If you ask people who want to get into real estate investing, but haven’t, for the biggest hurdles stopping them from getting in the game, most will probably mention the capital investment. A house is expensive, no doubt, and exploring loan options can be extremely complicated to even experienced investors. While there are financing options that allow for 3% or less as a down payment for a property, these options may not work for you. You may not qualify for loans like these, for a number of reasons we won’t discuss here. Or, you may not have the savings required to provide the calculated down payment plus the closing costs for the loan, not to mention any updates or repairs needed once you get the keys. Oh, and since you want guests to stay in the house, you need enough money leftover to furnish the place. Whatever your situation may be, you don’t need to let the financial burden of real estate ownership deter you from getting into the hospitality business. With a model called rental arbitrage, you can run your short-term rental business without owning the home at all.
What is Rental Arbitrage?
Arbitrage, simply put, is the economic practice of taking a resource from one market, where it has a certain value, and offering it into another market that values it higher. That difference in value is translated into profit for the person orchestrating the deal. In real estate for rental purposes, let’s consider 2 markets: long-term rental and short-term rental.
The Long-Term Rental Market
This is your classic rental home – whether it be a house, apartment, or condo, the leases are signed for an extended period of time. The agreements are usually for a 12-month period but landlords may offer 6-month or even month-to-month lease agreements to tenants.
The Short-Term Rental Market
This is why you’re here on my blog. The short-term rental market is that of a hotel; people looking for a place to stay for a period of time as short as one night. This isn’t a home, it’s a short stay to get the tenant close to whatever it is that brings them away from home and into the area. For a comparison of the financial implications of renting in the short-term rental market versus the long-term rental market, check out this article.
Now that we have an understanding of the difference in cashflow of an LTR versus an STR, this is where the arbitrage comes in. By taking a resource from one market (a long-term lease contract) and plugging it into another market (renting the home on sites like Airbnb) you can take advantage of this profit potential without having to own the home! You rent it…and then you rent it out. By paying the monthly rent to a landlord and then hosting the home as a short-term stay, you’re able to pocket the difference.
Why Wouldn’t the Owner List the Home on Airbnb Themselves?
- The work. Managing guest communication, coordinating cleaning schedules, furnishing the home… It takes more work to manage a short-term rental!
- The uncertainty. Many old-school landlords have been doing things the same way for a long time and it’s working.. Why would they change their strategy? They may not even understand the way the technology works.
- The risk. Many landlords see the venture into short-term rentals as risky. The potential for more damage and uncertain occupancy rates are scary ideas to many homeowners considering this strategy. Plus, depending on the type of property, the landlord may be looking out for the best interests of other tenants living in close proximity, protecting them from a continuous flow of strangers and parties in the building. As I’ll explain, it’s your job to make it clear to the owner that you are the one taking on, and mitigating, these risks.
How to Land a Rental Arbitrage Deal
What to look for
You can’t just sign any year-long rental agreement for an apartment and assume you can start listing it on Airbnb. Most traditional rental agreements don’t allow this type of sublease. You definitely don’t want to get caught renting the place out illegally and then find yourself stuck with multiple months left in a rental agreement. So, here are some key factors to look for to start your search prepared.
- Talk to the owner. A property manager or real estate agent you message through Zillow is likely to shut your request down right away or is not going to portray the opportunity in the most positive light to the owner. If you can find an owner renting out their home via listings on Facebook or Craigslist, you’ll have the best chance of making a personal connection with them and sealing the deal.
- Houses over apartments.
- Apartment units are going to be the toughest to get into the rental arbitrage game. These are often owned by corporations who don’t have time or interest in hearing about your “win-win opportunity”, and they also will be extra weary of the potential for rambunctious vacation renters throwing parties and disturbing the peace of the nearby residents. This goes for apartment complexes of all sizes, as well as homes that have been converted to multifamily structures.
- Condominiums are easier than apartments for this endeavor because they are individually owned, giving you a chance to get in contact with the owner directly. However, the owner may still have the issue of shared walls and friendships with neighbors to protect. Plus, HOAs may have lines in their bylaws that prohibit short-term renting of the units. Be sure to check the bylaws if you get to that point with a condo.
- Stand-alone houses are your best bet. If you can speak with the owner of a house, they will likely have less worry of disturbing neighbors. And, by promising to rent out the entire home, you may be taking a large financial burden off of them and their mortgage payment.
So…you’ve got the owner of a home on the phone. Now, what do you say?? Because we know the apprehensions that may keep a homeowner on-edge when they think about the STR world, we can prepare for their concerns and ease their minds with a few important selling points. Whether it’s over the phone or in an email, mention the following positives about letting you rent their home out on a short-term basis:
- Represent your business and your customers the right way. Instead of saying “I want to rent your house on Airbnb”, say something like “My company offers short-term housing for individuals visiting the area for work and for play”. Mention the different attractions and events that may be bringing someone to the area for a weekend. Get creative but be sure to sell yourself as a professional who provides a service.
- Move-in ready at all times. Because you will be bringing in new guests repeatedly, you will always have the house first-impression ready. You can check out this article on the benefits of short-term rental practices in terms of wear-and-tear on a rental property.
- Professional cleanings regularly. Similar to point number 2, homeowners can take comfort knowing that their house will be cleaned thoroughly between each guest. That means no year-long manifestations of filth, like they may have encountered after a long-term tenant moved out at the end of a lease.
- You make money, so they make money. Stress the fact that, because this is a business, you plan on always having money for rent. You don’t need to hide the fact that you will be making money on this transaction – It may give them comfort in knowing that they will be paid each month.
- Maintenance and lawn care. This can be a huge selling point, depending on the homeowner’s original intentions in the long-term agreement. By promising to handle all lawn care and minor maintenance issues inside the home, you may take a big burden off of their shoulders in terms of both effort and finances. You ultimately become the property manager for the home.
- Potential to grow. If all goes well, the relationship between yourself and the homeowner may bear fruit in the form of more homes to rent. They may own several homes already, or they may decide to invest in more homes now that they have such a reliable partner. This one comes with time but can really lead to scalability in your business.
Getting into the short-term rental business without owning real estate is not simple, but it sure is possible. Be prepared to hear “No”…a lot… in the beginning. With the right research, presentation, and reputation, you may find it getting easier and easier to land rental arbitrage deals as time goes on.