Rental Arbitrage -how to do airbnb without BUYING

Joe Kim · 2018-11-07T22:23:38-08:00

Lots of people have asked me how to start doing a "Rental Arbitrage" in STR (short term rentals - Airbnb is most popular but VRBO is another way).Rental arbitrage is you as the investor rents a home and becomes the tenant. But the sole purpose of renting is to then sublease the home on Airbnb or VRBO or corporate rentals. Here are the key rules of Rental Arbitrage:1) You need to MAKE money/profit. Typical target for most Rental arbitrage investors is $1000 NOI (net operating income = revenue - expenses). Do your research to make sure you can make a profit. This is not easy work to find a property, lease a property, furnish the property, and manage it. You better not come up with a calculation that comes out to be less than $1000/month NOI or you may actually LOSE money.2) You need to make sure everything is LEGIT/ABOVE BOARD/TRANSPARENT. You cannot hide the fact that the sole purpose for you to rent the home is to sublease. The owner must know from the beginning and in fact you need to include it in your lease agreement that the home is going to be subleased and that the owner agrees to allow this to happen. 3) City, county, local, HOA regulations must support what you are doing. You cannot go blindly into doing a rental arbitrage without knowing the restrictions. HOA is the trickiest. Typically the restrictive HOAs are condos, new construction communities.4) Cost of furnishing needs to be factored into your calculations. Cost of furnishing is not limited to the cost of furniture but labor costs to furnish home can be high. Typical costs can vary widely depending on where you get your furniture, labor cost, etc. Remember your own labor cost. Typically a 2 bedroom home can be furnished between $3000-8000. Remember the home is empty and filling it with all the amenities including (all kitchenware, bedding, etc..) are not cheap.5) Extra expenses include - Utilities, Garbage, Internet, Streaming (Netflix, SlingTV, do NOT get cable). Tricks and TIps - Best TV for STR = Roku TCL 4K TVs - as low as $250-350 per TV. Watch for my next post: How to approach a Landlord to rent to you!

Kinohi Larey

Honolulu, HI · Member since 2018 · 17 posts · 18 votes

7y

Well I was being brief and general, but if you needed me to be more specific with expenses I could have broke it down. Here's a specific list of expenses:

Expenses per month:
Rent $2,375
Internet $30
Short term rental insurance: $50 (Covers any liability, damage or lost income because of natural disasters)
Toiletries & refill supplies: $20
Repairs & maintenance: $20
All other utilities covered by landlord

Furnishings and start up costs: Almost all furnishings were already in said property when we took over the lease. We only spent a few hundred dollars as start up costs

Total income after service fees $4,750
Total monthly expenses: $2,495

Monthly net $2,255

Keep in mind, this is averaged, and based on PAST numbers, not projections.
Also, this property, if purchased would be well over 400k. For a person who doesn't have the cash on hand, or the ability or desire to have a mortgage on a property that expensive, this is an awesome way to make substantial monthly cashflow. Depending on your lease agreement, you can lock in this cashflow for the next few years like we have.

So basically, if we are comparing return percentage, this is a much much higher return. Yes it doesn't involve equity, and other real estate advantages, but it's a great way to get your foot in the door. It's a great way to quickly (relatively) increase your monthly cashflow by a couple thousand dollars without having to spend hundreds of thousands. And for us, it's a great way to build up savings to be able to one day purchase a similar property.

It's not for everyone, but don't dog on it if it's not for you. There are tons of people making a KILLING in this business.

Originally posted by @Ken Latchers:

1) you are not netting 2k. You left out vacation rental insurance, you left out things like furnishings and maintenance. Or replacement cost or risk.

Also, an owner would be making a ton of equity if they owned outright.

2) I think this is the kind of strategy that works better in places with high rent and High house prices.

