Allowing Someone to use my rental property as a short term / Medium Term Rental

[Adam Walker]

I have a 2/1 800 sq ft, house in Durham, NC. I have been unable to rent it for about 5 months now and I am not seeing the price point I was desiring when I closed on it (around $1700-1800). Currently property management has it listed at $1450 and still struggling to get a renter in even during the summer season. My mortgage on the property is $1773 and it is a brand new construction. 

Today I was approached by someone who is offering me around $1800-1900/month to rent the property from me to run a short term / medium term rental out of it, primarily for traveling nurses or other business people. They would pay all utilities and maintenance on the property and provide 2 months security deposit. 

My question is, is this to good to be true? Should I have concerns or is this a legitimate opportunity? What are the questions I need to be asking? 

Thanks for your help everyone! 

 

[Stephanie Walker]

What they're looking to do is called Rental Arbitrage. I would have them go through the same steps you would go through for a regular long term tenant. Background checks, credit checks, evictions, etc. and I'd look at how long they've been in business by looking up their LLC (if applicable) on the SOS website. Do you have an HOA at your property? If so, check your lease requirements. Lots of HOAs have 6 month or 1 year minimums. If everything checks out and you feel they are responsible, it could be a good opportunity. However, have you thought about maybe just turning your LTR into an MTR/STR yourself?

[Adam Walker]

Quote from @Stephanie Walker:

What they're looking to do is called Rental Arbitrage. I would have them go through the same steps you would go through for a regular long term tenant. Background checks, credit checks, evictions, etc. and I'd look at how long they've been in business by looking up their LLC (if applicable) on the SOS website. Do you have an HOA at your property? If so, check your lease requirements. Lots of HOAs have 6 month or 1 year minimums. If everything checks out and you feel they are responsible, it could be a good opportunity. However, have you thought about maybe just turning your LTR into an MTR/STR yourself?

Thank you Stephanie for your reply. This is helpful to hear the actual term for this. We do not have an HOA so that will check out fine. I agree with you, I think I just need to make sure the folks asking to do this are legitimate. As I am reading more it seems common but it also sounds like there are plenty of people who don't do it well.

As for doing it myself, I live overseas so I am really looking to be as hands off as possible. I could not imagine running a STR myself or even getting it started. My strategy is to buy and hold these properties, unfortunately I bought this one in January when rates were high. While I know they will come down eventually and I can refinance I am feeling the sting right now, and with not alot of applications coming through I find myself open to more ideas like this (rental Arbitrage). Who knows, it could be a tremendous win. But I think I am always skeptical which is why I am reaching out here...

She did share with me she would furnish the entire house, post pictures, pay 2-4 months of a deposit, and begin with a 12-15 month lease and see how it goes. Not sure if that is helpful for you all reading. 

[Stephanie Walker]

Quote from @Adam Walker:

Quote from @Stephanie Walker:

What they're looking to do is called Rental Arbitrage. I would have them go through the same steps you would go through for a regular long term tenant. Background checks, credit checks, evictions, etc. and I'd look at how long they've been in business by looking up their LLC (if applicable) on the SOS website. Do you have an HOA at your property? If so, check your lease requirements. Lots of HOAs have 6 month or 1 year minimums. If everything checks out and you feel they are responsible, it could be a good opportunity. However, have you thought about maybe just turning your LTR into an MTR/STR yourself?

Thank you Stephanie for your reply. This is helpful to hear the actual term for this. We do not have an HOA so that will check out fine. I agree with you, I think I just need to make sure the folks asking to do this are legitimate. As I am reading more it seems common but it also sounds like there are plenty of people who don't do it well.

As for doing it myself, I live overseas so I am really looking to be as hands off as possible. I could not imagine running a STR myself or even getting it started. My strategy is to buy and hold these properties, unfortunately I bought this one in January when rates were high. While I know they will come down eventually and I can refinance I am feeling the sting right now, and with not alot of applications coming through I find myself open to more ideas like this (rental Arbitrage). Who knows, it could be a tremendous win. But I think I am always skeptical which is why I am reaching out here...

