Airbnb Investing vs Airbnb Arbitrage (Full Comparison)

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What's up, guys? It's James here. And in today's video, we're going to be comparing an apples to apples comparison between rental arbitrage and short term rental investing the great debate, I have so many people that wonder if rental arbitrage is a good model, and they reach out to me, and they get in touch. And I have a lot of people that watch other content on YouTube and see other people doing rental arbitrage and wonder if that is a good model. And I've done another video where I kind of debunk the idea that people come to well, wouldn't it be better off, you know, investing my down payment money for a property instead put that into investing it into rental arbitrage. I got debunked that. But someone actually left a comment on that video saying, hey, this isn't actually an apples to apples comparison. And so I want to actually put together an apples to apples comparison. So we can really go through this once and for all and compare and contrast if you actually took the same amount of money and invested into buying a property and all the expenses that come along with that, versus if you took that amount of money and put it into rental arbitrage, picking up properties and doing everything that comes along with that and all the expenses that come along with that. So we're going to compare and contrast the two of them. Now, before we dive into it, I just want to remind you, there's a link in the description down below, there's actually two important links here. One is for a free training that we've just recently put together, my business and investing partner and I are on how to invest successfully in short term rental properties. So if you are looking to buy short term rental properties, you want to start investing in them and earn a really great return on your money, then I highly recommend you check out that free training below. We're also going to give you a free analysis tool. So you can actually analyze properties for short term rental when you sign up for that track. So make sure you check it out. And also for anyone here that is interested in starting an Airbnb business managing other people's properties on Airbnb and earn a full time income doing that there's another link in the description down below. So I highly recommend you check that out, we're going to show you how to manage other people's properties, earn a six figure income doing that without having to buy rent furnish any property, so it's not rental arbitrage. So I highly recommend that in the description down below. Let's jump into it. So the first scenario I want to look at is actually purchasing a property. So I'm going to actually use a real life example for this. This is a property that I recently purchased about a year ago. And so the total initial cash, we actually talked about this in a previous in a previous video here on the channel, the total initial cash was $165,000. And what that broke down to was $100,000 for the down payment because a $500,000 property sent 20% down, and then $60,000 for renovation and then $5,000 for closing costs. Again, if you want the whole detailed analysis of this whole, this whole, you know, purchase all the numbers, the breakdown of everything that's in another video on this channel. But then the furniture and amenities were an additional $30,000 there. And then interior design and photography was another $1,000. So our total investment to actually get the property ready to go live on Airbnb was $196,000. Now on that property, we got $120,000 Back in year one through a refinance. So again, if you want the details of all that, that's in another video on this channel, but basically bought this property that needed renovation work. And if you're familiar with the burr method that a lot of people use when they're investing in real estate, you basically buy a property that needs renovation, you do the renovation, so an increase the value of the property, and then you can refinance the property at the higher value the higher praise value. So in our case, we bought the property for 500,000. We put $60,000 of renovation work into it because it's very outdated, needed a bunch of rental work. And then we got to reappraise that $650,000, we were able to pull out $120,000 through a refinance your one cash back in actual profit for the property is projected to be about $70,000. We are currently six and a half months in, and currently at $48,000 in profit. Again, I break that down in another separate video on this channel. And we go through all the numbers but I'm not getting I know this number seems crazy. But this is why I think investing is so much better. Because you can get $70,000 on one property. And that's after accounting for all of our capital expenses, our carrying expenses. So the mortgage taxes, insurance, all of our operational expenses, our software, our yard maintenance, our snow removal, our cleaning teams, absolutely everything. So and that's also actually taking into account that we pay someone for guests munication and we pay someone to do our pricing optimization as well. So it's really, really hands off for me at this point. So that's our profit. Again, we're at $48,000 in the first six and a half months. So I'm being very conservative and assuming that we're only going to bring in about another $22,000 Over the next five and a half months here. That'll bring us to 70 and we're well on track for that and bookings. We actually have a bunch of bookings over the next 12 months that will bring that money in so your one total cash back through the refi and the profit is 190,000 of our 196,000 that we invested. So remaining cash in the deal still After year one is $6,000 that we still have in the deal. And so that's basically if you look at like our bank account, before