Poll: What camp are you? Arbitrage or Equity?

Question

My vote is Equity.  What's yours?

Eric P. · Answer

My vote is: it’s situational. Some markets (such as yours) it’s cheap to buy; other markets are becoming overpriced to buy, so renting as an acquisition method can make sense. Also depends on the person’s financial situation (arb requires much less up front cost), etc. I respect anyone who can profitably make either method work

Benjamin Vail · Answer

My equity STR properties are going to be what allows me to retire early, and will put my kids through college. However, my arbitrage STR units are still currently far out performing the equity units.

We currently manage 34 STR properties. About 12 are arbitrage, and 22 are management contracts. I personally own 6 of those managed contract properties (equity STR investments of mine).  The facts are that the arbitrage units bring home profits of over $1000 per month, while the equity units are somewhere between $500 - $1000/ in profits (even excludes management fees).

Not only are the profits higher per month with arbitrage, but the return on investment is much higher as well.  My best performing equity unit is one where I was able to cash out refinance, and only $12,000 of my equity still remains in that property. Last year the property made a profit of about $10,000, or about 83% ROI.  We have an arbitrage unit that only cost us about $5000 to get up and going. We are on year two with that owner, and that unit is still producing a profit of over $1000 per month or $12,000 per year after all expenses . That is about 240% ROI.

Of course the other factor is property appreciation. My equity units are probably making up in appreciation, where they lack in cash flow compared to the arbitrage units.  My concern (here in 2019),  is that some of the most popular areas for short term rentals, have already appreciated or over appreciated when considering what the market will do in the next several years. For me, in these higher-priced areas, I would rather not take a risk on betting that those  already high property prices will continue to rise. I would much rather sign a one or two year lease in overpriced neighborhoods.  In my area, the average sale price of a single-family house is $200,000. I currently am only considering purchasing short term rental properties that are $250,000 and under per unit .

I understand why most investors on BP prefer to do equity, especially with lack of short term rental experience. But I just wanted to throw my two cents in, and point out that arbitrage is often more profitable. (When done right).

Tanner Marsey · Answer

The arbitrage route, to me, seems like a bad idea. Someone else has too much control in the whole thing. 90% of landlords won’t let you do this knowingly. And there is a lot of liability that falls on you. I know people are killing it right now with this method but I think as fast as it is growing it was crash just as quickly.

Joe Garvin · Answer

Equity!  We own free and clear. Not sure how I even feel about the Arbitrage strategy.

Andrew C. · Answer

I think @Eric P. hit the nail on the head.  Everyone wants to be on one side or the other but the answer really depends on your circumstances.  Sure, I'd love to have equity, but that doesn't mean arbitrage won't work or that you can't be successful using it.  Buying a property will take a much larger upfront investment as well as time dealing with financing etc., whereas you can sign a lease, put down a security deposit and start arbitraging.  I'm assuming most who are arbitraging have goals of eventually moving to the equity camp in the future, but everyone has to start somewhere.

Luka Milicevic · Answer

Equity

Ken Latchers · Answer

I did a thread on why I dislike Arbitrage. It is like the Sirens to new investors. Jump into arb, scale up. Try to avoid land lines. All the effort for a percent of the reward and much risk.

In some cases it makes sense, but is brimming with risks.

I consider equity as a form of Arbitrage. I use the banks money and arb the LTR of a property against its STR potential. But I get all the potential benefits and if not work, I can always LTR

Luke Carl · Answer

@Paul Sandhu Equity! Who gets in to real estate to work harder? No thanks!

David Bergmann · Answer

Equity for us.

We've looked into arbitrage and found a very limited supply of rentals in our area that would be up to our standards for an AirBNB.  Of those that met our criteria, 80% were managed by property management companies that have absolutely no incentive to discuss this arrangement.  The other 20% were owners I was not able to persuade to try this out.  Most just want to continue doing what they've always done.  Maybe it works for someone more sales oriented?

John Underwood · Answer

Equity!

Poll: What camp are you? Arbitrage or Equity?

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