I'm quitting Rental Arbitrage after 4 years...here's what I learned

[Jake Mercer]

"Airbnb is dead." "Rental Arbitrage is an outdated business model." How many people have you heard this from?

Well..everyone's story is different. I started Airbnb arbitrage 4 years ago and here's why I'm quitting the arbitrage business.

I'm quitting because I don't need to do it anymore! I used rental arbitrage to scale from $10k in my pocket to nine arbitrage properties in less than 2 1/2 years and then used that cash flow and profit to hire a full time operations manager, build a STR property management business with a partner and work with investors to purchase properties out of state.. We manage 7 STR properties and just bought 2 single family homes and a tiny home. All that will be rented out on Airbnb! Not to mention our existing airbnb arbitrage portfolio ;

I say all this because, for me.. rental arbitrage was a stepping stone to building a business in real estate. And while it might not be attractive to all real estate investors, I believe it can be a fantastic way to start to build experience, build profit/cash flow and establish yourself as a STR professional in your market and then use that to build a co-hosting/management business and work with investors that want to you use their knowledge and expertise to partner on projects.

Point is, don't believe everything everyone says about what is "bad" and what is "good". I know people making $20k+ months couch flipping and investing in vending machines. Don't knock the hustle, just knock the operator. Become great at what you do and you can make any vehicle a success. We will do over $750k this year in revenue form our Airbnb portfolio and that's because I took a leap of faith in myself to start an Airbnb arbitrage business 4 years ago. 

[Todd Goedeke]

@Evan Polaski No , I am not talking about " traditional STR play". I was speaking of STVRs not STRs.

Smart hospitality managers don t tie up capital by owning a property. The property is a means to an end in profiting from cash flow. Business owners make money off of business execution not potential property appreciation. That’s why STVR managers don t rely on property appreciation to be successful. “ You can t eat appreciation”.

Professional , small business owners and high income investors don t buy into syndications where syndicators dock them with high front end expenses. They buy properties directly and passively manage properties relieving them of business risk while getting a stable cash on cash return of 15%+ per year.

The hospitality sector is not a low margin business as far as STVRs go. STVRs if run efficiently and marketed with 100% direct reservations should have 50%+ margins and ConC returns of 100%+ year after year. Property managers who triple net lease properties from property owners invest only in the furnishings not the building. That’s the reason for high ConC returns per property.

People proclaim they make 6 figures in property appreciation in 2-3 years. That’s all relative to what was paid for a property. Appreciation is not guaranteed until you sell or refinance.There is no consistency with appreciation. A business can t pay bills based on inconsistent RE features like appreciation. There is no formula for automatic RE appreciation year after year. STVR profitability and STVR property appreciation are not related.

Regarding syndications vs direct ownership with STVRs,it's easy to guarantee to investors a 100% ROI in 3 years;with tax benefits thru Cost Segregation and lease income. No RE syndication can give that guarantee.

[Allen Duan]

Love it! I've traveled a similar path. Started with rental arbitrage and now run a co-hosting business. Having the arbitrage experience helped us get our first co-hosting clients since we had the track record and their properties weren't the first ones we're experimenting and learning with.

To a few other posts here, most businesses take grit and drive to succeed. It's not for everyone and though I love entrepreneurship, by no means do I recommend it for everyone. For lots of people, sticking to a W2 career, spending less than you earn, and investing in real estate on the side is the way to go.

[Daniel Netzer]

Quote from @Cody Zucker:

Quote from @Nathan Gesner:

Quote from @Cody Zucker:

I respectfully disagree with you. I don’t think it’s just a “sphere” issue or echo chamber.

STR's have become more and more oversaturated over the last three years. Guests have more choices due to this over saturation so it's harder for Hosts to stand out. Additionally, budgets have tightened since a lot of the free money dried up and the fast rising inflation has caught up with consumers causing continued downward pressure on prices and occupancy. In addition, property prices and higher mortgage rates have squeezed margins due to higher monthly carrying costs. There just simply isn't as much money to be made for the average Host in 2024.

