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Show Notes

Jordan’s Hocking Hills AirBNB:

Learn more about arbitrage from someone who is crushing it, Easton Hill on LinkedIn

[00:00:00.090] – Tony

From there, start calling the owners. So make a list of the owners, start reaching out to them. You are going to need a good pitch.

[00:00:08.590] – Intro

Welcome to the Michigan Short Term Rentals Podcast, the show about buying, optimizing and managing shortterm rentals in the state of Michigan. Get insights and recommendations from vacation rental operators to help take your property to the next level. Are you ready to profit from your short term rental? Let’s get started.

[00:00:30.410] – Tony

Welcome to the Michigan Short Term Rentals Podcast. My name is Tony Stancato and I’m here with my co host Jordan Painter. Today we’re going to be talking about what is rental arbitrage, but before that welcome back buddy. So you just got back from a little trip to Ohio, right?

[00:00:47.680] – Jordan

We did, man. Hocking Hills. It was a super cool place and definitely looks like there’s some potential there in the future for us.

[00:00:55.260] – Tony

Yeah. So what you guys do?

[00:00:56.890] – Jordan

We checked out a lot of the nature trails and I’d say our highlight was definitely Old Man’s Cave. It was really cool to walk down in the ravine and just kind of see some of the history that was there and definitely saw a new side of Ohio that I had never seen before.

[00:01:12.130] – Tony

You guys stay in a short term rental?

[00:01:14.380] – Jordan

We did. We stayed in a great short term rental there and had a great time. Had a lot of really cool amenities, really private, kind of a log cabin field, had a pool table, game table, little video game console table and yeah, it was a really cool experience and the host really had a good set up for us.

[00:01:31.630] – Tony

Yeah, it seems like it’s an interesting place right when we went there. It does seem like it’s kind of lacking some of the fun things to do outside of hiking and that kind of stuff. But I imagine that kind of what maybe Gatlinburg was 20 years ago. What do you think about that?

[00:01:48.300] – Jordan

Yes, I would agree. It was just my wife and I that went and we had actually talked about maybe taking our kids back at some point, but one of the issues with it is after a day or two hiking, our kids will be pretty bored with it. So if we do that, we’re going to have to find a house that offers a lot of really cool amenities, swimming pool, maybe something extra for us to do because there really is not a lot going on over there commercially, which my wife actually liked. The fact that it wasn’t commercialized, I kind of landed somewhere in the middle where it would have been nice to have maybe a bit more modern things to do rather than just hiking. But it was a really great trip and really cool area.

[00:02:23.380] – Tony

Yes, I know we both spent a little bit of time running some numbers there when we went there. There’s definitely some premium houses. Those seem to be more around the 20% projected revenue to purchase price, but then they also have some really affordable houses and they might not be in as great of an area, but those are projected to actually do quite well. So there could be some opportunity. Probably just got to spend a little more time digging into the numbers. But the area, you just never know that that was in Ohio. I mean, the sites and the trails are just phenomenal. So definitely something worth going and checking out if you’re looking for a quick trip from Michigan to somewhere close. I know we spent only three days, a couple of nights, and I think you spent somewhere similar to that as well. But you can see a lot of good stuff when you’re there. So definitely check it out, let us know what you think and then let’s get into it. So what is rental arbitrage?

[00:03:18.970] – Jordan

Jordan yes, so the idea behind rental arbitrage is you are able to get into the short term rental gain without actually having to make a purchase. So the idea is you find a landlord that’s looking for a tenant and you become that tenant and you rent it long term from that landlord and furnish it yourself and turn it into a short term rental that you actually don’t own. So really great little cheat code to get started for some people.

