$47k/Month in Rent, 0 Doors Owned | Rookie Takeover w/ Rafael Loza

Tony:
This is the BiggerPockets Podcast show 520.

Rafael:
My goal is to be 65 on a beach, sipping a margarita on the first of the month getting a paycheck, and that’s able to happen because I started with 40 short-term rental arbitrage units that bought me my first apartment complex, that maybe got me the second one, that got me the third one. So by the time I’m 65, that margarita is going to be hanging out with me because I did all the work and the groundwork to get there. Does that make sense?

Speaker 3:
You’re listening to BiggerPockets Radio, simplifying real estate for investors large and small. If you’re here looking to learn about real estate investing without all the hype, you’re in the right place. Stay tuned, and be sure to join the millions of others who have benefited from biggerpockets.com, your home for real estate investing online.

Tony:
What’s up everybody? I’m your co-host, Brandon Turner. Wait, hold on, I’m not Brandon Turner. What’s up guys now? It’s Tony Robinson, I’m here with my co-host, Ashley Kehr from the Real Estate Rookie Podcast. And today, we are taking over the BiggerPockets OG show, and we couldn’t be more excited.

Ashley:
This is a very exciting day for us. It is also Tony’s first time ever doing an intro on the podcast. We almost had to get out a teleprompter, but he made it through. So everybody, please clap for Tony.

Tony:
Yeah. Hopefully, those bloopers never make it onto the air, that stays between us. Ashley, what’s up? Welcome to the OG show. How does it feel to be here?

Ashley:
It has been almost two years since I’ve been on the show. Even before I was a podcast host, I had an episode on here, so it is great to be back.

Tony:
Yeah, it’s so crazy, all the years we spent listening to the podcast and now to be on this side. So this is a message to all the listeners that dreams do come true. You can achieve your wildest, crazy dreams if you work hard enough to make it up.

Ashley:
Exactly. And we have a guest on the show today, Rafa, who talks about that is his dream was to get out of his W2 job and he has his five-year plan in place. And he’s going to talk about how he uses apartment arbitrage to have Airbnb, and short-term rentals, and corporate rentals, and nurse rentals, all kinds of short-term rentals you can think of.

Tony:
Yeah. So for those of you that don’t know, the majority of my investment portfolio is in short-term rentals, and Rafa and I actually connected on Clubhouse a couple of months ago. We’ve just kept in touch since then. He’s got such an amazing story of how he’s pretty much built this business single handedly. And he’s got like 25 active units. I think he’s got like another 30 that he’s working on right now. So he’s just doing phenomenal, amazing things. And he gives an absolute master class on how to get into the game of Airbnb or short-term rental arbitrage.

Ashley:
Before we get in today’s show here’s, today’s quick tip.

Tony:
Quick tip.

Ashley:
Make sure you guys go and subscribe to the Real Estate Rookie Podcast where Tony and I are the cohosts, and we have a ton of fun, and we bring you guys rookie content. So if you are a new investor getting started in real estate and you want to learn, and you want to grow and scale and become the best investor you can be, we have content that is tailored directly to you. So you can also check us out on YouTube, search Real Estate Rookie.

Tony:
All right, Ash, that was a great, awesome tip, a little self-promotion there. I love it. But with that, let’s get in today’s show and bring on Rafa. Rafael, welcome to the BiggerPockets Real Estate Podcast. We’re super excited to have you on here today, excited to dive into your story. Why don’t you tell the listeners a little bit about who you are and how you got started in the world of real estate investing?

Rafael:
Yeah, Tony. Thanks for having me, man. I’m really, really excited to be here. My name is Rafa, I do short-term rentals. It’s really all I do. I’ve been doing it for about four years now. Just a quick story to get into it. About four years ago, I wanted to get into real estate investing. I live in Southern California, so the houses here in Southern California, at that time we were about an average medium of like 460, 470 in my area, in Orange County. And so I had this idea where at the time I was transitioning between jobs, I was working at a casino and I’m like, “Hey, I need to find something to make extra cash to get out of this job.”
I’m not the type of guy that likes to work nine-to-five. I think I’ve had like five jobs my entire life. And so I started listening to podcasts and figuring out how to analyze deals. I didn’t know about the BRRRR method back then, and I quickly found out that if I were to buy a house here, I would make zero cashflow. I’d probably end up with like 50 bucks, if I timed everything up or probably even negative cashflow. So at the time, as I was doing research, my partner at the time, we were talking, because she works in Hollywood, and she’s like, “There’s this guy who’s driving around his Ferraris, he’s like 24 years old.”
And I’m like, “How’s he doing this?” And he’s like, “I guess he’s got like 10 apartments on Airbnb.” And I’m like, “Oh, I know what Airbnb is.” And I started doing research and I found out about short-term rentals and that was like, “Wait a second, so it’s as simple as the arbitrage model where I can lease out a unit and put it up on a website like Airbnb and start making money?” And so I started doing more research and found a mentor that was teaching systems and processes and I jumped in on it, watched a couple videos and then put it on the back burner like a lot of people do. I let it sit there for about six months.
It was always in the back of my mind, I was working still, at that time I was working graveyard. So as you can imagine, sleep during the day. It sucks, really slowed me down a lot, my progress. And then one day my partner at the time, she’s like, “I got us a meeting at this apartment complex. I already did the initial call, go out there and see what we can do.” So I went out there and I pitched them, “Hey, we’re trying to do short-term rentals.” So my first pitch, I was all nervous and shaky. And at that time, that complex, it was 120-unit complex, and it had about a 65% vacancy.
They were remodeling the whole thing, it was all fresh, brand new remodeled. So I was like, “I’ll lease one, two bedroom off you guys.” I ran the numbers and she’s like, “Yeah, we can go ahead and give you one.” So I was all excited. So we ran the numbers, and what I did is I ended up leasing. So what I do is arbitrage, and so I lease out units. We can go into that in a little bit, but I ran the numbers in comparison to the house that I was going to purchase versus this, and the money that I was going to put down on the house versus the money that was putting down on this apartment, that money I was going to get back in about seven months projected.
And it was a 20 grand or so, a little bit under 20 grand at the time. I ended up doing half on a credit card and half cash. And we spent about, I want to say a little bit under $20,000 on this two bedroom apartment, with rent and deposit. And we went live in the middle of December. I paid the first month rent, that first month deposit as well, because I was brand new in that building. And by the end of December, I had both that money back, the rent and the deposit. And I was like, “Whoa, okay.” At the end of January, I had made a $6,000 profit on a two-bedroom apartment. And I was ecstatic about it. So I was like, “Okay.”
And it all just fell into place after that, I had a good relationship with the complex, again, they were super vacant and they offered me another one, offered me another one, and then nine months later, I had 14 units live, two different complexes. Now, I’ve been at it for four and a half years, 24 units live right now.