This increased competition, lower rates and occupancy, overly optimistic underwriting and lower travel demand post COVID travel boom does warrant a reasonable label such as “Airbnbbust”.

TLDR

The environment has fundamentally changed and operators have had to do a lot more than simply list a property to profit heftily. It’s become a different game, in my opinion.

I’m not suggesting all people should quit, but some might consider it if they don’t want it be in the hospitality business or work hard to make great cash flow.

[Noah Applegate]

Quote from @Dan H.:

Quote from @Todd Goedeke:

@John Underwood one of the greatest myths of all is that the way to wealth in the STVR business is owning properties. STVRs is a hospitality/ management business . It’s not a business based on RE appreciation. It’s a business based on generating high net cash flow from a property. The building is a means to an end. It’s not the RE making the money ( other than buying/ building at favorable pricing). It’s the business housed inside the building that makes the money. High quality hotel brands are owned by investors and  triple net leased to management companies. Investors don t invest for RE speculation they invest for cash flow.

There are thousands of investors who are professionals, small business owners , professional athletes, entertainers , high 6-7 figure incomes who buy RE to benefit from its cash flow. They don t need to speculate on the “ maybe” of RE appreciation when they can earn a passive 17%+ tax free return from their leased STVR property/s.

 I suspect this is true of most markets in WI, but not true of most vacation markets. 

My STR properties have appreciated over $1m each. Because I have extracted value via refinance, my cash flow is modest. If I make a little cash flow and the property appreciates over $100k/year I am very content (which has been the case in recent years).

Different markets, different approaches.   They can all work but it is important to recognize there are differences in markets.  

Good luck

Dan H, curious to know what markets you are in

[Dan H.]

Quote from @Noah Applegate:

Quote from @Dan H.:

Quote from @Todd Goedeke:

@John Underwood one of the greatest myths of all is that the way to wealth in the STVR business is owning properties. STVRs is a hospitality/ management business . It’s not a business based on RE appreciation. It’s a business based on generating high net cash flow from a property. The building is a means to an end. It’s not the RE making the money ( other than buying/ building at favorable pricing). It’s the business housed inside the building that makes the money. High quality hotel brands are owned by investors and  triple net leased to management companies. Investors don t invest for RE speculation they invest for cash flow.

There are thousands of investors who are professionals, small business owners , professional athletes, entertainers , high 6-7 figure incomes who buy RE to benefit from its cash flow. They don t need to speculate on the “ maybe” of RE appreciation when they can earn a passive 17%+ tax free return from their leased STVR property/s.

 I suspect this is true of most markets in WI, but not true of most vacation markets. 

My STR properties have appreciated over $1m each. Because I have extracted value via refinance, my cash flow is modest. If I make a little cash flow and the property appreciates over $100k/year I am very content (which has been the case in recent years).

Different markets, different approaches.   They can all work but it is important to recognize there are differences in markets.  

Good luck

Dan H, curious to know what markets you are in

San Diego.  My STRs are at Mission Beach and Pt Loma. Very different market than WI.  I suspect your rents exceeds (maybe far exceeds) mine relative to current value of property.  But each of my STR properties have appreciated over $100k/year for quite a few years in a row and are up at least $1m.  As indicated different market.  

[Todd Goedeke]

@Dan H.My investors have us build them properties for their passive high cash flow of 17%+ cash on cash return. They don t depend on appreciation of a STVR for an investment return. They are business owners,and  high 6 and 7 figure income investors not wanting to depend on erratic property fluctuation for the investment to make sense. They prefer a consistent return based on a 20-30 year triple net lease with income jumps every 5 years.

Yes, for investors who want RE speculation with little to no current tax sheltered cash flow your model would be preferred.

On the other hand , a safer passive investment approach emphasizing cash flow and cost segregation tax saving benefits that don t fluctuate, makes investors happy by getting a 100% ROI after 3 years.