[00:03:45.630] – Tony

Yeah, absolutely. Let’s talk about some of the benefits of arbitrage. So one of the benefits is going to be reduced capital. So if you need to go buy a property, let’s say it’s $300 to $400,000, you’re going to need to take and put down at least 10%. In most cases, it might be more towards 20%. So right there alone, you’re looking at call it $30 to $60,000 on a $300,000 house. So big financial commitment right off the get go. But in arbitrage you would put down a lot less because you would typically put down your deposit, your first month’s rent, and then you have your furnishing costs as well. But it’s definitely a way to get started with a lot less capital needed. And then another one would be shorter commitment. So unlike buying a house, it’s a little bit longer term commitment when you buy a house. But when you’re doing rental arbitrage, you might sign a twelve to 24 month lease and that way you can kind of lower the risk, if you will. What’s the more benefits of rental arbitrage?

[00:04:54.580] – Jordan

Jordan yeah, so depending on what your goals are in this business, it also can be a way that you can scale much faster. Like Tony mentioned, the capital cost to get started is a lot lower. And so if you’re looking to really grow a business and grow a portfolio of properties that you manage, it’s a really low barrier way to get started in that regard. It’s also a great way to test a new market. So if you’re kind of considering moving into a new market and trying out an area that maybe you’re not as competent in before you make purchases, it could be a good way to just test the market and see what kind of returns that you can get so that you have a little bit of experience in that area before you really invest a lot of capital. Another one really that can be a big deal for people is just the maintenance costs and you don’t own it. So if it’s just normal maintenance type of issues, that falls back on the landlord and the owner. And so a lot of different ways that it really can make sense to get started early on.

[00:05:56.910] – Jordan

And it’s a really great way to scale business much more quickly for people that don’t have the startup capital that it takes to make the purchases.

[00:06:05.340] – Tony

Yeah, so if you need a new roof that’s not going to fall on your plate, it’s going to fall on the landlord’s plate. A lot of times we budget, call it five to 8% for capex expense. So just putting that away for some of those bigger expenses, you wouldn’t necessarily need to do that when you’re doing rental arbitrage. So again, you can just really get some good cash flow going with reduced risk. But let’s talk about some of the cons of rental arbitrage. So one of those is going to be no equity, no appreciation. So obviously when you buy a house and you’re making those payments, you’re paying down the debt, you’re building up some equity. Once the real estate market kind of starts going up, like we’ve been on a terror the last couple of years here, seeing just some really good appreciation, you’re not going to benefit from that side of it. So in terms of long term wealth building, it’s not a great option, but you just have to find a way, I would say, figuring out how to use that cash flow to invest in some other opportunities. Another con would be the landlord could decide not to renew.

[00:07:12.940] – Tony

So let’s say you’re in there, you got your twelve months, 24 months that you’ve been there, everything’s going really well, cash flow is just amazing. But then the landlord decides for whatever reason, that he does not want to renew the lease. So from there you’d have to pack up your stuff, get your furniture and find a new place. What are some other cons?

[00:07:33.550] – Jordan

Jordan yeah, one of my favorite things about the real estate business is the tax benefits that you get for owning real estate. And it can be a major difference in what the numbers look like in your income and tax liability for owning real estate. So you lose the ability to get a lot of those write off advantages that you get if you own real estate. So that’s definitely a negative in the long term. And also, I would say another thing that we’ve talked about on a previous podcast that we really think makes a big difference in driving revenue and increasing the value is some of the things from an improvement standpoint that you would do to make a property more appealing to somebody on vacation. It really makes it harder to invest the amount of money that it takes to offer a premium experience to a guest because you don’t own the property, so you don’t want to spend a bunch of money adding awesome amenities that are not going to be owned by you. So definitely some negatives with the ability to increase that nightly rate through the improvements that you can make.

