Anyone doing the rental arbitrage model?
Real Estate Agent · Atlanta, GA · Member since 2014 · 683 posts · 317 votes
Just want to see if anyone had success doing the rental arbitrage model? master lease from developer and operate them as short term rental? Any success story? I've reached out to a lot of apartments in area my company want to go but a lot of them have company policy that doesn't allow Airbnb type short term. Any developer here are thinking about partner up with a short term rental company?
Oh lord
@John Underwood here’s the disconnect I think we’re having. Buying property using leverage for your tenants to pay off requires taking on debt and property management. Arbitrage takes away the debt and ownership part for the increased revenue and risk from long term market uncertainty with regulations and owner pulling the plug at any time. It also has lower upfront capital costs compared to buying, in most instances. But the management aspect remains constant.
But if you’re focusing on Kiosaki’s teachings, why exclude Cash Flow Quadrant where he describes his dealings in high risk/high reward stock market investments in companies about to go public? That’s not a long term wealth building technique on its own and its work to look into those companies but it provides a lucrative alternative cash flow that allows him to buy more properties or businesses.
My family and I just departed an Airbnb that was clearly an arbitrage unit while visiting Disneyland. It was my first time staying in such a unit and I must say I didn’t much care for it.
It was located in a traditional apartment complex and I suspect it wasn’t legal. I received multiple messages instructing me not to tell anyone it’s an Airbnb, restricted pool usage hours, had to pickup the key from a completely different location which made the check in more difficult (lock boxes apparently weren’t allowed on property- nor the ability to use electronic locks) and the experience overall wasn’t that great (even though the unit itself was nice).
As an Airbnb owner myself I always struggle when I want to leave someone less than a 5 star review but my wife wants me to leave a 2 star. A few of these reviews will kill the rental and hurt his business.
My point? As an owner all of my complaints are non issues. Trying to arbitrage is like swimming upstream- even if legal- and this has zero to do with the rent potential and everything to do long term sustainability. You may make a few bucks but I do not believe it is a sustainable business model.
@John Underwood here’s the disconnect I think we’re having. Buying property using leverage for your tenants to pay off requires taking on debt and property management. Arbitrage takes away the debt and ownership part for the increased revenue and risk from long term market uncertainty with regulations and owner pulling the plug at any time. It also has lower upfront capital costs compared to buying, in most instances. But the management aspect remains constant.
But if you’re focusing on Kiosaki’s teachings, why exclude Cash Flow Quadrant where he describes his dealings in high risk/high reward stock market investments in companies about to go public? That’s not a long term wealth building technique on its own and its work to look into those companies but it provides a lucrative alternative cash flow that allows him to buy more properties or businesses.
Adam,
I generally pay cash and don't use PM's. I have systems in place so it takes almost no time to manage. So my money is making money while I sleep.
As I said having a tenant pay off your property is much better than paying off someone else's property as in arbitrage.
Most of the people wanting to get into arbitrage are not seasoned investors and do not fully understand the risks involved.
Debt and leverage can be a good think if used correctly. New investors shouldn't be afraid of it to acquire properties of their own where they can build equity and wealth.
Arbitage is a job to make just cashflow and enriches the actual owner of the property.
The owner has the final control of the property and can choose to yank this away from the young investor trying to make money off the owners property. Also laws and rules change that can prohibit STR and the Arbitage person is left holding a lease that he can't rent short term anymore.
@John Underwood I agree with 99% of what you said and am largely buy and hold, long term rental investor myself. I agree that someone doing solely rental arbitrage is not a real estate investor in a true sense. They have no assets and only collect cash flow without necessarily having a W2 job to show up at. All things considered, not a bad gig these days.
