Airbnb arbitrage - need additional insurance?
Property Manager · Philadelphia, PA · Member since 2020 · 7 posts · 3 votes
My partner and I are getting started with the arbitrage strategy to build up capital before we start buying property. We know that Airbnb offers insurance coverage, but are wondering if it is necessary or recommended to buy additional coverage. Does anyone have experience with this and if so, what has worked for you?
@Michael Baum I don't live in a perfect world and arbitrage works just fine for me. The pandemic bankrupted lots of businesses not just ones doing rental arbitrage. Stability in business is always about your position, your cash flow, reserves, what you negotiated, etc. The big boys who went bankrupt did so like many companies because they were never spending their own money they were spending wall street money from investors.
Also the statement that "any owner will charge you a premium above market rate" means you are either limiting your thinking to your own geographic area or your own limited experiences. I negotiate below market rents just fine and have plenty of owners willing to rent to me (including one I met with today).
"What you do is what we all do. Save up until you have your 10% and go from there."
Hogwash! @Rex Romano this is where you need to NOT listen to others who would throw water on your ambitions! Obviously be safe and make solid business decisions do do have a solid cash position but if I waited until I had the money to do things like "we all do" then I would be broke and only have a couple of properties.
If you want great rewards step out and take great (calculated) risks.
You need a commercial STR policy.
@Rex Romano, that coverage from AirBNB is not insurance. You need to have a commercial policy for STR's like @John Underwood said. I use Proper and I think John uses Foremost. A standard home owners policy will not cover anything.
Of course we all would try and talk you out of arbitrage. Hopefully you are independently wealthy and can take losing everything if things go sideways.
@John Underwood Thanks John!
@Michael Baum Thanks Michael! No, I am not independently wealthy. That is the reason for thinking of starting out with arbitrage. We do not have the capital to buy properties yet and are hoping to build up a cash reserve for a year or so to then be in position to buy. Do you have another start up recommendation, considering our situation?
@Rex Romano Not sure why anybody would be trying to talk you out of arbitrage but I would actually encourage you to get started that way while you build capital. Arbitrage is an excellent way to leverage property to create cashflow.
Airbnb coverage is in fact insurance despite what others say. Depending on locale it's underwritten by Zurich or a subsidiary. In the US it's typically underwritten by either Allstate or North Light Specialty.
I will agree with others that you need your own insurance as well depending on your circumstance. If doing arbitrage then you need renters insurance to cover your contents since you are the tenant. That also comes with some liability coverage but it's a toss up as to whether that would cover any guests under your Airbnb arrangement. You still have Airbnbs liability coverage but remember thats just liability and I'm not sure I would rely on that exclusively. The companies they mention in the thread specialize in the short term rental market so they can provide good options to keep you covered.
@Robert Gilstrap I appreciate the insight, Robert!
Well, in a perfect world arbitrage works. But we don’t live there.
This pandemic bankrupted many arbitrage people. No travel, restrictions on STR units left arbitrage people holding the bag.
Any owner will charge you a premium above market rate. You could then be stuck with a unit that loses if you manage to turn to into a long term.
All I can say is every arbitrage investor I know lost everything this year. Multiple broken leases really hampers you ability to do any real estate investing for a long time.
What you do is what we all do. Save up until you have your 10% and go from there.
Spend time in the forum and do some reading. Lots of great info there.
@Michael Baum I don't live in a perfect world and arbitrage works just fine for me. The pandemic bankrupted lots of businesses not just ones doing rental arbitrage. Stability in business is always about your position, your cash flow, reserves, what you negotiated, etc. The big boys who went bankrupt did so like many companies because they were never spending their own money they were spending wall street money from investors.
Also the statement that "any owner will charge you a premium above market rate" means you are either limiting your thinking to your own geographic area or your own limited experiences. I negotiate below market rents just fine and have plenty of owners willing to rent to me (including one I met with today).
"What you do is what we all do. Save up until you have your 10% and go from there."
Hogwash! @Rex Romano this is where you need to NOT listen to others who would throw water on your ambitions! Obviously be safe and make solid business decisions do do have a solid cash position but if I waited until I had the money to do things like "we all do" then I would be broke and only have a couple of properties.
If you want great rewards step out and take great (calculated) risks.