She did share with me she would furnish the entire house, post pictures, pay 2-4 months of a deposit, and begin with a 12-15 month lease and see how it goes. Not sure if that is helpful for you all reading. 

Sounds like it could be good opportunity for you then. I would just be very, very diligent in your efforts to qualify them for your rental. People arbitrage when they can’t qualify to buy.  

[Vivian Yip]

I'm curious about how this will work out.  I've been hosting MTR's now for almost 5 years.  I have never had two nurses travel together and needing a 2 bedroom.  I have however, received good demand from nurses for my studio in Austin that rents for about $2100 per month.  I am curious how they plan to make money after spending $5k to furnish and another $200 for utilities monthly, ON TOP of the $1800 rent. The math doesn't really math to me, but then again, I'm not in your area. 

[Adam Walker]

Thank you Vivian and Stephanie for your responses. So here is my other question. What are the risks if the person isn’t qualified? Why would they even try to do something like this if they couldn’t do it? Have you had experiences where people under delivered? I Would love to hear your thoughts. 

[Stephanie Walker]

The risk is the same for an unqualified "operator" of STR/MTR and an unqualified tenant. Their goal is to use your property to make a profit. If they can't make a profit, they are still on the hook to pay the rent. If they don't have the money, they won't pay the rent and you'll need to go through the proper steps and channels to evict. You need to make sure they can qualify to afford the rent regardless of whether or not they make a profit on your property. Think of it this way when you're going through the qualifying process: can they afford the rent for your property plus the rent/mortgage where they live? Most PM companies have a requirement where the tenants income needs to be 3x the rent per month.

There’s more to it than that - but it’s a lot to type out.

It's a popular strategy for those looking to get into STR/MTR and can't afford or can't qualify to purchase a home themselves.

[Vivian Yip]

I agree with Stephanie on all points.  Rental Arbitrage DOES work but they operator needs to have a track record.  I have more than 20 whole homes under management so I am pretty comfortable on how much they make and who I am targeting as a client. 

Here is a hint:  post your UNFURNISHED home on ALEsolutions.com and see if you get any bites. they will rent unfurnished for their clients for insurance claims. You can always just "play the lottery" and see if you get anything matched to your home. 

[Pat Lulewicz]

@Adam Walker check to see if they have other properties they do this for and ask for those landlords' contact info like you would with other tenants. If they haven't done it before, the risk is definitely higher. If they have references and those landlords are generally "happy" with the experience, then its a good operator. Your home IS in a location that could make it a good STR/MTR given proximity to attractions and it's in beautiful shape so I don't think the operator is pulling the interest/opportunity out of their a**.

Attorneys would probably argue with me, but if their LLC is going to rent it, I would still get the individual on the lease or at least a co-signor guarantor agreement so that you have the EIN and SSN for purposes of evictions and collections.

I'd say the biggest qualifier (assuming they can operate it well) is their credit score. If they have a 500 credit score and are trying to make a buck a popular investment strategy, they could just as easy shut down the LLC, stop paying you rent and jump ship since their credit is already bad, whats another hit. Low risk, high reward for them.I would also consider getting a 2x security deposit + 1st months' rent + last months' rent. Don't go more than 12m lease, and even consider a 6m to test the waters, though they will push back because it doesn't given them enough runway to buy the furniture and get runway.

If your PM is going to be managing them, make sure that they are just VERY diligent on collecting timely rent and get agreement to do quarterly (or so) walkthroughs/inspections to make sure the home truly is being maintained. In addition, get GRANULAR on which expenses/costs are tenant responsibility vs which stay with you. Who does HVAC maintenance? What happens if shower pressure deteriorates dramatically - are you on the hook for the plumber or them? Water heater? Appliances? Etc....everything should be very detailed/itemized and hyper documented.

