Is "residential arbitrage" a thing ?
A buddy of mine who owns a few investment properties said to me recently he's had heaps of people enquiring with him about "corporate lease contracts" on his long-term rental listed on Zillow. This made us wonder if "rental arbitrage" is a commonly practised strategy.
How it works is someone approaches an LTR listing to lease the property off the owner with a clause that permits the leaseholder to "sub-let"
The leaseholder then actively manages the property by listing it on AirBnB / VRBO, thus "Arbitraging" the rate difference between his LTR lease contract and the premium price a STR offers.
Now obviously, there is risk assumed here (primarily if you cant make enough STR income to cover the lease cost) but there is huge potential to double the investment quite easily should you manage to get a steady flow of STR interest.
The reason I'm considering this is, I'm keen to invest in property but lack the capital required. I see the process of "rental arbitrage" as a means for me to get more hands-on property management experience while saving the money I make from the Arbitrage process inorder to eventually provide me with a means to get a down payment on my first rental property.
So, is this a thing? Do people do this? If anyone out there does do this, I would like to use you as a sounding board for due diligence.
1. If you are doing this already (whether you are someone who acquires these types of leases and actively manages other people's properties on a STR basis, OR if your are a LTR owner who actively leases out your property with the right to sublet), Why do you do this & what has your experience been?
2. What are the main pain points? Are there any unforeseen issues or threats I haven't considered?
3. Is there any legal, regulatory or compliance red tape that needs to be addressed? Does the ability to engage in a lease contract for subletting only apply to certain states? Does it vary from state to state?
4. Is there an existing platform (like AirBnB) that offers this as a service? Like a direct market place for lease contracts to sublet?
Any information would be very much appreciated :)
#5 Contractors Contributor
- Flipper/Rehabber
there are tons of threads on BP about this. just do a quick search.
i would never let anyone sublet my LTRs for any reason or purpose.
if you lack capital... just work a W2 until you get enough capital. there's nothing magical or better about arbitrage.
Quote from @Nicholas L.:Thanks for your reply Nicholas; appreciate it. Ill do some more research on here re other posts as you have suggested. But while I have you, would you mind if I asked a few more follow up questions?
there are tons of threads on BP about this. just do a quick search.
i would never let anyone sublet my LTRs for any reason or purpose.
if you lack capital... just work a W2 until you get enough capital. there's nothing magical or better about arbitrage.
I do have a W2, but to be fair, with cost of living the way it is, my family are literally living month to month. I am very budget conscious and recently did a rectification of all expenses, changed power/phone providers to better / more cost-effective contracts e.t.c So I'm doing all I can to be more efficient with my spending vs income. However based on the money saved my calculations have me looking at a 10 to 15 year time horizon before I would have enough for a deposit on a second home, hence why I'm looking at arbitrage as an option.
So, regarding your answer "I would never let anyone sublet my LTR's, might I enquire why that is? I think the answer could be obvious but so as to not influence your response id be keen to hear your reasons directly and if there would be any scenario in which these concerns could be alleviated.
Thanks for your time. :)
@NIcholas Arbuckle in my area, most apartments or homes will state in the lease that they do not allow subletting or short-term rentals. This is also the case in HOA's or Condo Associations where it is often times written into the Rules and Regulations or CC&R's.
Probably not worth it to risk getting caught in those instances.
That being said, there are plenty of people who do this whether they have permission or not, and there are some landlords who will allow it. Most of the time, you'll likely get a no for an answer though because the landlord is carrying all of the risk while you have very little (if any) skin in the game.
Even if the landlord would allow it, you'd still need to get a permit for STR in some areas. IMO, any investment strategy that relies on bending or breaking the rules in order to be successful is likely not a good one.