Tony:
That’s amazing.

Ashley:
Yeah. It’s so awesome. Can you just tell everyone just real quick, what’s the snapshot of your portfolio look like? What was the total amount of units you have?

Rafael:
Yeah. Right now I have actually 23 light units, I just closed one down yesterday. So I have 23 apartments. They’re all arbitrage leases, and I’m actually sitting in an eight-bedroom apartment complex that we’re taking over right now. And it’s actually being remodeled by the owner, I’m in a partnership with them, where I lease out everything he goes live on. And so I have 23 live. I’m actually giving four away here, two to my brother and two to a buddy of mine because I want them to get started in this. So I’m going to have four more.
In the backside, there’s a two-bedroom bungalow that’s been remodeled that I’m taking over. I just signed a lease on a three-bedroom house this morning. So currently live, I have 23 units, four different locations, and I have four, five, six, seven units that are going to be coming live in the next three weeks or so. And then I spoke briefly, Tony about this, but I’m working a deal with another investor that I’m going to take over a 30-unit apartment complex, all 30 units, brand new remodeled.

Ashley:
Yeah. I can’t wait to dive into more of this. I want everyone listening today to be able to do the exact same thing you’re doing if that’s what fits their goal, their strategy. So let’s start first of all, with your strategy, what is arbitrage? Can you go into detail as to what that is?

Rafael:
Yeah, Ashley. It’s a really good question. I’ve heard a lot of people talk about it and everybody has a different how they do it. The arbitrage model that I do is basically we come in as a long-term tenant on any apartments or bedroom and we lease out the unit for long term, a yearly, it’s like a regular person, but we do it under our corporation. And what we do is we take that one-apartment house, whatever, the actual asset or the actual building is, and we furnish it and then we re-rent it per night as a short-term rental. So we end up making a profit based on the nightly rentals.
So if we rent an apartment for 2,100 a month for 12 months, then we furnish it. Instead of me making a $2,100 off that one-bedroom apartment, I ended up doing anywhere between 4,500 to $6,000 a month. So we make a decent spread on top of the rent and all the expenses. That’s what arbitrage is.

Tony:
Yeah. You’re basically locking up that unit and then reenlisting on an Airbnb for a higher price. Now, Rafael you and I originally connected on Clubhouse. And I remember after hearing you talk, I was like, “Man, this guy has got it going on.” Because we’re both in the short-term rental space, we’re doing it in different ways. And when I hear the revenue that you’re able to generate without actually owning the units, it makes my head spin. There are definitely some pluses to the arbitrage model, but there are also some risks associated with the arbitrage model as well.
So just from your own perspective, what do you see as the things that make rental arbitrage really, really , I guess, a really strong business plan? And then what are some of the risks associated with going down that path as well?

Rafael:
Yeah, absolutely. Tony, such a good question. Here’s the deal. I’ll give you guys a quick example. I just opened a one-bedroom apartment, it costs me $12,000 in terms of furnishing, design, first month’s rent and deposit. That’s all it was, the four biggest expenses. And so that unit, $12,000 is all it takes me to start up. I can get those $12,000 back in easy eight to nine months, and then as long as that unit is still active, it will be cashflowing for the life of that one-bedroom apartment. Just to give you a perspective, I just checked the numbers on that one bedroom, it went live the middle of June.
As of today, it’s already revenued 12,700 bucks. It’s not a profit, but it’s revenue just exactly what I’ve put into it, I’ve profited probably about 40% of that maybe, I don’t know. And so that’s the beauty of doing the arbitrage model is, let’s say somebody only has $10,000 to get started and they can’t go and get a $400,000 loan or a house because the deposit is not there and they just want cashflow, they don’t want the equity, they just want to make some side money to, I don’t know, pay for their weekends outs, or their dinners for family or whatever the case may be. You open one unit up at a cost of about 10 grand, a small one bedroom, 450 square foot apartment.
And that unit, if done correctly will be cashflowing you a minimum of $1,000 a month minimum, if done correctly and done in the right locations. And it’s extra cash. And again, if you’re the type of person who wants your money back, just save all the profits and you’ll have a backend assaulted eight, 10 months with what you initially started. To answer the second part of your question, the downside is that you’re pretty much at the expense or at the mercy of the property owner. So if you’re working with these giant REITs, the big 300-unit apartment complexes that have the property managements in place already, odds are, you can get kicked out in a year if you have issues with your guests, with neighbors, whatever the case may be.
Or if you go into a building without having full transparency with the owner and you start doing things like Airbnb, then the owner gets upset, he can kick you out and that ends your entire business. It’s over. So that’s the downside. And you’re pretty much at the mercy of whoever you’re working with and at the length of that lease. And there’s ways to mitigate that risk. I’ve been in buildings for four year, no issues. I’ve been in buildings where after 12 months, a lot of people started jumping into that building, and we were all asked to leave because it was just bothering too many neighbors.
So I’ve pivoted, I’ve talked about it shortly to where now instead of me going into these big, giant apartment complexes, I actually like to work with small mom and pop investors that own eight to 12-unit complexes, these small buildings where I can just lease the entire thing and I don’t have to worry about a long-term tenant being disturbed by my short-term guests. Does that make sense? And then I’ll sign a three-year lease, so I’m protected with them. I have full transparency of what I do with the owner, so the owner knows exactly what I’m doing. Not all of my units are on Airbnb, not all of my units are on VRVO. I get a lot of direct bookings, contractors, nurses, all of that.
And so they’re aware of all of that, and because they know how I operate, the way I manage, it’s a pretty safe bet that this eight-unit building I’m in, I’ll be able to have this for as long as I really want to be honest, three, four years, whatever the case may be. Does that answer it?