You said you are primarily a cash buyer (I envy you) and don’t use a PM. If you’ve got 8,9,10+ SF doors, I think I could make a case that you have a job managing those properties. Now, not everyone can start as a cash buyer, so using a rental arbitrage strategy to accelerate one’s trajectory to that point holds merit in my opinion. Along the way, you would get a solid education on what market rents are for different areas within a city while also seeing which areas have higher occupancy rates based on fewer available rentals able to subbed out to STRs. That knowledge is extremely pertinent as a buy and hold investor if the arbitrage profits are rolled into a buy and hold purchase. To merely write this off as irrelevant or something to be frowned upon doesn’t give it a fair shake in my opinion. Now, if you’ll excuse I’m going to climb down off my soap box and replay Rich Dad, Poor Dad.
@Jingru Sui
$1000 Brian Page's course on how to automate an Airbnb business HANDS OFF whether you use someone else's property or you use your OWN Property.
Or check out on YouTube "BNB automated". Sean runs hundreds of units on Airbnb and doesn't manage any of them. All he does is change prices once a week.
@Jingru Sui can someone explain this process to me via dm
@John Underwood here’s the disconnect I think we’re having. Buying property using leverage for your tenants to pay off requires taking on debt and property management. Arbitrage takes away the debt and ownership part for the increased revenue and risk from long term market uncertainty with regulations and owner pulling the plug at any time. It also has lower upfront capital costs compared to buying, in most instances. But the management aspect remains constant.
Just want to see if anyone had success doing the rental arbitrage model? master lease from developer and operate them as short term rental? Any success story? I've reached out to a lot of apartments in area my company want to go but a lot of them have company policy that doesn't allow Airbnb type short term. Any developer here are thinking about partner up with a short term rental company?
I think that you have 70 units you are in a much better situation than most.
I think the beef comes from everyone thinks everything is easy mindset. And you need to own the units. Hmm in RE its not what you own but what you control. I like the idea and we are doing this for Corporate Furnished Housing, but the margins are slim and it seems many are getting out of AirBNBN in my area because of the hassles, management etc and mostly because its being banned. Not a good business model if STR's are the reason you are buying it.
Someone mentioned Al Williamson he has alot of good sound approaches, google him or search him online on BP.
One thing with all the "gurus' that irk us to the core is if you listen to them who is really making all the money, they are. Take Brian Page he is all over youtube and plugs his system and it seems like a good idea and he might be one of the first. Of course he charges $2000 or so for the course. But when you hear him in a Grant Cardone interview he says he made x doing the STR Arbitrage but made 10x selling the course on how to do STR Arbitrage, love him or hate him thats more than you would ever make renting it on your own. I talked to a client yesterday that said he paid $35k for Fortune Builders in the past and what how.
Anyways you have to keep looking for ways to innovate and do something different because everyone is doing the same thing only works for a small while.
We target medical professionals and its good on paper but in actuality its always tough to get those numbers. Especially in CA
Keep us posted on your progress or what you find out!
@Jingru Sui you need togo to a str meetup that understands arbitrage.
Gareia has a 1st Thurs evening str group lead by a guy that only does apartments arbitrage!
Never houses. Apartments have support fix it ticketing systems. He's great a ststimatizing and running his Airbnb based on arbitrage at apartments.
Arbitrage works! It's the location and your systematization. Go to this Reia group for support.
Never take advise from folks who don't do XYZ. Lol
Aaaaaannd for the low low price of $1995 I can show you how to make over a billion dollars doing rental arbitrage! It's easy! It's profitable! It's a winner!
I don't want to be such a negative on this, but it is high risk for the majority of people. Anyone who comes in here with zero experience who wants to do arbitrage is not the person to do it.
I don't doubt there are people making money doing arbitrage. Most of us negative Nellys wouldn't do it and we are more experienced than those coming in here asking about it. Most want to make money with zero dollars and arbitrage seems like the way to go.
Now in @Jingru Sui's case, she is a very experienced investor with a ton of doors already so this could make sense for her. She has been very successful in the AirBNB space and is just looking for ways to expand in new markets.
The biggest issue I see with some of the replies is that you shouldn't listen to any of us who are not on board with the idea. Go talk to someone who has done it. While I agree that someone who is making it work is a good resource, you also need to find out how liquid they are, do they have the resources to take a hit that you might not have, do they have other properties they can rely on to keep things going if the arbitrage model goes south.