#5 Contractors Contributor
- Flipper/Rehabber
there are multiple reasons i'm not interested - one is that, if i ever buy a property that is a candidate to be a great STR, i'll run it as an STR myself. my current properties are all situated to be LTRs. two is that, i don't want anyone else 'renting' my properties out.
it sounds like you're thinking of arbitrage as a real estate related way to generate income on top of your W2. i guess that's right - but arbitrage is a lot of work. so it would just be like having a second job.
kudos to you for your financial discipline so far. all i can say is, keep going, keep learning, keep saving, keep being patient.
and start learning about seller finance if you haven't already. it's a way to potentially acquire properties without a large down payment. and i think it's going to be more attractive for more sellers based on the current market environment. PM me if you want to learn more.
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- The Woodlands, TX
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#1 Innovative Strategies Contributor
- Lender
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Quote from @NIcholas Arbuckle:Almost all the professional STR investors on BP recommend AGAINST STR arbitrage - some appear to be very emotional about it.
A buddy of mine who owns a few investment properties said to me recently he's had heaps of people enquiring with him about "corporate lease contracts" on his long-term rental listed on Zillow. This made us wonder if "rental arbitrage" is a commonly practised strategy.
How it works is someone approaches an LTR listing to lease the property off the owner with a clause that permits the leaseholder to "sub-let"
The leaseholder then actively manages the property by listing it on AirBnB / VRBO, thus "Arbitraging" the rate difference between his LTR lease contract and the premium price a STR offers.
Now obviously, there is risk assumed here (primarily if you cant make enough STR income to cover the lease cost) but there is huge potential to double the investment quite easily should you manage to get a steady flow of STR interest.
The reason I'm considering this is, I'm keen to invest in property but lack the capital required. I see the process of "rental arbitrage" as a means for me to get more hands-on property management experience while saving the money I make from the Arbitrage process inorder to eventually provide me with a means to get a down payment on my first rental property.
So, is this a thing? Do people do this? If anyone out there does do this, I would like to use you as a sounding board for due diligence.
1. If you are doing this already (whether you are someone who acquires these types of leases and actively manages other people's properties on a STR basis, OR if your are a LTR owner who actively leases out your property with the right to sublet), Why do you do this & what has your experience been?
2. What are the main pain points? Are there any unforeseen issues or threats I haven't considered?
3. Is there any legal, regulatory or compliance red tape that needs to be addressed? Does the ability to engage in a lease contract for subletting only apply to certain states? Does it vary from state to state?
4. Is there an existing platform (like AirBnB) that offers this as a service? Like a direct market place for lease contracts to sublet?
Any information would be very much appreciated :)
While I agree with much, if not most of their points, I believe there could be a profitable business in there. BUT, it’s a business, not an investment. So, you’re doing A LOT of work without one of of not the main benefit of investing in real estate - building equity by debt amortization and inflationary price increases. Not to mention that when you OWN a property you have the possibility of hitting a windfall if the area takes a turn for the better. What they’re saying is NOT that you can’t make a profit; it’s that there is more profit with LESS risk owning the property rather than arbitraging it.
Quote from @Nate Moncrief:
@NIcholas Arbuckle in my area, most apartments or homes will state in the lease that they do not allow subletting or short-term rentals. This is also the case in HOA's or Condo Associations where it is often times written into the Rules and Regulations or CC&R's.
Probably not worth it to risk getting caught in those instances.
That being said, there are plenty of people who do this whether they have permission or not, and there are some landlords who will allow it. Most of the time, you'll likely get a no for an answer though because the landlord is carrying all of the risk while you have very little (if any) skin in the game.
Even if the landlord would allow it, you'd still need to get a permit for STR in some areas. IMO, any investment strategy that relies on bending or breaking the rules in order to be successful is likely not a good one.
Thanks Nate, thats very handy info. So when you say that the "LEASE, states no subletting is allowed" is this a state regulation/law or just personal preference from the LTR owner? I have no intention of doing anything underhand and would only do it if it was agreed and written into the lease contract. But what I'm trying to understand if this is a state-by-state "regulation" thing or just something that needs to be negotiated with the owner of the property.
HOAs / condo's I assume, is written into the agreement with the HOA board that NO apartments can be sublet for STR purposes, which is understandable and makes sense.
