Newbie in Rental Arbitrage –How do I Analyzing Profit Potential?

Question

I’m an 18-year-old aspiring investor with a goal to build wealth in real estate. I’ve decided to start with rental arbitrage, given my tight budget. I’m focused on tourist-friendly areas (Bay Area, North Tahoe and primarily Sacramento) I have a few apartments interested in learning more about my plan. My challenge is that I’m struggling with figuring out if a property will be profitable or not, even though I've done research on sites like AirDNA and tried to analyze multiple factors.

where Im stuck: 1. Occupancy Rates: How can I accurately estimate average occupancy rates for these areas? I’ve looked at Airbnb listings, but it’s hard to tell which ones represent long-term averages.2. Monthly Expenses: I’m accounting for rent, utilities, and cleaning supplies, but are there other hidden costs I should consider? Any budgeting tips would be super helpful!3. Expected Nightly Rate: What’s the best way to estimate this without over- or underestimating? 4. Breakeven Analysis: I’ve read about calculating my breakeven occupancy rate, but I’d love to know more about how others in rental arbitrage set up and interpret this analysis.

If anyone has a process or checklist for analyzing potential arbitrage properties, I’d really appreciate it! Thanks in advance for any advice or insights.

Andrew Steffens · Answer

Your thoughts and commentary as an 18 year old is impressive! However, seriously beware of arbitrage.  I got my start in arbitrage but you will be sinking serious cash on start up and the cash flow could be minimal.  If you have $25-30k to sink in start up costs, it would be advisable to save up and use the money as a down payment on a turnkey furnished property.  Furniture tends to rapidly depreciate while real estate tends to appreciate.

Vanessa Lule · Answer

@Jonathan Greene I haven't thought about doing MTR on arbitrage before, however it does sound interesting. I'm curious though where I could possibility list MTR's and find the best location for it. Thank you so much for the feedback & insights on furnishing.

Bradley Buxton · Answer

@Vanessa Lule

I'm in North Tahoe and there are furnished rentals. Check with the local regulations on permits and what is required. Some condo HOAs do not allow STRs or some even long term rentals. Keep in mind there is a big movement to provide housing for locals. If you area considering the area make sure that the owners know what you are doing.

Garrett Brown · Answer

Welcome Vanessa! You are taking the right steps by checking AirDNA. You can also look at Airbnb using "the enemy method" to see what competitors are doing nearby that was coined by the brilliant Avery Carl. Have you used the BIggerPockets STR calculator at all? It can help to see the expenses that may come up in STRs.I would personally look into co-hosting over arbitrage if starting on a tight budget. Try to work or internship under a local property management company to get some training and learn the ins and outs of it. After, you can start bringing on owners confidently and it's one of the lowest costs to entry around with a very high upside. It is a business though so be prepared to work but the ceiling is very high.

Jonathan Greene · Answer

Welcome. You have the right things to analyze here, but STR might be a tall order to do arbitrage unless you have the funds to go heavy on the furnishings. Have you thought of doing MTR on arbitrage? Usually, owners will look a little more kindly on MTR because it's less wear and tear. For you, it means less money on amenities, but still full furnishing.

Scott Scoville · Answer

Hey Vanessa, I manage SFH, Small Multi, and a few MTR's, but only for my own properties. Be happy to chat about the market in Sac anytime.

Vanessa Lule · Answer

@Scott Scoville

Hello Scott, What kind of properties do you manage in Sacramento? Are they STR? Are you the landlord?

Jonathan Greene · Answer

You would list them on Furnished Finder. It's basically set up for MTR and much less hassle, but less vetting, and way lower cost.

Andrew Steffens · Answer

I got started in arbitrage in 2016 with a beach mansion in foreclosure.  I sunk about $40k getting the place rent ready luckily cash flow was about $20k a month and I had it for about 10 months before the bank took it back.  I have never seen a deal like that ever again.  More likely now if you find a willing property owner you will sign at best a 24 month lease lets say at $3,500 a month for a nice 3/2 with a pool 5-10 mins off beach.  You will pay $7,000 up front and about $20 a foot to outfit the property so lets say about $37,000 all in.  At best you cashflow $1,000 a month and you make $24,000 in 2 years so -$13,000.  You will have some 2 year old furniture that might be of some use, but its a losing proposition in my opinion.

Vanessa Lule · Answer

@Andrew Steffens I appreciate you sharing your thoughts. I'm curious if you have any learnings from your start in arbitrage and how to avoid sinking large amounts of cash. Turnkey properties are something I’d need to learn more about. With my current goal being focused more on cash flow, I’m wondering if pursuing turnkey means I’d have to wait many years to see any significant returns. Thanks again for your response.

Newbie in Rental Arbitrage –How do I Analyzing Profit Potential?

Most Popular Reply