5 Reasons Why Airbnb Rental Arbitrage SUCKS
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As a lot of people are finding out the hard way right now, Airbnb rental arbitrage is a pretty awful business model (in most cases). For the average person looking to make some additional income, the risk-reward tradeoff truly sucks on most properties. In this video, I break down exactly why that is, how you can protect yourself, and how you can transition to a better business model.
In any business (or investment) you want your potential reward to far outweigh your potential risk. (put simply: you don’t want to risk way more than you stand to earn) Unfortunately, very few properties actually meet that criteria when you break down the numbers on rental arbitrage.
For example, I just recently spoke with someone who had a property he rented for arbitrage purposes. The numbers looked like this:
(Total monthly = $1,700/mo)
Average monthly Airbnb income: $1,900/mo
As you can see, he stands to make about $200/mo in “profit” if all goes to plan. That means that in order to break even on his $3,000 furniture investment, he needs to successfully run this listing for 15 months.
Essentially, he needs to invest $3,000 upfront, plus $1,700/mo for 15 months, PLUS he needs to put in 15 months worth of WORK, just to break even. THEN he’ll STILL be risking $1,700 every month just to profit $200.
I don’t know about you, but that’s got to be the worst business model on the planet. You’d need to be off your rocker to run a business that way.
On top of that, you’re running 3 major risks at all times:
RISK #1: Decrease in Bookings; if for any reason your bookings start to slow down (like many hosts are seeing right now) you’re still on the hook for a huge amount of monthly overhead. You risk losing a whole bunch of money every month if you’re not able to “right the ship”.
RISK #2: City Regulation; because you’re constantly reinvesting your profits back into rent and furniture in order to grow your business with rental arbitrage, you never actually reap the rewards (ie. profits) from your business until you stop growing. If the city you’re operating in passes new regulations restricting Airbnbs before you stop growing, all your hard work could end up being for nothing. You could effectively be shut down before being able to actually realize those future profits.
RISK #3: Building regulations; this works pretty much the same as city regulations, and it means that building your business all in one building (for example a specific condo building) is exceptionally risky. Although it can drastically increase efficiency, you’re carrying a huge amount of risk in the event that the building passes new bylaws that restrict your operations.
And on top of that, rental arbitrage can also suck because:
#4: The business is hard/slow to grow; you need to have anywhere from $5-7K to bring on a new property, and you need to do all of the legwork of getting the property setup and listed on Airbnb without receiving any immediate compensation.
#5: Taking out profit further slows growth; as mentioned above, growing your business means reinvesting profits. If you want to actually earn an income and support yourself off of your businesses profits, it means that you can no longer grow, or that you have to significantly slow your growth in order to do so.
With all of that in mind, Airbnb rental arbitrage really doesn’t make sense, and quite frankly is a pretty terrible “investment” or business model for most people, in most scenarios. Of course, there are some exceptions to the rule just like anything else, but especially for anyone looking to build some side income or a lifestyle business, the risk reward is just awful.
Running this type of business is likely to be wildly stressful and carry too much overhead to justify. If you’re already running an arbitrage business, consider keeping a big stockpile of cash set aside as a safety net, and more sustainably, consider picking up some properties using the management fee model to keep cash coming in during downturns and to mitigate your risk exposure.
For anyone who’s newly entering the Airbnb space and wants to build an Airbnb business WITHOUT taking a whole bunch of unnecessary risk, I recommend starting out using the management fee model. Incorporate the odd “unicorn property” using arbitrage when it makes sense, but otherwise steer clear and opt for the management fee model.
To learn more about the management fee model and exactly how it works, check out this free training: http://bit.ly/3b24zmo
Hey there everyone. My name is James and in today's video we're going to talk about five reasons why Airbnb rental arbitrage. In other words, renting a property furnishing it and flipping it onto Airbnb as a business model really, really sucks in a lot of situations.