I paid 135000 for 2 Townhomes that grosses 65000 a year. Is a much better deal to own these then to try to sublease. And I get all the profits for the same amount of work. And I build equity and I'm not subject to the whims of landlords or property owners who change your mind or Etc

Originally posted by @Kinohi Larey:

@Penny Griffus It's been going well! We are making very good margins. Of course not as good as some "mentors" online advertise, but still way better than If we were to purchase a property and have a mortgage. Here are some quick numbers for one of our units:

Our rent: $2,375

Other variable expenses (internet, toiletries, etc) ~ $120

Our average income from STR (After service fees, cleaning fees):

$4,750

So we're netting over 2k a month. Pretty decent margin if you ask me :)

2 Reply

Cheryl Vargas

Rental Property Investor · Rohnert Park, CA · Member since 2014 · 307 posts · 160 votes

7y

@Kinohi Larey

Wow that’s an amazing return!

What city are you in?

I paid $2500/ month rent in Santa Rosa, CA and my first full month payout with Airbnb was about $3300. I did all the cleanings this month, in addition to my full time job, and I’m exhausted!

I haven’t even calculated all my expenses for the month yet, and I had to buy a $200 portable A/C unit because we had a couple 90 degree days last week!

I probably have to look out of my area so I can get better prices like you are! Are your rentals in Hawaii?

1 Reply

Kinohi Larey

Honolulu, HI · Member since 2018 · 17 posts · 18 votes

7y

Thanks! Yeah it's going pretty well, looking forward to high season in June and July. $3,300 in your first month is actually pretty good! You can expect your income to increase as you build your review base. Keep it up!

Yeah we're in Hawaii, in the resort zoned buildings in Waikiki (Government plans on cracking down on short term rentals that are outside of this zone, so we've chosen to only stick within this zone and do things legally)

Have you done Airbnb before? If not, there are some things that you might not know about that can significantly increase your revenue that many people are unaware of (Dynamic pricing, SEO tactics, etc.)

PM me if you have any questions and I'd be happy to help out in any way I can!

Originally posted by @Cheryl Vargas:

@Kinohi Larey

Wow that’s an amazing return!

What city are you in?

I paid $2500/ month rent in Santa Rosa, CA and my first full month payout with Airbnb was about $3300. I did all the cleanings this month, in addition to my full time job, and I’m exhausted!

I haven’t even calculated all my expenses for the month yet, and I had to buy a $200 portable A/C unit because we had a couple 90 degree days last week!

I probably have to look out of my area so I can get better prices like you are! Are your rentals in Hawaii?

1 Reply

Cheryl Vargas

Rental Property Investor · Rohnert Park, CA · Member since 2014 · 307 posts · 160 votes

7y

@Kinohi Larey

That’s great that you said that my income was pretty good this month!

I’m thinking that April, May, June, July will be really good, but I’m concerned about the fall and winter months. I think I might be paying too high rent to sustain a profit through the winter with less travel and all.

I collected about $500 in cleaning fees, and if I would have paid that out, I would have only made $300 in profits. But I did all the cleanings myself and I’m charging $55 to the guests for cleaning fees. I’m not sure what the market will bear for cleaning fees, but I have raised my rent prices from $129 weekends to $219 weekends since I started 1.5 months ago. I have $139 - $159 for weekdays now.

What do you think are good cleaning fees to charge the guests?

1 Reply

Paul Sandhu

Investor · The worst town to live in, KS · Member since 2016 · 4k+ posts · 4k+ votes

7y

$50 for a 2BR. $75 for a 3BR. $100 for a 4BR.

2 Reply

Cheryl Vargas

Rental Property Investor · Rohnert Park, CA · Member since 2014 · 307 posts · 160 votes

7y

Thanks!

@Paul Sandhu

0 Reply

Kinohi Larey

Honolulu, HI · Member since 2018 · 17 posts · 18 votes

7y

@Paul Sandhu & @Cheryl Vargas

Cleaning fees vary depending on what part of the country you are located. We are in Hawaii where cleaning prices are a lot more expensive. We charge there rates:

1 Br 1 Ba Condo in Waikiki: $125

2 Br 1 Ba Condo in Waikiki : $149

I know this may sound like a lot but for Hawaii it isn't, so it's all perspective. I would also recommend seeing other properties in your area and looking at their cleaning fees to get a bearing on what you should charge. Keep in mind, you should also factor in replacing of supplies (Laundry soap, toiletries, etc) into your cleaning fee, and not only think about the time spent on cleaning.

