Short Term Artibrage on New Construction Triplex

[Michael Gravallese]

I just finished a new build. Its a Triplex consisting of (3) 2 bed 2 bath identical units, with an attached 2 car garage I plan to keep for personal use. We just put the 3 units up for rent and I have been approached by a couple of different people looking to sign a lease with me , and then rent the units out through a 3rd party management company doing short term rentals. I understand the insurance requirements needed by both the lessee, and the 3rd party management company. I am not opposed to the idea, but just wondering what else I should consider before I make a decision about this type of arrangement. Any tips, suggestions, concerns or any other advice would be appreciated. The building is in Lantana, Palm Beach County. Market rents are about $2800-$3000 per unit/month. What do you think would be a fair price to lease all 3 units to one person for an arbitrage scenario?

Thanks

[Michael Baum]

Hey @Michael Gravallese. This is called arbitrage. Do a search and you will read a ton.

The bottom line is that I would want to see bank statements etc to make sure these people can afford to furnish and run it properly. Most arbitragers don't have 2 nickels to rub together.

If the market rent is $3000, I would charge them $4000 per unit. No way I would discount a single penny. I would charge a premium for allowing them to arbitrage your units.

They are going to need all the correct insurance for STRs. Not landlord or homeowners insurance.

I would make them get flood and wind as well. 

[Yu Liu]

I agree with Michael about making sure they can pay but I will add that there are a few good arbitrage teams out there. 

For the arbitrage people, they will ask you for a discount since they are signing for all 3. That is up to you whether you allow it or not and how much they are willing to pay for it. I say try having that conversation and see what you find out, it might be in your favor to try it out.

Main thing is finding out if your place is allowed to do STRs, owners can get fined if they're caught doing it somewhere illegal

[Richard Elvin]

I agree with what Michael said, also realize that you are taking most of the risk and none of the returns. If you want to go STR, why not use a good, emphasis on good, property management company that has the resources and knowledge to get you the extra return? I don't see a scenario where I would allow an arbitrager access to my property.

I think the biggest concern is that, unless they're well capitalized, if things go sideways they can walk away and leave you with the mess/fines/lawsuits/whatever. There's an old saying about getting blood from a turnip...

If you can't get above market rents why would you put all of your eggs in the one basket? One tenant means if that tenant has issues paying, you are missing three payments. That's one of the biggest reasons I like multiple units, it spreads the risk out. If one tenant rents the entire place you are no longer diversified.

[Ali Nichols]

If the numbers are solid for just traditional long term renting, avoid the hassle :) 

[Sarah Kensinger]

Unfortunately, there is limited resources for landlords seeking guidance on what to be cautious about in an arbitrage arrangement. First check and make sure STR are permitted in your location, because I'm thinking you have some restrictions.

The arbitrager should have STR insurance, and I believe Proper Insurance is the only company that provides coverage for arbitrage. They also extend that coverage to homeowners, offering a dual layer of protection. I'm not sure what the point of having the arbitrager pay for wind and flood would be, since those policies should be included in the landlord's policy rather than the tenant/arbitrager's responsibility. I wouldn't recommend raising the monthly rent solely due to it being a rental arbitrage situation. Currently, it's challenging to make the financials work for arbitrage, and increasing the rent could potentially lead to difficulties down the road. Particularly if occupancy rates decline, the rent is higher than local market value, which in turn makes it harder for the arbitrager to meet their monthly payment. No need to make landlord responsibilities harder! 

Lastly, I've heard of some landlords requiring the arbitrager to take on maintenance responsibilities, so you might consider working out a similar arrangement. If the arbitrager is marketing the STR correctly, the property should always be in pristine condition.

Maybe you can connect with @JakeMercer since he has lots of experience with rental arbitrage.