Now, I've got experience in all different types of Airbnb. For any of you who don't know me, I've got experience with rental arbitrage. In fact, I was managing over five properties on the rental arbitrage model before I realized these five things that really, really sucked about that business model and started to diversify away from it altogether. And now it's a very small part of the overall Airbnb operating that we do.
I've also managed my own property on Airbnb. And I really transitioned heavily over to what's called the management fee model, because there's a lot less risk in it. There's a way to basically diversify and remove some of the risk and all aspects of Airbnb rental arbitrage that I found to really suck as an overall business model. So we're going to talk about that today.
I'm going to talk to you about those five things that suck and also how you can avoid those things, how you can mitigate your risk. So if you're already managing properties using this rental arbitrage model, I'm going to talk to you about how you can protect yourself in this crazy time that's going on right now. And how you can set yourself up in the future to not have to go through all this different risk. And these ups and downs like you do right now, like you likely are experiencing right now because hosts all over the world are having a really tough time right now.
So I'm going to show you how to avoid that in the future. And for anyone that's looking to get into Airbnb into the Airbnb business, I'm going to talk to you about how you can do it without risking a whole bunch of money and time unnecessarily. So that's we're going to get into in this video, and hopefully you're gonna walk out if you're already doing rental arbitrage, you'll have a clear understanding of what you can do to hedge a lot of your risk and to avoid some of these things that really suck about the business that you're likely uncovering right now as we speak.
And if you're not in the business already, and you want to get into Airbnb, then you're going to walk away with an understanding of how you can do that with as little risk and as best of the best business model possible for renting and entering into this space. So let's go ahead and get started, let's start talking about some of the things that really suck about rental arbitrage as a business model. Well, number one, the one that a lot of people are familiar with right now with everything that's going on in the world is the risk of decreased bookings.
You know, with rental arbitrage, the challenging thing about this business is that it's incredibly high overhead. You know, a lot of businesses right now you're looking at the best business to be in is one that you can sustain for months and months and months without revenue. If you build up a little bit of cash, then you can survive off of that cash for ideally a couple months, maybe even one to three months right now so that we can get out of this tough time that we're in. Now.
This can happen for a number of different reasons. Obviously, there's one reason that's causing it all right now that I won't mention, but you know, for any reason your business can have down months with rental arbitrage. If you have a direct In your bookings, you now have thousands, if not 10s of thousands of dollars in overhead that you've got to have carry through every single month.
So you have to have, you know, hundreds of thousands of dollars saved away to be able to carry you through these tough times. So the risk of decreasing bookings is a really, really tough one. And one of the reasons why Airbnb rental arbitrage sucks because your business can fold and lose you a lot of money in a very short span of time if you just have a decrease in bookings. Number two is the risk of city regulation.
Now, imagine that you're in a city that right now is favorable to Airbnb, but then suddenly they pass a law that restricts what you can do and how you can operate on Airbnb. Now, if you're like most rental arbitrage operators who are growing their business, you're taking your profit and you're reinvesting it into growth. So every month you're making a little bit of profit, you might put a chunk of that back into the business to rent another property, furnish it, etc.
Well, that's all well and good because you'll build up a portfolio of let's say, 20 properties before you start to slow down. down. And then once you actually stop building, that's when you get to reap all the rewards of this, that's when you really start to just start cash flowing these properties month after month and really raking in the money.
But what happens if city regulations come in and get enforced, and they restrict how you can operate before you actually sat on that nest egg that you built, if you've just been in the build phase that entire time, then the whole tower can come crumbling down with you not having made any profit or hardly any profit at all. And now suddenly, you can actually make profit with potentially most or even all of your properties that you're managing.
Now, the third one is the risk of building regulations. So similarly, if you're in a condo building that suddenly decides that they're not going to allow short term rentals, they're not gonna allow Airbnb, then you can get really trapped with the same exact situation where you haven't actually been able to realize a lot of these stored up profits because you've been reinvesting it back into the business.
