\n<\/p>\n
Airbnb arbitrage<\/strong> is a real estate investing strategy<\/strong><\/a> that provides a low-cost, low-risk entry point for new investors<\/strong>. While you don\u2019t get the appreciation<\/strong><\/a> or tax benefits<\/strong> of property ownership<\/strong>, arbitrage can deliver cash flow<\/strong> in spades!<\/p>\n Welcome back to the Real Estate Rookie<\/em> podcast<\/strong>! Like many investors, Keron Bryce <\/strong>started house hacking<\/strong><\/a> to help cover his mortgage<\/strong>. Once he discovered the potential of short-term rentals<\/strong><\/a>, however, he converted his unit into an Airbnb<\/strong> and doubled his cash flow<\/strong> right off the bat. But Keron still aspired to grow his business. So, without a ton of money for down payments<\/strong>, he decided to try his hand at arbitrage<\/strong>\u2014a strategy that helped him rake in $140,000 of pure profit last year<\/strong> and allowed his wife to leave her nine-to-five<\/strong>!<\/p>\n Need an easy alternative to owning rentals<\/strong>? Arbitrage is not only a great way to test the waters before<\/em> buying properties,<\/strong> but it\u2019s also a profitable strategy<\/strong> in its own right! In this episode, you\u2019ll learn about the pros and cons of arbitrage<\/strong>, the systems and processes<\/strong> you\u2019ll need to automate your business<\/strong><\/a>, and the best way to find new units!<\/p>\n Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Keron: Tony: Speaker 3: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
This is Real Estate Rookie Show 370. Now, over the last year, you\u2019ve probably heard about traditional short-term rental investing and this funny phrase called short-term rental arbitrage. Both of these strategies are better known as traditional Airbnb investing or Airbnb arbitrage. And arbitrage is where you\u2019re renting a property from another property owner and you make the difference between the rent charged and the income brought in.
Guys, I\u2019m Tony. Today, I\u2019m rocking my first solo episode and I want to welcome you to the Real Estate Rookie Podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Now, rookies there are pros and cons to every investing strategy, but it\u2019s better to know what those are ahead of time before putting your hard-earned money to work and that\u2019s what we\u2019re going to be talking about today. Now, I\u2019m speaking with a rookie investor who has done both of these strategies, the arbitrage and the traditional ownership, and we\u2019re going to hear what he would\u2019ve done differently if he were to start all over again in 2024.
Keron, brother, welcome to the show, man. Super excited to dive in with you today, man.<\/p>\n
Great. Thanks for having me, Tony.<\/p>\n
So, we actually go back a little bit. I met you at one of our events back in 2022, and I think at that time you were just getting started, brother, so it feels like a really full-circle moment here to have this conversation with you. So, I\u2019m really excited to hear how things have been for you. Now, give the folks a little bit of background, man. What inspired you to really jump into real estate investing? I know your parents kind of played a role in that, so just what was the big motivation for you to make this whole thing happen?<\/p>\n
I started my real estate journey technically back in 2015, but I didn\u2019t really start ramping it up until 2020 when COVID hit. So, I started with the traditional house hacking back in 2015, bought a two-family house, lived in one unit, rent the other unit long-term, and that\u2019s kind of where my real estate journey started and ended. And then, 2020 rolled around and something happened that clicked to me and I was like, \u201cI need to really, really hop on this real estate thing.\u201d So, I started deep diving into podcasts, this being the first one. And I listened to you when you were a guest and then when you became a host, which was amazing. So, listening to you talk about short-term rentals, that kind of put the idea in my head of, \u201cHmm, what is he talking about short-term rentals? I hear Airbnb and I stayed in Airbnbs before, but I never thought about hosting on Airbnb.\u201d So, when I heard you moving away from the long-term rental strategy into the short-term rental, that\u2019s what made me really deep dive into that.<\/p>\n
I love that, man. And now Keron, you had a very stable daytime job, right? People retire from that after decades and decades. So, what did you do for your day job? And I guess what was that moment to make you say, \u201cI really need to jump into this full time\u201d?<\/p>\n
So, I\u2019m currently still a law enforcement officer. I\u2019ve been a police officer for the last 12 years, and it\u2019s been amazing. It afforded me the opportunities to dive into real estate and I needed an extra source of income on top of my 9:00 to 5:00 because I\u2019m raising a family and I knew that I needed to do something else. So, that\u2019s when I dove into the real estate game.<\/p>\n
Now, I just wanted to find some terms for folks that are listening. I mentioned them briefly in the intro here, but there are a few different ways you can go about investing in Airbnbs. There\u2019s the traditional strategy where you own the property, right? You go out there, you get some kind of mortgage, you pay cash, whatever it is, but your name is on the deed, on the title for that property, you have ownership and then you obviously go and rent it out on Airbnb or Vrbo. The other strategy, which is incredibly popular is called Airbnb arbitrage, where instead of you going out and purchasing a property, putting your name on the title, you are renting a property from another landlord. And instead of moving into that property yourself, you turn around and sublease that on Airbnb.