Tony:
Rafael, what a great answer to that question, man. And you actually answered my second question without me even asking them, I was like, “How do you mitigate that risk?” But what a great example. I know folks that are also doing arbitrage outside to you, and yeah, when you’re in that big apartment complex, there’s a friction between the people that actually live there, and then the guests that are coming in and out of these short-term rentals. So you’re bound to get some complaints, but if you go in and the whole place is yours, you don’t have to worry about anybody complaining. And then you have a better relationship with that owner. So I love that approach.
I want to go back to what you said about the startup costs, because I think this is what I really want to highlight for the guests. You said one of the recent units that you brought up, this one bedroom, your all-in costs was $12,000, which is mind blowing to me. We’ve got a studio that we’re working on in Joshua Tree, and we’re probably going to spend about $55,000 getting that one, the down payment, closing costs, and the furnishing. 55 versus 12 is a huge, huge, huge difference. Just ballpark, Rafael, how much do you think you’ll actually profit on that one bedroom that costs $12,000 to get set up on an annual basis?

Rafael:
On an annual basis that unit will do 1,500 a month minimum, like minimum. So what does that, I don’t know, what’s the total?

Tony:
1,500 times 12, I can’t do, it’s like 16,000, somewhere around there, I don’t know.

Rafael:
Yeah. It’s going to be like 16 grand for the year, something like that. And that’s, again, if I have it at the minimum. And this is just what I’m looking at right now, I’m actually seeing some crazy numbers with that unit. Guys, it’s 400-square-foot apartment, 450, it’s tiny. It should have been a studio. All of July, I was doing like 240 a night on that, and I was blown away by it.

Tony:
That’s crazy.

Rafael:
It had a ridiculous profit in July. Right now, we’re in slow season. So minimum, $1,500 a month profit for 12 months, is what I’ll make off that one.

Tony:
I did the math, not 16, but it’s $18,000. So $1,500 a month at 12 months is $18,000. So you’re getting back literally all of your capital and then some in that first year, right?

Rafael:
Correct.

Tony:
For us on this studio, again, we’re putting in about $55,000 into this property in Joshua Tree, we’ll probably gross about 75, we’ll net maybe half of that. So we’ll keep somewhere between 35 to 40 grand on that property. So we’re not quite recapturing all of our capital, we’re getting close, but not quite. And I’m illustrating these two different scenarios to show something to the listeners that the benefits typically of going with arbitrage are that you’re going to get better cash-on-cash returns because the capital outlay is so small. The overall revenue and profit numbers might be a little bit smaller, we’re talking to 18,000 versus like 35 to 40,000, but your money is going to stretch a lot further on the arbitrage model because you’re only spending a third or a fourth of what we’re spending to actually purchase and acquire these properties.
Well, for you and I have talked about this before as well, and then, sorry, Ash, I’m hogging up because we’re talking about short-term rentals. I can’t shut up when we get on this topic.

Ashley:
Well, actually, Tony, I feel like I do have a leg up for you this one time on a short-term rental because that’s my only unit for Airbnb, is arbitrage.

Tony:
The arbitrage. Well, let’s all talk through this, and Ash, maybe you give your opinion first, and Rafael, we can go to you afterwards. But I think one of the other benefits of owning the unit as opposed to the arbitrage model is that you get the long-term appreciation. To me, I think that’s probably one of the biggest reasons why I haven’t jumped into the arbitrage model yet, is because I also want to build wealth long term. So Ashley, what are your thoughts? And Rafael, we’ll go to you afterwards.

Ashley:
Yeah, I agree with you on that, Tony. There’s not a lot of equity buildup, there is no mortgage paid down, there’s no appreciation. What you’re seeing is you’re seeing cash now compared to wealth building in the future. And we had just had Avery Carl on, and she talked about this as to how she doesn’t do arbitrage because she’s building wealth and wants to own the actual units, I definitely agree with that, but I also think that there’s a ton of opportunity to build capital to buy other wealth-building assets by using this model. For example, the apartment that I have, it’s in a complex where I used to be the property manager for, I used to run it.
And I am on a month-to-month lease. The owner knows exactly what I’m doing, and super happy for me, and I can probably do it as long as I want, but I also have the option to pull out of it if I want to. So that’s pretty low risk for me doing this. I just actually pulled up the numbers because we were talking about the initial investment. So it was $5,000 for me to start it. And just this year alone, we’ve had 18,000 in revenue and we still have three more months to go for the year. So there definitely is a lot of cash to be made now, but really, I don’t see a long term benefit of it, except for using that cash to purchase other properties for buy and hold.

Tony:
Rafael, what are your thoughts on that debate?

Rafael:
Both are awesome points. And Ashley, what you just said at the end is exactly the whole reason. You’ve got to have a goal with this. And I want to structure this as best as I can, the whole point of why I do this and how I do this is to be able to come in and purchase property. Throughout my little four years of history that I’ve been doing this, I’ve had the opportunity to purchase several times already. The reason I don’t is because I have a goal in mind to hit a certain amount of cashflow every month to where I can come in and go, “I like that property, boom, here’s a down payment. I liked that property, boom, here’s the down payment.”
So you’ve got to have a goal in mind when you start this. If you want to start doing, for example, Tony, your studio in Joshua Tree, can a person really put in $55,000, open that one studio and then quit their job with the revenue of that unit?

Tony:
Heck no.

Rafael:
Probably not, Okay, well, I can take your $50,000, I can open five units, cashflow me five grand a month, I can quit my job, do this full time, build this business, and delayed gratification. In a year’s time, those five units will be cashflowing me enough to either open more units or to do this full-time as no other job and focus on actual investing now where I can learn how to do the BRRRR strategy regarding wholesale or lease to owner, whatever it is that people want to learn out there, because they started this first and a year later, now they’re cashflowing enough to quit, or they started five units and their cashflowing enough to in a year say, “Hey, now I have $50,000 sitting in the bank. Now I can go into real estate investing.”
And so anybody who’s listening to this needs to come in and go, “All right, what’s the plan?” I have a five-year plan, guys. My five-year plan is to get to a certain amount of arbitrage units, and it’s why I haven’t purchased anything because I don’t want to break that plan. In five years, if I have anywhere between 50 to 100 arbitrage units, I can go out and, Tony, join you out in the Smokies with the cabin. I’m looking at a five-unit complex right now that I might try the short-term rental’s purchase. I’m actually working with partners now to be able to buy complexes to purchase, but I’m at that stage where I’m able to get them.
Not only do I know short-term rentals so well with the systems, the processes that I have built, that for me, any unit I get, even if it’s a 30-unit apartment complex, I can plug and play it. And going back to that point, it was because the arbitrage model allowed me to get there. I can delayed gratification, again. I know that if I wait three, four years, my goal is to be 65 on a beach, sipping a margarita on the first of the month, getting a paycheck, and that’s able to happen because I started with 40 short-term rental arbitrage units that bought me my first apartment complex, that maybe got me the second one, the third one.
So by the time I’m 65, that margarita is going to be hanging out with me, because I did all the work and the groundwork to get there. Does that make sense?