Now obviously, the easiest way to operate one of these businesses is to have all your properties close together. And ideally, if you can have them in the same building, that's great. But unfortunately, with rental arbitrage, unless you're actually working closely with the building owner, you know, if you're working with the construction, the development company that can be really good, but if you're not, and you're just renting from individual owners in, let's say, a condo building, then you have a lot of risk exposure and all your eggs in one basket, so to speak, if you're managing all in one building.
Now, the next one, the fourth thing that really sucks about rental arbitrage is the it is difficult and it's slow to grow. You know, if you're trying to grow a rental arbitrage business, then you constantly have to be reinvesting thousands of dollars back into the business. Every time that you want to expand and grow your business. You're constantly taking your profits and putting them back in. And like I said, there's a lot of risk associated with that.
There's a lot of opportunity for something to throw a wrench in that plan. And because of that, it's just really challenging to actually make a profit in the business until you've actually realized that you want to stop growing, in order to grow, you have to be reinvesting a lot of your profit back into the business. And so it's difficult, it's challenging, slow to do it. And you can't just go and you know, pick up 10 more properties all at once likely, unless you have a big nest egg already put aside.
And even if you do that, obviously, you're risking a lot of money to do that. And then the last thing, the fifth thing that really sucks is, you're really tied into all of this is it's just capital intensive to grow. So as a lifestyle business, it's really challenging because, again, you're not actually able to take profit out and grow the business at the same time. They're directly tied together, the degree to which you take out profit is going to slow down your growth.
If you want to grow faster, you need money in the business. And then if you take out more money and you make profit for yourself, so you can live off of it support your lifestyle, then you're not going to be able to grow as quickly as you would otherwise be able to. So for that, those five reasons it's really sucky and really challenging because, ultimately being in a business that's challenging to grow, expensive to grow and then as high risk and a whole lot of overhead is really not a great business model. It can seem attractive in the beginning, because these numbers make a lot of sense.
And on some properties they do and the profit potential is there. But there's just aspects of the business that you might not have thought about previous to actually enter into it that once you start operating, you realize, Wow, well, you know, there's actually a lot of things that really, really suck about this business model. And so those are the top five things that I found that really suck about the business model.
Now, if you're already managing properties on rental arbitrage, you've got some properties you're renting, you furnish them, you set them up, it doesn't mean that you necessarily should get rid of those properties. In some cases, you should I've talked to people who are running absolutely horrible numbers. And when you think about it, you want to make sure that your profit is actually in line with the risk that you're taking that risk reward profile makes sense.
And otherwise, it honestly could be a really good choice to get rid of some of these properties that you're managing. If the number Don't make sense. You know, I talked to a guy just a couple days ago who was managing properties that he's paying 1500 dollars a month in rent for, that's rent cost is 1500 dollars a month. He's furnished them for three to $5,000 each. He's got $200 in additional overhead overhead for his electricity, his utilities internet.
So now he's 1700 dollars a month into these properties that are making 1900 $2,000 a month on average over a 12 month period. So let's just look at this, you know, you're you're risking 1700 dollars a month to make $200 a month. And that's not even that's not even taking account for the $3,000 that you've put in on the at the minimum in a furnishing this property.
You know, for that property to actually make profit.
You've got to operate it for over 15 months now. So you're taking on 10s of thousands of dollars in liability, just to get to break even you're putting in a year's worth over a year. worth of work just to get to break even. So you're investing all this capital all this time, and it's not actually making you any profit. And some people would argue that Oh your furniture, it's not really a sunk cost because you can always resell that it's an asset, let's be real, that furniture is worth half as much as what you bought it for the moment you take it out of the store.
If you try to sell it close to the the price that you bought it for, that's even more work trying to flip this furniture, you know, really, it's just not a good profile to get into as far as just a risk profile to get involved with in a business.
Now, I'm not saying that every property that has some properties, I've certainly spoken to a number of people that have properties that fit those kind of numbers. But on the other hand, we still do rental arbitrage, I still would do rental arbitrage, with a property that the numbers make sense on. And so I'm going to include a link down below to what's called our property projection tool.