0 Reply

Lynette Guy

Rental Property Investor · Decatur, GA · Member since 2018 · 42 posts · 31 votes

7y

@Penny Griffus I used Evolve for a while, but really prefer to completely self-manage. They're really only a booking/marketing company. I prefer to have that initial interaction with guests. It's more personal and there's no need for a thrid party. I'm much happier self-managing.

0 Reply

John Corey

London · Member since 2019 · 722 posts · 386 votes

7y

I was talking to some of the staff at AirSorted. They are the largest in the world for managing short term rentals. A UK based startup who operates in multiple cities and countries.

I host a monthly meeting in London for real estate investors and AirSorted is a sponsor. In the UK we call them a PropTech startup. They have raised millions and book thousands of reservations a week. I love my chats with them because they see more data than most anyone else across the sector. Data driver decisions about best pricing, where to market and what is needed in the rental.

What is the data telling AirSorted?

They have observed thousand of bookings across AirBnB, Booking.com, Expedia, etc and concluded customers are different when you think about price, benefits and fees. Some customers are very sensitive to the cleaning fees and others are completely neutral to whatever you charge. The country where the visitor lives full time, the age group, families vs couples vs singles all shift the sensitivities.

3 Reply

Account Closed

Investor · United States · Member since 2018 · 565 posts · 356 votes

7y

Same here!

I wrote a very in depth article on the bigger pockets blog. It's about to be released soon so keep an eye out for it.

Good luck!

0 Reply

Ken Latchers

Hatfield, PA · Member since 2012 · 1k+ posts · 629 votes

7y

Perhaps, but this whole post is kind of screamingly obvious. I didn't need data or a vendor.

Originally posted by @John Corey:

I was talking to some of the staff at AirSorted. They are the largest in the world for managing short term rentals. A UK based startup who operates in multiple cities and countries.

I host a monthly meeting in London for real estate investors and AirSorted is a sponsor. In the UK we call them a PropTech startup. They have raised millions and book thousands of reservations a week. I love my chats with them because they see more data than most anyone else across the sector. Data driver decisions about best pricing, where to market and what is needed in the rental.

What is the data telling AirSorted?

They have observed thousand of bookings across AirBnB, Booking.com, Expedia, etc and concluded customers are different when you think about price, benefits and fees. Some customers are very sensitive to the cleaning fees and others are completely neutral to whatever you charge. The country where the visitor lives full time, the age group, families vs couples vs singles all shift the sensitivities.

0 Reply

Joe Kim

OP

Rental Property Investor · SF Bay Area, CA · Member since 2014 · 352 posts · 543 votes

7y

HOW TO APPROACH OWNERS ABOUT RENTAL ARBITRAGE

GO TO My new thread that answers the question:

https://www.biggerpockets.com/forums/530/topics/706394-how-to-speak-to-owners-landlords-for-rental-arbitrage

There are many ways to approach this difficult task of convincing a owner or landlord to rent to you as an investor ONLY to sublease (aka Master lease) the home to furnished short-term rental.

#1 NUMBERS GAME: It's not easy. When I first started, i called 5 owners and all of them told me "NO". I met someone who was successful and he laughed at my 5 attempts and said, he called 300 owners before his first "YES". Now, after doing this several times my success rate is around 1 out 5. Here are some tips.

#2 MINDSET: Just like some people will NEVER become real estate investors regardless of time, money, related profession, - MOST people will never become real estate investors. Just ask your real estate agent if they own any rental properties.

Along those lines, if the owner gives you a very FIRM "NO" when you present your proposal to rent their home for the purposes of doing STR (short-term rental). Move on.

If they say, "maybe" or have lots of questions about the details, then move forward and pursue.

#3 TRUST. It's very important to establish trust as much as possible. This is one strategy I used. I tried to create rapport with the owner over the phone but waited to present my real agenda only in person. However, this has back-fired because it takes time to drive out to the home only to get a firm "NO" to your request. But if you lay out your plan to the owner over the phone, it's very hard to get a "yes" because trust is developed with a face to face meeting.

Trust can be established by talking about your past record (as an investor) but also if you have something positive about yourself (profession - real estate agent, nurse, teacher, fireman, doctor - any profession that can give you some added credentials).

