My thoughts (FWIW) on MTR Arbitrage

[Miguel Del Mazo]

MTR arbitrage is a useful tool to have in your tool chest, and like all tools, it has its uses along with its positives and negatives.

MTR: Medium-term rental (usually between 1-12 months)

Arbitrage: renting from another landlord and *with their permission* renting out that unit to a third party, hopefully at a profit. I know most of us here know these definitions, but just to make sure we are all on the same page.

The main negative with MTR arbitrage is that since you do not own the unit, you get none of the benefits of being an owner. You have no ability to make improvements to increase the value (and benefit as the owner); you can't deduct mortgage interest on your taxes as you don't hold the mortgage; and you can't own it while the value rises over time. There are, of course, more risks and benefits of being an owner, but in general, it's good to own.

The main positive: you don't own the unit. Paradoxical? Yes, but hear me out. There are times when you don't want to own the property yourself. Here are a few examples:

1. You can't afford to buy a good MTR property. This is probably the most common reason to arbitrage. You have enough money to furnish a property *fully*, and (this is vital) you have enough money to hold in reserves if/when things don't go perfectly, but you don't have enough to put down a 20-25% down payment to own. Yes, there are lower down payment options out there, but many of those will require you to live in the property for a year before renting it out (or it's mortgage fraud). Using an MTR strategy will allow an earlier chance to start.

2. Start what? Learning to attract residents. MTR is very different than short-term (STR) or long-term (LTR) leasing. STRs have platforms that do much of the heavy lifting to advertise your unit once you've set everything up. AirBnB, Vrbo, etc want to make it seemless for renters to stay with you (for a fee). LTRs require finding tenants much less often, but they also have a large pool of possible residents that understand the process and a large buffet of online places to source them. MTR advertising is still dominated by furnishedfinder.com, and this is a cheap, but bare bones, experience for both landlord and tenant. Think of it like a dating site in that its purpose is to just bring the interested parties together, but if love is to bloom, it will take some work. You must learn to communicate with possible residents, ethically and legally screen them, juggle the calendar, create leases and collect rent. Because you were able to start sooner (see #1), you are able to start learning earlier.

3. So is MTR arbitrage only for newbies? No. Let's say you're an old pro at MTRs, but you want to expand into a new market. You may have mastered all the techniques, both basic and advanced, but if you aren't sure how a new market might differ from where you know, arbitrage offers a way to learn without a long-term, expensive commitment. Essentially, you can go prospecting before committing to a larger purchase once you've hit pay dirt.

4. Even if you are flush with cash to invest, know everything and aren't leaving your preferred market, would there ever be a reason to MTR arbitrage? I think so. At the core of all businesses is the customer. For MTRs, the end user is the resident staying in a unit, and serving them is the main purpose of the MTR business. You may find that travelers to your area are turning to expensive or substandard options for their housing needs. When demand is growing rapidly, executing an MTR arbitrage play may allow you to quickly and profitably serve residents that might otherwise be in a bind to find good housing. 

There is a lot more to MTRs than my basic thoughts above, and I wrote this in a bit of a rush, so take everything with a grain of salt.  I just wanted to address some of the animosity I've read in these forums to MTR arbitrage.  You may find yourself in a position where it's the right tool for the job. You may find that, for you, it's never the right tool.