You can use that and it'll help you to analyze properties and figure out whether rental arbitrage really makes sense or whether a different model like For example, the management fee model makes more sense for these properties. Because ultimately, if you can be making as much money as you would under rental arbitrage, but avoid the capital expense of having to furnish the property yourself and avoid the monthly liability of that rent payment, that's a no brainer.
And in some cases, a lot of cases, I'd say about 80 90% of the properties you'll come across, you'll find that you can make just as much or very close to as much of the same money that you would on rental arbitrage using the management fee model that I'll explain in a couple minutes here and not have to risk any of that that capital of your hard earned money and not have to invest a bunch of time before you actually reap reap profit out of it.
So that can be a really good model. Now, some properties they are going to make sense for rental arbitrage because the numbers are just a no brainer. These are the properties that you can pick up for 2500 $3,000 a month and average over 12 months. They're going to bring in 6000 $7,000 a month, with numbers like that. You're risking $303,000 A month, let's say to make $3,000 a month.
So you're getting 100% return on your investment every single month, you know, you're paying for your furniture after one month of operating two months at most of operating. Now, suddenly, that makes a whole lot of sense. Because you can really make, you know, even just two or three or four of those properties can be a full time income for you. So that's really the overview, not sort of the challenge of it.
Now, if you're doing rental arbitrage right now, and you've got some properties that really kind of suck and the numbers don't make sense on it might make sense to drop some of those properties. The other thing that I recommend doing if you're doing rental arbitrage is having cash on hand. Cash is gonna be your friend to be able to weather the storm of some of these bad times these unforeseen things like what's going on right now in the world.
So having cash on hand is the next thing you can do to just make sure that your rental arbitrage business is safe in case anything like this ever happens again. And then obviously right now we're in kind of a damage control mode, but preparing for the future for this to happen again, if Do you find yourself in a position where you're over leveraged, you're overexposed, a great way to mitigate that risk is to pick up properties on the management fee model, such that they'll offset the cost of your rent expenses.
Now, let me explain first what the management fee model actually is what it entails, so you can understand what I mean by that. So the management fee model is essentially doing a profit sharing with the property owner, as opposed to giving them a fixed monthly rate. They're going to be the ones that pay for the furniture and the property, they're making that investment into their property.
And then you guys are going to do a revenue split, typically it's about 8020, with 80% of the revenue going to the property owner, and 20% going to you. Now what property owners love about this is that they get completely hands off management, you're going to do everything the same, you're going to take care of everything for them. And they're going to get a part of the upside, right so they're going to get to share in the upside of having it on Airbnb, they're going to be completely hands off. And you guys are really, you know, co incentivized.
You have the same incentive as them the better the property performs for them. the better off you are because you're getting a percentage rather than just a fixed monthly rate as well. So it works really well. It's very mutually beneficial. There's a lot different value propositions, I'll leave a link below as well to a free training that I put together that you can check out that gives a full overview of the ins and outs of starting a management business using the management fee model, kind of talk through everything in a lot more detail than I can pack into this video.
But under that model, your cash flowing every single month, typically will actually charge your property owner anywhere from a couple hundred to 1000 $2,000 depending on the property and what all what all is required for it just instead of expenses to get the property set up and listed on Airbnb, we're a service based business rather than we're doing some kind of arbitrage now and so we can charge for our services.
And so because of that we're cashflow positive from the very beginning. You're not investing anything to get the business off the ground, you're not putting money into rent security deposit furnishing the property and under that and you have monthly cash flow. So your cash flow is Isn't at risk because you don't have a liability attached to it.
You know, in a month, like this month where there's a lot going on in the world and revenues are down, some of the revenues are even at zero, our month is still zero rather than being in a position where we're negative 1500, negative 2000, negative 3000 a month, we're at zero, which is a lot better place to be. And in any month, we're up, we're always cash flowing.