Ok @Robert Gilstrap, you do what works for you. I just don't assume that it is the way everyone should go. I am not going to continue arguing with you. If you are able to get below market rates in popular places and arbitrage with low risk, more power to you and congratulations.
@Rex Romano, you do what you like and take @Robert Gilstrap's advice about making sure everything is in line. All I am trying to do is give a warning. Arbitrage doesn't work in every place. What also can happen is that the owner decides to not renew and do it themselves.
Frankly I have only told one person that she should move forward with arbitrage. She had a deal ready to go on a multi family place. She also had almost 100 units in service she and her partners owned so the risk was minimal.
I won't come back into this thread to comment. My suggestions are here.
Not sure what the difference is when you say "arbitrage doesn't work in every place"? That presumes that if you owned the property and did STR then everything is fine.
OK, you own it and pay a mortgage payment of $1,300/mo or I rent it and pay a rent payment of $1,300/mo. The money is the same and the risk to me is actually less given the fact that I don't own it. How is that different?
I agree that one should seek to own assets and I own plenty but controlling assets through arbitrage that produce income streams without the downsides to owning is also a viable alternative. Not saying I don't have plenty of risk doing so but it's managed risk.
Also, owners in my experience never do it themselves even if you try and convince them to. STR's are a LOT of work and the hospitality biz is a STEEP learning curve for almost everyone. Long term rental owners want mailbox money with no hassles and no extra effort. I pitch owners all the time who solicit my management company for property management services about doing Airbnb and almost all say "no thanks" due to the hassle/work. They DO however perk up when I offer to master lease the property myself and do airbnb where I take on the work and the risk and they get me as a stable long term tenant.
You also don't need to get below market rates in popular places. Pretty much any place will do as short term rentals aren't strictly about popular areas or vacation destinations. My typical guest is the guy who sold his house and has nowhere to go for 40 days or the guy who's installing a new production line at a local manufacturer and will be on site for 6 weeks and prefers a house over a hotel room or the lady whose kitchen caught fire and the insurance company is putting them up in a house for a month while the repairs are completed. These exist universally in every town in America.
I do agree that a good location is much preferable but its certainly not required.
Not sure what the difference is when you say "arbitrage doesn't work in every place"? That presumes that if you owned the property and did STR then everything is fine.
I do agree that a good location is much preferable but its certainly not required.
Because it doesn't work in every place. I think the consensus is if you rent a (or a bunch) of houses, apartments etc. in Florida or California (as an example - high vacation destination) with arbitrage in mind and we see another round of lock-downs, the landlord still gets his money because you signed a lease. This is just one example...think of Hurricane in Florida or earthquake in CA. AIRbNb travel is pretty much non-existent. Arbitrager gets hosed on rents, but still has to pay rent.
The person arbitraging the property also has to think of furnishing a rental which is not cheap. My most recent AIRbNb as an example was over $30K in furniture alone. Is this too much to spend on furniture? Maybe, but if I bought estate sale, FB marketplace or Craigslist stuff, then well it would look like a turd just like the rest of the crappy looking AIRbNb's out there and I would get average bookings and not 90% occupancy or superhost status.
I think the consensus is if you have enough cash to furnish a place, why not save a little more for your first rental and scale from there? The OP looks young from his avatar photo so probably can absorb the risk if things turn south. But your youth is where you need to take risk, and if I didn't take risk early on I wouldn't be posting on a RE forum now.
If you are into the Arbitrage idea, look for "Brian Page" on YouTube. He was everywhere a year ago I wonder how his "arbitrage empire" is doing now in this market of uncertainty.
@Brett Rosenbauer Brian Page might be doing well but seems like he's more interested in making money selling courses to me. Nothing wrong with that and I applaud his success but the second I start hearing the words "my students..." I shut down.
Going back to your example though you mentioned these calamites like earthquakes and hurricanes.
A. these are VERY short events and then things go back to normal. Even during COVID we've done really well considering. I had a pretty ****** April and May but things jumped right back up at the end of May.
B. If you owned the units instead of arbitrage and did short term then what's the difference? You're still having to furnish the unit, you still are stuck making a mortgage payments instead of a rent payment, etc. Also you're ignoring the fact that you can work in terms in your lease that give you an out under extreme circumstances (as COVID has taught us).
On furniture $30K is a lot but it depends on how nice the unit is and I'm with you, I don't want crappy units I want as high end unit as I can get because there is less competition there.
