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Rental Arbitrage

Rental Arbitrage

Owning real estate can have several advantages, but let’s face it … qualifying to buy a property in today’s economy isn’t easy. So, how can people who aren’t able to purchase real estate still take advantage of making a profit off properties?

Short-term rentals are one way someone can take advantage of it and without ever even purchasing a property. Wait … what? …

That’s right. There are people right now who rent properties from landlords and then basically sub-lease those properties to other people. There are multiple ways to do this, such as by renting the property from the landlord directly or through a lease option. Nonetheless, the beauty is in being able to cash flow on a property that you don’t even own.

Let’s say you rent a house for $2,000 per month from a landlord. Then, you list it on Airbnb for $5,000 per month. You’d make $3,000 per month in profit before paying any necessary expenses.

Is This Even Legal?

YEP!! It’s completely legal. What most new investors forget is that what you put into an agreement or contract is what makes a deal happen. All you need are two willing parties. So, let’s say you have a landlord who wants to make $2,000 per month. Well, if the landlord can make their $2,000 renting their property to you knowing that you will also make a profit, often, they are on board to create a win-win scenario. Sometimes you will come across landlords who have no interest in participating in what you want to do, but others may. Always be honest and tell the owner your intentions for the property. Most property owners who disagree with what you want to do only do so because they are unaware of the benefits for themselves.

One benefit is minimizing their vacancy rate by knowing that they are getting a long-term tenant who has a personal stake in keeping the property in decent shape to make a profit themselves. During this time, you are also helping pay down the property owner’s mortgage, aiding in principle paydown to increase their equity.

As the person conducting this type of business within someone else’s property, you do have to be aware of any risks associated, like destruction of property, but that is why having insurance and other security measures can help mitigate any issues. There is always a risk when you are investing and have multiple parties involved.

How to Get Started in Airbnb

You don’t need to own real estate and don’t need to have a lot of start-up capital to begin. Remember, we are using other people’s property, which essentially means we are using other people’s money.

The first thing you’ll want to do is to work on your legal entity to set up your business structure and foundation. With this, you’ll want to start implementing the infrastructure you’ll need to get the business up and running so you can sustain it effectively. To do this, you’ll want an attorney and accountant so that you create an entity that both protects you on the business side, as well as offers the greatest tax advantages. This is what your attorney and accountant know best. While building the infrastructure of the business, you’ll want to also expand on building your team.. As you start to grow your business and scale to your needs, you’ll want support from a good team of people who understand the necessary steps to keep things on target. Your attorney and accountant will be the first two people on your team, and then you’ll want to expand on those who can help within the business itself like a property manager, repair person, cleaning crew, etc. If you intend to expand your business, you may also want a good real estate agent, potentially an interior designer and general contractor, and possibly a mortgage broker if you do intend to purchase properties in the future and not just rent them from landlords.

Next, you need to start your market research. With short-term rentals, it’s critical to know which properties are in high demand and in what areas. What attracts renters to a specific area and why, and then look deeper into the financials of what renters are willing to pay for an entire home, vs. a portion. You will want to check into the number of bedrooms people desire, what amenities are crucial, property proximity to downtown or tourist areas, and how the properties look. Are they overly decorated, simple, or themed? All these things play a role in helping you determine which properties will make the most out of your business plan.

After you’ve done your market research to know which area makes the best business sense for your short-term rental, you’ll want to run your numbers to calculate your potential profit. We suggest being profitable at 50% monthly occupancy, as a rule of thumb.

Let's give an example. Let’s say the daily going rate in your area is $300 per night. It’s booked for 50% of the month, resulting in about fifteen days. If we multiply the $300 per night by 15 days (about 2 weeks), the profit would be $4500 for the month. If your expenses, including what you pay to the property owner are $2,500, you will clear $2,000.

Now that you know which area you want to target, it’s time to get started on our fourth step, and find properties. Finding a target area is simple once you know what you’re looking for, but for this step, you will need to be able to analyze a deal to know if the numbers are going to make sense. If the property does make sense, you’ll then need to communicate with the owner to help them understand what it is you want to do and what other costs may be associated with getting the property going to make it a win-win for you and the property owner.

If the property owner agrees to your terms, it’s time to implement step five, which is to list the property for rent. If you list on Airbnb or VRBO, their business pages are usually pretty user friendly to help you with creating a schedule of availability, setting requirements and restrictions for guests, and help set your daily rental rates.

As you get bookings, it may make sense to start automating your business and have a larger team to accommodate all your listings and guests, but to get started, you can be a one-person-show until it’s a proven concept within your structure. Always make sure you get reviews from guests so you can use it to market future listings and to appeal to renters as a top tier host.

Getting started with short-term rentals can be seamless if you follow these steps to get educated and to get started. Legacy offers several courses on learning all the various aspects you would need to become savvy in any investment strategy. Join us today so you can take advantage of the real estate market now, whether you own real estate, or intend to. As you can see, you don’t know what you don’t know. People everywhere with various levels of knowledge get into real estate without their own money. You can too.

Areas of Review

Takeaway

Big picture takeaway points

  1. You can rent a home that you don’t own and generate monthly cashflow.
  2. Yes, it's legal, all you need is two willing people and a great contract for you to create a win-win.
  3. Know what area people want to go to and why, look at other people's listings and see what the going rates are in that area.

Reflection

Self-reflection questions to think more about the content

  1. Do I have a team? 
  2. Do I have accounts on certain websites? Open an account on VRBO, Airbnb, and home away. They are all a little different and offer a few different things.
  3. Is my business set up? Set up your business correctly so that you are protected in case of anything, but also for tax benefits.

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