we bought the property versus a bank account a year after we bought the property, if no other money came into that bank account, there's just $6,000, less than there was a year ago, year two and onward, our profit is going to be $70,000. So that's assuming no market growth, which the market has been growing by about 10 to 15%, every single year, consistently, but just staying conservative, we're just going to say $70,000 a year, we're obviously not going to have that refinance. In later years, that's only something you can do once or if we were renovate the property. Again, we could do it, but we wouldn't really be able to because we already renovated the property. So it's already renovated. It's already, you know, nicely done. So there's just not an opportunity to do another refinance, we could refinance the property later on down the road to pull out equity. But we're not going to force appreciation through a renovation, again, like we did here. And so additional returns that we are getting on this property are going to be the principal pay down, which is the pay down on the mortgage so that $70,000 comes, you know, our actual revenue on the property is about $150,000 over the course of the year. And then our part of that, that's being deducted from that to get us to the $70,000 in profit is our mortgage payment. And part of our mortgage payment is obviously interest. But another part is principal. So annually, we're paying about $10,000, in, in principle pay down each year on that property where the mortgage payment is about $2,500 a month. So about $10,000 a year, we're averaging all this over a 10 year period, it's gonna be about $10,000 a year appreciation at 2%. If you again, average it over a 10 year period, because it does compound on itself, which is obviously very powerful. And you're about $14,000 a year and appreciation again, that's at 2%, which is just insanely conservative for the market that we're in. We're just a couple hours outside of Toronto last year alone in appreciating that market about 35%. So do percent per year over 10 years is pretty crazy low. But again, we're not banking on that. I don't want to wait that heavily in here. Because I want to be fair equity in the property, we also have $130,000 worth of equity in the property because again, we when we did the refinance, we still have an A 20% equity stake in the property, which is worth about $130,000, because the property itself is now worth $650,000. Again, if you're confused by any of the refinance stuff, or any of the equity in the property, I'd highly recommend you go back and check out that other video on our channel where we break that down in a lot more detail. But we've got that so that averaged out over 10 years is about 130, or about $13,000 per year. So Taking all this into consideration the 70,000 plus 100,000, or sorry, plus 10,000 plus $14,000 a year for appreciation plus $13,000 per year, because again, I'm just averaging that over a 10 year period, we're getting to a total annual return after the principal is paid back because obviously in year one that just went to repaying the principal repaying the amount that we'd invested. So now we're earning about $107,000 per year on this property. $70,000 of that is actual cash in the bank, the rest of it is equity in the property through principal pay down appreciation and then equity, it's just tied up in the property. So you can look at that however you'd like. Obviously, we don't have all that money in cash, the large majority of it is in cash about 70%. So additional consideration, so our monthly debt service on that property is $3,000 per month. So that's our worst case scenario is that the property cost is $3,000 a month, if everything were to grind to a halt, our time required. Right now I'm putting about half an hour per month into this property. And that is spending time basically just going over the financial report, which I do once per month. Again, I'm taking into account when I look at this profit number that's a deduction from our total revenue. We've got people paid for gas communication, maintenance cleaning, and then we have someone doing our pricing optimization actually compiling a monthly report for me so that I can look at it again, that's up doesn't cost a ton for that it doesn't take a long time. But that's basically all going into it. So my actual time required is about half an hour per month that I take for this property. So our profit per hour on that is about 15 and a half $1,000 per hour right now I'm going to address why that number is so crazy high. If any, you guys are wondering, holy smokes, why's that number so crazy high? I'm gonna address that later on this video. But that's the number that's $15,000.50 and a half $1,000 profit per hour on this property. Another thing I want to point out here is that our dollar per dollar monthly so for every dollar that we put into that that monthly debt service, how much do we actually get back in profit when we do operate it? Well, we're getting about $2.97, so about $3 out for every dollar we put in. So if you just run the math on that, that sort of works out to dollar for dollar monthly. And so that's something I like to look at because that is a good indication of what kind of risk you're taking. Obviously if that number were very low You know, if you spend $1, to make back $1 And, and 10 cents, you're still doing well, you're still making a profit. But if you put in $1, and you only make back, you know, 10 cents, that's a much thinner margin, you're a lot more risky than if you put in $1. And you make back, you know, an extra $14, or whatever, right. So the lower that that number is lower that ratio is, the more risky it is, is a good way that I like to look at it. And so now let's look at the same kind of thing for that same total of 196,000. So if we think back to