[Bhargav Hirapara]

Check the Lease Terms: Ensure the lease clearly outlines responsibilities and terms.

Background Check: Verify the renter's legitimacy and experience with short-term rentals.

Insurance: Ensure your insurance covers short-term rentals.

Local Regulations: Verify local regulations for short-term rentals to avoid legal issues.

Exit Strategy: Understand what happens if they terminate the lease early.

[Warren Powers]

@Adam Walker I do this on one of my properties and due diligence on the operator and my comfort level with them is key. You will have to obtain appropriate insurance which in my case was much harder to find and cost twice as much. A standard rental policy will not cover short term activity and make sure the insurance company is ok with the sublet/arbitrage arrangement.

[Adam Walker]

@Pat Lulewicz, @Vivian Yip, @Stephanie Walker, @Bhargav Hirapara, @Warren Powers, 

This is all great advice everyone, thank you for sharing your experiences and also the realities. The individual has told me they will be sending us the referrals for us to contact so we will see how that goes. They also expresses they could do 2x - 4x security deposit, we will see if that is true or not. 

My current property managers, while they do not tend to work this way have said they would be open to it if our family desired to move forward this way. Does that seem like a wise decision to have property managers involved? To be able to make sure everything is legitimate? We live overseas so we are very much out of the picture from a hands on perspective. 

Maybe I am naive, but if they are giving a large security deposit and they realize its not working and stop paying, do we not just move forward and the lease is canceled? Or is it more complicated than that? I think that is why I am open to the idea of using our property managers, because they know how to handle late rent payments and evictions. 

Once again, thank you all for your help. This is my first time posting on the forum and its really helpful! 

[V.G Jason]

Quote from @Adam Walker:

I have a 2/1 800 sq ft, house in Durham, NC. I have been unable to rent it for about 5 months now and I am not seeing the price point I was desiring when I closed on it (around $1700-1800). Currently property management has it listed at $1450 and still struggling to get a renter in even during the summer season. My mortgage on the property is $1773 and it is a brand new construction. 

Today I was approached by someone who is offering me around $1800-1900/month to rent the property from me to run a short term / medium term rental out of it, primarily for traveling nurses or other business people. They would pay all utilities and maintenance on the property and provide 2 months security deposit. 

My question is, is this to good to be true? Should I have concerns or is this a legitimate opportunity? What are the questions I need to be asking? 

Thanks for your help everyone! 

 

In regards to your mark to market for the rental; who gave you that type of range it'd rent for? RTP area is notoriously bad for RTP. Arguably the worst among bigger cities. I have two units rented at $1760 and $1775 that are 3/2s 1200-1400 sq ft in solid areas-- one in Durham and one in Raleigh. Those are my smallest units but fit your rent range to get an idea. Even in my primo areas, you don't get top dollar you do get a really primo city though.

In regards to this, the risk is likely not worth it unless the operator has a successful track record, puts a healthier deposit, and signs waivers to own all liability. Depending on where you are in Durham you need to priced properly-- probably closer to $1400-$1500 to move. Lots of people have entered the market this year and are egregiously priced. 

[Nicole Heasley Beitenman]

Have you connected with other investors in Durham at a local meetup? Is your rent just priced too high or are you in a bad area of Durham? If you're not having success renting it as an LTR, is there enough attracting people to that area that would lead to success as an MTR?

[Colleen F.]

@Adam Walker don't wing it with the referrals.  Put together a set of questions related to payments and conditions of your property that you want to know and ask them each about how the experience has been.  How do they manage repair requests.  What modifications if any will they make to the property? cameras?  You could even check out the listings they already manage to see the contact info matches who you are talking to. 

[Drew Sygit]

@Adam Walker what are your options if they default?

[Adam Walker]

@Drew Sygit this is what I am unsure of. I am not sure what the property manager would do. My basic assumption is move towards eviction and keep the security deposit. But like I said before this is new for me.