#4 Owner vs. Property manager: General wisdom is only talk to the owner as much as possible. If there is a property manager, your success rate is going to be very low. That being said, some "property managers" are real estate agents and NOT a property manager. Those agents who are helping their clients finding a tenant are easier to talk to and my become your advocate.

Here is a huge exception. A property manager may be a hard egg to crack but once cracked (built trust or relationship), they can open many doors since they can be your advocate and have access to many homes.

this is the case with apartment complexes. Usually there is one owner and a property manager. Some apartments are open to "corporate" housing.

#5 Airbnb - Do NOT mention "airbnb". Airbnb has many negative connotations. I do airbnb in all my rental arbitrage, they are the biggest player in the STR market. So how do I avoid talking about airbnb. I use the terms - "corporate furnished rentals", "short-term rentals", and talk about my target clients- Business travelers, traveling nurses, traveling healthcare workers.

#6 Knowledge - Know why STR is better for the landlord than traditional rentals. The wear/tear is much less for STR because the guests do not live their full-time. type of travelers especially business travelers, cook less, use the facilities less, and most of the time are at work during the day.

#7 AVOID - Avoid condos. Condos have many many owners and the HOA and management has to abide by the laws enacted by its owners. Therefore, this is not a type of home you want to mess around with. I made that mistake with a 2 bedroom condo - after 1 year, I had to shut down operations due to HOA rule violations of NO short-term rentals less than 30 days.

#8 The 30 day+ rule - Certain places Airbnb is outlawed or a softer rule is the 30day+ rule. meaning each guest must stay for 30+ days or more. I really love Airbnb because they do all the marketing for me. Also, for me 30+ bookings tend to be less profitable even though there are less vacancies.

If you are desperate to get a landlord to say yes to you (don't be, just move on to the next home), one compelling thing you can do is ONLY do 30day+ bookings.

#9 SWEETEN the POT: Do not think that paying extra rent is going to entice owners to rent to you. Do not offer to pay more rent ever to make the deal happen. However, I have offered two things

A) Higher deposit - this way the owner's fears are alleviated somewhat

B) Property management - offer the owner that you will essentially property manage the property for them. Specific example, I tell all my owners that any minor repair less than $150, i will fix for free. Why? time is money. You cannot wait for an owner to fix things, you will lose bookings.

#10 CONTRACT - make sure what you are doing STR is listed in the contract - typically in the addendum section. That way you and the owner are in agreement and you have been green-lighted to go ahead and run your business.

3 Reply

Ken Latchers

Hatfield, PA · Member since 2012 · 1k+ posts · 629 votes

7y

@JoeKim - not sure how much experience you actually have or if you are trying to market yourself. I

would suggest you better understand before trying to post advice to others

Definitely NOT less wear and tear. STRs are a steady stream of carrying bags, food and luggage through the entrances, hallways, etc. Scratches and scuffs that need constant attention.

Sometimes they are trying to have private parties that are hard on stuff. Longterm tenants get it. And it is THEIR furniture.

STRs are often max capacity and trying to squeeze people in beyond capacity. Can be hard on neighbors.

They are not familiar with stuff so more forcing things like faucets.

2 Reply

Tirza Wibel

Rental Property Investor · Spokane, WA · Member since 2019 · 7 posts · 1 vote

7y

@Mel Hignell I’m intrigued with your list of 185 items. I’m starting the process to furnish two units from scratch. Would you be willing to share your list with me? Thank you!!!

0 Reply

Paul Sandhu

Investor · The worst town to live in, KS · Member since 2016 · 4k+ posts · 4k+ votes

7y

@Tirza Wibel Take a look at your own house. Remove your personal things like clothes, jewelry, toiletries, photographs, medications and such. Look at what is left. That's what you'd see in an STR.

Take me for an example. I have a 2-tap kegorator in my garage. One of my STRs has a single tap kegorator in the laundry room. I keep a few shotguns for hunting and competitive clays. Another STR has a scoped pellet gun and starling bait. I have a garage full of tools. Most of my STRs have a drawer with screwdrivers, boxcutters and other hand tools. There is a big brushpile in my back yard (I live in the country on 40 acres) that I make into a bonfire once a month. Several of my STRs have firepits and firewood in the back yard.