the exact same total amount of investment, it's $196,000. And let's do this with rental arbitrage. So now, my assumptions for this are going to be a rent renting properties at $2,000 per month furniture for those $2,000 A month properties is going to be $3,000 per month, and then the cost per property to get it set up is going to be $7,000 Because you'll pay first month's rent $2,000 Last month's rent another $2,000 and then furnishing the property $3,000. Now I've done rental arbitrage. So these numbers are unrealistically low, in my opinion, in my experience, and I think that pretty much anyone that's talking about rental arbitrage will tell you that experience with rental arbitrage will tell you this is a very fair set of assumptions to make. And then the total properties obviously, is gonna be 28. Because if we have $196,000, and we want to, again, compare apples to apples, I know you could take the profit reinvest it, blah, blah, you can do the same with investing, but we're just talking about taking that $196,000 and investing it in a property or using it for rental arbitrage. So the total properties that you could get at $7,000 per property with $196,000 is 28 properties. So I'm also going to assume your monthly profit on each property is $900. And again, from my experience, this is pretty aggressively high for a $2,000 a month property, if you're renting it for $2,000 a month, a month for the property. And then after all your expenses, your cleaning everything you're profiting $900, that is very good. That's great. So I'm assuming that's on the high end. And then that I'm going to assume a growth rate as well of two properties per month. Because there's just no realistic scenario that a person is going to get started in rental arbitrage and pick up 28 properties all at once and get them somehow furnished and listed instantly on on short term rental, I'm going to assume that we start the clock as well, from when the first two properties are actually on boarded. They're up and they're like listed ready to go on Airbnb. And I'm going to assume that in month one they perform at $900 per month in profit. So again, I'm giving a lot of benefit into this because I again, I don't I know that I'm an advocate for investing in property. So I don't want this to come off as bias. So I decided to bias it the other way to counteract that. So I'm assuming a growth rate of two properties per month. Again, that's going to be like relatively aggressive to continue growing at two properties per month, every single month for more than a year. And also work out your operations of managing and operating 20 Plus properties, almost 30 properties, but we're going to assume a growth rate of two properties per month. Now, that means that your year one growth, you're only going to get to 24 properties in the first year. So you're going to have another four properties basically to bring on in the second year in order to get that whole $996,000 invested invested into these properties. So that means your year one investment is $168,000. And then your your one cash back at $900 per month per property with two properties per month. That means that actual cash that you get back, because obviously not all of those 24 properties are operating all year, because you're only bringing on two per month, your actual cash back is 140,400, meaning that you still have remaining cash in of 27,600. But obviously now you've obviously got 24 properties up and running. So the next four months are going to be quite high high income. So that's going to be repaid relatively quickly, I'll give it that. So then we go into year two, we have four more properties that bring on year two to get to 28 in total. Now that's where we're going to stop because again, we want to limit ourselves to the 196,000 just to compare apples to apples. So the year to investment is just $28,000 that's just $7,000 for each property times four properties 28,000 Our year to cash back is going to be $300,600 So that's a lot better obviously we're getting a lot more cash back because we started year two with 24 properties and then we grew 28 Three and a lot more cash back I mean they're a year to profit after we pay back the year to investment and repay back the remaining cash we had in in at the end of year one is $245,000. So actual profit in year two would be $245,000. In this scenario, not bad right the total annual return after The principal is paid back. So your three onwards in this scenario is gonna be $302,400. So if you remember, our total annual return was about $107,000, if we were to buy one property, whereas if we're doing rental arbitrage with 28, we're actually going to get a total return total profit of $302,400. So about three times as much. So you'd look at that and you go, looks pretty good. And this is where I think a lot of people stop. This is where I think a lot of people stop actually thinking about it. And this is why I'm such a huge advocate for Hey, actually crunched, the numbers actually analyze it actually consider everything, because so many people stop here, and they don't consider anything else. So let's look here, you know, additional considerations, here's your monthly debt service on this 28 property portfolio is $56,000. That means every single month, you are liable not for $3,000, like you would be in the worst case scenario on an investment property. But for $56,000, that for most people, that means bankruptcy, in a worst case scenario, it means you're completely financially ruined, that is a lot of money to have as a monthly overhead. So not only are your time required, and we're again, I think this is aggressive, this two properties per month, all year, you know, if you're experienced, and you've got a big portfolio, maybe, but if you're just starting out to grow at two properties per month, and keep compounded every