Pros and cons to each, right? With ownership, you get appreciation, you get the tax benefits, and you get cashflow. Pros to arbitrage are you get cashflow, right? That\u2019s the biggest thing for arbitrage. So, the goal of today\u2019s show is to kind of drill down and see which strategy might work best depending on your situation. So, Keron, for you, where did you get started? Did you start with arbitrage? Did you start with ownership? And what has rental arbitrage really done for you done for your business and for your personal life?<\/p>\n
So, I actually started with the ownership piece. Like I mentioned, back in 2015, I house hacked my property. I\u2019m actually still living in that same property. After six years of having great tenants, they were moving out. And at this point, this is when I was introduced to the short-term rental strategy. So, I said, \u201cLet me turn this unit that I\u2019m living next to into a short-term rental and see how that does.\u201d So, fast-forward two months to set it up, it became a phenomenal, phenomenal short-term rental. It\u2019s over 90% occupied every single month, and it is been cash flowing crazy. It\u2019s been cash flowing crazy. Long-term rents were 1,400 bucks. And then, now I\u2019m averaging anywhere from 3,000 to 5,000 a month.<\/p>\n
1,400 to almost 3,000 per month. That\u2019s almost or more than double, if you hit 3K. And I think that\u2019s the power of short-term rentals as a strategy. Because you\u2019re house hacking this, so what do the expenses look like? Are you fully covering your mortgage? Is your cash flow on top of that? Just give us your quick numbers on the house hack.<\/p>\n
Yeah, so it\u2019s actually fully covering my mortgage and expenses. So, heat, electricity, and water. And it\u2019s providing some money in my pocket at the end of the day. So, I\u2019m getting paid to live in my own house, which is insane.<\/p>\n
One of the biggest expenses for people, aside from taxes, is their living expense. And I think a lot of people when they look at especially house hacking, they feel like they\u2019ve got to make a ton of money on the cashflow side. But even if you\u2019re just able to break even. Now, you\u2019ve just reduced one of your biggest expenses of your living down to effectively zero, which then frees up all this additional capital to then go pour into maybe that next real estate investment. So, it sounds like you absolutely crush it with this house hack. And just really quickly, Keron, what market is that? What market is the house hack in?<\/p>\n
We\u2019re in Stratford, Connecticut, so Fairfield County, just about an hour north of New York.<\/p>\n
Okay. I\u2019m from California. I\u2019ve never heard of Stratford, Connecticut in my life, but it goes to show that short-term rentals can be effective in many, many markets across the country. And that\u2019s part of the reason why I have a beef with the whole Airb-and-bust concept. It is true that there is some markets that have been more impacted than others. Our properties in Joshua Tree, we\u2019ve seen revenues get squeezed in that market for sure. Our properties in Tennessee, you wouldn\u2019t even think that there is a difference, right? Everything looks the same out there, so it is very market dependent. So, I\u2019m just happy to hear that you\u2019re not in some big vacation hotspot. You\u2019re in Stratford, Connecticut, which is an hour north of the next biggest city, and it still works well for you.<\/p>\n
Yeah, it\u2019s crazy because when I first started people were like, \u201cOh, who\u2019s going to come to Connecticut for Airbnb?\u201d And yada yada yada. And I pretty much shut those people down with the numbers that I\u2019ve posted.<\/p>\n
I want to get into the transition to arbitrage, but one last question on the ownership piece. What is drawing people into your city? Are you noticing that it\u2019s like folks who are visiting family, do you have a lot of traveling professionals? What is it that makes Stratford Connecticut a healthy market for short term?<\/p>\n
So, for me, the three major things that I looked for before I started this market was major hospitals, major colleges and universities, and we\u2019re on the shoreline, so I\u2019m five minutes away from the beach. So, those three things alone drive the guests to our property. But I narrowed it down to 18 reasons why people have visited my properties. I\u2019ve literally went through messages and narrowed down 18 reasons why people have come to Connecticut and I\u2019m like, \u201cThis is crazy.\u201d<\/p>\n
So, you\u2019ve got something that\u2019s pulling people in, which is an important part of choosing your market correctly. Now, let\u2019s talk about the transition to arbitrage, and before we even talk about why you made that transition, I just want to know what has that change in strategy afforded you when it comes to your lifestyle and just how things have shifted for you since you made that decision?<\/p>\n
I retired my wife from her 9:00 to 5:00 job. It was a great way to learn the systems and the processes for my business, and it created cashflow for me.<\/p>\n
You\u2019re saying it like real calm, cool and collected, Keron. That\u2019s a big deal, man. You retired your wife from this decision to focus on this new strategy. So, I think for a lot of people that are listening, the goal is to allow their spouse to maybe stay home with their growing family. Their goal is to eventually become job optional for themselves. And it seems like you\u2019ve taken that first step, which is incredibly impressive, Keron. So, how did you do it? What pulled you into arbitrage? And then, what has your process been for kind of scaling it up? So, Keron, I want to hear your response to that, but before we do, we\u2019re going to take a quick pause to hear a word from our show sponsors.
