Better Arbitrage Ideas?

Question

Since I was on a soapbox on a different thread here,  I want to give my opinion on Arbitrage.

Recently, Eric Moeller  who is running an  Airbnb success type business,  has abandoned the Arbitrage model in favor of a co-hosting model.  the reasons he gave were pretty sound.

Ignoring the people who claimed to find furnished units they can Arbitrage, which is pretty much fantasy, Eric was pretty much pointing out they had to spend 20 to $25,000 on units which they did not even own.

And he talked about many other problems such as zoning that became you could not do short term rental unless you lived in that building. Or owners who decided to do it themselves later. And it made it hard to get a profit with a lot invested in it.

They were talking about things like a 3 year Payback with the investment required.

So now you have your 20 Doors, and the city says you can no longer do your vacation rentals. For people who were doing Arbitrage, co-host is probably a much better choice. It can get around that problems that crop up in the future

My business is a different kind of Arbitrage. I buy lower cost units that are aggressively priced, I put in the needed work, using an investment mortgage, and 20-25% down.

The Arbitrage is the vacation rental income as compared to what I could get if I rented out my property to long-term tenant.  I am using other peoples money (bank)

I build up equity. Improvements I make belong to me and not the landlord. The furniture belongs to me. No one can throw me out later or decide to change his mind after I got it ready. I pick a place that is vac rental friendly and has good volume.

Good business practices are to not get ahead of yourself. This constant focus of newbies on rapid scaling and unreasonably cheap furnishings fixtures and equipment are no guarantee of success. With little concept of how complex the VR biz can be.

It is sort of like somebody who buys a franchise and decides that owning 10 franchises will make him rich 10 times faster. You don't have to worry about business process or understanding a business, he just needs to expand rapidly without worrying about the things that make a business more successful.

Arbitrage also is where you have 100% of the problems and expenses, but you have to deal with a lot more properties to make the same amount of money.

Ethan Cooke · Answer

@Ken Latchers - I agree that rental arbitrage is not for everyone. Like you, I have read my share of arbitrage posts that make it sound like “easy money,” which it is not. But there are many ways to build a successful, scalable arbitrage business with minimal risk. I have been growing a furnished rental arbitrage business in the San Francisco Bay area for about 16 months. I have more than 12 units, all of which are profitable ($300-$1200 monthly profit on average). 3 of them came furnished already, so it’s not unusual.

On the places I need to furnish myself, it takes me 3-6 months to earn back enough profit to pay for all the furnishings, bedding, kitchenwares, etc. And then another 3-6 months to earn back profits to cover the first month’s rent and deposit. Then year 2 is when profitability is really good!

Whether you own furnished rental units or rent units from someone else, the revenue opportunity is typically the same (except in places like SF where subletting others’ properties has a 30-day minimum and renting out your own property is allowed for short-term rentals). So it’s mainly a question of cost and risk. As long as I can use a place as a furnished or unfurnished rental, the chances of losing money on it are very slim. The kinds of low-risk places I rent and then re-rent are:

- below-market rent (I find these on Craigslist and sometimes Zillow)

- nice neighborhoods where I can easily convert a furnished rental to a long-term rental if regulations change

- low rent per bedroom

- easy parking

- decent kitchen

I am part of a community of 200 rental arbitragers with varying levels of experience and success. The people who do well are curious, persistent, methodical and positive.

Ken Latchers · Answer

The revenue opportunity from rental arbitrage and owning is very much NOT the same. In 10-15 years I own my properties and you own nothing. If zoning or regulations limit or makes your arbitration illegal, I still have longterm rentals building equity while you have sublease hanging around your neck. If regulations or zoning makes owning the building more necessary, you lose. If the owner takes it back, you have nothing and that cannot happen to me. If the market saturates and drives down revenue, again you have subleases hanging around your neck and I have longterm rentals building equity.

If you ignore basic business principles such as risk adjusted reward, then on a shallow level it may seem so.

Much of the rest of what you say does not address my objections above.

Ken Latchers · Answer

One of those ideas where either people with blogs or products to sell make is sound so easy. Or in certain markets under certain circumstances and certain conditions for people with a lot of experience make it work (maybe).

But newbies want to scale rapidly, remotely, with little down, and are guaranteed unforeseeable problems.

VRs are exploding rapidly. Some markets are saturated or will be soon. Suddenly that expectation of "2-3 times" rent becomes no better than longterm, with a lot more complexity. And you are trapped with your sublease.

Merchants made a lot of money from the uninformed who flocked to CA in 1849 for gold. Prospectors mostly lost everything

I stayed in an Airbnb in Jersey City recently. Room for two, $30. NYC marketplace!! Times 30 days (full occupancy), that is $900 a month!!!!!

Paul Sandhu · Answer

There are 2 strategies that are common in the above threads with STRs.  One is to rent then sublease the property.  The other is to gain equity then then rent the property.

Both sides are making money.  But there is one thing that isn't mentioned.  They are making money with their method that works IN THEIR MARKET.

In my market, you'd break even or make a little money if you did the lease and sublease method.  If you bought a traditional house in the traditional method, it would take years to recoup your money.  The market I'm in lost an Amazon.com distribution facility.  It was the largest employer.  It also lost the 4th largest employer 2 months later.  People left town.  They let the banks keep their house.  Foreclosure sales are common and inexpensive.

There is a refinery in this town that employs lots of travelling contractors for short term jobs.  Those people are my renters.  There are 3 refineries in the state that I live in, and maybe 125-150 in the United States.  So yes, it's a niche market.

Eric P. · Answer

Where do you operate, such that you are profitable for both STRs & LTRs? You are the only person in all of these threads not mentioning where you operate

Ken Latchers · Answer

I am not against Arbitrage. My point is that many of the discussions I see here related to it are unrealistic, naive and based on flawed assumptions.

An underlying point of this thread, is that owning mortgaged properties is also Arbitrage, between renting out as longterm VS. short term.

Lisa Graesser · Answer

I never thought the arbitrage idea made sense. Way  much uncontrollable risk. Good to see a confirmation.

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