single month and operate them all, you're going to be at least 60 hours per week, at least at least 60 hours per week. So that's 240 hours per month, as opposed to half an hour a month, right, just let that sink in, you're literally spending 480 times more time to manage this portfolio versus man's latter portfolio. So your profit per hour works out to $105. Whereas if you remember from the last scenario, it was 15 and a half $1,000 per hour versus $105 per hour. So again, sure, once you get this business established, and you get it automated, you've got people in place for all the operations of it, sure, you can bring that profit per hour way up. But that's going to also your total annual return is going to come down because you're going to have to pay someone to do this 60 hours of work per week, they've got to be quite competent as well. So you're going to probably pay at least $80,000 a year to get that stuff, man. So you got to remember, your net number is going to come down pretty substantially when you do that. And it's going to take a lot more time for the first couple years, you can just outsource someone like growing your business. So for the first couple years, and if you averages out over 10 years, again, you're still going to be a much, much, much, much, much lower profit per hour than investing. And then the other thing to consider is the risk, right? Remember the dollar per dollar monthly. So for every dollar of overhead, you're earning back $2.97 in profit in profit. So you pay back that dollar, and then you get another $2.97 back dollar for dollar. Whereas here, for every dollar you put in, you're getting back $1.45. So you're getting back 45 cents worth of profit on every dollar that you invest. So that's 6.6 times a lower profit $1 per dollar. So your risk is just a lot higher running a much thinner margin. So here are the other things that I would consider like why is the profit per hour, so much greater, like just a huge, huge multiple, what is that? It'd be 150 times greater profit per hour for investing versus for arbitrage will ultimately that just comes down to leverage it comes down to the fact that you are leveraging, you know, you're investing this $196,000. But you're now controlling a $650,000 asset. So you're leveraging you're actually investing your money and your money is working for you as opposed to your time working for you. So that's why I always use air quotes. When I say that you're investing in rental arbitrage, because it's not investing, you're spending you're you're building a business. And that's all well and good. I'm all for building businesses. I'm all for doing that. But it's just not accurate to compare that as if it's the same thing as investing the same way that you invest into the stock market or invest into real estate actually buying it. And so that's really what it comes down to is like there's just no leverage in a rental arbitrage business. Wouldn't it be way easier to buy three properties in three years, instead of scaling to 28? Right? Because you could get to three properties and be earning the exact same amount of money with those three properties. If you owned them, as you are in this scenario with 28 properties. If you do rental arbitrage with them, wouldn't it be a lot easier as buy three properties? Yeah, absolutely. Right. And maybe it'll take a little bit longer than three years. But if you refinance the properties, if you do the renovation, you refinance the property, then realistically, you're you're getting that money back to the refinance. You don't have to save up another $196,000 each time. The other thing I I think a lot of people are going to point out here is Hey, James, you didn't take into account the the time and energy that went into finding the property that went into renovating the property that went into everything, you know, setting it up. And actually, yes, I did. But when you average that out over it's, it happens one time, it's one time that you do that. And if you average out over 10 years, then your investment is like nothing, it works out to a couple minutes, per per month, right. So it's just so little, because you only do it once. And because you can leverage a lot of that out like for managing the whole renovation, everything, I didn't actually do the renovation myself, I hired someone else to do that. Whereas again, if you want to consider a scenario where you do that, with rental arbitrage, where you, you know, you do it the one time for just over a year getting all these properties, and then you hand it off, you can do that. But again, that's going to give you a hit of $80,000 or so on your annual income and your profit per hour is still going to be a lot lower than it would be with investing. Yeah, way easier to scale by investing my in my experience. Absolutely. And then other things to consider is arbitrage carries about 20 times more risk 20 times more monthly overhead for about three times more ROI, if you don't account for the investment of your time. So the the risk reward there is drastically weighted towards risk, you're taking on a lot more risk proportional to the amount of additional reward you get. Now, if you actually do account for time, then arbitrage carries about 20 times greater risk for 150 times lower ROI because like I said, Your again, maybe you can cut that number down to 75 times lower if you hire someone out. So you're not investing as much time after the first year and a bit bring on those properties. But again, it's going to be way lower ROI when you consider time and still way more risk, there's no real way to get around that it's just inherent with the arbitrage model. And then the other thing is investing gives you a lot more control. In that you get to control your property, you get to control you do it, there's no liability of the landlord saying, Hey, you