All right, so we are back. Keron just shared that he retired his wife by not only investing in this amazing house hack that he short-term rents, but also, focusing on the strategy of rental arbitrage, Airbnb arbitrage. So, Keron, a couple of questions here. First, what prompted you to make the transition into arbitrage, and then what steps did you take to actually build that side of the business out?<\/p>\n
So, what made me going to the arbitrage route was the barrier to entry with the rental arbitrage, and it was a new strategy that I stumbled upon and wanted to try my hand at. So, the barrier to entry was the low cost it takes than the traditional buy and hold route. So, I tried my hand at it and it was great. The barrier to entry for me for my properties were anywhere from 10,000 to 15,000. And having those low costs still with the cashflow was a win-win for myself and everyone involved.<\/p>\n
One of the big pros it sounds like then for arbitrage is that the capital needed to get started is lower than purchasing a property in most scenarios. So, you said you\u2019re able to set one of these units up for $10,000 to $15,000, that\u2019s your total investment?<\/p>\n
Yes.<\/p>\n
Wow. And what does that $10,000 to $15,000 typically cover? What are the costs associated with standing up an arbitrage unit?<\/p>\n
They normally require a security deposit and first month\u2019s rent. And then, that also includes furnishing the property, so adding the toasters, the coffee maker, the furniture and everything that you need to run a functional short-term rental property.<\/p>\n
So, one of the things that people always look at when it comes to a traditional like owning a property for short-term or any other type of investment. Is their cash-on-cash return, or how long will it take for me to get my capital back? So, a 100% cash-on-cash return means that however much money I invested I get back in that first year. A 50% cash-on-cash return means it would take me a year and six months. So, what is the typical timeframe that you\u2019ve seen to recoup that initial investment of $10,000 To $15,000? Is it a year, is it two years, is it three years? What does it typically look like?<\/p>\n
It\u2019s roughly anywhere from six months to a year.<\/p>\n
No way.<\/p>\n
Yes.<\/p>\n
And I think this is one of the powers of this strategy is that you\u2019re able to start recycling that capital relatively quickly because say you go out and you drop 10K, six months later you got that 10K back, redeploy that to another property, six months later you get that back and now you\u2019ve got two units that are given off cashflow. So, you got more to dump into that third property and that\u2019s snowball effect starts to move a little bit faster. How many arbitrage units do you currently have up and running?<\/p>\n
Four.<\/p>\n
And as you\u2019ve set those units up, what was your process for identifying the right city for arbitrage and then identifying the right unit, like the right property itself?<\/p>\n
It was pretty much just where it\u2019s located. Location, location, location, as is said in real estate. So, hospitals, major colleges and universities, and beaches are the biggest three biggest areas of where I want my rental arbitrage units to be. So, once I identify that area, as long as the rents make sense and I know that whatever I\u2019m going to be cash flowing will cover the expenses and then still leave some money left behind, I know that\u2019s going to be the great area.<\/p>\n
So, are you investing in your own backyard, Keron, or have you kind of ventured outside of Connecticut?<\/p>\n
I\u2019m still in my own backyard, I\u2019m still in Connecticut. But I\u2019m looking to eventually branch out now that I created my systems and processes.<\/p>\n
I mean it\u2019s good that you have been able to scale in your own backyard because your market can support that type of demand, which I think is really great. So, what are some of the other benefits, some of the other pros associated with going the arbitrage route? Obviously, it\u2019s significantly less capital, your payback period is faster. What are some of the other benefits you\u2019ve seen that come along with investing in the arbitrage model?<\/p>\n
Another pro is not being liable for the property maintenance, which is huge. If a furnace goes out, you\u2019re not coming out of pocket a few grand to fix that. That\u2019s going to be on the landlord, on the property owner. So, that\u2019s a great pro for you because I\u2019ve had that happen in one of my properties that I own and it\u2019s not fun. It\u2019s not fun.<\/p>\n
So, we launched a few arbitrage units, our first arbitrage units late last year and this last month the HVAC unit went out in one of our units. And same thing, instead of us having to coordinate that, we called up the owner said, \u201cHey, our next turner is on this day this time, please make sure you send someone,\u201d and someone was there to get it fixed for. So, the property maintenance piece, definitely at least that expense comes down a little bit. Now, we do have an understanding with our landlord that some of those minor expenses we\u2019re just going to fix ourselves. If there\u2019s a clog in the drain, we\u2019ll just fix it ourselves with our handyman. If there\u2019s, I don\u2019t know, a fixture that goes out, we\u2019ll just have our handyman fix that. So, are you doing any repairs yourself or are you pushing everything to the actual property owner?<\/p>\n
Just the major things, like you said, the low-ticket items, I take care of myself. I don\u2019t want to bother the landlord with that minute stuff, or anything that my guests might\u2019ve potentially damaged, we\u2019ll cover that cost no problem. But as far as the big ticket things that are out of our control, no, sorry.<\/p>\n
