Rental Arbitrage: Make Cash Flow in Real Estate with No Property

Arbitrage: the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.

“Take advantage of differing prices for the same asset.” As an investor, leverage can be a good thing in many ways, and using someone else’s assets for your gain is key.

Last week, I went to a local rei meetup. During the meetup the idea of “Rental Arbitrage” was presented and nearly changed the way I will approach the market in 2019.

You didn’t need a down payment of 20% for your investment property, you didn’t need good credit, you didn’t need qualified income, or anything really to get a cash flowing property! And this to me was an insane opportunity, especially for someone who is new to real estate investing.

As a newbie the number one obstacle that is going to stand in your way is going to be money, everyone new is looking for low or no down payment options, which is possible but difficult.

I hope I have your attention as this is truly great information that can help you reach your cash flow goals, financial freedom, and maybe even possibly retire early.

I personally have never completed a “Rental Arbitrage”, the idea to me is still brand new, but I will be using this February to complete my first. I will release an updated article once completing my first rental arbitrage.

Let’s dive into the details of Rental Arbitrage and how it can make you money!

What is Rental Arbitrage?

Rental Arbitrage is where an investor (you) finds a property (usually apartment/condo/smaller house) leases it from a landlord at $X amount of dollars and subleases it out for $X dollars more than you are leasing it for.

Really try to connect the dots here to see how powerful this method can be. As the investor you are renting a property from someone else, subleasing it out, and taking a profit off the top.

You are probably wondering, well, why would a tenant want to pay me more than the regular landlord?

Rental Arbitrage is marketed towards STR (Short Term Rentals) an extremely explosive and profitable market. STR tenants would maybe be travelers, business executives, military housing, school housing, etc. Someone who needs a 30+ day stay but doesn’t want or need to enter a lease.

Before I get into the details of who would want to rent your rental arbitrage, lets take a look into the reason why everyone is here: The ability to cash flow with no real estate property.

Cash flow is the number 1 reason why people get into real estate investing, and normally it takes a decent amount of capital to get into a property. With rental arbitrage, you are acting like a middle man between the property owner, and the short-term tenant. This doesn’t require a big amount of capital.

Now because these are short term rentals, there is more turnover between tenants, and in turn does present different challenges, but don’t worry, as long as you research your market you will succeed. It is important to do the correct research to make sure your investment is profitable so you can keep your property filled with tenants.

Let’s take a look into how much money you can cash flow with a rental arbitrage property.

Cash Flowing from Arbitrage

The key term we will use in this part of the article is Net Operating Income. For those that don’t know what NOI is, here is a break down.

Income – Operating Expenses= Net Operating Income

NOI is important when it comes to rental arbitrage. If you don’t calculate your expenses correctly, you may actually end up losing money.  The typical NOI goal for rental arbitrage investors is $1000.

$1000 NOI is average? Yep. That’s because as a rental arbitrage investor you are not competing against other apartments for rent or other people listing their short-term rentals on services like Airbnb.

You are competing against companies like Extended Stay America. Extended Stay America has built these multi-million-dollar hotels for extended stays. The average price per night at an Extended Stay America, or similar company, is about $100/ night. That’s $3000 dollars a month?! As the little guy lets take advantage of that, check out how a short-term rental makes more sense for someone to stay at than an “Extended Stay America”.

The Numbers

NOI

Income: $2500 /month

Expenses:

  • Rent: $1000
  • Utilities and Commodities: $350
  • Property Maintenance $150

Net Operating Income: $1000

Cost for Tenant:

STR: $2500/ 30 day stay

vs

Extended Stay America Tenant: $3000/ 30 day stay

Tenant Saves: $500

As you can see here, this is why people would be willing to stay at your property! It’s cheaper!!!  The key is to keep the property filled! Plus, the part we care about! We are getting our cash flow, it’s a win-win for each party.

$1000 is a great amount of money as cash flow, especially because in a normal buy and hold rental, a good cash flow per door is only about $300 dollars. Imagine being able to turn that rental property that you own and turn it into a cash flow machine by turning it into a short-term rental.

These numbers look great, and you probably asking yourself, how do I get started? Well, luckily for you in this comprehensive article I go over that too! Let’s see what you need.

Businessman hand touching HOW DO I START? tab on virtual screen

What you need to get started

Now, even though we do not need as much capital as the traditional buy and hold property, we still need some money to get started. Some of you are probably thinking great, another real estate investment I can’t afford, well leverage yourself, get a partner, use that 401k loan, or go get a small peer to peer loan. This is truly the lowest cost real estate investment you can get into except a REIT.

Let’s take an overall look at our costs.

Start-Up Costs

  • Application Fee
  • Property Deposit: Depends on Market, Will Vary.
  • Furnishing: For a 2-bedroom unit this will run between 3k-5k

Generally, just because every market varies, I am going to say you will need about 5k in funds to start your rental arbitrage, not including your deposit.

Return on Investment

No one wants to make an investment where they don’t know what they get in return. Let’s see how long it will take to break even. As stated early, typical profits from a rental arbitrage is $1000 cash flow per month.

Start-Up Costs: $5000

NOI: $1000

Break Even: 5 months

Return on your investment: 240% ($12000 Yearly NOI/$5000 start-up cost)

Isn’t this such an amazing opportunity??? Only 5k dollars and you can take start your rental arbitrage business, next thing you know you are cash flowing, and you don’t even own any property! This is why I am personally taking the next month to invest into a rental arbitrage property.  Now, even though that there a load of potential here, every investment comes with risk, but you can minimize that with great market research.

Market Research

As I was saying, market research is extremely important when looking to do rental arbitrage. It’s the key to your success. You can do everything right when it comes to picking the right property, cutting your start-up cost to a minimal, and even get a tenant. But, hold on a second, to be successful, you need to consistently fill your property with tenants, and that right there is where market research come into play.

The single best place to do market research for your short-term rental is airdna.co

Out of all the places I looked to do market research for a short-term rental, airdna.co seemed to be the best all around platform. It does require a subscription that is kind of pricy, but the information you can find on airdna is invaluable.

By doing your market research, your goals are to identify market conditions, local regulations, and to prepare for any unexpected events that may occur.

While doing your research, you are going to want to identify a niche for your rental. What type of people do you want in your rental?

Here is a list of some of the most reliable niches:

  • Military
  • Executive
  • Medical
  • School
  • Insurance
  • Temporary

The only niche that is not considered reliable is vacation rentals. They are too short term, are seasonal, and are not recession proof. All of the other niches are recession proof in the sense that there will still be a need for them. There will not be a need for vacation rentals in a recession as many people will reduce their spending.

So, make sure when you are doing your market research to identify a niche that is reliable and resistant to market changes. Remember, market research is the key to your success!

Wrap Up

Although there is risk involved with every investment out there, the amount of risk involved in a rental arbitrage when compared to the traditional real estate investment, it is minimal. You are not fronting a down payment, closing costs, repair, etc. And when there are market changes or a recession comes about, the value of your property doesn’t decrease because its not yours!

This is your chance to enter a market that many don’t know about, take advantage!

Learning about rental arbitrage was like seeing a light bulb go off over my head. Let it do the same and expand your real estate business or start yours with it! Go get that cash flow!!!!!

If you are brand new to real estate, don’t forget to check out our FREE Beginners Real Estate Investing Roadmap!