Me personally, I am liquid enough to take a hit giving it a try. There is no way I would take that risk. Maybe I am just too risk averse, maybe I am too afraid..who knows. All I know is that I prefer to own the properties I am renting out. I HATE the idea being under the thumb of someone else.
So, for those that are interested in arbitrage, great. Just go in with your eyes wide open. Don't just listen to those who have a system, to those who are making it work. Listen to those of us who understand the STR space and those who are naysayers. Plan, plan and then plan some more.
As always, my 2 cents.
Hey:
I wanna make lotsa money. I am new and I hear some people somewhere sometime are killing it.
I wanna scale. Big. Quick. I don't got no money. I don't got no experience.
You naysayers. Dontcha see some here say it works great?
Arb. Arb. Get rich quick for us po' dogs.
Just gotta get a few landlords to gimme their apartments and I'm in.
What could possibly go wrong?
After all, dont vac rentals make 4 times the money or sumpin?
Easy street baby. Why do it the hard way when you can start making 6 figures in 8 weeks controlling 378 units from nuttin?
Did I mention what could possibly go wrong?
@Curt Neider "All of the wear and tear items I saw in the thread are no different than those found in long term rentals at move out time. "
100% agree. The difference is that for STR, you have to keep up with the wear and tear repairs or you will hear about them each week when your next visitor moves in (and/or bad reviews).
For a LTR, these are reported less frequently as the tenant realizes they are the cause and chooses to live with the issue(s). You may identify them during your 6-month walk-through or during tenant turn-over. You gain the efficiencies of scale when you address the items as a block and you can knock out a bunch of them at a time.
Stating the obvious, for a STR, one probably needs a greater repair reserve and a handyman near his bat-phone.
Joe
Well, there is a good amount of hate going on this thread regarding rental arbitrage haha. Is it better to own the property that you are renting on airbnb? Well, yes. You have complete control over the unit and you get more benefits to it, namely appreciate and principal pay down, in addition to the cash flow.
The difference is that it is much easier to get into an arbitrage unit for dirt cheap compared to a property, and sometimes just for the cost of a security deposit/ first months rent. Personally, for my first one I opened up a 0% APR credit card for 15 months to cover the furnishing expenses ( And even my rent payments) to get in for nothing down. My goals are to take the cash flow I make off my arbitrage unit(s) to funnel into properties of my own. I think it can be a great way to build a small business for yourself, and then you can take the cash flow to put towards more stable investments to build wealth (If you want to).
I highly recommend the Airbnb Automated youtube channel to learn what it takes to be successful in this business model. It's all free and he puts out some incredibly useful advice.
@George Munoz
Thank you for sharing and the advise!
@Remington Lyman that’s very smart you have stake in both ownership and str management.
@Joe Jor
Not trying to make excuses. I don’t work with Stayafred. Just speaking from my own experience with managing multiple units. Everyday operation without solid team that has boots on the ground who can inspect properties in a regular basis will definitely show in the units! As you mention lots of condo are not build like hotels with industrial grading materials. The wear and tear will show on the wall, shelfs, lighting, etc. especially in urban setting where we have lots of turn over. It’s tough to manage!
@Jessie Randolph
I just updated our short term rental listings in my bio. Columbus listings are also in there. Free feel to check them out and let me know if you have any questions!
@Curt thanks Curt! I agree 100%. I also can’t imaging all the property owner will like to deal with the headaches that comes with short term like coordinate cleaning, maintenance, claims etc. I’m thinking of this method because we have pretty capable team already in place and trained to deal with high column turn over and buying a complex some time takes months. We are ready to take on the next step to scale. And it’s good challenge for the whole team to step up and do better.
But all the advices I got from here are solid advices that has investor’s best interests. Make us think more on the risk side. All good! Thanks again for your input!
@Rick Baggenstoss. Great advise on co host! We are looking to rent at least 10+ if possible. This way it’s easy to manage. Thanks!