And I think I want to at some point get into how you negotiated securing these units because I think that\u2019s a big part that folks overlook is sourcing, but also, convincing these landlords to accept you as someone who\u2019s going to do arbitrage. But one of those selling points is what we just said is that we\u2019re going to be the type of tenant that\u2019s not going to bother you for all those little things because I have a guest checking in in four hours, I got to make sure it\u2019s fixed before they check in, so I\u2019m not even going to go to you for that. So, you\u2019ll only hear for you if it\u2019s something that\u2019s big. So, I think it\u2019s also a selling point for the landlords there.<\/p>\n
Big selling point.<\/p>\n
The reduced cost for property maintenance is something that\u2019s a benefit for arbitrage. What are the things are you seeing that are a benefit or a pro to the arbitrage model?<\/p>\n
Minimal ongoing expenses. It allow you to build your systems and your processes, so that\u2019s huge, especially for something that you don\u2019t own. You don\u2019t have to worry about coming out of pocket for major expenses for a down payment, and then trying to run a business that you have no business running, or that you have no idea about. And then, it don\u2019t work and now you have to worry about selling a house. At least with a rental arbitrage unit, if it doesn\u2019t work for you, you can simply step away, give the 30, 60 day notice to the landlord if it\u2019s not working and you wouldn\u2019t have to worry about any other major expenses that you can occur.<\/p>\n
So much truth to that and basically your exit strategy is a little bit cleaner, a little bit easier. I\u2019ve told folks that I\u2019ll only open up a short-term rental in a metro market or a suburban market if I can say one of two things are true, either one, that property also works as a long-term rental or two, I\u2019m doing arbitrage because say that regulations shift in that market and now short-term rentals are no longer legal or whatever it may be, now I\u2019ve only got to worry about breaking a lease and not trying to potentially sell a property at a loss. So, there\u2019s some benefit there to the exit strategy. You talked about being able to build the systems and processes, Keron. What exactly do you mean by that? Maybe you can elaborate a little bit.<\/p>\n
So, with building that means pretty much automating your business and helping it flow a lot better and easier for you. That way, you\u2019re not running around after every guest and having a headache. So, that means having your cleaners in place, building your automated messages system for your guests, so you don\u2019t have to worry about sending each guest a message every day and then forgetting to send them the code to the door, having your electronic locks and things of that nature. So, sending your automatic pricing, your dynamic tools, so you don\u2019t have to worry about missing a date that you know should have went up on on the rates, but you forgot and now you\u2019re short-changing yourself. So, that\u2019s what I mean by building those processes and systems.<\/p>\n
And are you self-managing these units yourself, Keron, or do you have a virtual assistant or a property manager? Are you self-managing that piece?<\/p>\n
Self-managing it every day.<\/p>\n
Just ballpark, like a weekly basis, how much time would you say actually goes into managing the current portfolio?<\/p>\n
I would probably say maybe three to four hours a week. Three to four hours, it\u2019s so easy when you automate it and build your systems. It\u2019s so easy.<\/p>\n
You retired your wife on three to four hours a week?<\/p>\n
Yep.<\/p>\n
That\u2019s amazing, man. I love to hear it, brother.<\/p>\n
Now she takes care of the kids and she\u2019s like, \u201cAh, it\u2019s great, but they drive me crazy.\u201d<\/p>\n
That\u2019s how it goes, man. So, Keron, one of the other benefits that I think that comes along with rental arbitrage is that it kind of allows you to move into new markets a little bit easier. We talked about the flip side of that where you can get out of a unit easier, but the inverse of that is true as well where say you want to maybe test out a market and instead of buying a property there first, you can just set up an arbitrage unit for a fraction of the cost potentially and validate whether or not that market works for you. So, I asked a question earlier, have you explored any other markets and you said, \u201cI\u2019m still in my backyard right now, but I\u2019m looking to expand.\u201d When you go into that new market, are you going to focus on ownership? Are you going to focus on arbitrage? And I guess what\u2019s the kind of process you have laid out to validate whether or not it makes sense?<\/p>\n
So, arbitrage would be a great method to try in a new market to test it out and see if that\u2019s a market that we can move into. So, if I can set up an arbitrage unit and it can give me 100% plus cash-on-cash return within that first year, then that\u2019ll be definitely a market that I would love to go into and potentially buy later on.<\/p>\n
We talked about all the benefits of rental arbitrage, but there are some limitations to the strategy as well, so it\u2019s not all butterflies and rainbows here. But before we get to that, I just want to ask one final question about the acquisition side. What is your process for actually analyzing a potential deal to know if it\u2019s going to be profitable or not from an arbitrage perspective?<\/p>\n
For an arbitrage perspective, I use AirDNA, I use Rabbu just to check the market out. The bedrooms and bathrooms, I look at those listings on Airbnb and try to match them up. And then, I look for those hosts in that area and see what they\u2019re doing, see what their average nightly and daily rate is, and see how much they\u2019re charging per night. And then, I can see what other amenities and what they\u2019re providing and their setup and I can calculate it all from there to see if it\u2019s going to be profitable.<\/p>\n
So, Keron, I want to get into the downside, some of the con difference of arbitrage. But before we jump in, we\u2019re going to take a quick break to hear from our show sponsors.