So a good really good way to manage it and mitigate it that I like as a model is to only bring on what I call unicorn properties under the under the rental arbitrage model, the ones that are going to earn a whole lot of money in that make a ton of sense when you work out the numbers to be having on rental arbitrage, and have enough management fee properties that the management fees offset the cost of your rent, so that even if you're in a really down period of time, you're still gonna have your rent offset and you're not going to have a negative month.
So you get the benefit of having the upside and you get to mitigate your risk on the downside hedging any financial investor who's a student is going to tell you that that's a really great strategy because rule number one of investing, as Warren Buffett says is don't lose money. And rule number two is refer to rule number one.
So it's not necessarily about trying to get greedy and about trying to make as much money as possible and squeeze out those extra couple dollars out of the property and take on a whole bunch of risks to do so. It's about being able to get a lot of the upside and mitigate your risk on the downside as well, because obviously, having a down month backtracks, a lot of the work that you put in and can put your business in a lot of jeopardy.
So that's what I recommend for anyone who's got rental arbitrage properties and you want to protect yourself from something like this in the future. I've actually got a video coming out in the next couple of days here that's going to talk about why Airbnb as a business is actually very recession proof and how that all works.
Now, I know that in something like this that's going on in the world right now, you might doubt that but you have to remember that there's a potential recession happening right now.
And then there's the whole other issue Aside from that, and that's what's causing the slowdown and tourism, but the recession is likely to have very little impact on Airbnb and Airbnb businesses compared to the rest of the economy overall, like I said, I've got another video coming out in the next couple days, that's going to explain exactly the logic behind that.
And why that is, and how it is that Airbnb was able to take off as a company during the 2008 2009 financial crisis that happened in in North America and really impacted the entire world. So that's going to be in another video.
And now the last thing I want to cover is just for anyone who's starting out wants to get into Airbnb and wants to get into this whole world of Airbnb, everything that's going on here but doesn't want to use that rental arbitrage model and take on a whole bunch of risk and you know, have that monthly overhead have that liability have the potential for all these different disasters to occur and really break down your business and undo a lot of the hard work that you've done.
I recommend starting with the management fee model. Once you've got the management fee model going and you've got it operating, you're making cash flow You're making profit, it's actually a lot better as a lifestyle business than rental arbitrage. Because there's none of that stress not overhead, you have to risk those down months. And then once you've got your footing and you're comfortable, you'll have a better idea of which properties are those unicorn properties, you'll be able to better identify them.
And if one of those properties comes along, you'll be able to realize it and make a decision for yourself, whether it's actually worth taking on for you and what your goals are, whether it all lines up.
Now again, if you want to learn more about all the specifics and the ins and outs of that management fee model, then just click the link down below, it'll take you to a free training you can register for it's a really really in depth dive training like completely free, we dive into all the behind the scenes and I show you step by step how I was able to build this business for myself, and really just go in depth on exactly how to do that. So if you want more information about that, I recommend checking out that training.
And otherwise, like I said, the other tool that's in the resources in the description down below is going to be that properly projection tool. So you You can analyze properties in your local area and run the numbers yourself, you know, don't trust me and take my word for it, run the numbers yourself and try to look at, you know what the risk benefit analysis is actually going to be on bringing on that next property that you're thinking of rental arbitrage eating or managing and just look at the numbers and the difference between doing management fee model and having no risk, no overhead, no capital and doing rental arbitrage and see if the numbers make sense to you.
So I hope this has been a really helpful video. Like I said, I'm going to be posting more Airbnb related content on this channel. So if you want to learn more about Airbnb managing properties on Airbnb host on Airbnb, all that stuff, then click the subscribe button down below there, subscribe to the channel. I'm gonna be posting new videos twice every single week. So be sure to subscribe. If you got a lot out of this video.
If you got some value from it, give it a thumbs up, give it a like, I'm really excited to just share your share your comments with me down below. I'm just starting this channel off. So I'm always open to feedback and if there's something specific that you want, discuss Let me know in the in the comments there. Until next time, have a great one. Happy hosting. Let's weather the storm together and I'll see you soon