we are on the hook for are utilities. I might add that in certain markets 6 continuous months of gross rent will pay for the purchase price of a house. It can take 7-10 months to get 6 months of rent.

That's the case in my town. But nobody comes here for a vacation. My renters are refinery contractors; welders, pipefitters, boilermakers and other such ruffians. People that if you saw down the aisle of a grocery store, you would skip that aisle until they were gone.

2 Reply

Account Closed

OP

Investor · United States · Member since 2018 · 565 posts · 356 votes

7y

Originally posted by @John Underwood:

@Account Closed The problem with the rental model is that the owner has control over the situation in that they can decide to stop renting and possibly start doing an STR if they think you are making too much money.

The plus side to the rental model is that if they change the laws to prohibit STR at least you don't own the house and mortgage long term.

I got my VRBO up and running for pretty inexpensively by finding good used furniture and then replacing it with profits once I was up and running.

I am also getting much more than 3k a month as my lake house rents for top dollar and VRBO connects me with the people that can afford to pay and stay at a nice Lake front house for their vacation.

Great point John,

The owners do have control once the legally binding agreement we signed together runs out. After that if they want to change things then that's up to them. However, what I've found is that most property owners are trying to build their net worth and rental income by expanding their portfolio. The great thing about renting to someone who does Airbnb is that their property is in top shape year round other wise it wouldn't rent. Also many owners are completely ok with the fact that someone doing Airbnb is making more money than them because they get to rent to a solid tenant. Everybody's values are different this is why people are able to raise millions of dollars in real estate syndications. One at first might think "why would someone provide their hard earned capital to earn a preferred return while the General Partner rakes in all the cashflow above that". But the answer is simple. The passive investors don't want the responsibility of operating the property. They just want cashflow and appreciation. The same concept goes for this model as well.

Also you have to look at the owners as your team members. You're not "renting from them" you're helping them expand their portfolio. If they want to acquire a new property they know that they will have a long term reliable tenant to who will pick it up immediately...

As for $3K/month you're right. I'm just being conservative with the numbers because most people probably wouldn't believe me if I said the properties are actually doing $7,000 - $9,000/month per home.

Thanks!

0 Reply

Andrew Ziebro

Investor · Cleveland, OH · Member since 2016 · 25 posts · 36 votes

7y

I don't know if I trust the arbitrage model. I don't like not having control. Also, you're not paying down the property and getting any equity. Lots of upsides to buying the property. The last one we did we got in for NO cash invested. Acquisition, rehab/furnishing, etc. was all done by private lender and seller carry back financing. So our cash on cash return is infinite on it. House cashflowed from 3 weeks after purchase, and will be paid off in 5 years.

2 Reply

Account Closed

Rental Property Investor · Devon, PA · Member since 2016 · 28 posts · 22 votes

7y

I bought a property to rent on Airbnb recently and wish I fully understood the arbitrage model before I bought it.

I’m currently in the process of setting up an arbitrage unit and will probably sell the house I bought in a few years after I’ve built up enough equity to make selling worth it.

2 Reply

James Clifford

Los Angeles, CA · Member since 2018 · 23 posts · 14 votes

7y

From my experience, arbitrage operators would love to own but lack the capital and are using arbitrage to get to ownership.

The lease arbitrage game in multifamily buildings has fierce competition in the best major markets. The biggest players in the lease arbitrage world (Stay Alfred, Sonder etc.) have already formed solid relationships with large multifamily management firms and developers and their relationsips usually include exclusivity clauses locking other operators out of that building.

The combined risk of local regulation and the reality limited inventory opportunities make it difficult to scale a lease arbitrage model to a size that really cashflows.

2 Reply

Account Closed

OP

Investor · United States · Member since 2018 · 565 posts · 356 votes

7y

Originally posted by @Andrew Ziebro:

I don't know if I trust the arbitrage model. I don't like not having control. Also, you're not paying down the property and getting any equity. Lots of upsides to buying the property. The last one we did we got in for NO cash invested. Acquisition, rehab/furnishing, etc. was all done by private lender and seller carry back financing. So our cash on cash return is infinite on it. House cashflowed from 3 weeks after purchase, and will be paid off in 5 years.

