Do you want to start your own short-term rental business but don’t think you have enough capital to get started? What if you could get started with a minimal investment and very low risk?
In reality, you don’t need a lot of money to get started in the short-term rental game. In fact, you don’t even need to own property.
Rental arbitrage is the practice of subletting a property short-term while you hold the long-term lease. The only prerequisite is that you charge more money than the lease and utilities cost you out of pocket.
This isn’t as hard as it sounds, and once you get started, the sky’s the limit on the number of properties you can leverage to scale your budding business using this method.
What you need to know
The first thing that needs to be nailed down is what you need to charge to be profitable. Let’s say, for instance, you have a goal of $1,000 monthly net profit from your rental property.
To be successful, you‘ll obviously need an average nightly rental rate that puts you at that $1,000 mark, but in order to do set that rate, you need to carefully select your property’s location and ensure that your rates are in line with the rest of the market in that area.
Let’s dive a little deeper on our example. For a two bedroom apartment that costs $1,500 per month to rent and averages electric and internet costs of approximately $200 per month, your average nightly rental fee would need to be at least $90 per night to achieve $1,000 net profit.
You don’t need to have 100% occupancy to achieve your goal either. Shorter stays will bring higher nightly revenue while longer stays will ensure more stable occupancy, but at a lower nightly rate. You only need to average $90 per night throughout the entire month to reach your goal. This should be fairly simple to achieve with only 80% occupancy.
Of course, a net goal of $1,000 per month - while a very nice supplement - isn’t exactly a huge income, but this is by no means a one-trick pony.
With this same method, you can keep adding properties to your portfolio and grow your business very quickly. Most property managers will be more than happy to rent multiple units to you, and your profit potential is limitless using rental arbitrage.
Other factors beyond availability of property exist though. You need to make sure that the market is strong enough in your chosen area to justify the number of rental properties you maintain. If you add one property to your portfolio every three months, you could easily be earning up to $5,000 per month in one year’s time.
All great business plans start with research, and a short-term rental business is no different. You want to make sure you make the right decisions for your business from day one in order to maximize profits, while keeping overhead at an absolute minimum.
This is only achieved through careful planning and attention to detail. As you begin your research, ask yourself these questions before going any further.
Who is your target demographic?
Who exactly is coming to your city, and why are they coming? The answer to this question will help you decide what location and type of property is best for your target audience. Some questions you can ask to best determine your target demographic are:
- Why do people travel to your destination?
- How do most people reach your destination?
- What type of traveler do you hope to reach? Corporate? Vacationer? Weekend warrior?
- Do you want to have higher occupancy at a lower nightly rate or do you prefer shorter rentals at higher rates?
Property type and location
What type of property and part of town are best for your locale? Once you know your target demographic, it should be easy to identify the property and location that will bring you the most success. Some questions to ask when choosing a property are:
- What transportation options are readily available?
- Is the property close to business centers and/or points of interest?
- Is the property large enough to accomodate my target demographic?
- Is the area safe and inviting?
- What amenities, if any, are included with the property?
- Are there any regulatory rules or laws in place that could hinder your business plans?
Identify your costs
Like in any business, cost is always a concern, and you should aim to minimize your overhead as much as possible.
Naturally, upfront costs are always going to be higher than monthly rates, but you can plan accordingly based on your current financial situation. If you have more to invest upfront, you can minimize monthly costs. But if you don’t have quite as much upfront capital, there are certainly options available to help minimize your initial investment with the trade-off being a slightly higher monthly cost. Here are some factors to consider:
- What are the lease terms?
- How long is the lease?
- Is there a discount if you rent for more than one year?
- What is included with the rent?
- Does the landlord or management company permit subletting?
- Are there any pet restrictions?
- Can you spread out the “move in” costs over several months, and if so will this be at a higher rate?
- How much will utilities cost?
- How much will furnishings and amenities cost?
Growing your portfolio
Once you get started, you can build your portfolio quickly and with little risk to your bottom line. By leveraging the profits from one property, you can utilize your initial arbitrage model to invest in property after property. Your choice in number and type of properties is limitless and can be easily customized to fit your specific needs.
Another option to grow your portfolio with low financial risk is to add the properties of owners who are seeking to rent out their unit but don’t want to bother with the hassle of finding tenants or guests. Once you have a proven track record of being able to turn a profit on one or two units via arbitrage, you can demonstrate your portfolio’s performance to owners and take on their properties. Typically, managers charge owners somewhere between 15-50% depending on the location. Research what nearby property managers are charging to make sure you are competitive.
Finding owners can be difficult at first, especially if you don’t know where to start. You may have to get creative in the beginning. While you may find clients via word of mouth, creating a search ad using Google AdWords or searching for local Facebook groups of rental-by-owners (RBOs) and posting your background and value proposition can prove fruitful as well.
Benefits of rental arbitrage compared to purchasing new property
- Low startup costs.
- No property tax.
- Minimal or even no maintenance fees.
- In many cases, free water and lawn maintenance.
- You are only committing to the length of the lease. If for any reason rentals in a particular area drop off, you simply need to choose a different location.
If it seems simple that’s because it is. Anyone can do this with a little research and a small amount of cash on hand. The best part is that once you get started you can keep adding properties to your portfolio and grow your business very quickly.
You should expect your initial investment to be between five and six times your monthly rent for any given property. Most properties expect at least a month in advance and a security deposit, usually equal to one month’s rent.
Continuing our example of a $1,500 per month in rent for a 2-bedroom apartment, you can expect your initial investment to be around $8,000. Of course this is very dependent on how you choose to decorate, or if you lease the furnishings rather than purchase. If you do choose to lease the furniture, this number would be significantly lower. This type of investment starts paying off immediately, so the turnaround time to recoup your investment should be relatively short.
When you are in the midst of growing your property management company, it is important to note two things. One, don’t lose sight of your current properties, meaning you should focus on maximizing the revenue of each property in your portfolio. And two, know when you need help to maintain your business’s integrity and to take your business to the next level.
Property managers who are focused on getting the most out of each property and scaling their business turn to property management software (PMS) to fulfill both of these needs. The right software and industry expertise can assist property managers of any experience level in growing their business to reach their goals.
Property managers on MyVR have eliminated the problems that arise when managers are growing their inventory - namely double bookings, inaccurate data and inflated pricing - while helping them maximize their revenue by adding more channels and convert more bookings.
MyVR’s direct connections to every major channel eliminate these problems and allow managers to control their business from one centralized dashboard - freeing up time previously spent on tedious day-to-day tasks so they can focus on what matters most: growing their business.
An increasing number of property managers are using rental arbitrage to get their operations off the ground. Dotting your i’s and crossing your t’s in your preliminary research will create a foundation for success that you can use to springboard your business into a multi-property operation.