Quote from @Nicholas L.:
there are multiple reasons i'm not interested - one is that, if i ever buy a property that is a candidate to be a great STR, i'll run it as an STR myself. my current properties are all situated to be LTRs. two is that, i don't want anyone else 'renting' my properties out.
it sounds like you're thinking of arbitrage as a real estate related way to generate income on top of your W2. i guess that's right - but arbitrage is a lot of work. so it would just be like having a second job.
kudos to you for your financial discipline so far. all i can say is, keep going, keep learning, keep saving, keep being patient.and start learning about seller finance if you haven't already. it's a way to potentially acquire properties without a large down payment. and i think it's going to be more attractive for more sellers based on the current market environment. PM me if you want to learn more.
Appreciate all of your feedback and opinions Nicholas, this is invaluable info :). I might be dropping you a DM soon in relation to more info, so will send you a connection request now. Thank you very much for offering up your time and experience :)
Most corporate rental companies do not allow subletting.
You can ask if they would allow corporate housing to say a nurse or similar.
Its also called medium term rental, the idea is you sign a long term lease and furnish and manage and put nurses or what not in for 3 to 6 months etc and keep the difference.
This also works for condos as its a rental 30+ days and should get around the no short term rentals.
And any dealings with landlords, I would not mention short term rentals or airbnb
@NIcholas Arbuckle As someone with LL experience this is my main reason it's a hard no, there are other reasons as well: You stated that it would be 10 to 15 year time horizon before having the DP for a second home. How are you going to fix something if one of your guests causes significant damage? Do you have the cash to pay if a guest causes $15k, $5, or even $1k in damages? Most arbitragers don't have any resources, so the LL ends up taking all of the risk of loss.
Usually there's a phrase to the effect of bulletproof lease, landlord protective document, etc, that's pure hogwash when it comes down to it because the arbitrager has no way of affording to actually make the landlord whole again if there's substantial damages. Insurance will cover some damages, but ask any LL and there are always holes in insurance.
Second reason, almost as good as the first, is that I would hire a PMC, let them have ~20%, and reap the rewards myself for the added risk.
Why not start a good property management company? Get licensing, insurance, etc, and do it well! Less risk for everyone involved and you'll still make $$.
Quote from @NIcholas Arbuckle:
Quote from @Nate Moncrief:
@NIcholas Arbuckle in my area, most apartments or homes will state in the lease that they do not allow subletting or short-term rentals. This is also the case in HOA's or Condo Associations where it is often times written into the Rules and Regulations or CC&R's.
Probably not worth it to risk getting caught in those instances.
That being said, there are plenty of people who do this whether they have permission or not, and there are some landlords who will allow it. Most of the time, you'll likely get a no for an answer though because the landlord is carrying all of the risk while you have very little (if any) skin in the game.
Even if the landlord would allow it, you'd still need to get a permit for STR in some areas. IMO, any investment strategy that relies on bending or breaking the rules in order to be successful is likely not a good one.
Thanks Nate, thats very handy info. So when you say that the "LEASE, states no subletting is allowed" is this a state regulation/law or just personal preference from the LTR owner? I have no intention of doing anything underhand and would only do it if it was agreed and written into the lease contract. But what I'm trying to understand if this is a state-by-state "regulation" thing or just something that needs to be negotiated with the owner of the property.
HOAs / condo's I assume, is written into the agreement with the HOA board that NO apartments can be sublet for STR purposes, which is understandable and makes sense.
Typically, it is personal preference of the landlord or something boiler plate that exists in the lease document they are using. A lease can technically say whatever the landlord wants, but at the end of the day, the law will take precedence and void the landlords prohibition on subletting if their states laws specifically allow it. That is a state by state ruling though, so you'd have to check your states laws regarding subletting and leases to find out for sure.
Since your plan is to go to the landlord directly with the intention of sub-letting, all you would need is for them to have written consent. If they don't want to do so, you wouldn't have a lease agreement anyway, so there's not really a downside to asking.
With the amount of risk involved, it sounds like the safer option would be to just start a short term management company and go to the LTR listings and say hey, I'll manage this for you short term at x rate.