Intersting point Andrew,

If your goal is to build equity in a home then this model may not be for you. If your goal is to own/build equity in a "business" that can be sold on a multiple time EBITDA and make a ton of cashflow than this model is perfect for you.

As for control you have a legally binding agreement called a lease between you and your property owner that can be as long as you want.

2 Reply

Account Closed

OP

Investor · United States · Member since 2018 · 565 posts · 356 votes

7y

Originally posted by @Account Closed:

I bought a property to rent on Airbnb recently and wish I fully understood the arbitrage model before I bought it.

I’m currently in the process of setting up an arbitrage unit and will probably sell the house I bought in a few years after I’ve built up enough equity to make selling worth it.

Hopefully you can at the very least break even on it.

What are the main reasons you now prefer arbitrage vs buying?

0 Reply

Account Closed

OP

Investor · United States · Member since 2018 · 565 posts · 356 votes

7y

Originally posted by @James Clifford:

From my experience, arbitrage operators would love to own but lack the capital and are using arbitrage to get to ownership.

The lease arbitrage game in multifamily buildings has fierce competition in the best major markets. The biggest players in the lease arbitrage world (Stay Alfred, Sonder etc.) have already formed solid relationships with large multifamily management firms and developers and their relationsips usually include exclusivity clauses locking other operators out of that building.

The combined risk of local regulation and the reality limited inventory opportunities make it difficult to scale a lease arbitrage model to a size that really cashflows.

James, the reason my friends and I love the arbitrage model is because it makes a ton of cashflow, without the liability of owning a home, adaptability and ease of expansion. I don't own a home and never plan to unless it's way under market from a foreclosure and then I'd probably just sell the contract.

In my experience the local regulation is not enforced and easily neutralized with following local laws and paying tax. When it comes to inventory being limited that's not something I've heard before. And this business is certainly not difficult to cashflow as you can see in the case study and comment below that about $9k/month.

0 Reply

Account Closed

Rental Property Investor · Devon, PA · Member since 2016 · 28 posts · 22 votes

7y

Originally posted by @Account Closed:

I bought a property to rent on Airbnb recently and wish I fully understood the arbitrage model before I bought it.

I’m currently in the process of setting up an arbitrage unit and will probably sell the house I bought in a few years after I’ve built up enough equity to make selling worth it.

Hopefully you can at the very least break even on it.

What are the main reasons you now prefer arbitrage vs buying?

I’m cashflowing 2k/month on it after expenses so it’s not that bad all things considered. But I’m in a very special market that is perfect for Airbnb.

The reason I have regret is that I now understand how much faster you can expand with the arbitrage model. Also if things ever slow down in my market I’m stuck with the property until I can sell....

2 Reply

Account Closed

OP

Investor · United States · Member since 2018 · 565 posts · 356 votes

7y

Originally posted by @Account Closed:

I bought a property to rent on Airbnb recently and wish I fully understood the arbitrage model before I bought it.

I’m currently in the process of setting up an arbitrage unit and will probably sell the house I bought in a few years after I’ve built up enough equity to make selling worth it.

Hopefully you can at the very least break even on it.

What are the main reasons you now prefer arbitrage vs buying?

I’m cashflowing 2k/month on it after expenses so it’s not that bad all things considered. But I’m in a very special market that is perfect for Airbnb.

The reason I have regret is that I now understand how much faster you can expand with the arbitrage model. Also if things ever slow down in my market I’m stuck with the property until I can sell....

Brilliant... that's exactly the case I'm trying to make. If someone has $10,000 sitting in the bank and they want to get into real estate investing Airbnb is THE way to go. Most people are literally sitting on a gold mine they just don't... or won't, see it.

Thanks.

1 Reply

Jason D.

Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes

7y

@Jason Allen I've had this discussion before.

It can be a great way to make money, but while you're collecting a paycheck, the owner is building wealth that will last a lifetime.

You're only taking advantage of one piece of the pie, cashflow. You're losing out on tax benefits, loan paydown, and appreciation.

3 Reply

Account Closed

OP

Investor · United States · Member since 2018 · 565 posts · 356 votes

7y

Originally posted by @Jason D.:

@Jason Allen I've had this discussion before.

