_ Yours Non-Technically: Rental arbitrage business idea

Rental arbitrage is one of several types of real estate strategy that can be used as the basis of a semi active, semi passive business model.

Rental arbitrage, aka a master lease, is a type of lease that gives you the right as the lessee to control and sublease the property during the lease as a landlord, while the owner retains the legal title. The concept of arbitrage deals with buying in one market and then selling in a different one for a profit, aka spread even despite expenses associated with doing the sale. In order for the arbitrage to work, there must be some type of amplified rental arrangement or 'different' market. I want to stress the point of 'amplification'. For instance, there will be an ideal amplification, aka open arbitrage or spread if you 'buy' into a lower value, long term lease market but then 'sell' rent to tenants in the higher value short term rental market.

Disadvantage(s) of rental arbitrage

While this model generates revenue, it does NOT create long term wealth because you will not own the property. It is the property owner who will enjoy value appreciation. Consequently, the model is usually attractive to people who do not yet have sufficient funds to own real estate. This is not all bad however because the model is useful for building wealth to eventually own property.

Steps

#. Set up a solid business infrastructure.

For most people, an LLC is ideal because it limits liability but is not as onerous as a full scale corporation.

#. Build a team.

Your core team should consist of an accountant and attorney is important, especially as you can no longer handle all of the tasks alone. Get their advice to avoid common pitfalls that newcomers make.

Your attorney should

specialize in corporate law and or real estate, especially if they have experience with real estate investors and other rental property owners.

Your accountant should

understand tax strategy and have experience with real estate investors

As you scale (to about 3 or more properties), expand your team to also include the following. From this point, the business can become a little more passive.

Your co-host __________ is a property manager that oversees your day-to-day operations and therefore becomes the face of your business. She may manage several of your properties. You will need to pay the co-host a percentage of your profit for each deal with which they help you.
Your cleaning crew

can be a mom & pop arrangement that is cheaper when you can no longer do the work on your own (because cleaning is very time consuming). However, companies are usually better and have better corporate type accountability.

As you grow even more, your team may grow further to also include the following.

Your real estate
An interior designer
A general contractor
A photographer. Quality and appealing photographs of your property are very useful in selling properties.
A book keeper

#. Do market research into your strategy.

Find out the potentially most profitable areas.

Even the airbnb website can help to identify the best zip codes and streets.
Whole home properties can generate more income. Find properties that have asking nightly rates of at least USD 100.
Note the map for clusters of listings. Go through each listing to find patterns to see what is in demand in the market. Common variables within the cluster that you want to identify include characteristics like the number of bedrooms, amenities (like laundry equipment, AC, etc), proximity to downtown or other tourist-relevant places, decorating style.
Pay attention to the attractions, essentially the UVP for your city; whether beaches, parks, etc. Look for these selling points in the top ranking listings, visitor reviews and travel sites.
While you can use the airbnb website for this type of information, you can also get data analysts or special analytic tools to test for occupancy and demand (using projections for top listings in your proposed market).

#. Estimate monthly profitability.

Ideally, you should be profitable, even at 50% monthly occupancy, a fair barometer for success.

#. Find lease opportunities.

This is ideal when owners want to keep their property, BUT do not use it much or at all and would rather avoid the headache and cost of maintaining and managing it otherwise. The owner must be willing to allow you to sub-lease the property.

Sell the idea of the benefits to the owner. Be upfront about your plans. This will avoid subsequent problems from owners finding out on their own and wanting out.

It is in your best commercial interest as a lessee to maintain the property in the best possible condition long term. This is better than having a regular tenant who may not take as good care of the property while living in the property as a long term tenant. Owners often need to do heavy duty cleaning and repairs after long term tenants leave.
The owner no longer has to worry about dealing with the usual headache of fixing missing bulbs and other small issues. You will do that.
property owner equity (aka net assets) increases
the owner will get paid each month. Owners generally feel more confident of this when dealing with you as a corporation rather than if you approach them as a private person.

Address common owner objections.

In response to the risk that tenants will damage the property, offer third party insurance. For many lessees, this means a layer of insurance in addition to your current ____ insurance policy.
Offer profit sharing, ie a percentage of your net profit of each deal. This 'economic alignment' strategy is a financial incentive that is likely to help you to succeed. While this erodes your profitability, it is a useful strategy when you are just starting out before you have built a reputation of success.
In response to owners objecting to short term rentals, remind them that you will be their long term rental arrangement.
In response to the owners' fears over the types of tenants you bring, indicate your specialization, if you have one.
.........