Ashley:
This is why I love real estate, is because there’s so many different strategies, so many different ways to do it. And real estate can be easy because there’s so many different ways to get started, but it can also be hard because there’s so many different ways that there’s no set like, “Okay, you go to college, you go to med school, you do your residency. Okay, you’re a doctor.” There’s no set plan, to that makes it difficult. But I also love it because no matter what your background or what your goal, there is some way for you to find a strategy that works for you. And this is what’s working for you.
So Rafa, I want to know when you go out and find these units, how do you pitch these landlords? For my unit, it’s somebody that I know very well, and it was easy, but how do you even go out and find these apartments? And then what does your pitch look like?

Rafael:
Sure. So there’s so many ways to do it right. Now, my strategy has changed over the years. At first, it was going apartments.com and look for apartments that were for rent. And that’s how I found it. The problem with that, Ashley, is that, without to change the conversation is that every pitch is different depending on the type of location I get. My pitch is different for property managers who are managing 500 units, my pitch is different from another owner who has a three-bedroom house, my pitch is different to an eight-unit apartment complex owner.
Every single one is different, and it has to be approached differently because this is a different type of vocation and the way it’s going to be managed is different. So the best way right now, if anybody wants to get started in arbitrage, is to drive your neighborhood, and what’ll happen is if you see like a multi-family being rehabbed, go talk to the general contract. So you drive in the neighborhood, you see a contractor, get the contractor to put you in contact with the owner, because the owner is going to want to lease these units out eventually.
So you’re going to come and solve this owner’s problem before it even goes on the market. If you’re doing like, let’s say it’s an eight unit complex, you get the owner on the line and you go, “Hey, my name is Rafa, I’m with Knight & Reign Properties, we’re a short-term rental provider. We do corporate housing, we house business travelers, travel nurses, families who’re for leisure in the area. And I’d love to talk to you about leasing out your complex before you put it up on the market. Is that something that would work for you? Do you allow corporate leases? Are you interested in working with me? I’m an investor and I can show you what I do.”
That’s the initial conversation with a small investor, someone that’s like-minded that also invests that will take care of it. That’s the first initial conversation. Kind of like how wholesale has three different calls that you do, rapport build, all that. Well, same with this. The first conversation, I just want the investor to know, “Hey, this is what I do.” The second conversation, we meet up and I go, “All right.” I show them either a unit that I have, or I tell them, “Hey, look.”
And with all of them, I’ll give you guys the pitch for the giant apartment complexes. But with all of them, I don’t focus on short-term rentals, I don’t focus on Airbnb, I don’t focus on corporate housing provider, I focus on the customer that I’m attracting to these locations, whether it be business travelers, whether it be nurses who are here, whether it’s the families that are here for Disneyland; I’m very close to Disneyland, whatever it is, travelers to the national parks, Tony, whatever you guys are having. And I focus on that specific topic more than anything.
So I tell the owner, “Hey, so this apartment here, I want to turn it into a short-term rental. It’s going to be corporate house for people that are going to be here for business, this place is great.” And I walk them through what I do, how I’m going to furnish it, how long that stays are going to be. Medical professionals and business travelers are typically, they’re not really short term, they’re about… Well, they’re short term, but they’re 14 days to about a month, 41 days, on average. And so once I explain what it is that I’m doing and how I’m using their unit and how well I’m going to take care of it, that’s important, you’ve got to explain how well you’re going to take care of the unit.
The fact that, “Hey, I’m going to clean this unit professionally seven times a month, maybe, instead of one time all year where are you going to have to come in and scrub the gunk off the shower,” that’s not going to happen with me in five years from now because this place has to be exactly the same five years from now than today. And so that’s how I talk to the investors. It’s a very similar to the big REITs, the big property managers. The one thing I do want to make clear is, with the big property managers, a lot of these big property managers already have their systems in place up to who they allow in, how they vet people, and what the requirements are to enter this building.
You come in and you say, “Hey, my name is Rafa, I’m with Knight & Reign Properties, I’m a short-term rental operator that sets up corporate houses for travel nurses, medical professionals, business travelers, and families here for leisure in the area. Do you guys allow corporate leases?” And that’s it. And then I wait. They’ll either tell you, depending on, again, the type of property manager that you’re dealing with, they go, “Oh yeah, we do a lot of corporate housing,” or, “Yeah, we do a lot of corporate leases,” or, “Yeah, we allow that.” Or they’ll tell you, “I don’t know what is that.” And that’s where you have to go in and educate them.
Our job is to actually educate them on how we do it. Well, the problem with these big REITs, these big property management companies is that they require two years business history, they require business credit, they require maybe a year worth of bank statements or even three years’ worth of bank statements or five times the amount of money in the bank for the deposit and for the rents and the deposit and all that. But their definition of a corporate lease is very different based on who you’re talking to. Some people think that you’re bringing your employees and you’re going to house them in that unit.
Some think that you’re doing a corporate lease at 30-day minimums, or some think that all it is your corporation is literally signing the lease and that’s it for yourself. So they don’t understand. And you have to educate them. That’s why I throw in short-term rental bid in there because I tell them, “Now, look, we furnish the entire apartment and then we provide it to people who need short-term stays or places to stay short term, where they don’t have the ability to sign a one-year lease. And that’s where we come in. That’s the service we provide to them.
The service we can provide to use that we can fill up any vacancy you have right now. I can take five units. If you have them, I can take 10 units if you have them. And then that’s where you go from there based on the conversation. Did that answer it? I hope that makes sense.