[00:08:38.610] – Tony

Absolutely. And we should have started off with so we don’t currently have any rental arbitrage units. We did head down that path at one point. We had the contract signed, we started furnishing the place, but there’s just some things with the place that we were renting that we didn’t agree with or we thought it would kind of harm the guest experience. Not harm the guests, but harm the guest experience. So we just talked to the landlord, said, hey, we don’t think this is going to be a great fit after all. So super cool guy, he gave us all of our money back, our deposit and no ill will between the two of us and we stayed in contact. So it’s definitely something that we would be interested in doing given the right opportunity. So we’ve headed down that path. But we currently don’t actually operate any rental Arbitrage units. But if we were going to be looking to do a rental arbitrage unit, we’re going to tell you how we would kind of get started. And Gordon, what’s kind of the first step in finding a rental arbitrage unit?

[00:09:46.420] – Jordan

Yeah, so Tony is going to make me say the dirty word for Realtors, which is Zillow. So the first thing is where to find them. Right. So you’re going to go to Zillow, you’re going to go to, you’re going to go to the different platforms. A lot of areas have different platforms for rental to find, rentals being advertised. So really getting a list together of the places that are currently looking for tenants, that’s a really good place to start. And then when you start finding those places very similar to when you’re going through the purchase process, you find a place and then you run the numbers through the Air DNA system, which has been really great for us to help to analyze properties. We found it to be fairly accurate in regards to the potential income. So the first two steps are going to be located those properties on whatever websites, the area that you’re looking is being promoted heavily and then analyzing them to see which ones could be the best fit. Tony, what’s next?

[00:10:39.930] – Tony

Yeah, so once you have your list, start looking at, hey, these are the projected numbers, this is how much the rent would be. You can kind of sort of filter those. Some might not even be worth going after, but I would filter the highest projected on down and then from there start calling the owners. So make a list of the owners, start reaching out to them. You are going to need a good pitch. A lot of them might not have been approached in this manner for this type of product, so you’re going to really need a good pitch. Hey, we’re a lot of people’s opinion of Airbnb or short term rentals is kind of party pads, that kind of stuff. You’re going to have to really have something to kind of counteract that. Let them know that we appeal to travel nurses or professionals that are coming to the area for different things. You can also let them know, hey, we won’t be disruption to the neighbors. Here are some of the things that we do to mitigate that, whatever that might be on your end. Again, we use noise aware in our properties so that we can just kind of monitor if noise spikes above a certain level.

[00:11:46.660] – Tony

So that could be a great thing to work in your pitch as well. And then you can also obviously they’re in it to make money. So if they’re asking a month, you could go in and say, hey, I’m willing to pay 1250 a month. Sign a twelve to 24 month lease so you can sign a longer lease and give them higher revenue than they would get on their traditional. And that might be enough for them to say. Let’s proceed. And then after that. Obviously go tour the property with the landlord and then from there you kind of go into signing the lease and then you want to furnish the place and get it listed on Airbnb and VRBO. All the platforms. That’s kind of the high level of what Rental Arbitrage is. Again, there’s a lot of people doing it really well. There’s a guy on LinkedIn Eastern Hill, has several Arbitrage units doing really well on cash flow, so we can find him, track him down and pick his brain. But yeah, what else? Is there anything else we missed on Rental Arbitrage?

[00:12:50.380] – Jordan

Jordan I think that’s it just really great way to get in the market and build a business. If you’re not ready to make purchases, and I think if you’re smart with that investment and you can roll some of that money back in and make purchases in the future, it’s a great strategy as an overall plan to get into the short term rental game.

[00:13:08.290] – Tony

All right, well, that’s it for Rental Arbitrage. Go ahead and head on over to Michigan Shortterm If you’re not on the email list, join the email list. There’s going to be a series of four emails that you can get. It’s going to kind of help you. There’s 650 zip codes that we’ve already went ahead and analyzed and did revenue projections on, so that can really kind of shortcut your finding the hot market and then there’s also a furnishing calculator, a property greater and you’ll see how we analyze an entire market. We went through South Haven, looked at every single property that was for sale. Be a very similar process to what you’d be doing on the rental arbitrage and looking at all the properties for rent there. So if you’re not on the list, go over there, join the list, get some really good value at emails and learn how to go through the process. Other than that, have a great day.