Lease from Owner then Vacation Rent Out - Wrap?

[Greg Horn]

Aloha!

I live on the island of Kauai, Hawaii, which isn't the easiest place to find long-term rentals with good cashflow. We also get over 1M non-resident visitors per year. There are only 68,000 full-time residents, so tourism is a huge part of the island.

For months, I've been looking into acquiring property in an area where vacation rentals are allowed (it's restricted here on Kauai via the VDA - FAQ). It can work if you've got the cash to plunk down for a large down payment, which I don't. When I run pro formas based on splitting equity with an investor or getting a loan, it creates a fairly narrow return on both sides, so I've been scratching my hear.

Recently, a friend was telling me about a team he knows in Chicago that will sign long-term leases on apartments where the owner is simply looking for stable, consistent income. Then, they'll turn around and vacation rent out the apartments and manage all of that. All of this is above-board, written into the contracts and all that, so there's nothing shady happening. 

The long story short is that they're crushing it, clearing a couple thousand per month on each rental. They'll basically go into these places and get them set up with any furniture and appliances needed to make them vacation-rental ready. They will also do some form of a net lease, because a common objection from an owner is that vacation renters will beat up their place. So, this team will take on responsibility for some of the maintenance of the place. 

Basically, the only upfront costs are the security deposit, any minor rehab, any furniture/appliances and a safety cushion to carry the place for a couple of months while you get the rental dialed in. Like any other rental, I'd be setting aside portions of the income for repairs and maintenance. 

The only downside I see is the very hands-on management of a vacation rental, which I'm prepared and willing to handle. 

The worst-case scenario I see is that the economy takes another nose-dive and vacation rentals take a hard hit. If that's the case and I really can't vacation rent it out enough to cover expenses, I can either try to long-term rent it out or break the lease. Even in breaking the lease, it'll be a few thousand bucks probably, maybe just the loss of my security deposit. Either way, not a terribly tragedy. 

I keep trying to poke holes in this strategy and understand why this wouldn't work here on Kauai, but I haven't been able to find any. So, I turn to you, my BiggerPockets ohana, to help me figure out why this may not work on Kauai. Please give me everything you've got to help me figure this one out.

Mahalo,

Greg

PS - one realtor friend here said that he believes I'd need to be a licensed realtor to do this because, in effect, I'm managing property owned by someone else. I'm checking with the Real Estate commission to confirm this before I sign up for the next Real Estate class. If anyone has insight on this, in Hawaii or otherwise, it'd be appreciated.

PPS - I think this strategy is called a wrap. Forgive my ignorance and please let me know if that's what it's called.