can't keep doing this, we've had complaints from the neighbors or whatever, because you own the property, you are the landlord. So in this scenario of also considered to keep it kind of apples to apples. In order to do that, I've had to consider that there's no risk of regulation coming in and wiping out your entire business and you being left with no equity at all with rental arbitrage. Whereas with real estate, that worst case scenario, if it happens, you still have equity in the property. And you could still sell that property for profit, go and buy something somewhere else. Whereas if that happens in your first year of building the business, with your portfolio, you're out of luck, like all that money, you don't have any equity that's built into it that just rent and furniture. So maybe you can salvage a bit of furniture by selling it secondhand for half of what you bought it for, but that money is out the window. So again, I've just discounted that whole risk there, I've discounted the risk of the landlord coming in saying, Hey, we don't want to keep doing this with you. So for that, we can assume that you've had some kind of a clause in your agreement that would be really hard to negotiate where you're not liable for those things. And still, we're still looking at these numbers and like, it's still just makes way more sense to invest. So it gives you way more control, you have better backup plans, because you still have on most real estate investment deals. If you buy the right deals, you also have a backup contingency of going a long term rental and still earning a decent profit. Whereas with rental arbitrage, maybe you could flip it as a long term furnished rental and make a bit of profit. But again, you have to check that with your landlord unless you've got an agreement in place which is just really difficult to negotiate. So and then you also have just way better margins, like we talked about 6.6 times better return dollar for dollar on your monthly overhead. And then the other consideration is like I don't understand why someone would want to go this route of rental arbitrage when management fee if you just manage the properties for a percentage of the overall revenue, you have way less risk if I mean you don't have any risk of capital because you don't have to invest any money into renting the property first and last month's rent, furniture, any of that so there's no capital you have risk. And then there's also similar cash flow like on a good management fee model property you're earning 700 $800 per property. So to get rid of all the risk and all the capital save yourself that $196,000 And you do invest in your business you get $100 less per property like it just doesn't make any sense in my mind to go to go there the rental arbitrage model and that's why like I'm speaking from experience I made this mistake I looked at the rental arbitrage numbers years ago and just got tunnel vision on it didn't think about all of this other stuff and just went and started doing rental arbitrage and then later realized oh my goodness this is so risky. It's so capital intensive to return dollar for dollar is so bad the return on your time taking that into consideration is so bad like all that stuff. Now, the return on your on your time is still quite good. If you look at Under the context of building a business $105 An hour like that's a decent hourly wage. And again, you can leverage that more it can be can bring it up to a few $100 per hour. It's just not in the same world as investing. It's two different things. It's
building a business versus investing your income. I recommend both I advocate for both, I think people should build their own business to build cashflow. And then people should invest to build wealth. But I just think that a lot of the time we conflate those two in this space. And it's really important to kind of separate them out and see them as the different very different animals that they are. Hopefully you got value from this. I know this is a long video, but I want to really go into detail here and provide as much value as I could in such insight as I could, you might disagree with me, if so let me know in the comment section down below, I'd be interested in your thoughts. If you do want to learn more about exactly how to invest in short term rental properties and actually buy them own them, get these great returns and not be taking a huge risk, then I highly recommend you check out the free training that is linked in the description down below. We're also going to give you analysis tools. So again, all that stuff is free, it's in the description down below. If you do want to build a business, you want to build cash flow, you don't have the $168,000 to invest right now. And we've got a training for that as well. So that's our training on how to earn a full time income managing other people's properties on Airbnb, again, that's a fantastic place to start. That is where I really built my business after realizing the flaws with rental arbitrage. That's where my background came from majority of it for for Airbnb. So I'd highly recommend you check out that training, we go in depth on exactly how to scale the business from zero to $100,000 a year and during the way where you're not again renting or purchasing or furnishing or any of that with any properties. So if you want to build substantial monthly cash flow, then I highly recommend you check out that training we're going to give you a bunch of tools resources to help you along the way with that. All that being said, I hope you guys really enjoyed this video. I hope you got value from it. If you did, make sure you hit that like button give me a thumbs up on the video. Also, make sure you hit the subscribe button to stay up to date with the two new videos we post every single week. And I'll see you in the next video.