Some arbitrage operators also try to get multi-year lease terms, security deposits waived, free rent up front, and the like.

The short answer is supply and demand. 

It has worked so far, but there are few things about it that we've had issues with (security deposits, rent receipts, etc.).

You should use a state-specific lease that is clear regarding the start and end dates, the monthly rent, the fees that will be charged (ex. pets) and those that may be charged (ex late fee), the amount of the security deposit, and a clear list of rules associated with the property (no smoking inside is a big one as are rules related to parking).

@Dan Dares TMIf the "investing partners" are going to be passive, you need an SEC attorney since you are now creating a security.

Nope, too much of a security issue! 

It will be all materials supplied, so it's just labor.

Remember your costs will be more for an STR, you'll be paying for a lot of things you wouldn't with an LTR - higher STR insurance, all utilities including internet, supplies like toilet paper, paper towels, dishwasher detergent etc, upkeep on furniture and linens if damaged, yard maintenance and grass cutting/snow removal, trash removal, etc.  

After  exhausting security deposit is sometimes less expensive  to give them a stipend to leave.

I explained to the seller that my offer contained a substitution of collateral clauses and I would be exchanging the note they held on the subject home with a note of similar principal and interest secured by a different property of greater appraised value.