It can be a great way to make money, but while you're collecting a paycheck, the owner is building wealth that will last a lifetime.

You're only taking advantage of one piece of the pie, cashflow. You're losing out on tax benefits, loan paydown, and appreciation.

So that's one way of looking at it if this is all you do. Personally I take all of my money and shovel it into multifamily apartments which get all of those benefits.

I personally think that the cashflow is more valuable than the equity in a single family home which can fluctuate based on the market comps. That doesn't sound like a place I want my net worth to build.

Something many people may not realize is that you're not just taking the cashflow piece of the pie. You're building a legitimate business which much like commercial real estate is valued based on none other than cashflow or EBITDA depending on your analysis. So a business that produces a very doable $10,000/month > $120,000/year X a 2.7 multiple is worth $324,000. That's just an example and it would be worth much more based on EBITDA. This IS net worth, this IS equity and best of all instead of making $200 bucks a month with a single family rental you're making thousands with each property.

But I get it... more money is not everyone's cup of tea. That's fine.

Thanks Jason!

2 Reply

Jason D.

Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes

7y

@Jason Allen I know you're not going to like this opinion, but your not building a legitimate business, because all you have is income with a huge tax liability. Few people would buy a business with a 50% tax rate attached to it.

You're buying real estate with the profits, so you know that owning is more advantageous.

Sounds like you are very successful, keep at it!

1 Reply

Tsvetomir "C" NikolovPro Member

Rental Property Investor · Bar Harbor, ME · Member since 2016 · 20 posts · 13 votes

7y

I think that model works in certain markets and in others doesn't.
We are located in small town in Maine- Bar Harbor
I end up buying a ready to rent house (due family reasons) that went 2 weeks after closing date on Airbnb we are 6 weeks in and already have enough bookings to cover mortgage expenses (incl. income tax) for the year all in all this is ~ 60 days booked.
Season ends in late October and we are hoping for at least another 30 days booked, I know it is not ideal, but being first time host in such area with no review is a hassle. We made the property as attractive as possible and we have some more to do with spring upon us.

Property numbers:
Purchase price 397k
Down 20% conventional ~ 80K
By end of May after adding some furniture, garden and landscaping we will have 20K in improvements.
All in all 100k invested.

Expenses:
P&I insurance etc. 2k a month.
Bills about 300 a month.
Airbnb license 250 annual.

Income so far:
Expected 26k in booked reservations and more to come.

By end of the year I will have positively cash flowing property with over 100k equity build into it.
I wouldn't have any of that if arbitrage but it would be very lucrative.

On back ground we are trying to get a garage and small apartment above added to the same piece of land and refi by end of the year. It seems doable but a bit complicated since it requires upgrading septic system. I am contractor as a side geek so a lot of the work I do myself.

My two cents from my story.

[email protected]

1 Reply

Myka Artis

Rental Property Investor · Arlington, TX · Member since 2016 · 706 posts · 611 votes

7y

@Account Closed Sounds like I need you on my podcast. I'll PM you about that but I will say one thing that I notice most arbitragers forget when comparing buying vs arbitraging. They don't look at the market in totality. I figured this out my first few months doing arbitrages. I personally suggest doing arbitrages in sellers markets and buying in buyers markets. I do arbitrages globally so this helps me build the capital to stay ready to buy. Ex: I have several arbitrages in Dallas, TX. It was a sellers market a few months ago and a few arbitragers missed the window to buy because they tied up too much of their money in arbitraging. Dallas has now been saturated with STR's and prices are dropping so I have moved into buying out of state in a buyers markets and only doing arbitrages in Texas to replace leases that are coming to an end. Great thread though. I'll be sending you a PM.

3 Reply

Account Closed

OP

Investor · United States · Member since 2018 · 565 posts · 356 votes

7y

Originally posted by @Jason D.:

@Jason Allen I know you're not going to like this opinion, but your not building a legitimate business, because all you have is income with a huge tax liability. Few people would buy a business with a 50% tax rate attached to it.

You're buying real estate with the profits, so you know that owning is more advantageous.

Sounds like you are very successful, keep at it!

