Airbnb Arbitrage: Renting vs Buying

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Airbnb Arbitrage: Renting vs Buying

Account Closed
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
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.

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  • 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:
    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.

    You are not reading the conversation. The question was how many properties for $350K EBITDA (basically net earnings). In other words, after you pay rent for the property, cleaning expenses, virtual assistant, AirBNB service fee and any other operating expenses. That is not going to be $50K per property. Even if you could net $50K per property, it would take 7 properties to equal $350K, not 6. Finding 7 properties that net that much seems challenging, because high demand STR markets are also high rent for LTR.

    That is the point, that expenses cut into your margin. So maybe you gross $350K, then pay out $300K in expenses and the net is only $50K. Then you need 49 properties to net $350K. That is 49 leases and thousands of guests annually. I am not saying it isn't possible, but hardly autopilot (despite what the 4 hour work week told you). 

    The harsher reality is that you are not acquiring any physical asset. So there is no asset appreciation. You are just banking on a good STR future. The only exit strategy is to break your lease and close up shop.

    1Reply
  • 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:
    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.

    You are not reading the conversation. The question was how many properties for $350K EBITDA (basically net earnings). In other words, after you pay rent for the property, cleaning expenses, virtual assistant, AirBNB service fee and any other operating expenses. That is not going to be $50K per property. Even if you could net $50K per property, it would take 7 properties to equal $350K, not 6. Finding 7 properties that net that much seems challenging, because high demand STR markets are also high rent for LTR.

    That is the point, that expenses cut into your margin. So maybe you gross $350K, then pay out $300K in expenses and the net is only $50K. Then you need 49 properties to net $350K. That is 49 leases and thousands of guests annually. I am not saying it isn't possible, but hardly autopilot (despite what the 4 hour work week told you). 

    The harsher reality is that you are not acquiring any physical asset. So there is no asset appreciation. You are just banking on a good STR future. The only exit strategy is to break your lease and close up shop.

     You wrote “Maybe I am wrong, that is why I asked for some examples of people who have done this. If you are grossing $350K...”

    I don’t care about asset appreciation only cash flow.

    1Reply
  • Account Closed
    OP
    Investor · United States · Member since 2018 · 565 posts · 356 votes
    7y
    Originally posted by @Joe Splitrock:
    Originally posted by @Account Closed:
    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.

    You are not reading the conversation. The question was how many properties for $350K EBITDA (basically net earnings). In other words, after you pay rent for the property, cleaning expenses, virtual assistant, AirBNB service fee and any other operating expenses. That is not going to be $50K per property. Even if you could net $50K per property, it would take 7 properties to equal $350K, not 6. Finding 7 properties that net that much seems challenging, because high demand STR markets are also high rent for LTR.

    That is the point, that expenses cut into your margin. So maybe you gross $350K, then pay out $300K in expenses and the net is only $50K. Then you need 49 properties to net $350K. That is 49 leases and thousands of guests annually. I am not saying it isn't possible, but hardly autopilot (despite what the 4 hour work week told you). 

    The harsher reality is that you are not acquiring any physical asset. So there is no asset appreciation. You are just banking on a good STR future. The only exit strategy is to break your lease and close up shop.

    haha, man... There's nothing harsh about making a ton of cash, I promise.

    0Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    7y

    @Joe Splitrock

    The rental arbitration scenario is not real estate investing by any stretch of the imagination, it’s a real estate related business, like brokerage, property management, house flipping, etc.

    Owning the property and operating it as a STR is both a real estate investment and a real estate business.

    Owning the property and renting under a longer term lease is a real estate investment.

    Now to the big question, can a successful STR arbitrage business, with current properties under contract, be sold as a going business? Of course it can! Just like any other personal service business. The larger the business, and the more it is able to support employees between the owner and the clients, the higher the multiple it will sell for.

    However, personal service businesses sell for a lot lower multiple of profits than other types of businesses.

    The profit number of $350k has been tossed around. If a arbitrage STR business had a net income of $350k verifiable, with no negative other factors (changes in laws, loss of units, etc.), and was able to demonstrate this income level or an increasing level for 3-5 years, then a sales price of $1,000,000 - $1,200,000 would be obtainable.

    Private Mortgage Financing Partners, LLC
    WebsiteView Page
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