Airbnb Arbitrage: Renting vs Buying

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Airbnb Arbitrage: Renting vs Buying

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

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 Property

Starting Capital: $25,000

Purchase Price: $200,000

Down Payment: $20,000 (10% = best case scenario)

Furniture & Admin Startup Costs: $3,000

P&I, PMI, Taxes, Etc: $1,250/month

Business Expenses: $750/month

Revenue: $3,000/month

Cashflow: $1,000

Rental Arbitrage

Staring Capital: $25,000

Purchase Price: $0.00

Down Payment: $500 security deposit

Admin Startup Costs: $1,500 (using a furnished apartment & not including rent)

Rent & Utilities: $1,450/month

Business Expenses: $750/month

Revenue: $3,000/month

Cashflow: $800

Total Capital Used: $4,200

Leftover Capital: $20,800

So 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!

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John UnderwoodPro Member

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

@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.

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AJ Vanderhorst
Property Manager · Kansas City, MO · Member since 2018 · 35 posts · 17 votes
7y
Originally posted by @Account Closed:

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!
After about 4 months, my SFH is trending in the right direction. I'm in the black, just not making what I projected. I'm expecting the listing to gain more traction as the reviews keep stacking and we head into the summer months. I did a lot of research as well. Market analysis, zip codes, property types, seasonality, etc. AirDNA was helpful for this. What I realized was the historical data I based my projections on—as well as my own past experience in KC—doesn't account for current market saturation...so in the future I'll have to be even more conservative with projections.
I'll shoot you a pm. I haven't seriously looked into long distance arbitrage, but it would be cool to take advantage of non saturated markets.
1 Reply
Account Closed
OP
Investor · United States · Member since 2018 · 565 posts · 356 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.
Penny,
do you know the Florida market? It may be hard to do your first one out of state long distance. I would generally advice against that unless you spend half the year there.
As for a sublease, technically you're not subleasing. It's not really about the rental agreement it's more about the relationship you have with the landlord. Once you find one who wants to work with you then drafting up an agreement is easy.
I think this is a great idea for you if you're trying to get started sooner than later. It's also much more profitable than purchasing a property as well.
If you have have any questions don't hesitate to PM me and I'll try to help you the best I can.
Good luck!
1 Reply
Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
7y
@Account Closed I think this is a great business assuming you are running it above board:
1. The owner needs to know the intended use and have it written into the contract. This is to avoid issues with the owner. If the lease doesn't say it, then the owner has the power and if you are not telling the owner, that is just inviting problems.
2. Have short term renter insurance that also covers damage to the property with the owner co-named as a payee. This protects you and the owner from liability.
3. Include options in your lease for extension. This is common in commercial real estate and it protects you in two ways. You can specify term, so 1 year lease with up to 3 year options. Secondly, you can specify maximum rent increases over that term. This protects your business in case the owner gets greedy and jacks rent or decides to kick you out and run their own STR.
4. Follow local legal and zoning laws. It is not a business if you are breaking the law. Have a clause in your lease that it terminates if local zoning laws restrict use as a short term rental. No business succeeds long term breaking the law.
As far as tax treatment, it is really no different than any other business income. Bonus, with the new tax cut and jobs act, you are now eligible for the 20% pass through deduction.
I would consider this a business, however not one that has real value. You are not going to be able to sell the business to anyone. It is like a single proprietor law firm. If you are the only attorney, there is not really a business to sell. You can sell your process or customer list, but that is about it.
Of course you can make money and that is why it is a business. It is just really a job long term is the point. That is why it is smart you are investing in apartments, so you can build a long term passive income source. Something that does have value and that can be sold.
As an owner, I prohibit short term rental in my properties. I just view it as too much risk. I am sure it would be fine if I found the right person, but there is just too many hacks in the STR business. I don't want to be left holding the bag for their mismanagement mistakes.
3 Reply
Account Closed
OP
Investor · United States · Member since 2018 · 565 posts · 356 votes
7y
Originally posted by @Joe Splitrock:
@Account Closed I think this is a great business assuming you are running it above board:
1. The owner needs to know the intended use and have it written into the contract. This is to avoid issues with the owner. If the lease doesn't say it, then the owner has the power and if you are not telling the owner, that is just inviting problems.
2. Have short term renter insurance that also covers damage to the property with the owner co-named as a payee. This protects you and the owner from liability.
3. Include options in your lease for extension. This is common in commercial real estate and it protects you in two ways. You can specify term, so 1 year lease with up to 3 year options. Secondly, you can specify maximum rent increases over that term. This protects your business in case the owner gets greedy and jacks rent or decides to kick you out and run their own STR.
4. Follow local legal and zoning laws. It is not a business if you are breaking the law. Have a clause in your lease that it terminates if local zoning laws restrict use as a short term rental. No business succeeds long term breaking the law.
As far as tax treatment, it is really no different than any other business income. Bonus, with the new tax cut and jobs act, you are now eligible for the 20% pass through deduction.
I would consider this a business, however not one that has real value. You are not going to be able to sell the business to anyone. It is like a single proprietor law firm. If you are the only attorney, there is not really a business to sell. You can sell your process or customer list, but that is about it.
Of course you can make money and that is why it is a business. It is just really a job long term is the point. That is why it is smart you are investing in apartments, so you can build a long term passive income source. Something that does have value and that can be sold.
As an owner, I prohibit short term rental in my properties. I just view it as too much risk. I am sure it would be fine if I found the right person, but there is just too many hacks in the STR business. I don't want to be left holding the bag for their mismanagement mistakes.
Joe,
Absolutely you need to be 100% transparent with the owner about your intentions with the property. This goes without question and not doing that will leave you in a very bad situation.
I also definitely recommend third party insurance on top of the $1 Million liability protection from Airbnb.
I love your point about the lease extensions and options. There should always be what I like to call contractual accountability between the parties because people are people. I also agree with and advise people to have several escape clauses in the event of something external negatively affecting the business, for sure.
I will have to disagree with out about this not being a real business. It definitely is a business like any other as long as of course... you created a legal entity and followed business regulation. But it is a legitimate business and it can very well be sold for millions, just ask some of the folks that have done it. I am a little confused as to why some people think this...? Maybe you can clarify what you mean.
And once you automate the business with your team, software and systems it's far from a job. In fact this entire business model can be ran from a laptop and a phone from anywhere in the world. It's completely location independent once you master the business model.
Thanks!
2 Reply
Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
7y
Originally posted by @Account Closed:

Originally posted by @Joe Splitrock:

@Account Closed I think this is a great business assuming you are running it above board:
1. The owner needs to know the intended use and have it written into the contract. This is to avoid issues with the owner. If the lease doesn't say it, then the owner has the power and if you are not telling the owner, that is just inviting problems.
2. Have short term renter insurance that also covers damage to the property with the owner co-named as a payee. This protects you and the owner from liability.
3. Include options in your lease for extension. This is common in commercial real estate and it protects you in two ways. You can specify term, so 1 year lease with up to 3 year options. Secondly, you can specify maximum rent increases over that term. This protects your business in case the owner gets greedy and jacks rent or decides to kick you out and run their own STR.
4. Follow local legal and zoning laws. It is not a business if you are breaking the law. Have a clause in your lease that it terminates if local zoning laws restrict use as a short term rental. No business succeeds long term breaking the law.
As far as tax treatment, it is really no different than any other business income. Bonus, with the new tax cut and jobs act, you are now eligible for the 20% pass through deduction.
I would consider this a business, however not one that has real value. You are not going to be able to sell the business to anyone. It is like a single proprietor law firm. If you are the only attorney, there is not really a business to sell. You can sell your process or customer list, but that is about it.
Of course you can make money and that is why it is a business. It is just really a job long term is the point. That is why it is smart you are investing in apartments, so you can build a long term passive income source. Something that does have value and that can be sold.
As an owner, I prohibit short term rental in my properties. I just view it as too much risk. I am sure it would be fine if I found the right person, but there is just too many hacks in the STR business. I don't want to be left holding the bag for their mismanagement mistakes.
Joe,
Absolutely you need to be 100% transparent with the owner about your intentions with the property. This goes without question and not doing that will leave you in a very bad situation.
I also definitely recommend third party insurance on top of the $1 Million liability protection from Airbnb.
I love your point about the lease extensions and options. There should always be what I like to call contractual accountability between the parties because people are people. I also agree with and advise people to have several escape clauses in the event of something external negatively affecting the business, for sure.
I will have to disagree with out about this not being a real business. It definitely is a business like any other as long as of course... you created a legal entity and followed business regulation. But it is a legitimate business and it can very well be sold for millions, just ask some of the folks that have done it. I am a little confused as to why some people think this...? Maybe you can clarify what you mean.
And once you automate the business with your team, software and systems it's far from a job. In fact this entire business model can be ran from a laptop and a phone from anywhere in the world. It's completely location independent once you master the business model.
Thanks!
I tried to explain using the attorney example. I understand you can run it from anywhere, but what if you unplugged for six months? A business would run without you for 6 months. Airbnb requires hosts paying daily attention to the business, which is why it is a job.
In order for a business like this to sell for millions, it would require millions in net income. That would require hundreds or maybe thousands of units. You would be managing contracts with hundreds of landlords and booking thousands of reservations. I guess this is possible, but when I hear about people doing AirBNB arbitrage by renting units, it is self managing a hand full of units.
Do you have some links to stories of people selling a business like this for millions, without owning any of the units? I am genuinely curious about this. It seems strange someone would want to buy a real estate business that has no physical assets.
0 Reply
Penny Griffus
MI (michigan) · Member since 2019 · 9 posts · 4 votes
7y
Originally posted by @Account Closed:

Originally posted by @Penny Griffus:
Account Closed
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.
Penny,
do you know the Florida market? It may be hard to do your first one out of state long distance. I would generally advice against that unless you spend half the year there.
As for a sublease, technically you're not subleasing. It's not really about the rental agreement it's more about the relationship you have with the landlord. Once you find one who wants to work with you then drafting up an agreement is easy.
I think this is a great idea for you if you're trying to get started sooner than later. It's also much more profitable than purchasing a property as well.
If you have have any questions don't hesitate to PM me and I'll try to help you the best I can.
Good luck!
Thank you for your reply. I am definitely wanting to het started sooner rather than later. I don’t really know the market that well other than just visiting, researching some VRBO options, talking with others on some short term rental Facebook pages, so not really. I have heard from several that there homes are fully booked for quite a while, in various locations. I just know I like to go there for sunshine and warmth :) I originally thought I wanted a short term rental that I could go to for a while in the winter and then rent out when I’m not there but I have changed that mindset basically to more of a business approach rather than worrying about it being a place that I want to go or stay myself. In my post I think I made it sound like I was worried about the contract or rental agreement but I think what I meant to say was is it difficult to get a landlord to agree to these terms? It seems like many landlords would right off the bat not want you to rent it out but when you said developing relationships that’s a different story where maybe you could convince them? And I would definitely like to pick your brain more on this so thanks. Coming up with the money down on a second home or vacation home has been a bit difficult since my current home that I live in, the appraisal came in to light for the refinance that I was trying to work out to make the purchase. But when I read your post and several others, that may not be such a bad thing after all.
1 Reply
Account Closed
OP
Investor · United States · Member since 2018 · 565 posts · 356 votes
7y
Originally posted by @Joe Splitrock:

Originally posted by @Account Closed:
I tried to explain using the attorney example. I understand you can run it from anywhere, but what if you unplugged for six months? A business would run without you for 6 months. Airbnb requires hosts paying daily attention to the business, which is why it is a job.
In order for a business like this to sell for millions, it would require millions in net income. That would require hundreds or maybe thousands of units. You would be managing contracts with hundreds of landlords and booking thousands of reservations. I guess this is possible, but when I hear about people doing AirBNB arbitrage by renting units, it is self managing a hand full of units.
Do you have some links to stories of people selling a business like this for millions, without owning any of the units? I am genuinely curious about this. It seems strange someone would want to buy a real estate business that has no physical assets.
Actually no one I know has personally "written" about it so I stand corrected... That's why I'm trying to shed light on this topic because so many people could get into this but they don't know what's possible.
Ah... ok. Yes, if you stopped paying attention to it for six months it would be some problems for sure, so would an apartment. However with the relationship between me and my co-host or portfolio manager that's actually debatable. I didn't realize when you said "passive income" you were leaning more towards the "mailbox money" hype form of passive income that doesn't really exist outside of being a limited partner in a real estate deal. But even that's not passive my friend as you need to find, vet and establish a relationship with the GP.
As for selling in the millions you are a little off on the numbers. So the current industry multiplier for the hotel & recreation industry around 10.51 EV/EBITDA. If you're making $350,000 EBITDA with a 3.7x multiple you've got yourself a valuation of $1,292,000. You see income, like NOI in commercial "IS VALUE = IS EQUITY = IS NET WORTH = IS SELLABLE". It's an asset. You mentioned that the business doesn't own any assets... again, not true. It may not own physical property assets, which I would argue are actually liabilities, and if you don't think so then go ask your banker whether your house is listed as an asset or a liability on their ledger. It's an asset to them, the lender, and a liability to you the owner. But are your contracts not assets? Can they not be sold? Can your portfolio not be sold? Is an entity separate from yourself that produces steady income which can be bought and sold not an asset?
Contemplate this:
2 Reply
Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
7y
Originally posted by @Account Closed:

Originally posted by @Joe Splitrock:
Originally posted by @Account Closed:

I tried to explain using the attorney example. I understand you can run it from anywhere, but what if you unplugged for six months? A business would run without you for 6 months. Airbnb requires hosts paying daily attention to the business, which is why it is a job.
In order for a business like this to sell for millions, it would require millions in net income. That would require hundreds or maybe thousands of units. You would be managing contracts with hundreds of landlords and booking thousands of reservations. I guess this is possible, but when I hear about people doing AirBNB arbitrage by renting units, it is self managing a hand full of units.
Do you have some links to stories of people selling a business like this for millions, without owning any of the units? I am genuinely curious about this. It seems strange someone would want to buy a real estate business that has no physical assets.
Actually no one I know has personally "written" about it so I stand corrected... That's why I'm trying to shed light on this topic because so many people could get into this but they don't know what's possible.
Ah... ok. Yes, if you stopped paying attention to it for six months it would be some problems for sure, so would an apartment. However with the relationship between me and my co-host or portfolio manager that's actually debatable. I didn't realize when you said "passive income" you were leaning more towards the "mailbox money" hype form of passive income that doesn't really exist outside of being a limited partner in a real estate deal. But even that's not passive my friend as you need to find, vet and establish a relationship with the GP.
As for selling in the millions you are a little off on the numbers. So the current industry multiplier for the hotel & recreation industry around 10.51 EV/EBITDA. If you're making $350,000 EBITDA with a 3.7x multiple you've got yourself a valuation of $1,292,000. You see income, like NOI in commercial "IS VALUE = IS EQUITY = IS NET WORTH = IS SELLABLE". It's an asset. You mentioned that the business doesn't own any assets... again, not true. It may not own physical property assets, which I would argue are actually liabilities, and if you don't think so then go ask your banker whether your house is listed as an asset or a liability on their ledger. It's an asset to them, the lender, and a liability to you the owner. But are your contracts not assets? Can they not be sold? Can your portfolio not be sold? Is an entity separate from yourself that produces steady income which can be bought and sold not an asset?
Contemplate this:
Passive income is very possible in buy and hold real estate. I have tenants that I have not had contact with in over a year. I get electronic payment every month. Of course things do come up, but on average it is once a year per property. If I had a property manager, it would be mailbox money.
You said you can sell it for millions. That is a little different than one million. Still even at a million that is a lot. How may properties does that $350K represent - like 200-300 rented properties? That is a lot of leases, a lot of guests and a lot of landlords to deal with. It is a job for either you or someone else. If you hire people, it cuts into revenue.
The other issue is who will buy a business like this? If I wanted into the hotel industry, I can buy an entire hotel building for $1,275,000 or better yet, I can use leverage and buy a $5M hotel. I would actually own the building, which gives me tax benefit and an underlying physical asset. I don't see banks lending money to buy an AirBNB business that has no assets. Contracts can be considered assets, but in this case the bank will view it as a liability. I guess that leaves a cash buyer that wants a full time job.
Maybe I am wrong, that is why I asked for some examples of people who have done this. If you are grossing $350K with STR that are rented units and someone is willing to buy it for $1.3M, I would jump at that offer. I just see better ways to invest that kind of money.
Interesting topic. I am curious how many rented units are you managing? Are you doing all the guest interaction yourself? I will admit I am not an expert in this, so I am genuinely interested.
2 Reply
Account Closed
OP
Investor · United States · Member since 2018 · 565 posts · 356 votes
7y
Originally posted by @Joe Splitrock:

Passive income is very possible in buy and hold real estate. I have tenants that I have not had contact with in over a year. I get electronic payment every month. Of course things do come up, but on average it is once a year per property. If I had a property manager, it would be mailbox money.
You said you can sell it for millions. That is a little different than one million. Still even at a million that is a lot. How may properties does that $350K represent - like 200-300 rented properties? That is a lot of leases, a lot of guests and a lot of landlords to deal with. It is a job for either you or someone else. If you hire people, it cuts into revenue.
The other issue is who will buy a business like this? If I wanted into the hotel industry, I can buy an entire hotel building for $1,275,000 or better yet, I can use leverage and buy a $5M hotel. I would actually own the building, which gives me tax benefit and an underlying physical asset. I don't see banks lending money to buy an AirBNB business that has no assets. Contracts can be considered assets, but in this case the bank will view it as a liability. I guess that leaves a cash buyer that wants a full time job.
Maybe I am wrong, that is why I asked for some examples of people who have done this. If you are grossing $350K with STR that are rented units and someone is willing to buy it for $1.3M, I would jump at that offer. I just see better ways to invest that kind of money.
Interesting topic. I am curious how many rented units are you managing? Are you doing all the guest interaction yourself? I will admit I am not an expert in this, so I am genuinely interested.
Your first sentence sounds a lot like how this business model feels in practice... Here's the thing, this model is a business which means there are a few more steps than just buying a property and renting it out. And to automate it you have to cut into revenue but that's not a problem. This is more like managing a commercial property, which by the way... is a business. It's no more complicated than a multifamily apartment and guess what it produces a much higher return.
Actually I was being quite conservative with $350,000/year and I wouldn't sell for a million. If you have 50 properties making $1,000 (just cashflow) per month that's $50,000/month > $600,000/year "just cashflow". That's very very conservative as most properties are doing more than $1,000/month. The truth is man this business is a lot more profitable than anyone wants to realize. There's plenty of the pie to go around which is why I thought I'd share some insights with the community.
Yea, you could buy a $5 Million hotel but do you have a $1,750,000 down payment plus an extra $350-1MM for potential rehab costs, acquisition fees, due diligence and closing costs? Plus the hotel business is suffering because of things like Airbnb. Airbnb and other vacation rental platforms are the way of the future. This is an industry disruption just like motor vehicles, the internet and smart phones. I would rather consolidate a fragmented industry i.e. Airbnb into a holding company and then sell it to a private equity fund or hedge fund for millions when the time is right.
1 Reply
Nancy Bachety
Rental Property Investor · North Fork, NY · Member since 2016 · 1k+ posts · 631 votes
7y
A couple of thoughts that come to mind. I'd hesitate to buy a business that is based on annual leases (even with extension clauses) and permissive regulations, as well as previous relationships. To me, there is so much value in establishing a relationship with the landlord in the first place and as a buyer, Id' be suspect. Not to say it can't be done. Under the right conditions in the right locations with the right people, I'd agree it is possible. (I'm not doubting it, it's just not something I've come across.) Have you sold a business like this yet Jason?
To the question on taxes, I'd wonder about that too. Carrying costs include rent, insurance, utilities, supplies, and cleanings but is that enough to make it worthwhile? $!000/mo cash flow (or $600,000/year) means what in terms of real income?
I love the thread and the interest in it.
As the landlord, I'd need to be sold on the tenant (you, the arbitrager) and her/his STR management history and the cleaners. As the arbitrager, I wouldn't want to have to cancel one future booking due to a landlord changing the terms, whether it's right or legal or not. Not worth my hosting status. I wouldn't be able to book outside of a three-month window unless we renewed well in advance of the end of the lease. That's ok in some markets though.
0 Reply
Ken Latchers
Hatfield, PA · Member since 2012 · 1k+ posts · 629 votes
7y
I find the original assumption of no expense in furniture highly questionable. I am a landlord also. I would NOT include furnishings to an Arbitrage! That is your responsibility!
0 Reply
Account Closed
Rental Property Investor · Devon, PA · Member since 2016 · 28 posts · 22 votes
7y
Originally posted by @Joe Splitrock:

Originally posted by @Account Closed:
Originally posted by @Joe Splitrock:

Originally posted by @Account Closed:
I tried to explain using the attorney example. I understand you can run it from anywhere, but what if you unplugged for six months? A business would run without you for 6 months. Airbnb requires hosts paying daily attention to the business, which is why it is a job.
In order for a business like this to sell for millions, it would require millions in net income. That would require hundreds or maybe thousands of units. You would be managing contracts with hundreds of landlords and booking thousands of reservations. I guess this is possible, but when I hear about people doing AirBNB arbitrage by renting units, it is self managing a hand full of units.
Do you have some links to stories of people selling a business like this for millions, without owning any of the units? I am genuinely curious about this. It seems strange someone would want to buy a real estate business that has no physical assets.
Actually no one I know has personally "written" about it so I stand corrected... That's why I'm trying to shed light on this topic because so many people could get into this but they don't know what's possible.
Ah... ok. Yes, if you stopped paying attention to it for six months it would be some problems for sure, so would an apartment. However with the relationship between me and my co-host or portfolio manager that's actually debatable. I didn't realize when you said "passive income" you were leaning more towards the "mailbox money" hype form of passive income that doesn't really exist outside of being a limited partner in a real estate deal. But even that's not passive my friend as you need to find, vet and establish a relationship with the GP.
As for selling in the millions you are a little off on the numbers. So the current industry multiplier for the hotel & recreation industry around 10.51 EV/EBITDA. If you're making $350,000 EBITDA with a 3.7x multiple you've got yourself a valuation of $1,292,000. You see income, like NOI in commercial "IS VALUE = IS EQUITY = IS NET WORTH = IS SELLABLE". It's an asset. You mentioned that the business doesn't own any assets... again, not true. It may not own physical property assets, which I would argue are actually liabilities, and if you don't think so then go ask your banker whether your house is listed as an asset or a liability on their ledger. It's an asset to them, the lender, and a liability to you the owner. But are your contracts not assets? Can they not be sold? Can your portfolio not be sold? Is an entity separate from yourself that produces steady income which can be bought and sold not an asset?
Contemplate this:
Passive income is very possible in buy and hold real estate. I have tenants that I have not had contact with in over a year. I get electronic payment every month. Of course things do come up, but on average it is once a year per property. If I had a property manager, it would be mailbox money.
You said you can sell it for millions. That is a little different than one million. Still even at a million that is a lot. How may properties does that $350K represent - like 200-300 rented properties? That is a lot of leases, a lot of guests and a lot of landlords to deal with. It is a job for either you or someone else. If you hire people, it cuts into revenue.
The other issue is who will buy a business like this? If I wanted into the hotel industry, I can buy an entire hotel building for $1,275,000 or better yet, I can use leverage and buy a $5M hotel. I would actually own the building, which gives me tax benefit and an underlying physical asset. I don't see banks lending money to buy an AirBNB business that has no assets. Contracts can be considered assets, but in this case the bank will view it as a liability. I guess that leaves a cash buyer that wants a full time job.
Maybe I am wrong, that is why I asked for some examples of people who have done this. If you are grossing $350K with STR that are rented units and someone is willing to buy it for $1.3M, I would jump at that offer. I just see better ways to invest that kind of money.
Interesting topic. I am curious how many rented units are you managing? Are you doing all the guest interaction yourself? I will admit I am not an expert in this, so I am genuinely interested.
You can gross $50k with one unit. So $350k gross is like 6 properties.
You can automate almost everything with software and electronic locks. For cleaning just hire a cleaner, and for customer service you can hire a virtual assistant.
0 Reply
Ken Latchers
Hatfield, PA · Member since 2012 · 1k+ posts · 629 votes
7y
Like much of the above, this is like the "up to 80%" sale. Good luck finding that on something you actually want. In my market, you'll be lucky to get half that gross. And the automate works but not always. Same with a virtual assistant. The fluffy trite presentation of the stuff as presented misleads a lot of newbies. Cannot put vacation rental on autopilot. Cleaners don't show up or go out of business. Guests want recommendations or cannot find the place and you need to be there to get them in. Your automated lock fails. The power goes down. Handyman won't come when you need him. The last guests trashed the place and the new guests are standing in the kitchen wondering what to do. Your virtual assistant cannot do these things. Get a property manager, and there goes 30% of the gross.
"You can gross $50k with one unit. So $350k gross is like 6 properties.
You can automate almost everything with software and electronic locks. For cleaning just hire a cleaner, and for customer service you can hire a virtual assistant."
1 Reply
Jessica Wygal
Real Estate Agent · Cypress, TX · Member since 2018 · 156 posts · 73 votes
7y
@Account Closed you are my new favorite bigger pockets member. I saw you mention above to another member about sharing pointers and you do extensive market research...I'd def love to know more about what you look for (and where) while doing your research.
1 Reply
Account Closed
Rental Property Investor · Devon, PA · Member since 2016 · 28 posts · 22 votes
7y
Originally posted by @Ken Latchers:

Like much of the above, this is like the "up to 80%" sale. Good luck finding that on something you actually want. In my market, you'll be lucky to get half that gross. And the automate works but not always. Same with a virtual assistant. The fluffy trite presentation of the stuff as presented misleads a lot of newbies. Cannot put vacation rental on autopilot. Cleaners don't show up or go out of business. Guests want recommendations or cannot find the place and you need to be there to get them in. Your automated lock fails. The power goes down. Handyman won't come when you need him. The last guests trashed the place and the new guests are standing in the kitchen wondering what to do. Your virtual assistant cannot do these things. Get a property manager, and there goes 30% of the gross.
"You can gross $50k with one unit. So $350k gross is like 6 properties.
You can automate almost everything with software and electronic locks. For cleaning just hire a cleaner, and for customer service you can hire a virtual assistant."
Those numbers don’t apply to every market. I thought that could go without saying.
1 Reply
Account Closed
OP
Investor · United States · Member since 2018 · 565 posts · 356 votes
7y
Originally posted by @Jessica Wygal:

@Account Closed you are my new favorite bigger pockets member. I saw you mention above to another member about sharing pointers and you do extensive market research...I'd def love to know more about what you look for (and where) while doing your research.
Sure,
I want to know exactly which zip codes, neighborhoods and even streets are proven to be most profitable based on real market data.
I want to know the future plans of city growth which can be found at your local urban development department, e.g. a new light rail, new stadium, etc.
I want to know which property types are most successful (size, type, etc.), what amenities are most sought after, what attractions are most popular, what headlines work best, what property descriptions and writing style gets the most views and bookings, etc.
There's a lot of stuff that should go into it. It's not as hard as you think when you know how to do it...
Thanks!
1 Reply
Jessica Wygal
Real Estate Agent · Cypress, TX · Member since 2018 · 156 posts · 73 votes
7y
Allll great...question is...where do you find the answers?
1 Reply
Account Closed
OP
Investor · United States · Member since 2018 · 565 posts · 356 votes
7y
Originally posted by @Ken Latchers:

Like much of the above, this is like the "up to 80%" sale. Good luck finding that on something you actually want. In my market, you'll be lucky to get half that gross. And the automate works but not always. Same with a virtual assistant. The fluffy trite presentation of the stuff as presented misleads a lot of newbies. Cannot put vacation rental on autopilot. Cleaners don't show up or go out of business. Guests want recommendations or cannot find the place and you need to be there to get them in. Your automated lock fails. The power goes down. Handyman won't come when you need him. The last guests trashed the place and the new guests are standing in the kitchen wondering what to do. Your virtual assistant cannot do these things. Get a property manager, and there goes 30% of the gross.
"You can gross $50k with one unit. So $350k gross is like 6 properties.
You can automate almost everything with software and electronic locks. For cleaning just hire a cleaner, and for customer service you can hire a virtual assistant."
Ken,
With the right business acumen, patience, diligence and a little bit of luck, one can do all of the things I've mentioned on this post and my others. But there are a few things that will stop everyone's potential it its tracks, and that is a limited mindset, lack of creativity and no resourcefulness.
Thanks!
1 Reply
Account Closed
OP
Investor · United States · Member since 2018 · 565 posts · 356 votes
7y
Originally posted by @Jessica Wygal:

Allll great...question is...where do you find the answers?
of course,
Airbnb website, VRBO, AirDNA, everbooked, urban development, city planning, realty platforms, CoStar, people on the streets, REI meetups, forums, google, facebook, craigslist, etc.
0 Reply
Jessica Wygal
Real Estate Agent · Cypress, TX · Member since 2018 · 156 posts · 73 votes
7y
Thank you! I'll take it...and run with it!
1 Reply
Paul Sandhu
Investor · The worst town to live in, KS · Member since 2016 · 4k+ posts · 4k+ votes
7y
It takes 3M talent.
Mechanic. Magician. Mindreader.
2 Reply
Ken Latchers
Hatfield, PA · Member since 2012 · 1k+ posts · 629 votes
7y
Newbies don't have the business acumen. Neither is 80% of the Arbitrage kool-aid being served up here.

Replace "limited mindset, lack of creativity and no resourcefulness." with fantasy, wishful thinking and fluff" on the part of those serving up Arbitrage as if it were a panacea, and I will assent.

Originally posted by @Account Closed
Ken,
With the right business acumen, patience, diligence and a little bit of luck, one can do all of the things I've mentioned on this post and my others. But there are a few things that will stop everyone's potential it its tracks, and that is a limited mindset, lack of creativity and no resourcefulness.
Thanks!
1 Reply
Account Closed
OP
Investor · United States · Member since 2018 · 565 posts · 356 votes
7y
Originally posted by @Ken Latchers:

Newbies don't have the business acumen. Neither is 80% of the Arbitrage kool-aid being served up here.

Replace "limited mindset, lack of creativity and no resourcefulness." with fantasy, wishful thinking and fluff" on the part of those serving up Arbitrage as if it were a panacea, and I will assent.

Nothing is a possible without work, I'm not sure who said that it didn't, and no investment or business is without risk, upsides and downsides.
It seems like you just don't believe that the rental arbitrage model is actually real and profitable. And that it requires some unreasonable amount of effort and capital to make it possible. Well, I agree with you... if, of course one is not educated on how to do it properly, which was part of my intent for attempting to educate the community.
At the end of the day some people will do it and others won't. The one's who do, if armed with the right information and commitment will be successful. Will there be challenges regardless? Of course. Will it be perfect? Of course not. I hope no one advertises otherwise.
Thanks!
1 Reply
Tim White
Rental Property Investor · Madison, AL · Member since 2015 · 177 posts · 110 votes
7y
@Jason Allen
Great topic and thanks for starting the conversation. I currently own four AirBnBs and plan to add a few more to my portfolio. I don’t personally cashflow the numbers you mentioned however they do beat the long term cash flow numbers. I think it’s great that people are using this arbitrage model however to me you don’t have a lot of control and you have limited exit strategies. Since I bought all the properties below market value in the path of progress I can rent the properties long term or sell if there are issues such as city officials banning short rentals. With your model you would still have to honor your lease if the city disallows short term rentals. Nevertheless get your money!
2 Reply
Account Closed
OP
Investor · United States · Member since 2018 · 565 posts · 356 votes
7y
Originally posted by @Tim White:

@Jason Allen
Great topic and thanks for starting the conversation. I currently own four AirBnBs and plan to add a few more to my portfolio. I don’t personally cashflow the numbers you mentioned however they do beat the long term cash flow numbers. I think it’s great that people are using this arbitrage model however to me you don’t have a lot of control and you have limited exit strategies. Since I bought all the properties below market value in the path of progress I can rent the properties long term or sell if there are issues such as city officials banning short rentals. With your model you would still have to honor your lease if the city disallows short term rentals. Nevertheless get your money!
Tim,
It's good that you got your properties under market value.
I like to have escape clauses in each lease. If there's a problem you are able cancel the lease for any reason with a small payout.
You mentioned a lack of control. In the sense that you don't own the properties yes you could argue that you don't have control. But you do have contractual control to an extent. However I personally don't want to own everything and/or control everything. My equity wealth game is being built in the value of the business which is determined by cashflow, EBITDA and industry multiples. My wealth is also being invested into multifamily/commercial real estate as well.
The airbnb model is a cashflow dominate business, what one chooses to do with that cashflow in terms of investing or owning assets is up to their preference be it SFH, MF, Commercial, land, Etc.
Thanks!
0 Reply

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