Tony:
Absolutely, Rafa, what a fantastic breakdown, brother. And you’re getting like a masterclass on how to negotiate the arbitrage units. I guess one follow-up question is, have you ever been denied by a landlord? You went to go give them your pitch, and they said, “No, I’m not interested.” And if so, like what was their reasoning?

Rafael:
Yeah, a lot, actually. Funny story, I almost got denied with the guy I’m working with now and I actually have 14 units with him. The first thing he says when I walk in the door, before we even introduced each other, he goes, “I don’t want any Airbnb here.” And I’m like, “Okay, no problem. Let me tell you what I do first before we get into the Airbnb talk.” Tony, that doesn’t answer the question, but that guy, I had to educate him on what it is that I do. Right before him, I’ve called hundreds of complexes. I know all the apartment complexes in my area. They’ll just tell you, “Hey, we don’t allow corporate leases.” “All right, no problem.” Or, “No, we don’t want any short term stays,” or, “We’ve already had a guy do Airbnb here before, we don’t want that anymore. It’s a bit too many headaches. There’s too many problems.”
Okay. Well, no hard feelings, no problem. You go on and you call the next one. The ones that really hurt are the small investors, because you’re like, “Hey, we’re like-minded here. I’m trying to get to your level. You own the property, but I’m at the point where I can lease it out for you so that you’re at 0% vacancy.” Those are the ones where I’ll meet up with them and I’ll explain to them what we do, and they’re like, “No, man, look, I don’t want to deal with any of that, I’d rather just have a long-term tenant in there.” And I’m like, “Look, I am going to be your long-term tenant, I’m just going to be using the house multiple times. As a matter of fact, I’m going to be an even more of a headache solver because I’m going to deal with the small maintenance issues. You don’t have to call a maintenance person out here.”
And they’re still like, “No.” They’re not open to it. They’re like, “No, we just don’t want to deal with it. We’re going to disturb the neighbors, the neighbors are going to get upset.” They immediately think, “Oh, if I lease you this unit, it’s going to go on Airbnb, and tomorrow, there’s going to be 20 people walking in the door with a cooler and a DJ system.” That’s literally what their mind goes. Usually, the conversation goes back to them, they’ve passed on letting me lease, and then they’ll call me like a month later where the unit is still vacant and they’re like, “Hey, can you explain to me again what it is that you’re doing?”
And then that’s when I come back and I’m like, “Look, yeah, this is what I do, this is how I do it.” Sometimes it ends up working out, sometimes they tell me, “No hard feelings, just go to the next place.”

Tony:
I asked kind of a leading question, Rafa, because I would have assumed that there would be a lot of rejection while you’re going out and doing this. And I think people hear that you’re at 23 active units with another 30 plus that you’re working on. And they’re like, “Man, Rafa is killing it,” but they’re not understanding all of the legwork and all of the rejection that you had to go through to get to that point. Ash and I talk about this all the time, we see new investors who say, “Man, I’ve submitted three offers and nothing has been accepted. Real estate investing doesn’t work, it was all a lie.” But it’s like, no, it’s a numbers game, you’ve got to get to a certain number of rejections before you finally get to that first yes.
And the fact that every single apartment complex in your area and you’ve been rejected by many of them proves that point, man.

Ashley:
That’s literally me just on everyday deals this week, rejection after rejection after rejection.

Tony:
But it’s part of the process, right?

Ashley:
Yeah.

Rafael:
Well, I’ll tell you guys what, to put everybody’s mind at ease, Tony, everybody listening, you’ll get 40 nos, but all you really need, guys, is one yes. Because we’re going after multi-family here. So if I’m going after somebody who has got 10 apartments or an investor who’s got, I don’t know, 20 doors or something, and I get one yes from them. And then I do my job as a short-term rental operator and I kill at it. I house the right people, my security systems are in place, I stop the parties, instantly, their vacancy is full, they love it, the places designed beautifully, they use me to appraise their property because it’s just beautiful, I guarantee everybody listening to this, that after your first one, they’re going to offer you the second one. And then they’re going to offer you the third one.
That first building that I was telling you guys about, I had 14 units in that building because they went from one and then they’re like, “Man, this guy’s doing what he said.” This is why I focus so much on, talk about who you’re going to house. Because if I tell them, “Hey, I’m going to bring business and families here,” and then they see five 25-year-olds walking with coolers and cans of beer, then I’m not housing who I said I’m going to house and now I’m lying. And so when you get that first one and you operate correctly and you do what you’re going to say, I guarantee everybody listening to this, you’ll get the second unit from that same person.
Or when you go out in your network and you go to like a local real estate meet up, you have the experience to talk about what you’re doing because you’re excited about it, you’re going to catch somebody’s ear, and that person can go, “Hey, I want to talk to you about short-term rental.” Especially right now, they’re super popular. Everywhere you go, everybody wants to talk about Airbnb and short-term rentals. And they’ll tell you, “Hey, I have a property. You want to come look at it, see if it works for you?” I’m actually turning away properties now they’re so ugly and beat up that I’m like, “I can’t work with this. Rehab it and then I can come in and take over it.” I kid you not.
Again, to put everybody’s mind at ease, get the first yes, and that person will just start throwing properties at you.

Ashley:
Rafa, this whole conversation really reminds me of somebody going after a partner too. You’re pitching them an opportunity, really. The people that do decide to have a nice apartment to rent out to you, you are providing them an opportunity because just like the things you said, where in five years, it’s going to look exactly the same, they’re not going to be scrubbing gunk off of the wall, and they’re going to have that guaranteed rent for the next three years or however long your lease is. Tony and I talk about this a lot, as pitching a partner and not begging them like, “Oh, please give me this opportunity to partner with me.” As to show them that really you’re providing them an opportunity and that’s the way you should be pitching it not that they’re doing you a favor.