0 Reply

Tirza Wibel

Rental Property Investor · Spokane, WA · Member since 2019 · 7 posts · 1 vote

7y

@Kinohi Larey where do you purchase your short term rental insurance? We own our property and have HO insurance but I’m guessing we need this additional insurance. I like that it covers lost income due to natural disaster.

0 Reply

Ken Latchers

Hatfield, PA · Member since 2012 · 1k+ posts · 629 votes

7y

You MUST have short term insurance!! HO insurance that doesn't know about short term activities will likely deny claims. It is commercial, not residential.

The Airbnb stuff is practically useless.

Assuming you are active with short term rentals, nationwide, state farm, safeco and others MAY cover you at a lower cost. Your agent may also misinformed you.

Foremost, cbiz, proper will LIKELY cover you.

Loss of rental income, contents replacement and property damage are the primary areas of coverage. And of course exclusions and optional coverages. Wind, flooding, terrorism, etc.

What type of property, old wiring, etc

Don't assume ANYTHING

And there is actual replacement value vs the other type

0 Reply

Cody L.

Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes

7y

Originally posted by @Paul Sandhu:

@Mel Hignell Let's see pictures of what you have. Here's my ad from 2 days ago. Notice there are 2 vacancies listed, everything else is rented. I have no complaints that my houses are not furnished enough. I would dare say that my biggest house is probably furnished more than your own residence. Does it have a jacuzzi, gas and charcoal grill, 2 washers, 3 dryers, 4 HDTVs and a kegorator?

Craigslist ad

Omg did you REALLY post this in your ad?

Lol. This is a troll right ?

“If a motel room is your standard of living, you are pathetic. I'd rather not rent a house to you. You have low standards and are irresponsible with your money. I'd rather not rent a house to you. You and your irresponsible low standards can just stay in a pathetic motel room

1 Reply

Paul Sandhu

Investor · The worst town to live in, KS · Member since 2016 · 4k+ posts · 4k+ votes

7y

@Cody L. Nope, no troll.

Here is the ad from yesterday. Notice the date and time stamps are 17 hours before your post.

Craigslist ad 5/12/19

0 Reply

Mel Hignell

Property Manager · Portland, OR · Member since 2018 · 46 posts · 108 votes

7y

@Cody L. OMG. 😂😂😂

Well, I guess best to let guests know who they’re renting from beforehand? Or something like that?

@Paul Sandhu what is the advantage to pre-calling potential guests “pathetic”, and do you find this tactic to be a positive for all sides?

0 Reply

Account Closed

Investor · United States · Member since 2018 · 565 posts · 356 votes

7y

Originally posted by @Paul Sandhu:

Originally posted by @Ken Latchers:

"Typically a 2 bedroom home can be furnished between $3000-8000"

Fantasy

I must live in a fantasy world. My STRs are furnished from estate auctions. What I don't buy at auction, I buy at Wal Mart (linens, cookware, utensils, etc).

Washer $75.

Dryer $75.

Stove $100.

Fridge $100.

2 recliners $50.

Tables and lamps $50.

Dining table and chairs $50.

2 bedroom suites $300.

2 old style televisions, free.

That's $800.

Probably spend $400 at Wal Mart for soft goods.

Finally my biggest single expense is the Smart TV for the living room, $250.

My tenants work 10-12 hours a day, 6-7 days a week. They just need a place to drink beer, cook food, do laundry, take a shower and sleep; in that order.

I agree man,

people over pay for crap they think matters and under pay for what gets results.

0 Reply

Paul Sandhu

Investor · The worst town to live in, KS · Member since 2016 · 4k+ posts · 4k+ votes

7y

@Mel Hignell It's been my experience that people that choose stay in motels do not last long at the job. They are gone within 2 weeks. Whether they are fired, layed off, or voluntarily quit; I do not know.

Their co-workers who rent from me stay 2-4 months before they leave. I ask them why the other people stay in motels. They don't know. I don't know either.

It's like 2 restaurants. One restaurant in the ghetto will serve you a hamburger, french fries and a soda for X dollars.

Another restaurant in a nicer neighborhood serves you a steak, baked potato and a glass of wine for less money.

