What are the pro & cons for airbnb arbitrage ?

4 Replies

Saw a great interview with Grant Cardone & Brain Page . It’s been out for awhile now but I never took the interest in actually watching it , be I did yesterday and he was pretty much

Breaking down the business of airbnb arbitrage , so I thought I would ask bp what am I missing what are the pros & cons of this setup? I understand this is something a person who have to sale the property owner on letting them is their home to operate this product, but it feels like I’m missing some kind of major risk that I not seeing , it almost felt too good to be true , so what are your experiences with it ? Why or why don’t more investor use this strategy. Is it the new best kept secret that not so much to a secret? ...

Personally, I think there's a ridiculous amount of downside and limited upside for the property owner. I love how these new "terms" crop up to essentially describe something that's existed forever (subletting). I suppose if you owned a property in an area with poor/no property management facilitators, and you wanted to turn your property into STR, there might be some value in letting someone else do it who can make more money than you can, but generally the pieces don't really fit together all that well. If you have a property in an area popular enough to warrant a thriving STR, there's probably competent property management available, and if you don't there's probably not enough business for someone else to pay you what you want, them to do the work and make a profit on top of that. Not impossible but unlikely. Outside of some rare situation, I fail to see why you wouldn't want to just capture that profit yourself rather than rent to someone at/below market rates and let them profit from your property, which will experience accelerated wear.

Just like anything else in life and business, there are pros and cons for both landlords and the "arbitrager".

I currently have a couple and IN MY OPINION,
there is way too much hype around it, a lot of people arguing against it with ZERO experience.
Most of the argument for it, the person is really trying to sell you something.

Personally, it is good for me, because I get some cash-flow, that otherwise wouldn't have, But I plan on purchasing
a property as soon as I can qualify. Cons: there is always a risk of new regulations, there is no appreciation, no tax benefit, and
supply is increasing like crazy everyday. Until you have good systems in place, it is ALOT of work, back and forth communication, 3am phone calls, etc... It is not as easy as they try to sell you.

As for the landlord, I would rent to an "arbitrager" with a track record all day. The property needs to be kept top notch,
in order to have business. It gets cleaned 2-3 times a week. Any maintenance issue $500 or less, is usually done by the arbitrager within 24 hours in order to keep the business going. Cons: The arbitrager could stop paying rent, so could any tenant that you dont screen correctly...


Originally posted by @Robert Collins :

Saw a great interview with Grant Cardone & Brain Page . It’s been out for awhile now but I never took the interest in actually watching it , be I did yesterday and he was pretty much

Breaking down the business of airbnb arbitrage , so I thought I would ask bp what am I missing what are the pros & cons of this setup? I understand this is something a person who have to sale the property owner on letting them is their home to operate this product, but it feels like I’m missing some kind of major risk that I not seeing , it almost felt too good to be true , so what are your experiences with it ? Why or why don’t more investor use this strategy. Is it the new best kept secret that not so much to a secret? ...

 

@Robert Collins

For the record, I am a big fan of AirBnB. I am staying in one tonight, and I support owners being able to do what they would like with their property.

I think the 'con' is the political risk now in certain markets. The coastal urban markets are where this is often in demand (think absentee New York condo owner in Florida for 6 months). Those markets are hungry for regulation and new ordinances. Given the makeup of likely voters, these laws seem to pass with relative frequency. This just passed in Jersey City. 

What worries me is that AirBnB owners and arbitrageurs run their numbers solely on the short-term rental market, which means they are underwater if they have to go with a longer-term lease. It's completely understandable why they do this, but it leaves people with few options and underwater if the cranky local voters do what they do best. 

I have tried to think of an appropriate hedge for this, and come up with the idea of serving two markets on a state line (think Portland Oregon and Vancouver Washington, for instance). This way, you hedge by being on either side of the line. That said, political action like this can be contagious. I would also be careful about markets where inventory is very tight. These laws seem to come up as a response to increasing rents, which tends to be driven more by markets with byzantine zoning rules and a lack of new inventory coming online.

@Robert Collins , I agree with what @Trevor Ewen mentions and think of AirBnB as the following:

Assuming you can rent your property as a 12 month rental or chose to use AirBnB

Pros:  Generate higher yields in the short term, creates flexibility for your property if you also like to use it.

Cons:  More management overhead, cashflow could be unpredictable, higher property wear and tear, economically more dependent, on the hook for utiltilies (internet & cable) and upfront furnishing costs.

If you are taking an arbitrage strategy where you are renting from a landlord and then creating a spread.  You need to go direct to property owners to find propreties where you can do this.  Any good property management companies will not allow tenants to do this if they are aware of it.  If you are doing this you are not an investor but an operator...so make sure you are not confusing the two.  Investments have a value that can be sold, I don't see the arbitrage as a sellable asset.

Bottomline is that there are plenty of operators making money doing this and it requires minimal startup costs (~15K for furnishings) for the operating business.Overall, I see this business model as high risk for the following reasons:

1. Monthly costs (rents, insurance, utilities, landscaping, etc...)

2. Funiture and other furnishing costs due upfront

3. Property Owner can take back the property after your lease is up (potentially after the first 12 months)

4. Would a recession lower nightly prices?  How much new AirBnB inventory is coming online and how is that impacting prices and occupancy?

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here