@Robert Gilstrap why would an owner rent to you at below market? Are you taking on maintenance? Property tax increases?
Long term rental owners want stability and peace of mind in general. I offer them that. Most mom and pop owners are not after getting every last dollar of rent to get the maximum, they instead want a fixed amount they can depend on and not have any worries from month to month. I offer options if they want it like shared revenue / performance type leases or regular old long term leases. Depending on the arrangement we handle minor maintenance (HVAC, electrical and plumbing systems and appliances are still owners responsibility). Plus when they see what technology we put into a property and the investment we make and how we take care of the property we are already head and shoulders above any "regular" tenant. Really it seems to all be about being open to what the owners needs are. Everybody is different.
In my specific circumstance since I'm a property manager I am basically giving them discounted or free management since the net in their pocket by master leasing to me is greater than letting me manage it and charging management fees.
Rex, I like all the advice that Robert Gilstrap mentioned.
In regards to your insurance question, I would insist that the owner of the home add you to their landlord policy as an "Additional Insured". I realize that you are the tenant, but since you are also the property manager, you have an insurable interest. If there is a lawsuit, you can be sure that you and the owner will both be listed as defendants so you might as well have the same insurance company pay to defend you both at once.
I would suggest a million dollars for the liability coverage, that the owner of the home pays for, and another million in umbrella insurance that you pay for. The umbrella will likely cost $200 to $300 a year and you will have 2 million in coverage.
Landlords renting to people operating STR may have insurance problems that they are not even aware of. Make sure your perspective landlord is aware you are operating a STR and make sure their insurance provider is aware. The owner of the property is taking on extra risk. Liability claims are higher on STR than they are on LTR.
Not sure what the difference is when you say "arbitrage doesn't work in every place"? That presumes that if you owned the property and did STR then everything is fine.
OK, you own it and pay a mortgage payment of $1,300/mo or I rent it and pay a rent payment of $1,300/mo. The money is the same and the risk to me is actually less given the fact that I don't own it. How is that different?
I agree that one should seek to own assets and I own plenty but controlling assets through arbitrage that produce income streams without the downsides to owning is also a viable alternative. Not saying I don't have plenty of risk doing so but it's managed risk.
Also, owners in my experience never do it themselves even if you try and convince them to. STR's are a LOT of work and the hospitality biz is a STEEP learning curve for almost everyone. Long term rental owners want mailbox money with no hassles and no extra effort. I pitch owners all the time who solicit my management company for property management services about doing Airbnb and almost all say "no thanks" due to the hassle/work. They DO however perk up when I offer to master lease the property myself and do airbnb where I take on the work and the risk and they get me as a stable long term tenant.
You also don't need to get below market rates in popular places. Pretty much any place will do as short term rentals aren't strictly about popular areas or vacation destinations. My typical guest is the guy who sold his house and has nowhere to go for 40 days or the guy who's installing a new production line at a local manufacturer and will be on site for 6 weeks and prefers a house over a hotel room or the lady whose kitchen caught fire and the insurance company is putting them up in a house for a month while the repairs are completed. These exist universally in every town in America.
I do agree that a good location is much preferable but its certainly not required.
yeah we do corporate housing for nurses, corporate and education. Would like to upgrade to more margin markets though that would be a better option. With regard to arbitrage -with real estate its not what you own its what you control. if you dont own it you lose some control and benefits but it is a good way to expand, build up some revenue and then buy. And in regards to the leases - always go with a back up plan, ie break the lease and eat the expense, lot better than losing a property, rent it your self, rent it out long term furnished, drop the price till it rents out. If you shoot for the moon you might miss it but if you can shoot for something realisitic and can live through the worst case then you will be fine.
Rex, I like all the advice that Robert Gilstrap mentioned.
In regards to your insurance question, I would insist that the owner of the home add you to their landlord policy as an "Additional Insured". I realize that you are the tenant, but since you are also the property manager, you have an insurable interest. If there is a lawsuit, you can be sure that you and the owner will both be listed as defendants so you might as well have the same insurance company pay to defend you both at once.
I would suggest a million dollars for the liability coverage, that the owner of the home pays for, and another million in umbrella insurance that you pay for. The umbrella will likely cost $200 to $300 a year and you will have 2 million in coverage.
Thank you Danny. That is very helpful and advice I had not yet heard.