Motels are the hamburger place, I'm the steak place. That's why I call them pathetic and irresponsible with their money. They are not offended, because they sort of know it. I'm not the first person to tell them this, and I won't be the last.

1 Reply

Mel Hignell

Property Manager · Portland, OR · Member since 2018 · 46 posts · 108 votes

7y

@Jason Allen disagree one thousand percent. There are five main items that can make or break a stay, another twenty that can hugely impact a stay, a handful that are great crowd pleasers, and the rest can be purchased inexpensively.

However, those of us who pay attention and cater to the guest make the most. For instance, when I design one of my own homes I do so in a way that every single thing a guest could need is at their fingertips. I am currently at my New Orleans home doing my yearly refresh/design. Just a few of the “extras” I provide are:

- local coffee (we have partnerships in each city)

- tea

- creamer

- sugar

- sugar alternatives

- Advil

- tampons

- condoms

- bug spray

- sunscreen

- ear plugs

- charging cables

- TVs in each room

- Pay It Forward cocktail bar

I’ve mentioned it before, but between all of my homes, both past and present, I have never received a negative review on any platform.

That’s not to say **** hasn’t gone wrong. I’m not a magician.

But the amount of love and (tax deductible) extras I’ve put into my homes shows my guests I truly care about their experience, and small grievances tend to take a backseat.

As the market continues to saturate, especially as the hotel chains get into this, the hosts who cater to the guest will be the ones still cashing in those big money checks.

3 Reply

Account Closed

Investor · United States · Member since 2018 · 565 posts · 356 votes

7y

Originally posted by @Mel Hignell:

@Jason Allen disagree one thousand percent. There are five main items that can make or break a stay, another twenty that can hugely impact a stay, a handful that are great crowd pleasers, and the rest can be purchased inexpensively.

However, those of us who pay attention and cater to the guest make the most. For instance, when I design one of my own homes I do so in a way that every single thing a guest could need is at their fingertips. I am currently at my New Orleans home doing my yearly refresh/design. Just a few of the “extras” I provide are:

- local coffee (we have partnerships in each city)

- tea

- creamer

- sugar

- sugar alternatives

- Advil

- tampons

- condoms

- bug spray

- sunscreen

- ear plugs

- charging cables

- TVs in each room

- Pay It Forward cocktail bar

I’ve mentioned it before, but between all of my homes, both past and present, I have never received a negative review on any platform.

That’s not to say **** hasn’t gone wrong. I’m not a magician.

But the amount of love and (tax deductible) extras I’ve put into my homes shows my guests I truly care about their experience, and small grievances tend to take a backseat.

As the market continues to saturate, especially as the hotel chains get into this, the hosts who cater to the guest will be the ones still cashing in those big money checks.

Hey,

I never said to not take care of your guests. Thats priority #1.

What I'm saying is that when getting started people become obsessed with the little things like the color of the drapes, brand of furniture, etc. when what they should be focusing on is getting their first property up and running with as little cost as possible on liabilities such as furniture.

They should be more resourceful when it comes to these things by working deals with the owner, finding furnished properties, getting items wholesale.

The main effort goes into the pictures, the title & description, the backend business, acquiring a property in the first place, negotiating terms, creating stand operating procedures that they can use to scale later on.

Once you have a profit and you understand the business model I advise to start getting fancy with luxury properties, brand new furniture, etc.

Thanks!

2 Reply

Mel Hignell

Property Manager · Portland, OR · Member since 2018 · 46 posts · 108 votes

7y

@Jason Allen

Thank you for the clarification! In that case then I agree to a point but not entirely. I urge people to do things correctly the first time. That doesn’t mean buy luxury everything by any means. But it DOES mean doing a lot more than the list @Paul Sandhu previously provided, though it seems he’s catering to a far different demographic of traveler. Totally fine. Just not my wheelhouse.

Then again I'm not a huge fan of the arbitrage model. Too many variables that can't be—or are hard to—control. In that case you're totally right - go cheap, because you never know when the owner needs to move back in or the HOA changes or the legislation deems multi-tenant units illegal.

2 Reply

Rental Arbitrage -how to do airbnb without BUYING

Rental Arbitrage -how to do airbnb without BUYING

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