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Rental Arbitrage: Harnessing the Power of Property Without the Purchasing Cost

In todays’ real estate market, the option to purchase property as a means of investment may seem a little out of reach. Good news, there are options available to those who want to invest in real estate without having to own properties of their own, and specifically in STR (Short Term Rental) market. 

With Rental Arbitrage, investors can financially benefit from the STR market without having to own real estate, therefore forgoing many of the expenses associated with ownership such as high market values and soaring mortgage interest rates.

So what exactly is Rental Arbitrage and how does one get involved?

Arbitrage refers to a tenant leasing from a landlord, furnishing and maintaining the property, and in return leasing the property to a third party. Rental Arbitrage utilizes a STR platform, such as Airbnb for example, as a means of acquiring short-term rental tenants. This model allows investors to capitalize on the financial opportunities STR’s provide without incurring many of the associated expenses or risk of ownership. That is not to say that Arbitrage does not involve significant investment or commitment. Let’s delve into the in’s and out’s of this model by answering some key questions.

Why would a property owner agree to an Arbitrage arrangement?

  • Guaranteed Income. As a property owner’s top priority, they like to ensure that rent is received reliably on time.
  • Tenant commitment. Having a long-term tenant removes the vacancy concern for the property owner.
  • Peace of mind. Assurance that their property will be well looked after.
  • Cost savings. When the investor agrees to rent multiple units from the property owner, the owner can save on maintenance expenses by appointing the arbitrage operator as the property manager for those units.
  • More time. Occupied units free up time for property owners to focus on other aspects of their business.

What makes an investor an excellent rental candidate for a property owner?

  • Dependability. As mentioned above, owners seek dependable tenants; if an investor can provide that assurance and pay rent ahead of time for upcoming months, they are likely to be more receptive to the proposal.
  • Lease Duration. Agreeing to sign a lease with a minimum duration secures income for owners for that period of time and removes the financial stress of vacant units.
  • Responsibility. Reminding the owner it’s in the investor’s best interest to keep the property pristine and well cared for may improve their chances and make them a top rental candidate.
  • Maintenance: By assuming repair costs, investors heighten their attractiveness as potential tenants, relieving owners who are frequently burdened by tenant requests such as leaking taps and appliance repairs.
  • Strong References. If an investor has rented properties from other owners, referencing those agreements and providing recommendations during negotiations can be valuable.

Tips on keeping costs down for the Arbitrage operator while ensuring an excellent customer experience:

  • Focus on creating simple and comfortable units, as luxury units could cost more to furnish.
  • Furnish using big box stores, online retailers, and brands that provide a good product with a pleasing aesthetic at a lower price to keep start-up costs down.
  • Build a trusted team, while saving money in the beginning to put the investor further ahead in the future. For instance:
    • The investor can consider cleaning units themselves when starting out, then hire a professional cleaner as the business grows.
    • Hire a designer to save time furnishing all the units with economically sound furniture choices.
  • Being aware of vacancy rates provides the investor with the power to negotiate things like lower unit rent, the first month free, etc.
  • Consider purchasing business or commercial insurance to create another layer of security.
  • Utilize a STR platform such as Airbnb. They offer built-in insurance for property damage and theft and they guarantee payment.

How can an investor scale a Rental Arbitrage model?

  • Consider renting multiple units from a single owner. Volume allows greater negotiating power to the investor and provides the property owner with greater financial stability.
  • Smaller communities outside major urban centers have lower rental rates. It may be more economical to acquire multiple units in these areas.
  • Consider the US as it may prove beneficial with the prevalence of lower rental rates.
  • Approach property owners strategically during seasons of low occupancy such as in the winter to possibly negotiate a lower rent.
  • Get the units up and running as quickly as possible with quick turnarounds.

What can I do to get the most ROI?

  • Monitor expenses (rent, maintenance, furnishing the unit, insurance) against the per-unit STR rate.
  • Focus on keeping the managing expenses down by building a reliable team or doing some of the work when starting out.
  • Keep the occupancy rate high by focusing on building a clean, simple, and comfortable unit with a fair nightly rate.
  • Opt for third-party booking sites like Airbnb over going solo, as they offer damage insurance, secure payments, and safety for both renters and operators.
  • Consider rolling a portion of the returns into passive real estate investments to continue growing wealth without the stress of property ownership or management.

Investment through real estate may appear to be at arm’s length in our current climate but with some creative thinking, planning, and research, leveraging the STR market is a realistic option.

Whether it be locally or internationally, Arbitrage is an excellent and scalable investment strategy for those looking to become involved in real estate investing without the high costs associated with ownership.

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July 27  |  7pm

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