@Mary K. Hey Mary. I updated my bio to include our Columbus listing. Feel free to check them out. So far they are doing great. Better than expected. I’d love to connect with you and have a chat. :)
@John Underwood so true so true! One of the reason we are trying to explore this method is because we have very capable team right now that also help run our portfolio. As investor who want to retire early and not worry about daily operation, I don't like STR's daily struggle. But as a business that already has a team of employees who are looking to grow and scale we are looking in to this way. Maybe we can help other Long term owner to get better cash flow in current market but also benefits from the partnership ourself? Who knows? Just trying to explore some possibilities. :)
@Mike V. Good point Mike. Thanks for sharing.
@John Underwood id like to learn more about the system you use to manage everything automatically. Could you share more on that? Thank you!!
@Jonathan Escobar I have to check it out. Thanks!
I would like to remind people that arbitrage is creating a job for yourself and not creating wealth. We as real estate investors want to create wealth. If you want a job and some money in exchange for your work then by all means have as many jobs as you like.
Read or reread "Rich Dad Poor Dad"
Arbitrage is creating wealth for the owner of the property, you want to be the owner of the property.
My goal is to retire early because my money is working for me making more money.
I as an owner would be OK with someone doing arbitrage on a property for me because they would be working and I would be creating equity and wealth.
The better way of course is to purchase your own properties and then rent them out STR or Long Term.
Have an owner that might be open to arbitrage? Instead try and get them to owner finance the property to you so that you will get something long term out of the deal instead of just a short term paycheck.
Long term wealth is created by investing money. The key here is that you must first have money to invest.
It often takes several tens of thousands of dollars to fund a 25% down payment on a rental (which most people don't have) just to hope to cashflow 1-200/month. Then it's back to saving for another 4-5 years to afford the down payment on the next property while they slave away at their W2. This is how 99% of people on BP scale their portfolio. After coming up with a way to fund the deal, you must always worry about repairs etc which can be costly.
While I don't do STR's (As military I move every 2-3 years and don't want to long distance manage a STR), I do know several people that do the STR thing (they don't arbitrage). Their income obviously fluctuates slightly from month to month, but over the course of the year they average roughly 2x what they could otherwise rent it out as a LTR. This means if you are doing arbitrage, then you have twice as much income coming in, as you do expenses going out by paying your lease.
This means that after expenses are paid, you would still have 100% of what the property would otherwise rent for if it were a LTR. If we assume the 50% rule of expenses is true for buy and hold properties, then for every STR that you arbitrage, this provides the same cashflow as having 2 FULLY PAID off rentals that you own. Which do you think is easier to accomplish, finding a building to sublet, or completely paying off two full properties?
In many ways, subleasing a property could be more advantageous than actually owning the property. Besides the difficulty in raising the down payment, one of the problems with STR's is that they tend to experience higher wear and tear, but since you aren't the owner, this isn't your problem.
Yes, you are at the mercy of the landlord, and they may choose to non-renew your lease. But who cares? It's not like that is the only building in town. Simply find a new building and pay a few grunts from craigslist $200 to come with a truck and move the furniture to the new location. While you don't have any income coming in during this transition period, you also don't have any holding costs. Could the city decide to ban STR? -Sure, but then again government usually moves rather slowly so you would likely know if there was an upcoming vote anytime soon and simply not enter into that market.
Subleasing would allow you to scale rather quickly to multiple units which would generate significant monthly revenue. If you wanted a more long term plan then there is nothing stopping you from taking that revenue and begin to actually buy properties of your own. And as far as creating a job for yourself with the STR thing, there are plenty of management companies that specialize in running STR's so your only 'job' would be to find the locations. However being your own PM with LTR's is also a job, maybe not a full time job but it's certainly a job.
Given that the OP already has a decent portfolio of properties and likely enough income coming in to be able to afford an experiment such as this, I would highly suggest that she give it a shot with a few properties and see how it works out. If it works then great! -Continue to scale it. If it doesn't work then the slight loss of money likely wouldn't even dent her net worth.
--If it's stupid and it works, then it's not stupid.