Real Estate Investment Strategies: Leveraging Short-Term Rentals
The secret to success is to own nothing, but control everything. – Nelson Rockefeller
In today’s Real Estate Investment Strategies, I’m going to cover rental arbitrage. More specifically, short-term rental arbitrage. The concept sounds great on paper. It’s not difficult to understand, and it’s won’t be difficult to find potential candidates.
However, it can be somewhat challenging to find a landlord willing to cooperate with you simply because they don’t understand what subleasing is. You’ll have to be willing to explain to them how this arrangement can be of benefit to them. It’s better if you can meet face to face first.
Don’t go into how you are going to make money off their property. Instead, stay focused on how they will benefit from agreeing to let you rent the property out as a short term rental.
WHAT IS RENTAL ARBITRAGE?
Basically, you are subleasing a property from a landlord. What this means is that you agree to a long-term contract (1 year only if you’re just starting out) at a mutually agreed to the monthly rent. The key is to make sure you have permission to sub-lease the property out.
For vacation rentals, location is key. For short-term rentals in general, location is still a factor but does have more leeway which I’ll cover further later in this article. Keeping your costs low is your goal. So, you’ll want to make sure that if it’s already furnished, the furniture is in good condition and appealing. The reason being that your reviews on the property will either make you or break you.
When approaching a property owner/landlord, make sure you are upfront and tell them you want their permission (include it in your contract with the owner) to sublease the property. If in a subdivision of townhouses and condos, double-check that the Home Owners Association permits short term rentals and subleases. Why would a landlord consider doing this?
Oftentimes, inexperienced landlords don’t know how to effectively market a property and may find it difficult to rent consistently. More often than not, they are just not that computer savvy or don’t have the time or willingness to dive into online marketing. It can be somewhat daunting for the inexperienced.
Knowing how to market properties successfully on sites such as VRBO and Airbnb is a science unto itself. Thankfully, it’s something we, my husband and I, have taken hold of with both hands over the years with a good measure of success. If you’re of the younger generation or already have some experience, then it’s fair to say you have a big leg up.
PROPERTY OWNER BENEFITS
Here are some benefits you may want to mention in your discussions with a property owner:
1. Steady income (you agree to pay monthly rent regardless if the property is occupied or not).
2. You’ll look after the property. We offer to take care of any minor repairs up to $200 (negotiable).
3. Because the property is watched closely, it’s also well taken care of and cleaned regularly at no cost or hassle to the owner.
4. As part of your negotiations, you could also offer to cover cable & internet.
5. You’ll also manage the property. However, keep in mind that some owners may prefer to keep their property manager in place. If that’s the case, make sure you will have full authority and access to schedule bookings directly. Compose a letter to the management company and have the property owner sign and date it.
Property management companies will NOT often be cooperative with you and act as gatekeepers, limiting your access to the property. If you have your own management company, try to convince the owner to let you transfer it over to yours, saving them the money and giving you full control of the property.
BENEFITS TO YOU:
1. Instead of forking out 10-20% downpayment on a property purchase, you’re only initial downpayment is the cost of 1-2 months of rent.
2. Low costs: Only 1-2 months rental deposit, insurance, cable & internet, and possibly some furniture.
3. Much easier to make the property profitable if you’re willing to go all out on building up your Airbnb and VRBO prominence (i.e. Superhost status).
4. Using this method you can quickly build up your rental income portfolio with little money.
5. No need to pay HOA fees, garbage disposal, lawn maintenance, property taxes or high-cost maintenance items.
You can determine if a property owner is struggling by looking at their bookings on these sites and their reviews as well. Look at the bottom of the search results, not the top.
WORKING OUT THE NUMBERS
When working out our own profit/loss numbers, we do not include the cost of the deposit to secure the property. Why? Because you get that back at the end of your lease. So although it’s an initial expense, it’s 100% refundable at the end of the year unless we decide to renew the lease. That’s not to say you can’t include it, I’m just explaining why we choose not to.
Your first-year expenses will be higher than year 2 or 3 because of your initial set-up costs.
Short-term renters expect more than the typical long term tenant would. Things like a coffee pot, sugar & salt, napkins, plates, cups, paper towels, silverware, etc.
Even if the property is furnished, you’ll still have to place extra towels, blankets, pillows, bath mats, bedding, tissues, toilet paper, hand soap, dishwashing liquid, etc.
Place yourself in your visitor’s shoes. When you go on vacation, what things do you expect to be provided with? Then add a few extras here and there. Attention to details will NEVER go unnoticed and you’ll be rewarded with great reviews and repeat business.
Identifying Gold Mines
Sometimes, it’s the smallest things that can turn a rental property around. Read the reviews to determine what characteristics need improvement that will generate better reviews when you take it over.
Go see the property first hand if possible, determine what’s needed to spruce it up a little. Maybe just a fresh coat of paint in the main living area, a new area rug, pillows on the couch, a nice coffee table or end tables. That kind of thing can go a long way.
Look at the online photos. Do they look like they were taken with a mobile phone? It’s well worth the expense to hire a professional photographer and include it in your set-up costs. you want the very best photos online because that’s what potential renters will go on.
Do the rooms look dark or like cramped spaces? Is the furniture outdated? How old are the appliances? These are all things to take into consideration.
We find, that more often than not, a good cleaning, some new area rugs and TV, and professional photos are all that’s required. We take the time to go look at the property, making sure the appliances are not too old and that they work well. We also make sure the flooring is in good condition and there are not any cracked floor tiles and the unit has central air and forced heat. Check out the kitchen and bathroom(s).
You don’t need to go for the big units either. We find that the small 1 bed or studios are easier to maintain and you can really spruce them up nicely for less. As such, they rent a lot faster and are more profitable. You want it to have the look and feel and a special getaway, so if you’re considering arbitraging a condo, make sure it has some nice amenities such as a pool, clubhouse and/or workout room.
Contacting Property Owners
Do NOT contact the management company in an effort to get the owner. It won’t work. Management companies are looking out for their own best interest, of course, and will consider you a threat. You’ll have to find a way to contact the owner directly.
This can be somewhat challenging, but get creative. You can often find the property owner’s name and mailing address through public records. Also, check out online rental & FSBO sites such as Zillow, Trulia, Craigslist, etc.
Many For-Sale-By-Owners and long-term landlords may like the idea of an income property but haven’t the slightest idea how. If you come along and offer to pay them a steady monthly income and handle everything else, they just might go for it.
When negotiating, make sure your contract covers who repairs what and when. You don’t want the landlord taking 30 days to fix a leak or repair/replace a dishwasher. You want to make sure he/she understands it’s critical that any repairs that fall into their purview are done very quickly. Also, make sure you have an out clause. So if, for instance, the landlord refuses to adhere to the terms of the contract or misleads you in some way, you can pull out quickly.
Working out whether or not a property will be profitable is key, of course. You’ll need to determine your break-even point, rate of occupancy required, nightly rate against your expenses. Make sure you include the cleaning fee in your rate or as an add on.
I hope this information will get you seriously thinking of rental arbitrage, especially if you’re on a limited budget. The location doesn’t have to be on a beach, as even studio apartments in or near small cities nearby universities, hospitals, lakes, etc., do very well.
Your Two Cents
Are you interested in real estate investing? It’s by far, one of the best ways to build up your net worth and income. What did you think of the video? What questions can I answer for you? Leave your comments below.