[Dre N.]

Quote from @Jake Mercer:

"Airbnb is dead." "Rental Arbitrage is an outdated business model." How many people have you heard this from?

Well..everyone's story is different. I started Airbnb arbitrage 4 years ago and here's why I'm quitting the arbitrage business.

I'm quitting because I don't need to do it anymore! I used rental arbitrage to scale from $10k in my pocket to nine arbitrage properties in less than 2 1/2 years and then used that cash flow and profit to hire a full time operations manager, build a STR property management business with a partner and work with investors to purchase properties out of state.. We manage 7 STR properties and just bought 2 single family homes and a tiny home. All that will be rented out on Airbnb! Not to mention our existing airbnb arbitrage portfolio ;

I say all this because, for me.. rental arbitrage was a stepping stone to building a business in real estate. And while it might not be attractive to all real estate investors, I believe it can be a fantastic way to start to build experience, build profit/cash flow and establish yourself as a STR professional in your market and then use that to build a co-hosting/management business and work with investors that want to you use their knowledge and expertise to partner on projects.

Point is, don't believe everything everyone says about what is "bad" and what is "good". I know people making $20k+ months couch flipping and investing in vending machines. Don't knock the hustle, just knock the operator. Become great at what you do and you can make any vehicle a success. We will do over $750k this year in revenue form our Airbnb portfolio and that's because I took a leap of faith in myself to start an Airbnb arbitrage business 4 years ago. 

That’s awesome, congrats! 

[Dan H.]

Quote from @Todd Goedeke:

@Dan H.@Dan H.My investors have us build them properties for their passive high cash flow of 17%+ cash on cash return. They don t depend on appreciation of a STVR for an investment return. They are business owners,and  high 6 and 7 figure income investors not wanting to depend on erratic property fluctuation for the investment to make sense. They prefer a consistent return based on a 20-30 year triple net lease with income jumps every 5 years.

Yes, for investors who want RE speculation with little to no current tax sheltered cash flow your model would be preferred.

On the other hand , a safer passive investment approach emphasizing cash flow and cost segregation tax saving benefits that don t fluctuate, makes investors happy by getting a 100% ROI after 3 years.

>My investors have us build them properties for their passive high cash flow of 17%+ cash on cash return.

we have had STRs since 1999 and all of them have total returns very far in excess of 17% annual.   We use PMs on our STRs but I still do not consider it passive.  

>Yes, for investors who want RE speculation with little to no current tax sheltered cash flow your model would be preferred

why do you say it has no tax sheltered cash flow?   In fact the tax sheltering is the same but there is less need as appreciation can be extracted without it being taxed until time of sale. You can cost seg also if you desire additional write offs same as higher cash flow.   I have a few hundred thousand accelerated depreciation for 2024.  

>They prefer a consistent return based on a 20-30 year triple net lease with income jumps every 5 years.

never heard of nnn on an STR.   I would think this would be rare even if arbitrage. A significant prop tax increase could be devastating without the ownership.  

[Todd Goedeke]

@Dan H.perhaps you don t understand what cash on cash means. It’s not total return, it’s cash.

Understand that just because you have not heard of NNN being used with STVRs does not mean it has not been in use. There are STVRs in other parts of the country outside of SanDiego. Thankfully, the rest of the US does not function like CA real estate.

[Sarah Kensinger]

Thanks so much for sharing! Love hearing successful stories!

[Sarah Kensinger]

Quote from @Cody Zucker:

Quote from @Nathan Gesner:

Quote from @Jake Mercer:

I am on BP almost daily, and I can't recall anyone saying, "AirBnB is dead." 

 You haven't been on YouTube then because that's all it's been for 2 years.

It's been talked about on here as well, just not recently. Thankfully I think that "click bait" of sorts is quieting down a bit. Some hosts are realizing some of us are still doing very well because we're willing to adapt and change. But unfortunately, not everyone can be convinced. 

[Adrian Roytberg]

Awesome!