Lease Arbitrage Deals Just Got Riskier

so i talk a lot about the upsides and real estate and short-term rentals and that's because i'm super bullish and i think it's got a lot of room to run especially if you're in the right market but there's a couple areas that maybe we need to be a little more careful about one of those is lease arbitrage there are some more potential downsides that i want to bring up this week welcome to short-term rental riches where we'll discuss investing in real estate but with a specific

focus on short-term rentals to help you build wealth faster with as little headache as possible so if you guys have been listening to the podcast for a while you know that i i mainly own all my properties but i did do a lease arbitrage deal with 10 apartments it's actually working out very very well although we have had a few issues and i was watching a popular youtube channel airbnb automated recently not sure if you've seen it but a guy named sean runs it and he

exclusively does lease arbitrage so he knows this much better than i do i think he has over like 100 properties or something and so he has good advice on the operational side on how to run lease arbitrage deals now he's not an investor in these properties and as you guys know i am an investor at heart and that's what we talk about almost exclusively on this channel but i did happen to do this lease arbitrage deal and he brought up some good points as to why

lease arbitrage might not be looking so bright in the future so i want to talk about some of those main points a couple of which are actually sort of affecting me right now with my lease arbitrage deal so let's just jump into the first one what happens if a landlord doesn't fix big maintenance issues well we can have this in our lease right uh and i i hope that you do if you have a lease arbitrage deal out there but even if we have it in

the lease it doesn't mean that the landlord's gonna fix it like overnight i can tell you this property that i leased these 10 units it's in a really cool historic building it was like 90 renovated but the part that wasn't renovated well we're having a couple challenges with and it's getting delayed and it's getting delayed and it's preventing us from being able to rent some of the units i don't know when they're actually going to be able to be rented out there's some noise issues and

stuff like that the good news is i have a good relationship with the owner and so i'm not paying for those leases while i'm not able to rent them out but this has taken a long time and now if you're in a lease deal with an owner that maybe isn't so easy to work with he could kind of run you out of that deal right so we can kind of relate this to rent control if you've studied rent control before you know it usually doesn't work

out and yes they did just pass it statewide in california which is where i'm originally from but a lot of times what happens with rent control is that if an investor a landlord can't raise their rents and they have a tenant in there that's way underrented well they stop fixing things it's a way for them well first of all they're not making as much money but it's also something that they might be doing in hopes that the tenant moves out so that they can raise rents

so it's not good for either side and when we're doing these lease arbitrage deals we're we're locked into a lease rate right and a lot of these lease arbitrage deals like the one i signed is seven years long that means if the landlord or the owner thinks that he's missing out on a lot of rent well then maybe some of these similar things might start happening so we can of course cover some of these maintenance expenses and i actually have that in our lease that you

know if it's under 200 we're going to fix it because we want to get it fixed as soon as possible so that our guests are happy but there's only so far we can go with that before it starts to eat into our returns right so that's a big issue that you might encounter is just issues with the property and a landlord maybe not wanting to fix them now another one that might come up and as property prices are are booming because we've printed so much money

and asset prices are getting higher and higher a lot of landlords would like to refinance their properties and pull cash out we've talked about cash out refinances before but you can't cash out refinance a property that's not leased up right so if a landlord comes along and someone says oh i want i would like to lease all of your apartments well that's a way for them to lease them up really quickly the rent's coming in regularly and a bank's probably going to be comfortable or more

comfortable providing them a new loan because that property is fully occupied now what if hopefully this doesn't happen but what if the landlord really just wanted to lease that property up so he could cash out refinance and then he doesn't really care what happens afterwards that could kind of go downhill you know what i mean so hopefully that's not happening this third one we talk about a lot and that's if the laws change in a city and you don't have it in your lease you don't

have that as an out in your lease so for example if so and so city comes along and says you can't do lease arbitrage and you're still required to pay that lease and you don't have that out in your lease well gosh you're going to be you're going to be in trouble there so we did a we did a uh episode a while back about some of the things that i highly recommend putting in your lease arbitrage deal if you're going to do that i have

this clause in our release in my lease so one other thing that's happening here in the real estate world and that is that rents are going up they're going up really quickly right around the nation we've talked about this as well uh actually an average of over 10 percent nationwide some cities as much as 30 percent so if you're locked into a long-term lease that's great because that means that your arbitrage the difference between what you're leasing the property for and what you're very likely able

to release it or sublease it out to a short-term rental guest is probably going to be higher but what happens when that lease runs out if it's only a year or two year from now and your landlord wants to jack your lease up 20 if you're not in a lease well then they can do that in most states some states have restrictions around that but what's going to happen at the end of that lease well the one that i signed is seven years i'm already making

i've already got all my money back basically and it hasn't been a year yet so it's working out really really well but i incorporated two lease increases in my seven year term two three percent rent increases which means at the end of this seven year term i'm going to be running those apartments for way way way less than the market value and what is the landlord very likely going to want to do he's going to want to jack them way up right so the end of

this seven year lease could very well be the end of my lease arbitrage deal but i'm prepared for that like i said uh the reason i got in this deal is i already had the operations in place and we've talked about that before lease arbitrage deals are operated just like a normal short term rental for the most part on all the guest relations everything in that sense so i think they can be really good there's just things that we have to be careful of and with

rents rising like this maybe they're not going to be as lucrative as a lot of us maybe wanted them to be so lastly again i got some of these points from sean on airbnb automated he does have a lot of good content on his youtube channel so check it out if you haven't already and he said that he's making about 25 to 27 on his money now i can tell you i'm making more than that and yes there are barriers to entry to purchase your properties

and i realize that that can be a bit of a hurdle but this is a long-term strategy owning the property is a long-term strategy if the rules change in the city i can go back to long-term rents if the rents rise really high well then good for me good for all of us that actually own the property because we can charge higher rents so i'm actually making more than the percentage that he quoted and that's not even including the fact that we can do these cash

out refinances so some of these properties i have zero dollars in and they're making a lot of money so the returns are really good i'm not saying lease arbitrage doesn't have a space in your portfolio or if you already have the operations set up and it could be a really good way to get started just keep in mind the future outlook maybe doesn't look as bright as it used to and you've got to think in the very end of this is is this a long term

solution we know it's not really an investment right we're not we're not actually owning anything if you stop leasing those properties well then you're going to stop making money whereas if you own the properties you're going to continue to have 10 nets in there you're going to continue to build wealth so that is the ultimate goal i know it's not super easy to get into that we've got that initial hurdle of coming up with our down payment but you can definitely do it if you haven't

yet so just want to bring up some of these points and i don't want to intimidate anyone from getting the short-term rental world because i think it's fantastic i'm super bullish on it and so until next time have a wonderful day you