That's an interesting point Jason,

How would you define a legitimate business?

Also my tax rate isn't 50%... The hotel industry as a whole is much higher than airbnb. However industries such as steel, advertising, recreation and alcoholic beverages pay upwards of 40% and they are bought and sold all the time.

Anyways... we've all got our strategies I guess.

0 Reply

Account Closed

OP

Investor · United States · Member since 2018 · 565 posts · 356 votes

7y

Originally posted by @Tsvetomir "C" Nikolov:

I think that model works in certain markets and in others doesn't.
We are located in small town in Maine- Bar Harbor
I end up buying a ready to rent house (due family reasons) that went 2 weeks after closing date on Airbnb we are 6 weeks in and already have enough bookings to cover mortgage expenses (incl. income tax) for the year all in all this is ~ 60 days booked.
Season ends in late October and we are hoping for at least another 30 days booked, I know it is not ideal, but being first time host in such area with no review is a hassle. We made the property as attractive as possible and we have some more to do with spring upon us.

Property numbers:
Purchase price 397k
Down 20% conventional ~ 80K
By end of May after adding some furniture, garden and landscaping we will have 20K in improvements.
All in all 100k invested.

Expenses:
P&I insurance etc. 2k a month.
Bills about 300 a month.
Airbnb license 250 annual.

Income so far:
Expected 26k in booked reservations and more to come.

By end of the year I will have positively cash flowing property with over 100k equity build into it.
I wouldn't have any of that if arbitrage but it would be very lucrative.

On back ground we are trying to get a garage and small apartment above added to the same piece of land and refi by end of the year. It seems doable but a bit complicated since it requires upgrading septic system. I am contractor as a side geek so a lot of the work I do myself.

My two cents from my story.

It sounds like you guys are crushing it. Starting off with one property to learn the business whether your buy it or rent it is a great idea. Once you learn the business you can decide whether you want to scale out and acquire more properties or not.

I would not be against buying if and only if the property were bought much under market value in a forclosure, preforclosure, etc.

Good luck!

1 Reply

Account Closed

OP

Investor · United States · Member since 2018 · 565 posts · 356 votes

7y

Originally posted by @Myka Artis:

@Account Closed Sounds like I need you on my podcast. I'll PM you about that but I will say one thing that I notice most arbitragers forget when comparing buying vs arbitraging. They don't look at the market in totality. I figured this out my first few months doing arbitrages. I personally suggest doing arbitrages in sellers markets and buying in buyers markets. I do arbitrages globally so this helps me build the capital to stay ready to buy. Ex: I have several arbitrages in Dallas, TX. It was a sellers market a few months ago and a few arbitragers missed the window to buy because they tied up too much of their money in arbitraging. Dallas has now been saturated with STR's and prices are dropping so I have moved into buying out of state in a buyers markets and only doing arbitrages in Texas to replace leases that are coming to an end. Great thread though. I'll be sending you a PM.

Absolutely true, most arbitragers don't do any research at all in general. They just find a house they think will work and wing it. I haven't considered your point about buyers and sellers markets and how that would effect one's strategy. I'll have to look into that.

Thanks!

1 Reply

AJ Vanderhorst

Property Manager · Kansas City, MO · Member since 2018 · 35 posts · 17 votes

7y

Fascinating topic. I’ve thought about this a lot and haven’t seen much posted on it, so thanks.

I STR several units that I own and also have an arbitrage SFH that's been active since December of last year.

For me, I’d prefer to own and build equity, but know from personal experience that’s not always possible.

With my latest STR, I've learned that due to my market (Kansas City) being saturated, it's taken about 4 months to be cashflow positive while accumulating 5-star reviews. Based on my previous experience with STRs, I expected my projected numbers to materialize more quickly.

So in markets like mine, your start-up costs ought to include a buffer for 3-6 months of negative cashflow or basically breaking even. Hoping to see my own numbers take a step forward in the next couple months now that I have 10+ strong reviews.

If and when that happens, I’ll be ready to rinse and repeat while I work to get enough leverage to buy my next property.

1 Reply

Account Closed

Rental Property Investor · Devon, PA · Member since 2016 · 28 posts · 22 votes

7y

Another point that no one has brought up is that you can quit your job a lot faster with arbitrage units - this is a big motivation for me as I actively dislike my current day job.

