The short-term rental industry is open to everyone looking to try their hand at real estate investing, regardless of their aspirations or capital investment capabilities. Companies such as Airbnb and VRBO have provided an easy entry strategy, and you can enjoy a steady income stream from them too.
If you’re a people person and you would like to help build this industry, then you may want to consider the idea of entertaining guests and having them stay in a living area at your house.
Through this piece, I’ll take you through running a small business with your living space — or purchasing a property to host travelers in and around your city.
- Advantage: Minimal Initial Capital Investment – Maintenance Deferred
- Disadvantage: Contract with Property Owner – Deferred Maintenance/Control Liability
As a property co-host, you would need to be in close communication with the property owner for the property’s management needs. This means attending to issues such as:
- General cleaning
- Calendar bookings
- Guest communication
The owner handles the following:
- Short-term Rental Insurance
- Property maintenance
The owner has more responsibility in this scenario, but they are still relying on the Co-Host to help guide and coordinate what is necessary for a smooth operating Airbnb. This means accounting for scheduled maintenance or repairs or making sure the utilities are functioning properly.
- Owner/Host: Generally, you negotiate your revenue percentage in the contract.
- Co-host: You earn a percentage of total sales as commission.
The co-hosting strategy is great for just getting started because it requires the least amount of investment capital. Co-hosts help STR property owners by facilitating many of the required tasks, but co-hosts will not complete tasks that require a property manager’s license. If you have space to rent out but don’t want to perform any tedious hosting services, you could consider co-hosting. The co-hosting strategy allows you to leverage a property and help an owner to manage a short-term rental. Co-hosts would need to handle the full details of running the rental. They provide information on the booking platform, ensure that the booking calendar is up to date, and make sure that guests remain happy throughout their stay. As a co-host, you could earn new clients by sharing a Co-Host Credibility Packet. This packet allows you to show pictures of properties you have managed, as well as reviews from guests. It adds a layer of authenticity to your claim and improves your chances of acquiring a new client. It is like showing off your property on Airbnb.
As a property owner, you can maintain your host status while assigning the co-host status to the co-hosting service provider itself. Either of you can change the property’s details on the booking platform and directly communicate with prospective guests.
There are also Full-Service Property Management companies, which are a competitor for co-host service providers. Property Managers are more thorough in their service delivery and packages. These companies provide a myriad of services, including but not limited to monthly financial servicing, property maintenance, and tax accounting.
Primarily, the difference between these companies and conventional Co-Hosts is the flow of money. For Property Management Companies, revenues go to the company before being distributed to the property owners. The companies also handle payments for utilities and other incurred expenses. However, for a Co-Host, owners receive all funds and would pay utilities and other services in addition to monthly invoices for the co-hosting services.
If you need help with co – hosting, keep in mind that Dynamic.RE can help! Dynamic.RE acts as a partner on your vacant homes, vacation rentals, or Airbnb listings. Our team steps in and handles all aspects of the short-term and mid-term rental process from marketing, guest communications, vendor dispatch, unit inspections, key management, revenue projections and asset inspections (The A to Z of the short-term vacation rental experience).
Slightly more investment is required for a rental arbitrage scenario.
- Benefits: Some initial investment and the opportunity to defer maintenance
- Drawbacks: You have to sign a contract with the property owner, and you bear deferred maintenance liability
The owner handles the following:
- Short-term Rental Insurance
- Property Maintenance
The short-term rental company handles the following:
- Private pool (if any)
- Co-hosting responsibilities
- Property maintenance
- Owner Revenue: The rental agreement at the standard rent rates
- STR Host Revenue: The short-term rental agreement, fewer expenses
What Is Rental Arbitrage?
Rental arbitrage goes by several names — including a master lease, a sublease, or an LLC lease. This short-term rental strategy will require a business entity, essentially renting a property through a long-term rent option and using the property as a short-term rental.
The short-term rental host will handle all utility payments but will also keep profits that exceed rent. For many hosts, this is much higher than the usual monthly revenue. It is worth noting that there is no guarantee of higher incomes. The host is also bound to the precepts of the lease agreement.
In rental arbitrage, upfront down payment costs are also limited to the initial investments, which include security deposits and property furnishings.
Most rental arbitrage properties are homes for rent and condos. The property owner will take care of all the major issues that hosts report. These include general appliance repairs and more. That said, hosts will also need to follow up with owners to ensure that problems are resolved quickly. So, you must have a healthy relationship with the property owner and ensure that property reporting details are up to date.
For property owners, rental arbitrage has the benefit of providing considerable assurance. They know that the property is a short-term rental and would need to stay in great shape, even when there are no guests on the property. So, the owner is confident that the host is taking care of the property and that any issues will be adequately addressed.
Rental Arbitrage Negotiations
Short-term rental hosts would need to speak about their intentions for the property before signing the agreement. Keeping this from the property owner can lead to conflicts later on. Also, it is generally recommended that you do this to stay in your landlord’s good graces.
Generally, you would want to talk about the following:
- Monthly security and rental deposit
- Requirements from the Homeowner’s Association (HOA): Some HOAs will not allow properties in their community to be used as short-term rentals. Knowing this upfront will affect your decision to move forward or not.
Other factors will need to be discussed too. For instance, your owner could have several properties being managed digitally. This will mean that they feel more comfortable with online communications and payments. In that case, you can talk more about your services to ensure that they buy into your business and operational model.
- Advantage: You can build equity
- Disadvantage: This structure requires a considerable initial investment
Factors to consider:
- Possible down payment
- Monthly mortgage outlay
- Interest rates on mortgages
- HOA requirements
- Market conditions: You need to be able to adapt to changes in the market. Always have a handy backup and be ready to pivot.
While it is a long-term investment, purchasing your property for a short-term loan can yield considerable returns. The most significant benefit of this system is the equity you get when you build property and lease it over time. Your revenues will be more consistent, and you can enjoy a great deal in the long run.
This option can also apply to homeowners looking to create shared spaces within their properties, or who have detached guest houses or spare accommodations. Some hosts have even rented out boathouses and treehouses as short-term rentals.
At the same time, this real estate investing option is viable for people who own traditional rentals and would like to switch to the short-term rental leasing model.
Some properties that work well for this model include:
- Duplexes, triples, and quadruplexes
- Single Family Residences
Note that while a cash floor is an outcome that can lead to additional income to pay off your mortgage or invest elsewhere, you will need frequent metrics to ensure that your short-term rental revenues can sustain the incurred costs. You also need to have several exit options (including a sale or a traditional rental) in case there’s a change in the short-term rentals market.
Let the numbers tell you what to do.
Researching properties shouldn’t be hard or time-consuming. Dynamic.RE can show you the property’s Estimated Value, Rental Rate, and Short Term Rental Revenue all in one click. Our mission is to help homeowners and investors take advantage of the power of real estate and partner with you to help select a strategy that aligns with your goals and help analyze residential real estate for investment opportunities.