Rafael:
Correct. Well, you know what, Ashley, really quick to give you an example on that. When I first moved to this city on one of the buildings that I have here up the street, it’s a 12-unit building. I actually have eight units in that building, and it’s the same guy that I told you that the first thing he says was, “I don’t want Airbnb.” We have the conversation, it was about an hour and a half long. I said, “Hey man, look, listen, I’ll tell you what, give me this one unit, try me out. Let’s do a six-month lease so you can see how I operate. If it doesn’t work for you, no hard feelings. The building’s vacant anyway, if you get other tenants, cool, if you don’t, I can take all 12. I kid you not. I can show you that everything that I have, my business history, all of that, whatever you need.”
And he goes, “All right, fine. I’ll try you out for six months.” We started designing it. It was, I want to say a week and a half later, he’s like, “All right.” We were in there hustling because we’ve got to get this unit up and running. It’s got to be up and running within the week to start making money. We have the security guy come in install everything, the doorbell cameras, the works. And he goes, “Hey, you want another unit?” And I just started laughing. I go, “I’ll take all eight.” He goes, “Just take one more.” I’m like, “Okay.” I start the second unit. Two weeks later, “All right, I will give you the one next door.” I’m like, “I’ll take all of them. I’ll take all of them.” And he gives me another one.
And then he ended up getting two long-term leases up top. And then after that, he’s like, “Bro, just take the entire building.” And I was like, “I told you.” And now I have eight units in that building.

Ashley:
You talked a little bit about your startup costs, but what about your reserves? What kind of reserves do you have in place for each of these units as you take more and more on? How was it during COVID? For my unit, we had one month of vacancy and I think we were pretty lucky that was all that we had. And that was even when Airbnb reimbursed you up to, I think like 15% of what your booking should have been. So it really wasn’t that bad. But if you have this many units, how do you prepare if something like that were to happen?

Rafael:
Man, Ashley, you’re bringing up dark times. So COVID was tough, it was. When it hit in March, I was projected at the beginning of the month in reservations is something like 47K or something, I don’t know. At the time I actually had 21 units live, and the moment COVID hit, I was down to $700. And I’m like, “Oh, what’s going to happen here?” I had reserves. So everybody, you should definitely save one month’s reserves, take the money and save it. This is one of the things with short-term rentals, everybody thinks… You know how I just said, I’m going to profit 1,500 bucks a month, I’m not taking that and pocketing it.
I pay myself a very small salary out of my business and the rest is in the business and it just stays there. And I have one month minimum for all my rent and my expenses. It just sits there and it’s already waiting. So in case something happens, I at least have 30 days to figure out how am I going to stay afloat here if it continues to happen. So luckily I had that when the pandemic hit. The second thing is I had to pivot. This is another very, very important thing too is… That’s why I think, you guys heard me, I’ve saying short term rentals, not in Airbnb the whole time, because Airbnb is just the marketing platform that I use to acquire customers, it’s not my business at all.
And so now from when COVID hit, I had to pivot really hard to attract different kinds of customers, people who are going to do 30-day minimums to at least break, even to keep me afloat. And that’s what we did. I started reaching out to my entire network. I’ve been saving people’s information from the first reservation I got, and I know every customer who stayed with me, every restaurant whose employees who I’ve housed, contractor companies, nurses who stayed with me, I have all their info. And so I blasted everybody and said, “Hey, we have available units.”
I reached out to the city and I said, “Hey, I have 23 units in your city. You guys have workers who need a quarantine, let me know, I’ll house them, and I’ll give you guys a really good discount. ” I actually got like three, four reservations from the city for cops and firefighters because they got COVID and they had to quarantine. And then I negotiated with some of the complexes that we were in rent. So we were paying a percentage of the rent based on the revenue we brought in. And then it was going to be deferred. And it got deferred for about eight months. We’ve paid them back now, which is awesome. And that helped out a lot.
So my operating expenses dropped, I think like 25%, which is great. But the entire pivot was, I have money to cover the next month of losses, but after that, I need to be able to generate the revenue to at least break even. This is why when you do this… One thing I want everybody to understand is when you get into the short-term rental world, especially arbitrage, you’re in the hospitality business and you’re building a business. You’re not doing passive income, you’re not doing real estate passive income, no long-term tenants, you’re building a business, and you have to treat it as such.
And so I treated it that way. I pay myself a very small percentage, so anything on top of it, I can save. I pivoted and I housed different customers because as a business, as an entrepreneur, you have to be able to solve those problems. And so I started housing people long term 30 days. I started offering very steep discounts to my breakeven number. And some circumstances, some of my units were at $300 out of loss, but that’s okay, because as long as I stayed afloat during the pandemic, the uncertain times, once everything came back, I knew it would come back.
And look, it came back hard. Just June and July were two of the greatest months I’ve ever had in the last five years. It blew everything out of the water. It was insane. I was telling Tony some of the numbers on my two-bedroom apartment and as I was speaking about it, like, “I’m getting chills thinking about it.” I was blown away at these numbers, and all because I pivoted and I was able to stay afloat and work that system to be able to house different customers instead of focusing only on Airbnb and relying solely on Airbnb. Does that make sense, Ashley?

Tony:
Rafa, way to pivot your business model, to still make it a viable thing even in the midst of the pandemic, man. But the point you made, Rafa, about it being a business and not just being like passive income, I think is an important distinction for listeners to understand, is that this isn’t like you’re taking $15,000 and putting it into an apartment syndication where you’re limited partner and you’re just getting a check every quarter, this is an active business where you need to be hands on, managing the guests, managing the cleaners, managing the handyman, just all these different pieces of it.
So it is an active business, and I just want to make sure that the people understand that. Now, along the same point, you talk about how you negotiated with some of the landlords during COVID and it makes me wonder, how are you actually structuring the leases with these landlords when you go into these agreements? Are they in Rafael’s name or are they in your LLC’s name? How are you structuring them? Walk us through that whole process.

Ashley:
Yeah. What are the terms of the lease?