Buying for appreciation could be a longer term play, but it’s not going to help you dramatically change your employment situation in a short period of time.

I would also like to add that I am pursuing arbitrage units in an area where single family homes can cost as much as 3 million dollars. I’ve bought in a totally different part of the country where homes cost 200k. I agree that the market should dictate where each type of strategy is employed.

2 Reply

Account Closed

OP

Investor · United States · Member since 2018 · 565 posts · 356 votes

7y

Originally posted by @AJ Vanderhorst:

Fascinating topic. I’ve thought about this a lot and haven’t seen much posted on it, so thanks.

I STR several units that I own and also have an arbitrage SFH that's been active since December of last year.

For me, I’d prefer to own and build equity, but know from personal experience that’s not always possible.

With my latest STR, I've learned that due to my market (Kansas City) being saturated, it's taken about 4 months to be cashflow positive while accumulating 5-star reviews. Based on my previous experience with STRs, I expected my projected numbers to materialize more quickly.

So in markets like mine, your start-up costs ought to include a buffer for 3-6 months of negative cashflow or basically breaking even. Hoping to see my own numbers take a step forward in the next couple months now that I have 10+ strong reviews.

If and when that happens, I’ll be ready to rinse and repeat while I work to get enough leverage to buy my next property.

How's your SFH from last December doing?

You're absolutely right about some markets being slower than others which cut into your potential profits. I do a very strong market research process before I commit. I can share some point with you on PM if you'd like.

Good luck!

2 Reply

Account Closed

OP

Investor · United States · Member since 2018 · 565 posts · 356 votes

7y

Originally posted by @Account Closed:

Another point that no one has brought up is that you can quit your job a lot faster with arbitrage units - this is a big motivation for me as I actively dislike my current day job.

Buying for appreciation could be a longer term play, but it’s not going to help you dramatically change your employment situation in a short period of time.

I would also like to add that I am pursuing arbitrage units in an area where single family homes can cost as much as 3 million dollars. I’ve bought in a totally different part of the country where homes cost 200k. I agree that the market should dictate where each type of strategy is employed.

Excellent point Jake,

I've always said that being successful in business isn't really that hard if you understand the fundamentals. However starting and scaling a business when you have a 9 to 5 job is almost impossible if you're not seriously efficient with your time.

Being able to quit your job and go full time into your business is essential to create massive success. The sooner you can get in the game full time the sooner you'll become successful.

Im interested in your strategy with the 3 million dollar homes... How has that affected your arbitrage business?

0 Reply

Penny Griffus

MI (michigan) · Member since 2019 · 9 posts · 4 votes

7y

@Jason Allen

This seems brilliant. I have been researching and trying to build capital for months to purchase a Florida VRBO home in the perfect location...East Coast versus West Coast etc. for months. This idea sounds amazing but I have to wonder how difficult is it to find a rental agreement that will let you sublease? Is this common? I may now switch gears towards this to get my business off the ground. I live in Michigan but was planning to do STR's in Florida although I would do them wherever most lucrative so I'm really open to location.

2 Reply

Tsvetomir "C" NikolovPro Member

Rental Property Investor · Bar Harbor, ME · Member since 2016 · 20 posts · 13 votes

7y

Originally posted by @Penny Griffus:

@Jason Allen

This seems brilliant. I have been researching and trying to build capital for months to purchase a Florida VRBO home in the perfect location...East Coast versus West Coast etc. for months. This idea sounds amazing but I have to wonder how difficult is it to find a rental agreement that will let you sublease? Is this common? I may now switch gears towards this to get my business off the ground. I live in Michigan but was planning to do STR's in Florida although I would do them wherever most lucrative so I'm really open to location.

Personal experience from FL west coast- specifically Naples FL majority is community keep in mind they probably won't allow that at all. But there few spots with elderly owners trying to get out you may have luck even to get afordable owner financing if you stay and search long enough.

This might be my next location in near future.

[email protected]

1 Reply

Airbnb Arbitrage: Renting vs Buying

Airbnb Arbitrage: Renting vs Buying

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