All right, Keron, so I think you just convinced everyone listening to this episode that they need to jump into arbitrage. But again, there\u2019s some benefits to each strategy. But just like all other types of real estate investing, there maybe some potential cons for arbitrage as well. So, from your perspective, what have you seen as some of the downsides of the strategy?<\/p>\n
So, one of the downsides I\u2019ve seen from the strategy is the rates, the monthly rates on what you\u2019re paying the landlord. Every year you get a percentage increase in the rent. So, you being an Airbnb host, you\u2019re no stranger to that, just like a regular long-term rental occupant. So, you get hit with those rates and they could definitely cut into your business for sure.<\/p>\n
I have a friend who really focuses on arbitrage here in California as well, and I don\u2019t know, he has 100 arbitrage units, something crazy like that. And he said he had to let some units go where he had almost an entire floor in a complex rented out. And when the owner saw how much revenue he was actually making from the arbitrage, he unreasonably tried to increase his rent. And instead of accepting that rent increase, he just walked away from, I don\u2019t know, it was like 12 units in one building. So, the landlord definitely does have a little bit more control per se, but what I\u2019ve seen some folks do who focus on arbitrage is that they\u2019ll sign longer leases. So, they\u2019ll enter into a lease agreement instead of it being one year, they\u2019ll do three years to really lock in that low rate, so that way they\u2019ve got a little bit of buffer against the owner, not getting greedy, but maybe trying to capitalize on what you have going on. So, what\u2019s your normal lease length for the four units you have?<\/p>\n
I do the traditional yearly lease, more so because locking yourself into that two or three year rate could also be a downside, because now, if that rental unit is not working at all as a short-term rental, then you\u2019re kind of locked into that rate and into that unit. So, it might be a little harder to walk away.<\/p>\n
And then you\u2019re right, I think that works well if maybe you already have executed at least one lease. So, say you\u2019re looking to re-up, instead of re-ing up for another year, maybe you push for that three to five year lease and see how that works. What we did for our first three arbitrage units, it was one building, same landlord, we got three units. And we actually did almost like a profit share, but what we set up was we had a base rent of $1,000 for each of the three units we set up. And then, the landlords get the first 100% of the profit up to, I don\u2019t know, like $1,400 per month. So, they\u2019ll get 1,000 but say that we didn\u2019t perform that month, then they don\u2019t get anything above that.
And if we get anything above that 1,400, then we get to keep that for ourselves. So, that\u2019s how we kind of hedged our best because it was our first time doing arbitrage, it was in a market that we didn\u2019t really know and we didn\u2019t want to set ourselves up for these big expensive leases when maybe they weren\u2019t going to work out. And it did work in our favor because it took us a little bit longer to get those units set up. We had a handyman that we had found and the guy just ghosted us, even kept some of our stuff. So, it took us a little bit of time to get those up and running. And luckily, we didn\u2019t have to pay the full rent, we were just paying that 1,000 bucks per month. So, there are some things you can do on the negotiation side to try and work on that rate piece.<\/p>\n
$1,000, where\u2019s that at? I need that.<\/p>\n
But you\u2019re beachfront, right? So, your units are probably a little bit different than ours.<\/p>\n
Yeah.<\/p>\n
So, rates potentially changing as one con of the arbitrage model. What else have you seen as a potential downside, Keron, of the arbitrage piece?<\/p>\n
Another downside is if the owner decides to sell and then the new owner comes in and they don\u2019t like the model, they could pretty much disrupt your whole business. They could say, \u201cNope, I don\u2019t want any short-term rentals.\u201d Or like you said with your friend, they want to charge you more or do it themselves, and then your units are gone.<\/p>\n
Yeah, and I think the bigger theme there is just between those first two cons you mentioned is there\u2019s a lack of control that comes along with arbitrage where, yes, you get the cashflow for very little investment, but you also lose an incredible amount of control over how that property operates. The three units that we set up, the landlords actually text me and said, \u201cHey, we\u2019re probably going to end up selling this unit or this complex.\u201d And it\u2019s a 12 unit, we have three of them. And they\u2019re like, \u201cHey, if you want it, we will give you the first offer.\u201d But I\u2019m not quite sold on that city yet. I don\u2019t know if we really want to go into it. So, now, like you said, they could potentially sell to another landlord that maybe isn\u2019t as amicable to this profit share setup that we have. And when we renew the lease, they want to charge us an arm and a leg. So, there definitely are some downsides to having that ownership there. Well, any other things that kind of come to mind for you, Keron, in terms of downsides of the arbitrage model?<\/p>\n
