What Was Your Rental Arbitrage Experience Like?

Question

I see from this forum that this is a bad investment strategy but guests on the Bigger Pockets podcasts have had success taking this route.

If you’ve gone the rental arbitrage route, what was your experience like? Pro’s? Con’s?

Steve K. · Answer

Haha sorry, typing on my phone.

Jeremy H. · Answer

I see a lot of "gurus" on social media claiming to make a killing - I met a few people who did it with some mediocre success to breaking even...

The thing for me is that I want to own the asset - that's my goal. Arbitrage is a short sighted business (to me) that will work for a time but is vulnerable to all kinds of interruptions in my opinion. And what is the exit strategy?

Owning the asset gives me more options and actually builds wealth over time - I generally buy at 80-85% ARV (little built in equity), get appreciation over time as the value of the home increases, some monthly cashflow (after budgeting repairs/maintenance & CapEx) and I've been building a pretty large tax asset (I'm not a REP and my income forces my deductions to be passed forward), even better you'd be able to take straight tax deductions. And at the end of the day I can sell for a profit. It's a fairly stable business with exit options.

Arbitrage cannot claim the same benefits - maybe it has a lower entry point, some tax deductions but it is a different business entirely. You don't own anything at the end of the day and there are no good exit strategies. That's where it falls short with me. I'd bet the goal of most people that do arbitrage is to buy a rental...so why not just go straight to buying a rental and skip the risky complexities?

Patrick King · Answer

I had a few rentals in the DFW Texas market and always was in the green with what we brought it each month.  When you look at all the additional tax advantages and the inevitable inflation of rental prices, you can't go wrong with real estate.  One great success we had was a house hack townhome that we lived in for six months and converted the downstairs bedroom into a monthly rental (walled off the hallway, put in a separate entrance).  We moved out when we realized we could get $3500 a month all day long on this property (PITI was $2k a month).  Sold it years later for about 150k profit.  The new owner is a good friend of mine and he currently gets 5K a month rent.  In hindsight, I should have kept it.

Andrew Steffens · Answer

Well, I did my first and only in late 2016.  My very first STR experience, where I found a beachfront mansion in Redington Shores, FL.  It was listed for $5,500 and the property was in foreclosure so the owner was not opposed to me doing STR.  The property brought in 20-35,000 per month.  Wild success.

This was nearly 7 years ago and while I still look I have never seen anything like it again and I do not think you can make money today arbitraging small SFR and condos etc.  At least not in my market.

Michael Baum · Answer

Paragraphs @Steve K., paragraphs! :)

Steve K. · Answer

One issue with arbitrage that I see being commonly overlooked is that the way many do it is essentially running a property management business and in most states (all except a small handful), a real estate brokers license is required to manage properties which you don’t own. This means that in order to arbitrage legally one must either 1) operate in one of the few states with no licensing requirement 2) get their broker’s license (which typically requires having a real estate license for several years first) or 3) avoid any activities that are regulated by the local real estate commission such as advertising  property for rent, preparing or discussing a property management agreement with an owner, negotiating leases or lease terms, showing a rental property, accompanying a potential renter to a rental property, contracting services for rental property owners (ex. hiring or supervising property maintenance or cleaners) or collecting rents. Again this varies state by state so it’s important to understand which real estate activities are regulated and require a license in the state you plan to operate in. So that alone very much limits the services an unlicensed arbitrager can offer an owner and lowers the value that they can bring to the arrangement, while staying within the law at least. There’s also liability issues to consider... legit property managers carry errors and omissions and general liability insurance, generally know the applicable laws and follow strict best practices to limit their risk of losing an expensive lawsuit as much as possible. They also usually require their clients to have a landlord insurance policy and the tenants to have renters insurance. So they have those levels of protection for if/when things go awry. The legal risks are still considerable even when following the laws and with the proper insurance in place. As an unlicensed/ uninsured arbitrager, you will not have the same level of legal protection if something happens at the property and you end up being named in a lawsuit from either the owner, a renter or their family member (like in the case of a serious injury or death at the property). Other potential lawsuits an arbitrager could face are practically endless but the most common ones would be the owner claiming your negligence caused  property damage, a renter alleging wrongful discrimination, or someone bit by a dog or bedbugs or sick from mold, slip and falls, fair housing laws violations, etc. etc. you get the idea…). Most arbitragers probably don’t have the right business structure in place in terms of obtaining the proper licensing for the services they plan to offer or the liability/ insurance protection they will need in case anything ever goes wrong.

Drew Sygit · Answer

@Colleen F. and that's the problem!

There is a LOT of fraud in the STR industry and a lot caused by arbitragers.

Colleen F. · Answer

@Drew Sygit The denver article is more about fraud then arbitrage.  They claimed the residences as primary residences and they were Short term renting them.

And the NY article is more about illegal rentals.  You can't rent your subsidized or rent controlled apt in NYC which is definitely a fair regulation.

Definitely articles that deal with fraud and corruption in STR.

January Johnson · Answer

I think what many people with big arbitrage dreams miss is that the additional income is not CONSISTENT.  In my market, the high season is March - early September, but Nov - Feb has significantly fewer visitors.

Bottom line:  Plan for vacancies and don't get too starry-eyed.

Brooklyn McCarty · Answer

I would try to actually buy if you can.

What Was Your Rental Arbitrage Experience Like?

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