Rafael:
Okay. Man, you guys are bringing up all the good points. All my leases are under my LLC, every single one, nothing’s under my name. Number one, just because of the protection. I don’t want to be liable or responsible, that’s why we have the corporation. But the leases, it’s just a regular tenant lease, there’s nothing special about it. The only thing that we do is we add a subletting clause or a subletting addendum to that lease. That’s it. Super, super important. I can’t stress this enough to everybody who listens to this podcast and says, “Hey, I want to go try arbitrage.” Make sure your lease is structured.
Not just because if you’re cool with the manager and the manager says, “Yeah, I love it. Let’s do it. Let’s give it a shot.” And then they say, “Hey, we can’t change it, but it’s okay, I know what you’re doing. No problem.” Don’t do it. Please don’t do it, because I guarantee you that if the property manager says… Some property managers rotate managers, and they decide to rotate this manager and the next one comes in, you have to educate a whole new person, convince them. If that person says no, you don’t have it on paper, you’ve got the boot, you’re out the door.
Not to mention if you have that addendum or that little clause in the lease that lets you do, because essentially what we’re doing is we’re subletting. And if you have that little paragraph, that little form of protection, when somebody, let’s say another, this happens to me all the time, another operator jumps into the building and just causes havoc in that building. And now they’ll say, “Hey, all the corporates got to go.” It’s happened to me. This is another dark set of short-term rentals. I just posted a video about this on my Instagram, because I just got the boot to leave on one of my complexes.
I could have bought that place, I could have said, “Hey, no, I have the lease, it’s here, I have permission to do this. You need to kick out whoever’s causing problems, not me.” But the reason I didn’t fight them is because I have five units in that building and they’re giving me permission to keep three and I got to get rid of two, which is fine. But I can certainly come in and go, “Hey, no, look, my lease says that I’m allowed to be here. What’s the problem?”
I still only have the freedom to be there till the end of the lease, regardless, they can kick me out at the end. But at least to having a scramble and figure out what I’m going to do in the middle of a six months left on my lease to figure out where I’m going to move my furniture, do I got to go get storage? Do I have to go and find another complex? Whatever it is. So very important, make sure you guys have the lease structured properly so that it’s on paper to make sure you’re operating correctly.

Tony:
Rafa, this is like a master class on rental arbitrage, man. You’re dropping so many gems, I love it, man. I love it. I want to take us into our next segment here, which is our deal deep dive. Come on. You guys say it with me. Ashley.

Ashley:
Oh, I do?

Tony:
Yeah. Come on. We are going to the next segment, which is our deal deep dive.

Ashley:
Deal deep dive.

Tony:
All right. Rafa, we want to get into the nitty-gritty of one of your rental arbitrage units. Do you have a specific deal in mind that we can talk through?

Rafael:
Yeah. Actually, we can go over this eight-unit complex as a whole, if you guys want?

Tony:
Beautiful. Let’s take that one. I’m going to hit you with some rapid fire questions just to set the table, and then we can go into it from there. So what kind of property is it? I think we already answered this, but what kind of property is it?

Rafael:
It’s an Eight-unit apartment complex, all one bedrooms, one bath.

Tony:
Beautiful. And how did you find it?

Rafael:
Actually, remember I was telling you guys that once you get in with a good investor, they just start throwing these things at you? He’s been remodeling this building for the last year and a half and he needs to get rid of his vacancy. And so I said, “Hey, it’ll rent on the first if you give me the entire thing.” And he gave it to me.

Ashley:
And how much was it?

Rafael:
For this building, here’s the great thing about being in good relationship with the owners, in this building, I’m paying him for four units is 2,100, for four units is two grand. So I’m paying 16,400 a month for this building. But I negotiated one month free rent. So my startup cost is going to be virtually only the furnishing. And I negotiated 1,000 per unit deposit. So I’m technically going in with $8,000 to start at this building. I have 30 days to operate for free to make that money back. And then some to cover next month’s expenses.

Tony:
How are you funding all these setup costs? Is it just money that you’ve generated from your business, are you working with partners, are you getting the loan? What does the funding look like?

Rafael:
Currently now, it’s all off of my funds, it’s on my business funds. When I first started, Tony, it was, I have a funny story about that. So my third unit that I started, the complex was, “Hey, we have a third unit, you want it?” And I’m like, “Yes, I want it.” I said yes and I have no idea how I was going to do it because I had no money. I had two units operating, I was using that money to cover those expenses, and I didn’t have enough money to open the third unit. So I called my dad and I was like, “Hey, you guys got some money laying around that I can borrow so I can open this unit?”
And funny story, he goes, “Yeah, I got about 10 grand under the mattress.” And I’m like, “Under the mattress, literally?” He’s like, “Yeah.”

Ashley:
Under the mattress?

Rafael:
And I’m like, “Can I borrow that? What is it doing under the bed?” He’s like, “Well, I don’t know. I’ve just haven’t deposited.” I was like, “Give me the money, I’ll make some money off of it.” So I took it and I opened the third unit. And I’ve opened three units with my parents, I’ve opened two units with a buddy of mine, just like talking about short-term rentals, he’s like, “Hey, can I invest with you?” And I said, “Sure. I’m trying to grow.” I think I was like on my eighth unit the time and he gave me some money, we opened two units. I offered him a split share, a percentage on the revenue, on the profit that we make on that.
And I’ve done working capital loans. Working capital loans, I’ve used to open one unit, I pay them back within the year. And I’ve talked to friends, I have a friend who I helped start short-term rentals, and she was too busy to open more. I was like, “How much money you got laying around?” Because I knew she had money because she’s got short term rentals. So she’s like, “I got about 24 grand.” I was like, “Give it to me. I’ll give it back to you in a year.” I know she said, “I have 20 grand.” I was like, “Give it to me, I’ll give it back to you in a year with four grand on top of it.”
She was like, “Serious?” I was like, “Yeah. I’ll pay you 24 grand in 12 months.” And she gave it to me, opened two units. She got a 24 grand back and I have two units running. They’re still running, it’s been two and a half years.

Tony:
Rafa, you’re like a wizard, man. You got all these different little tactics, man, in the world of arbitrage. But I think the important point here is that there’s so many different ways to fund your real estate interest no matter what avenue or path you want to go down. All right, man. So keeping it rolling with our deal deep dive here, we know how you funded it. The next question is, what did you do with it? But if anyone’s been listening to this entire episode, I’m assuming they know the answer to that is, but what are your plans with all these units that you’re taking over?

Rafael:
Actually, these eight units, four, I’m handing two over to my brother, the guy that just saved me from that ticket, and to a buddy of mine who I want him to start on short-term rentals. And so they’re going to take two and two each in the front, I’m going to take the four back. That’s actually a nine-unit complex, the bungalow, but I’m going to take the four in the back and all eight are going to be operating short-term rentals. That should go live somewhere on the 1st of October or the middle. Again, they’re still building it, but they’re finishing touches, but it’s all going to be short-term rentals, cashflow in us, handsomely, hopefully for the next couple of years.