Som, kind to piggyback off the pro where you\u2019re not liable for the large ticket items, at that same token, now you\u2019re at the mercy of the landlord when it comes to those items. So, if a hot water heater goes out and the landlord\u2019s like, \u201cOh, I\u2019m going to send my guy, but it\u2019s going to take three days.\u201d Well the guest is only here for three days, so you mean to tell me they\u2019re not going to be able to take a shower? And I\u2019ve had that happen to me before on New Year\u2019s Day. So, it was definitely not fun, it was definitely not fun. And that can lead to bad reviews because they don\u2019t have hot water.<\/p>\n
And how did you manage that? Did you just give the guest a refund? Did you pay out of pocket to get the hot water fixed? How do you manage that when the owner\u2019s timeline for fixing doesn\u2019t necessarily align with yours and the guests?<\/p>\n
Listen, one thing about me is we are going to get it done. It\u2019s New Year\u2019s Eve, I probably called 20 plumbers and one guy said yes, he\u2019ll come in the morning bright and early. So, he was able to get there and he didn\u2019t charge me an arm and the leg either, which was fantastic. But the great part of that was the landlord, he picked up that bill because I was able to get that fixed.<\/p>\n
One of my other concerns with the landlord as well is that the ones that maybe want to be too involved, where maybe they want to see your listing, and they want to check in on the property. Have you had any experiences like that where maybe the landlords are maybe overstepping boundaries a little bit?<\/p>\n
No, no, I haven\u2019t actually. They love the units. They use my unit as kind of the model unit for any potential other long-term tenants that are coming in like, \u201cOh, look how this is staged.\u201d They\u2019ll show them pictures.<\/p>\n
You\u2019re the selling point for them, right?<\/p>\n
Yeah. So, another con is having landlords show up unannounced. In one of my arbitrage properties, I had a landlord just show up, walk in the property and I have guests texting like, \u201cAh, there\u2019s a strange man walking around the property.\u201d And I\u2019m like, \u201cOh, no.\u201d So, I looked at the cameras and it was the owner. So, I messaged him, I\u2019m like, \u201cHey, we have guests in the house, and they saw that strange van outside.\u201d And he\u2019s like, \u201cOh, no, that was just me checking out the property. It looks fantastic.\u201d And I\u2019m like, \u201cOkay. Well, just let me know next time, so I can warn guests that somebody\u2019s going to be walking the property or just checking it out.\u201d So, that\u2019s another con that may happen. And some guests, they don\u2019t care about it, some do.<\/p>\n
Yeah, absolutely, man. So, one of the other big things that I see, Keron, and I\u2019m curious what your take is on this\u2026 And I guess before we even get into this, what I\u2019ve seen is there are four motivations that really drive people to invest in the Airbnb space specifically. You\u2019ve got cashflow, appreciation, tax benefits, and then vacation. You can subsidize the cost of your vacation spots. But cashflow, appreciation, tax benefits and vacations. When I think about arbitrage, I feel like the only box you can really, really check is that first one for cashflow. So, I guess how do you feel about those other three of the lack of appreciation, lack of tax benefits? Is that a con to you or is it not as important because you\u2019re not as focused on those ones right now?<\/p>\n
It can be if you want to build on those three other pillars, but if you\u2019re just strictly in it for cashflow and low barrier to entry, arbitrage can be the route for you because you\u2019re only furnishing getting in between 10 and 15. And every year you\u2019re making 30,000, 40,000, 50,000 on that rental unit. So, cashflow, if that\u2019s what you\u2019re into, cashflow, that can be a great strategy for you, the arbitrage route.<\/p>\n
And that\u2019s why I tell a lot of people, before you even buy a property, you just need to get clarity on why are you investing in the first place? What are your investment goals? If you are someone who\u2019s, I don\u2019t know, maybe you\u2019re 55 and you\u2019ve got a few years to retirement and you\u2019ve got zero retirement savings in place, maybe you\u2019re not as focused on appreciation at that point because you need cashflow today to help supplement your retirement that\u2019s five to seven years down the line. But say that you\u2019re 23, you just graduated from college, you\u2019re a software engineer for some tech company and you love what you do and you don\u2019t plan to retire until you get to retirement age. You\u2019ve got three decades to start building that pot. So, maybe you don\u2019t need the cashflow today and you can buy and focus more so on the tax benefits and the appreciation.
