Is "residential arbitrage" a thing ?

[NIcholas Arbuckle]

A buddy of mine who owns a few investment properties said to me recently he's had heaps of people enquiring with him about "corporate lease contracts" on his long-term rental listed on Zillow. This made us wonder if "rental arbitrage" is a commonly practised strategy. 

How it works is someone approaches an LTR listing to lease the property off the owner with a clause that permits the leaseholder to "sub-let" 

The leaseholder then actively manages the property by listing it on AirBnB / VRBO, thus "Arbitraging" the rate difference between his LTR lease contract and the premium price a STR offers.

Now obviously, there is risk assumed here (primarily if you cant make enough STR income to cover the lease cost) but there is huge potential to double the investment quite easily should you manage to get a steady flow of STR interest. 

The reason I'm considering this is, I'm keen to invest in property but lack the capital required. I see the process of "rental arbitrage" as a means for me to get more hands-on property management experience while saving the money I make from the Arbitrage process inorder to eventually provide me with a means to get a down payment on my first rental property. 

So, is this a thing? Do people do this? If anyone out there does do this, I would like to use you as a sounding board for due diligence. 

1. If you are doing this already (whether you are someone who acquires these types of leases and actively manages other people's properties on a STR basis, OR if your are a LTR owner who actively leases out your property with the right to sublet), Why do you do this & what has your experience been? 

2. What are the main pain points? Are there any unforeseen issues or threats I haven't considered? 

3. Is there any legal, regulatory or compliance red tape that needs to be addressed? Does the ability to engage in a lease contract for subletting only apply to certain states? Does it vary from state to state? 

4. Is there an existing platform (like AirBnB) that offers this as a service? Like a direct market place for lease contracts to sublet? 

Any information would be very much appreciated :) 

[Nate Moncrief]

Quote from @NIcholas Arbuckle:

Quote from @Nate Moncrief:

@NIcholas Arbuckle in my area, most apartments or homes will state in the lease that they do not allow subletting or short-term rentals. This is also the case in HOA's or Condo Associations where it is often times written into the Rules and Regulations or CC&R's.

Probably not worth it to risk getting caught in those instances.

That being said, there are plenty of people who do this whether they have permission or not, and there are some landlords who will allow it. Most of the time, you'll likely get a no for an answer though because the landlord is carrying all of the risk while you have very little (if any) skin in the game.

Even if the landlord would allow it, you'd still need to get a permit for STR in some areas. IMO, any investment strategy that relies on bending or breaking the rules in order to be successful is likely not a good one.

 Thanks Nate, thats very handy info. So when you say that the "LEASE, states no subletting is allowed" is this a state regulation/law or just personal preference from the LTR owner? I have no intention of doing anything underhand and would only do it if it was agreed and written into the lease contract. But what I'm trying to understand if this is a state-by-state "regulation" thing or just something that needs to be negotiated with the owner of the property. 

HOAs / condo's I assume, is written into the agreement with the HOA board that NO apartments can be sublet for STR purposes, which is understandable and makes sense.

Typically, it is personal preference of the landlord or something boiler plate that exists in the lease document they are using. A lease can technically say whatever the landlord wants, but at the end of the day, the law will take precedence and void the landlords prohibition on subletting if their states laws specifically allow it. That is a state by state ruling though, so you'd have to check your states laws regarding subletting and leases to find out for sure.

Since your plan is to go to the landlord directly with the intention of sub-letting, all you would need is for them to have written consent. If they don't want to do so, you wouldn't have a lease agreement anyway, so there's not really a downside to asking.

With the amount of risk involved, it sounds like the safer option would be to just start a short term management company and go to the LTR listings and say hey, I'll manage this for you short term at x rate.