Ashley:
What do you estimate that will be the revenue for a year, say?

Rafael:
For these units, honestly, these units are probably going to do a little bit better because it’s a brand new build. They’re very small and we’re going after a very niche customer, which is all business travelers. They tend to stay long term, might also have a lot of different people that we can use to get them filled through our direct bookings. So these units are probably going to be doing about anywhere between 1,500 to two-grand profit a month per year. That’s the numbers that I included.

Ashley:
That’s awesome.

Tony:
That’s amazing.

Ashley:
Did you learn any lessons from doing this deal?

Rafael:
Yes. Actually huge lessons in this deal. So I was actually supposed to take over this building in the beginning of June, the contractors and the owner, I guess he had a lot of setbacks. So I’ve been sitting on this unit vacant for June, July, August, going into September now. And I could have invested all this money that I invested here in other locations and taken advantage of the summer months. Instead, I got comfortable because it was handed to me and I said, “Hey, I’ll just wait.” Then they said, “It’ll be ready in 30 days.” And then I waited, and then it’s be ready in three days and then I waited.
So biggest lesson is number one, not all opportunities are ready to go immediately. This is a great opportunity, but I could have taken it and done something somewhere else while this was getting ready. Instead, I got comfortable and I spent all the money to get everything going in these units, and now we’re just sitting here waiting for them to go live. That was a big thing for me, where I was like, “Maybe don’t sign leases until the units are 100% ready to go,” because we’re waiting just for things to be finished.

Ashley:
I was just going to ask you, what would be your recommendation to anybody that if they come into that scenario, but you just answered that right there.

Tony:
Well, Rafa, man, dropping in all kinds of knowledge, man. Well, that was our deal deep dive. But before we get out of here, Rafa, we want to ask you the same four questions that is asked every single week on the podcast here. It’s time for the-

Speaker 5:
Famous Four.

Tony:
All right, Rafa. Ready for these four questions, man?

Rafael:
Yeah, let’s do it.

Tony:
All right. Number one, what is your favorite real estate book?

Rafael:
Favorite real estate, it’s got to be Rich ad, Poor Dad. Everybody answers that. I hate saying that too, but man, that’s what got my entire wheels rolling on this. It’s such a great mindset book. It’s what started everything.

Ashley:
And what would be your favorite business book?

Rafael:
Ooh, that’s a good one. Multipliers. Multipliers is huge.

Tony:
That’s a great one.

Ashley:
What’s that one? I don’t know what that one is.

Rafael:
Yeah. It’s about how to be a better boss, be a better leader. It’s bring people to grow with you instead of being the guy who’s directing and telling everybody to go. Learned a lot of lessons from that one. I used to be the guy who was like, “No, I want it this way, go do that.” Now it’s like, “How do you think it should be solved? How would you do it? Come tell me and let’s see if it works,” instead of doing that.

Tony:
Yeah. Ashley’s a terrible boss, that’s why she’s never read that book before.

Ashley:
You know what I see, I was actually thinking, “Geez, our producer should read that book because he’s always bossing us out.” You’re not taking our innovative ideas, Eric.

Tony:
All right. Rafa, question number three, what are your hobbies?

Rafael:
I love sculpting. I sculpt miniature collectibles, like little five-inch figures. I love anything art related. I love painting and sculpting. I actually have an art page on Instagram too, where I post the ball of the little pictures. I’ve sculpted like Robert De Niro, just random characters, things that inspire me. When I get inspired, I go out and sculpt something. Other than that, my bulldog, I have an English bulldog I love playing with.

Ashley:
What sets apart successful investors from those who give up, fail, or never get started? What would you think that would be?

Rafael:
Man, I love that question. In all honesty, in my opinion, it’s being comfortable. When people are comfortable, they don’t do anything else outside of their zone. For example, when I started short-term rentals, I told you guys in the beginning, I was working at casino. After my second unit, I quit, I said, “I’m going all in 100%.” Had I not done that, I would’ve probably still been at that job and I probably would’ve had maybe six units at the end of three years. Instead I went all in, dove into it with sink or swim, and got out of my comfort zone and I said, “This has to work, otherwise, I’m going to have to find another job.”
Even now, I get comfortable in this space where I don’t really want to do anything else because I’m doing well, talking about this building, I got comfortable and I could have found another opportunity maybe, or worked with other people. When other people are out there thinking, “Hey, I want to get into real estate investing, but I’m doing pretty good. My check covers the mortgage, all my expenses are paid. I’ll do this as a side gig when it’s convenient for me.” And then it ends up being never convenient for them and they end up never doing it. You get what I’m saying?
And so being comfortable is one of the biggest things that I think is what stops people from actually doing stuff. When you’re pushed to do something, it’s when you’re actually going to step up and go, “Sink or swim, I got to do it, or I don’t know what the heck’s going to happen.” Hopefully that answers that.

Ashley:
That’s such a great point. And I see that in a lot of investors where when they’re put into a situation where they have no choice, but to do something, they have to take action, they have to make it work because either they quit their job, they borrowed all their parents’ money under the mattress or whatever that is. And that really depends on the type of person. Some people don’t work well under that pressure, and so maybe it’s not best you quit your job and just jump full time into real estate. But really, if you see what kind of person you are, for myself too, I agree that put under pressure, then I will get it done because I have no other choice than to do it.
Rafa, thank you so much for joining us today. Can you tell everyone where they can find out some more information about you and possibly reach out to you?

Rafael:
Yeah. The easiest way is to get ahold of me on Instagram, it’s rafa_l0za. I have a Facebook group opened, it’s called Airbnb The Big Break where I talk about this stuff. People can join it there, ask questions, I’m pretty active there. Other than that, just tag me on Facebook or Instagram.
My website is knightandreign.com. It’s being rebuilt right now. And if anybody wants to invest, give me a call. I’m actually looking for investors to purchase some small complexes to do short-term rentals with as well.

Ashley:
Well, Rafa, thank you so much. You’ve provided great value today and we really enjoyed having you onto the podcast.

Rafael:
Thank you for having me, it was an honor.

Ashley:
Thank you guys for joining us. I am Ashley Kehr, and I am signing off with my co-host, Tony, “I’m Going To Look For My Mom’s Money Under Her Mattress” Robinson.

Speaker 3:
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