Sublet lease question, for medium term rental arbitrage

[Brent Langlinais]

HI gang, thanks in advance for your insights. 

I'm a veteran ER travel nurse of 9 years having worked dozens of contracts throughout the country.  But the industry has progressively tightened it's belt over the past 12-18 month with fewer and fewer travel nurse contract offerings, and pay packages continuing to  plummet.  We are now seeing average pay packages at, or below, pre-pandemic levels.  With increased housing costs and reduced income, travel nursing no longer makes sense for me financially, so I have switched from travel nursing to a full-time staff nurse position in San Fransisco where nurses are paid more that what is currently available as a travel nurse.  I'm happy to share my insights if investors are curious how this might effect supply and demand for MTR rentals, but for the time being I have some questions about MTR rental arbitrage.

I am looking at renting a 1bed/1ba apt in Daly City, CA. The property owner is also renting a 3bd, 1ba apartment on site and we are discussing the possibility of me leasing the entire property, and then subletting the 3bd apartment to travel nurses via MTR leases. The property is well suited for the purpose, no HOA, with potential cash flow that will provide me free housing in the 1bed 1 bath, maybe more... making for a great house hack. I have experience house hacking during college where I furnished a house and rented rooms to cover all my costs and free rent for me. I have also run a lucrative air b&b on my sailboat in Seattle way back when the Port or Seattle allowed it, and designed and set up an AirB&B via ADU at my mom's place which now nets her $15K annually. So I don't think managing this purposed rental arbitrage is beyond my capacity, but property owner and I have some details to work through.

Our dilemma is how do we vet potential renters, who conducts the background checks, who holds the deposits, etc. Of course I would furnish the property, advertise the property, show the property, provide weekly cleaning service, collect rent from tenants, and pay full rent to the landlord regardless of occupancy.  I also purpose that I pay the full deposit ($5000) to the property owner, and I pay for minor repairs myself, collect deposits from tenants, and I would be responsible for responsible for vetting the tenants by standard rental application, verifying employment, credit checks, references, and background checks.   However, the property owner is requesting that he hold deposits, applicants submit applications to him, and he takes on the responsibility for vetting tenants.    In my mind, this presents a conflict of interest if property owner is paid full rent by me, he has no risk associated with vacancy, no incentive to conduct timely rental applicant screenings, and no incentive to approve tenants.  And if he holds deposits, I have no means of recourse for potential damage to furnishings, or minor repairs which I would rather handle immediately as an onsite property manager.  Property owner and I are researching local sublet laws as they apply to MTRs and rental arbitrage, but I'm seeking any insight BP community has regarding how best to arrange the lease and potential subleases to best protect the property owner and myself.  

Thank  you all in advance for your thoughts and insights.  

~Sincerely

[Mason Weiss]

Hey Brent, good questions. If the property owner is set on handling all of the potential tenant screening and applications, I would not move forward with the arbitrage. It doesn't make sense for the owner to have this control. They could decline every potential applicant and then you are stuck paying for both units.

Protect yourself by having full control of the tenant sublease process, or I would not move forward with the other unit. 

[Brent Langlinais]

Thank you Mason. 

I think the property owner is open to other options as long as his investment is protected. Do you have a recommendation as to how we structure the lease so that he in protected in the event of a tenant refusing to leave, eviction problems, and liability?  It would seem that the risk of eviction would fall on me because I would still pay the full rent to the property owner while not collecting rent from the tenant.  And the property owner's insurance would cover their liability regardless of who the tenants are.  

Thanks!

[Zachary Deal]

I agree with Mason that you should only enter this agreement if you have more control. I think a simple structure where it is clear you are responsible for the rent regardless of occupancy would suffice. I think the best thing you can do to protect yourself is thoroughly vetting potential tenants and increasing security deposit for longer stays are your best bets

[Allen Duan]

Perhaps you can do a percentage based structure if the owner won't budge. Essentially you could operate like a co-host but with higher fees since you are furnishing the space. 

I love this "rental house hack" strategy. Great way for those who don't own to cover their housing expense. 

[Bill B.]

Of course the owner has to do all the screening. They’re the one that’s going to get sued when one of your/his tenants hurts someone. It sounds like the owner gets all the additional risk and you get all the additional reward?

Ps. If the place is still available after a week or two they may simply be asking too much in rent, that’s a pretty long vacancy. 

[Colleen F.]

@Brent Langlinais  If you do this as a partnership that is one way to handle it. 

As you propose the LL has to understand his risk and have the right insurance.   You could agree on criteria for renters you will abide by for screening and see if that works for him. 

Might I ask if you are quitting traveling due to pay why would you think you have significant demand for travel health workers and a 3/1 at that?  The refrain from many travelers is they want to pay less because reimbursement has fallen off but they don't want to share a bath.   

[Brent Langlinais]

Colleen F., Good questions!

I think San Fransisco is one market that will maintain solid Travel Nurse demand and higher pay, as it always has, partly to do with the fact that staff nurses in the Bay Area are compensated much higher than the rest of the US, so hospitals can offer higher travel nurse bill rates and not break budgets. I confirmed this with several travel nurse recruiters who have exclusive accounts with San Fransisco hospitals, and report higher than average winter rates and plentiful contracts in the Bay Area. I underwrote the deal with MTR comps for shared houses and apartments in the area and the competition is super weak with terrible marketing, and most offerings are in houses with a family or grandmother, cluttered shared space, lacking amenities, beat up furniture, terrible photos, don’t offer refunds if the nurse’s contract is unexpectedly canceled, won’t allow mail deliver at the property, among other things that we would consider “not traveler friendly” The property I’m arbitraging is ideally located, brand new rehab inside and out, high end finishes, hardwood floor throughout, elegant furniture (mine), in suite W/D and dishwasher, parking, 3 minute was to subway, etc. But more important than amenities or number of bathrooms, travel nurses want to feel at home and comfortable and welcomed, instead of dealing with a nosy micromanaging landlord, unnecessary demands, suspicions or accusatory attitude, etc.

No doubt I’d be prefer a 2bd/ 2ba, but I think the monthly rent will attract plenty of nurses willing to share a bathroom, and I don’t need to rent all 3 rooms for the deal to work out for me financially.

Perhaps the most important part of my underwriting is the fact that I have competitive advantages in Travel Nurse Mid-term rental space, and even with decreased compensation for travel nurse contracts, and a single bathroom, I feel confident I can fill the purposed rental unit in this specific market.

By this I mean that I personally know and stay in touch with literally hundreds of current and former travelers, and dozens of recruiters representing 30+ different staffing agencies. As such, I get hundreds of contract offers each week and follow trends to a degree I have not seen from any other travelers I know. I offer value to those in my network as I share with them especially lucrative contracts and serve as a resource for other travelers and recruiters who what an honest take on the compensation and terms of contracts they may be considering or what to know what their competition is offering. I've also been a guest on the travel nurse podcasts and participate as a top contributor in numerous travel nurse online forums, network at travel nurse convention, and the list goes on in terms of ways I offer value to folks in my industry who are likely to help me a competitively priced MTR where demand is high. All this to say that I can probably fill the units with people in my network who will gladly trade a shared bathroom for peace of mind renting from someone they trust not to harass or micro manage them, invade their personal space, not allow them to get mail, or generally make them feel unwelcome, l which is the main complaint nurses seem to have about the MTR operators. 

In fact, I may be able to fill the rooms without even advertising the rooms on Furnished Finders, as is the case with one of my colleagues who keeps his 3/1 and 2/1 in Palo Alto occupied year round just with referrals from my favorite recruiter, who I may or may not be dating. :~)