So, for all of our rookies that are listening, you\u2019ve got to really identify what your goals are and if your goal is just to get as much cashflow as quickly as possible than arbitrage might be the best route for you. But if you also want to balance the cashflow with the goal of long-term appreciation and the tax benefits, then you\u2019ve got to weigh those against the pros there. Now, one of the big questions I have, and I\u2019m sure a lot of folks here have as well, is how are you sourcing these properties and what does the conversation look like between you and the landlord to get them to say yes? Because I can imagine, Keron, unless they\u2019ve done this before, there\u2019s probably a lot of hesitation from these landlords to just hand you the keys, knowing that you\u2019re going to have 12, 13, 14, maybe 15 different sets of guests going through their property on a weekly basis. So, how are you sourcing and what does the negotiation process look like?<\/p>\n
So, I\u2019m sourcing it through my network. Network is huge. Networking, the local [inaudible 00:31:48] and local meetups is very huge. So, that\u2019s how I\u2019m sourcing these landlords. And one of the landlords, he\u2019s a huge apartment building guy. He comes to me with the deals now. I approached him about one property, he actually had a little pain with one of his rental units, and then I came to him with a short-term rental arbitrage. So, I solved his headache and he solved my problem of getting a unit. So, then he\u2019s seen what I\u2019ve done with that unit and he loves it, and he knows that I\u2019m going to take care of it at all costs. So, now he\u2019s throwing, \u201cI got five here. I got eight here.\u201d And I\u2019m just like, \u201cAll right, give me those three. Give me those three then. I\u2019ll take those.\u201d<\/p>\n
Give me a little bit of time, right?<\/p>\n
Yeah, exactly. So, that\u2019s how I\u2019m sourcing those.<\/p>\n
So just walk me through. Say I\u2019m starting from zero, Keron, I\u2019ve got no network, I\u2019ve got no relationships, I don\u2019t know landlords that are building a bunch of units. If I\u2019m a complete rookie, what steps should I be taking to find that first unit?<\/p>\n
The steps that you should be taking is doing your research, doing your homework, seeing what units are out there for rent and seeing how long they\u2019re on those sites as far as days on market, that can be a way for you to get into with those landlords. You approach them with your pitch and with your ideas, and you lay out all the pros for them as a landlord. Most might say no, but all you need is that one yes. So, when you get that one yes, now you have a reference, and that\u2019s what I did. You have a reference now for other potential landlords and now you have this paper trail and this track of what you\u2019ve done with your units. So, that\u2019s how I would get started.<\/p>\n
Keron, I want to get into how rookies can kind of mitigate their risk as they get into the short-term rental space. Because I\u2019ve heard stories of other investors, and we\u2019ll get into this in a bit, where maybe they over-leveraged themselves or they moved too fast. And guys, we actually have an episode coming up next week with a guest named Nicole Rutherford and she\u2019s going to talk about almost an Airbnb horror story, where she over leveraged herself on the Airbnb arbitrage side and ended up with almost this mountain of debt that she had to climb out of. So, Keron, when you think about trying to mitigate risk as you set up an Airbnb arbitrage business, what comes to mind for you?<\/p>\n
Mitigating risk? Just not moving too fast. Making sure that that unit that you\u2019re using and that you\u2019re setting up is going to cashflow enough for you to pay off, not just your expenses, but your debts. And then once you get a grasp on that, then you can kind of do the snowball effect and get another one. Do the same thing with that one, and then you could keep going like that. If you have a large amount of capital and you could just throw it at anything then yeah. But I would take it slow and do the little snowball effect to mitigate that risk.<\/p>\n
And how much do you think your systems and processes you\u2019ve built out have played in the reduction of risk for you? Would you say it\u2019s a big part or are there other things that are driving it maybe more so?<\/p>\n
Oh, it\u2019s definitely a big part. Definitely a big part. Having those systems in place, you\u2019re able to answer guest inquiry a lot faster and capture those guests within that short timeframe, because without having those systems in place, you might have a guest inquire on a property, and if you\u2019re out doing whatever, it might take you three, four hours to respond to a guest. They might\u2019ve moved on to the other property. So, having those systems in place and answering guests\u2019 questions to capture that lead is definitely instrumental in your profits and your average nightly rates and occupancy rates.<\/p>\n
So, Keron, we talked about a lot, but before we move on, I just want to understand, I know when I do traditional ownership, one of the things we focus on is reserves, right? We usually want somewhere between, at the low end, three months of our mortgage payment set aside, on the high end, somewhere in that six to 12 month range. How do reserves play into your business of rental arbitrage?<\/p>\n
Yeah, so reserves are definitely huge when doing the rental arbitrage business because God forbid something happens and your place doesn\u2019t book up for a month or two, then that\u2019s going to be bad for your business. So, what I try to do is upfront I try to front one to two months of those reserves and then the cashflow from the property being rented out, I build that up to another three to six months of reserves. That way, if I don\u2019t have any bookings for a couple of months, I know I\u2019m going to be covered on that end. So, that\u2019s how I handle that.<\/p>\n
And I think the reserves give you that peace of mind to make sure that if things do hit the fan, if there is some kind of crazy thing that happens, like COVID, you\u2019re not in the cold with four arbitrage that you have to worry about.<\/p>\n
