Last week we talked about some negotiating terms for the actual cost of our lease arbitrage which is leasing an apartment to sublease on Airbnb or VR BO or as a short term rental operation but there’s some really important things that we need to consider before we do this and we need to have these things in our lease and that’s what I’m gonna talk about this week stay tuned let’s jump right in.

Welcome to short-term rental riches will discuss investing in real estate with a specific focus on short term rentals quick actionable items to wire. Scale your portfolio I’m your host Tim Hubbard.

Welcome back to the short-term rental riches podcast how’s everyone doing out there I hope you guys are doing awesome fantastic I hope your short term rental operations are growing and growing smoothly and you guys are getting things figured out and you’re having a lot of success with this I think it’s a really exciting industry and there are so many ways to handle it there’s so many ways to make money from it this week we’re talking about lease arbitrage which is another way to make money from short term rentals essentially were leasing an apartment where we have the landlord’s permission to sublease it on a short term rental basis or on a nightly basis to short terminal gas and by doing so we make the difference between what we pay for our lease to the landlord and what we’re able to rent it out to our short term guests for and that difference is the arbitrage and hopefully that difference is really really big so we’re making lots of money so if you didn’t listen to last week’s episode I talked about a deal that I just signed for 10 apartments that I’m really excited about and I believe have a lot of difference or spread between the lease amount I signed for and what I’ll be able to sub lease them for but we have to be really careful with this because what happens if our projections are wrong are we stuck in the least forever losing money every month well we want to avoid that and his last year and all this cove it has taught us anything it’s that we need to be ready for uncertainty and we need to have back up options so I want to break down some of the main points this week that we included in our. East before we signed it to protect ourselves from the downside. So let’s just start from the beginning here. The main and probably most important thing that you need to have in your lease if you’re doing these arbitrage is an out yeah you need to have a way to get out of the lease if it doesn’t work if the city changes their regulations you need to have an out in your release that says we can exit the lease without penalty but you also need to have an out in case your financial projections are off if you’re losing money each month you don’t want to be in a long term lease obviously so not every landlord is going to be open to this but I would really suggest if your negotiating a lease and they’re not open to it. I personally wouldn’t feel comfortable with that if I didn’t have a lease or way out unless I maybe had a bunch of leased properties already in the city no I take that back just ask for the out. And then you’re going to protect yourself on the downside and the way we did this which made it fair for both sides so the owner doesn’t want to have an out in his lease that allows us to exit the lease without penalty just for whatever random reason right they actually need some proof some evidence that it’s not working out for us so the way I negotiate in our lease was based off an occupancy percentage and the nightly rate so of course you need to run your numbers on these properties if you’re planning on leasing a property to sublease that you need to come up with rent cops you need to come up with utility conoce housekeeping costs all of these things just like you would with a long term rental and after you do that you can calculate a break even point a point where you need to have a certain amount of occupancy at a certain nightly rate. To pay for all your fixed expenses so your fixed expenses are going to be your lease any short term permit fees you may have. I. 80 fixed management const you might have if you have someone else helping you but there are a lot of variable costs too and those are going to be things that change every month so that. Probably going to be housekeeping costs the costs associated with your supplies in your toiletries those will be things like utility costs electric and water bills you need to calculate a buffer in there before you agree to terms but that’s what I did I came up with an occupancy rate to where if it drops below that I’m very certain that I’m losing money and we also put in the least that if that happens for 3 months in a row we can exit the lease without any penalty so calculate those numbers as best as you can think of all of your expenses that go into this house keeping operations taxes. Toiletries supplies. All of these things miscellaneous maintenance repairs you want to be really conservative with your numbers before you sign a long term lease so that’s the number that’s the number one you got to have an out for poor performance to where you’re losing money you can get out no issue you also want to have that out in case the regulations change but now aside from that there’s quite a lot of other things that you’ll want to have in there that are gonna make the whole process a lot easier you want to have some terms in there the light to change the door locks if these apartments or these homes or whatever your plan on the scene have the old school keys well we know we need to get rid of those automatic locks digital codes that’s one of the beginning steps to managing our short term rentals right so you wanna make sure you have that in the least that you can change those and along those lines are you planning on doing any sort of renovations or interior repairs or anything like that you want to make sure that the lease allows you to do that as well now another big point of the lease is the term of the lease how long it’s going to be right I negotiated 7 years I have the option to rent these apartments for 7 years but the initial terms only 3 years and then it’s going to increase by percentage that we agreed on it for another 3 years and then at the end of the second set of 3 years it’ll increase again so I have it for 7 years I feel pretty comfortable with that you don’t want to sign a one year lease and by thousands of dollars of furniture to avoid the risk of something happening at the end of the lease landlord changing his mind or whatever it is so try to negotiate a long lease with low rental increases but also that still has that out to protect on the downside so a lot of landlords might think that you know lease arbitrage is just not a good idea they’re scared of parties are scared of actual live. All the things like that but it can work out really well for someone that knows what they’re doing that’s willing to put in the work to set up their operations professionally it worked out really well for both sides but you do need to have additional insurance for this deal we added another liability policy that adds the owner as an additional insured it’s not super expensive to add a liability policy you can check with a company called a proper insurance but also just check with any commercial insurance broker that does commercial liability policies and that will help you get some estimates and costs there so the beautiful thing about this you know you guys know that I’m a I’m I’m all about owning property investment property because the bill 12 but this is a really good way to build a lot of cash flow without as much money up front so your down payment or your deposit and your furniture costs and first month’s rent and then you’re on your way your your your rock and roll and so it’s a great way to get in if you’re not a position to buy property a and it’s also a great way to get your whole business set up because the same operations that were using we can use for our own properties that we own as well so I’m really excited about this deal just remember those key points if you guys are negotiating a lease and this isn’t everything that you should have on there but these are some of the most important pieces you want to have an opt out penalty free if your performance is low one way you could do that is by negotiating occupancy in a nightly rate course you’re gonna have to figure out some way to share that information with the owner if they ask for it you want to have an opt out for short term rental regulations in case the change you want to make sure that you have the R.. Shin to put your own locks on there and take care of any repairs that you cover you also want to make sure that all the utilities any maintenance any trash any common area expenses those things are all included in your release so really think it through but I’m excited for you guys if if if you’re going this route to I think it’s great just to get in the game to make some really good cash flow and also to preserve some of your capital for investing later if you want to good way to make money without having to spend a lot of money up front I’m excited keep you guys posted on this all let you know how it goes in future episodes but until next time. Have a wonderful day. There’s so much money to be made the short term rentals but it all starts by having the right property if you guys haven’t yet seen my free ebook on our website rest methods.com head over there and get a copy it’s going to break down what I look for in a property in some great short cuts so that you don’t have to spend hours and hours researching at over rest methods.com and you can grab your free copy there if you want a crash course in everything I’ve really learned to short term rentals in over 5 years managing over 15000 Gasol recorded on our last live event and I’m happy to say we broke it down really nicely into a bunch of different modules that you can watch at your own pace it takes you from start to finish finding a property we talk about analyzing the property but then also some of the more important pieces how to find your team and how to set up everything so that you can run your operation is passively as possible and free up your time you can find that it rests methods.com forward slash virtual.

RELATED PODCAST EPISODES

• Episode 71: Negotiating a Better Lease Rate for Lease Arbitrage
• Episode 62: Professional Tax Advice From My CPA – Part 2
• Episode 56: Short-Term vs. Long-Term Rental? How Much Does it Really Cost?
• Episode 22: Precautions for Accepting Guests Over 30 Days
• Episode 03: Owning a Short-Term Rental vs. Lease Arbitrage