Examples:

Properties like homes and trailers are often laying around. The owners may be parents that never or almost never use it but are disinterested in selling because they want to pass it on to their children.
Buildings under construction, renovation or that have been recently completed. Owners are often receptive, especially if newly completed projects have a high vacancy rate.

Rental ideas.

Corporate rentals involve providing the space for

airline pilots while the airline pays the rental fees.
office staff for usually around 15 days at a time.

Sober living in the US is a program in which the government spends a fixed amount of roughly USD 600 monthly for each bed in a house for recovering alcoholics. This is particularly profitable because multiple beds can be placed in each bedroom. If you rent a 3-bedroom house for USD 1,000, the rental income provides a very augmented income. Consequently, your earnings are 'amplified' what would have been possible if you had earned regular rental.
If you rent a house for $1000 monthly but register it for $100 nightly on airBnB, the profitability will be hugely augmented, even at 60% occupancy.
Student housing.

# Do the math. Calculate projected revenue and expenses to estimate your estimated net profit. What is your initial cash on cash return? To figure that out, do the following calculation.

revenue - expenses = net profit

net profit / initial cash investment = cash on cash return

Get the revenue estimates based on rates for comparable properties in the area.

# Negotiate when possible.

Example(s)

In a 8 unit property of unfurnished 1b+1b units. an investor had only 4 units, with each costing USD 2,100. However, when the owner wanted to remove his vacancy, the investor asked to take over the entire building, ie to get the additional 4 units at a unit monthly cost of USD 2,000, ie roughly 5% less than the others. The investor also asked for the first month free which helped to cover his furnishing costs.

#. Sign when the opportunity is ready to go live.

Beware of properties that are nearly done because of renovation. It is common to be left waiting with money tied up in a property whose date to go live gets pushed back for long, thereby raising your opportunity costs.

5. Befriend neighbors.

4. Get insurance. Ensure that your policy addresses the fact that you are doing rentals. Get coverage for the environment-specific issues, whether earthquakes, floods, guests who get hurt, income loss (know the percentage. This often ranges between 80% and 100%), etc. Establish what will be replaced automatically.

#. Have a risk response for drastic market downturns. The pandemic was a case in point of potential challenges in the rental business. Prepare to pivot appropriately.

People used to higher end corporate business travelers for typical stays of roughly 15 days were forced to pivot during the pandemic. Suddenly they faced acceptable cancelations. Investors who survived the pandemic have spoke of having reserves to cover all expenses for at least 1 month. Investors pivoted beyond platforms like airbnb. They had kept details of all contacts, including municipal office throughout their time in business and asked if anyone needed places to house persons that needed to be in quarantine at a discounted rate. The municipal office became clients to house policemen, firemen and other service men needing to quarantine in their location. This illustrates how this business model is not as passive as long term rentals.

6. Keep all documents, especially since some of the expenses may be used as tax deductions.

7. Guest experience. Automate as much of the guest recruitment and onboarding process as possible. For instance, you can allow guests the following.

To pay online
to leave keys in places they can access with temporary passcodes that expire after guests leave. There are even special smart locks that can be programmed and accessed remotely.
to access your guest manual that, among other things will include Wifi passcodes, gate codes, emergency contacts, co-host contacts, transportation options, etc. This allows guests to proceed without being bothered.

For AirBnB

Provide amenities that delight guests. The idea is to provide anything guests can get from a hotel front desk ... and a little more. Include items that are commonly forgotten on trips like phone chargers, deodorant, first aid kit, sewing kit, shaving cream, sun tan lotion, makeup remover, toothbrushes, toothpaste, dental floss, razors, mouth wash, feminine hygiene products. In the kitchen: snacks on arrival, filtered water, a light breakfast. Be careful not to establish expectations that you can not maintain always, like fresh local fruits and vegetables.

Regular listing. Amenities that are required by AirBNB: toilet paper, soap for hands and body, one towel per guest, one pillow per guest, linen per guest.

Plus listing. This involves having someone from AirBNB visiting to verify the amenities. These listings offer amenities that are over and above the basic listings. They can therefore garner higher prices. The additional amenities include: butter and oil, salt and pepper, pots, coffee maker, shampoo, hair dryer, iron, Wi-Fi, heating, AC, smoke and carbon monoxide detector.