And there\u2019s other ways as well as far as additional insurance policies that can cover rental loss.<\/p>\n
Tell me about that, Keron.<\/p>\n
Yeah, so I have additional insurance\u2026 You actually had them on a show, Proper Insurance. Yeah, so I have that on my rental properties. So, if something were to happen fire or just a natural disaster, anything that would prevent me from having bookings or cancel my bookings, I will be covered with that rental loss from that insurance policy.<\/p>\n
Yeah. So, it\u2019s a great way that\u2019s relatively low cost to kind of give you some additional peace of mind that if things do hit the fan, you can still kind of rust easy at night knowing that you got a little bit of a backup there. Now, before we go, again, we had a rookie posting in the Facebook group and I just want to hear your advice, Keron. And again, this is Nicole Rutherford. She\u2019s actually going to be on an episode that\u2019ll be releasing next week. So, make sure you jump in to see the whole story here. But here\u2019s what Nicole says. She says, \u201cHey, rookies, I\u2019m in desperate need of help here. I\u2019m doing rental arbitrage for the last year and I\u2019m making somewhere between $1,500 to $2,000 per house, but that was only for the first six to eight months or so. Since then, with the increase of supply in our market, we\u2019re now losing money and then landlords are trying to increase the rent even more, even though they aren\u2019t asking for market rates.\u201d
So, this is one of those risks we talked about where the owners maybe get a little bit greedy and want to gouge the rates there. \u201cWe still have significant debt from each home because we use the profits to open even more. What should we do? Option one, my partner just wants to sell everything off and move on. We\u2019ll still owe about 80K between everything we put into the homes. Option two, find a three to four-unit home and use an FHA loan to rent out the other units. If it\u2019s in a decent area, we can move the furniture there to convert to an Airbnb or just use as a long-term rental. And option three is use the furniture from our four houses for a staging company and then just pay down as much debt as possible.\u201d So, Keron, I want to hear what\u2019s your advice to Nicole given that situation? What would you do?<\/p>\n
If I were in their situation, I would probably go with finding a three to four-unit home and using a FHA loan, and possibly house hacking because that\u2019s how I got started. So, house hacking and using those other units to produce that income that can help them chip away at their debt, and it covers their living expenses on top of that. So, I think that\u2019s the route that I would take.<\/p>\n
Yeah, you\u2019re the poster boy for that, right? You just crushed it with your own version of that.<\/p>\n
That was a lay up, man.<\/p>\n
I definitely like that option as well. I think the other option too, that Nicole could potentially explore is just because\u2026 Obviously, this is going to depend on the lease and what it looks like, but if the landlord is trying to increase rents, it sounds like you might be at the end of those leases, just look at exploring, moving into a different property. Can you find a different property, a different landlord that maybe is willing to offer you more favorable terms? And it seems like she\u2019s got homes, single family homes that are, I think she said three bed, two to three baths. Maybe instead of doing three beds, can you just take those and move into one-bedroom apartment units and now you\u2019ve got three one bedroom apartment units that you can leverage as well. So, I think there are some other options there as well, Nicole, to make it a little bit easier for you. But we\u2019re going to find out what Nicole actually ended up doing in next week\u2019s episodes, so let\u2019s make sure we get back to that.
Now, we heard this strategy of rental arbitrage, Airbnb arbitrage, Keron, allowed you to retire your wife while working as a police officer. So, it\u2019s something I just want to drill down on a little bit before we let rookies go because I\u2019m sure they\u2019re all wondering the same question. What kind of cashflow are you actually generating from your arbitrage units on, call it like an annual or monthly basis, however you want to break it up?<\/p>\n
So, last year we finished with our six properties that we have between the arbitrage and our traditional buy and hold. We finished just around 300,000 gross. And then, net is usually about just below 50%, so around 40%. So, that was about 140,000 net, which is in a matter 18 months we started these properties. So, I can\u2019t complain.<\/p>\n
Absolutely crushing it, man. Dude, absolutely crushing it, brother. So, again, you\u2019ve just inspired every single person on this call to go out there and build their own arbitrage business. But just to recap some of the amazing things you shared with us today, Keron, we learned about how rookies can jump in with this lower barrier of entry arbitrage model. You talked about the importance of building systems and how that\u2019s allowed you to scale, but also, letting you build this thing up with a little bit of training wheels and a little bit lower risk. And then, obviously the possibility to partner with a great landlord in your market to make it a win-win situation for both of you. So, Keron, appreciate you coming on today, brother. I\u2019m sure folks got a tremendous amount of value from the story. I\u2019m so glad that I was lucky enough to interview you after all\u2026 It\u2019s been, what, almost three years now since we first met. And seeing the growth is absolutely amazing, brother.
So, if folks want to get in touch with you, guys, go to the show notes for this episode. We\u2019ll put Keron\u2019s information in the show notes there. If you guys want to get in touch with me, my social handles will be down there as well. But guys, that is it for today. I am Tony J. Robinson, your host for today\u2019s Real Estate Rookie Podcast, and we\u2019ll see you guys on the next episode.<\/p>\n
(singing)<\/p>\n