Rental Arbitrage for STR?

Question

Good day,

I’m curious on your thoughts and if anyone has done or is currently doing this successfully? I think it’s an interesting strategy, I’ve researched a bit. Figured I’d bring it up for discussion.

Michael Baum · Answer

Well I just don't think that's true. This forum is awash in arbitrage threads asking the exact same questions. What do you think? Is anyone successful doing it etc etc.

Sorry Account Closed, it's just these same questions keep coming up over and over. Literally 2x a week someone pops in and asks. The answers are the same. Many say no, some say yes.

If you have a ton of money, other investments etc, then you can make arbitrage work seeing as you can absorb the risk. If you have zero money, no investments then you are putting it all on the line and rolling the dice. That is where most people are who are interested in arbitrage. Yes it can work with low cash. But one change in regs, pandemic etc and you are bankrupt. There are a lot of failed arbitragers this year.

John Underwood · Answer

Very bad idea.

You are not investing, building equity or wealth. After you put money into it the owner can change their mind.

Best bet is buy your own place and then rent it.

Nancy Bachety · Answer

Dave Ramsey bashes credit cards. Some mutual fund fans bash real estate. Some STR owners bash arbitrage. The informed decision maker is one who asks, and listens to, like you, different perspectives. When you research these forums, you’re probably not going to find many real estate investors using that strategy.  But if you research jobs or self-employment ideas, you might find them. It’s not an investment strategy, it’s a job. And it won’t pay unemployment benefits when your landlord boots you.

Kyle Parks · Answer

There are lots of "gurus" peddling this idea. When I first heard of it I watched a few videos trying to see how they think this will work long term.

Let's be very clear on 1 thing - the VAST majority of people selling courses on YouTube make the majority of their money telling others how to do it at $500 a pop. Thats the real gravy train.

with that said - I may be doing 2x arbitrage units in the future, but the future owner of the units has an interesting situation where he owns businesses below the units that will benefit greatly from a STR and semi captive audience.  I would not go looking to leverage myself like this but if its a solid win / win why not

Brian Hatcher · Answer

@LaTrell Ray it works, much like any other investment strategy, there are risks and you have to learn how you can best mitigate your risk as well as understand your risk tolerance.

If you sign an agreement/contract that will limit the worry of owners changing their mind.

The numbers are always important in any investment , so doing your DD to make sure that the properties you are eyeing are good opportunities for arbitrage and project good margins are important.

You can also work in details in your agreement if things are going south with getting short term bookings and rent it as a long term or mid term 30-60 day furnished rental to try and weather the storm.

I think arbitration is good for investors who are good with numbers, have low cash and are looking to increase their cash flow. Most of the time I see investors use the cash flow to purchase their own properties and go from there.

Natalie Schanne · Answer

@LaTrell Ray - Several high profile, multi year, VC backed rental arbitrage companies recently went bankrupt because they couldn’t weather the storm of covid and/or other industry forces including increased local taxes and regulation (licensing, crack downs on zoning violations for stays less than 30 days). Check out Inman or Real Deal on: StayAlfred. Lyric. Domio. Bungalow. The StayAlfred owner said he’d still be in business if he owned fewer units vs doing the wide scale rental arbitrage and would have been able to weather the storm. Finding the units/owners, Setting up furniture, building booking websites with photos and floor plans, cleaning teams and customer service teams, insurance, etc. takes a while to pay back the upfront investment.

Many apartment owners want fixed rent (sometimes above market) instead of a % of revenue. The % of revenue is the best model for the operator. Though some operators can convince an owner to sign them on as “STR property management” and they take 30-50% and give 50-70% to the owner (depending on who owns the furniture, pays utilities, etc.) which is a preferable twist on the I’ll rent from you for 1 year with X years of options to re rent at increased prices.

Almost all my friends on facebook groups for Airbnb professional hosts would say that this is building yourself a job. Many decide it’s better to rent their furnished units longer term (3+ months) for less money because the turnover (especially with increasingly demanding clientele) is a pain in the butt and ultimately vacancy is quite expensive to your bottom line. You never know if you take a booking for Dec 30-Jan 1 that you wouldn’t have gotten one Dec 23- Jan 7 and now you’ve blocked it. With the value offering for my area, I was occupied approx 75% of the time (3/4 weeks) and ultimately decided it was better to rent long term with a security deposit. Most guests check in ok and don’t talk to you at all because they don’t need to. A few guests are terrorists and ruin your day/week for really trivial amounts of money. I never had anyone trash my units but there was definitely ?!? damage like the hair iron foot long burn in the top of my beautiful solid wood dresser. If you think the guest or Airbnb is going to pay you $500+ for a new dresser, think again. I asked for and got $60 from airbnb. The guest wouldn’t pay. If you have a lot of rapid check ins, you will notice something is broken or stained later and have NO idea who did it. If you charge the latest person, they may give you a one star retaliatory review either way because maybe they didn’t do it. Ultimately, I’m happier with medium to long term furnished rentals with clients found on Facebook marketplace, zumper, Zillow rentals (hotpads), cozy, etc. than having all my money coming through Airbnb. Did you know they cancelled every booking from mid March through may/June that requested to cancel despite strict no refunds policies from specific hosts and many professional hosts were like !!!! What do I do now ?!? When you’re reliant on any one marketing source for your revenue, life can get pretty bad, pretty fast. This is when a lot of the rental arbitrage people quit when they couldn’t see an end in sight and didn’t want to hemorrhage $20,000+ / mo of their personal cash and profit paying leases with no bookings.

So, in conclusion, it’s one way to make money but you may make even more with less time investment and risk if you’re the property manager at 30% of revenue for someone else. You can take advantage of housing appreciation and big depreciation tax breaks for tax free cash flow if you’re the owner.

Michael Baum · Answer

Hehe! Thanks Account Closed, but some really don't There are some that are killing it with arbitrage. More power to 'em. But most seem to have at least 100+ doors of LTR plus other assets. They can afford to lose if there is an issue. I know that I couldn't. Good luck!

Account Closed · Answer

@Brian Hatcher Thank you, Brian!

Account Closed · Answer

@Michael Baum Indeed. Well, I’m sure everyone’s post that you comment on appreciates your input like I have.

Account Closed · Answer

@Michael Baum Others didn’t have much info so I made my own hoping to get more engagement.

Rental Arbitrage for STR?

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