What I’m about to share with you might just be one of the best-kept secrets in the real estate investing industry. More and more first time entrepreneurs are making a killing with this business model than ever before and most of them are starting with no experience and very little capital.
We’ve all heard that real estate investing is one of the greatest ways one can build personal wealth at an early age. In fact, more self-made millionaires have achieved this status through real estate than any other industry. What I’m about to show you is a new method of investing in real estate that allows you to make a ton of money without all the headaches and risk involved with traditional investing.
When most people think of real estate investing they usually assume a few things right off the bat. One is that they’ll need a lot of capital for the down payment, repairs and closing costs. Two they’ll need a lot of experience in the industry. While this may be true if you want to enter the commercial and multifamily space it is not true of the method that I’ll be outlining today.
The method that I am referring to here is called Airbnb Arbitrage which is a method of investing in short term rental properties using real estate owned by other people. We’ve all heard of Airbnb and most of us have probably used it at one time or another. Most of us however probably never thought of using someone else’s property to run our business. This is the “arbitrage” aspect of the business which simply refers to renting a property from a landlord then listing that property on Airbnb and collecting the difference.
The problem with traditional real estate investing is that you need ten’s of thousands of dollars just to get one property. With the rental arbitrage model, you can acquire a handful of properties for what you would have paid for only one if you were to buy it. You end up paying more on an individual basis as rent is always higher than a mortgage but it allows you to scale much faster and you end up making A LOT more money in the process. Here’s an example:
Imagine that you have $25,000 of capital to start your Airbnb business. For this first example let’s say that you are going to purchase the property and then list it on Airbnb. A typical downpayment is around 10% for a residential property. So let’s say that you use $20,000 for the downpayment (additional closing costs not included) on a $200,000 house. Then you have $5,000 leftover to prepare the home, set up your business and develop your team.
Now that your first property is up and running let’s say that the mortgage and monthly expenses come out to $1,500 ($1,000 mortgage + $500 expenses). You rent it out for the month and your revenue is $3,500 which leaves you with a net profit of $2,000. Not bad at all, however, there’s one big problem, you’re out of money! So in order to scale your business, you’re going to need to wait twelve months to get another $25,000 to buy your next property.
Now, let’s take a look at the rental arbitrage model and examine why it’s superior. Let’s take the same $25,000 of start-up capital and put it to use in our next example. You set off into your local market to find a property that fits your criteria (market research is HUGE if you want to be successful on this step). You pitch a handful of landlords on your business concept and get a few follow up appointments. You know exactly what to say and how to say it and you end up convincing one of the property owners to partner up with you.
It’s a full-size house that’s already furnished so you don’t have to spend more money on that. You pay a $1,000 security deposit, first month’s rent of $1,200 and negotiate a deal to rent the property with a 10% profit sharing split if you’re successful. After the property is set up your rent and monthly expenses come out to around $1,800. Let’s say the property makes the same as the one above so $3,500 revenue per month. After your first full month, you make a net profit of $1,700.
Not as much as the example above but still much better than what you’d making renting out the house long term. But you still have something the first guy doesn’t have that sets you way ahead of the game. To set your property up from start to finish it only cost you around $3,000. You still have another $22,000 leftover that you can use to get your second, third and fourth property.
Let’s say that in the first 12 months you were only able to acquire five properties in total for a total investment of $18,000 for acquisition fees. Let’s say that each property makes $3,500 per month revenue and has $1,800 per month of expenses. In your first year, you would be making $8,500 per month. That’s just over $100,000 in your first year of business while the other guy is still saving up to buy his second property! Now I’ve been an investor and entrepreneur for more than 10 years and let me tell you if I had a business model that could’ve made that kind of money when I first got started I would have been ecstatic. And that’s only the beginning when it comes to the profit potential of this business model.
There are properties out there that make $10,000+ per month just by themselves. Just imagine what the possibilities are if you could acquire ten properties that were cash flowing at $3,000 per month. That would be a net profit of $30,000 per month without ever having to take the risk of buying a property, make a down payment, deal with real estate agents, fix toilets, etc. That’s a pretty good proposition for a new entrepreneur or someone looking for their next business venture to dive into.
Now if you’re not already bouncing around in your seat with excitement about this new opportunity then this next part on the viability of the short term rental market will have you salivating at your future profit potential.
As of right now, the hotel and recreation industry is being completely flipped upside down. Hotels are losing market share to short term rental companies like Airbnb and VRBO like it was going out of style. As this happens the hotel companies are digging in their heels further entrenching themselves in their old ways. Now if you have any foresight you can easily see what’s going on here. In fact, it’s nothing new, all you have to do is look at Kodak, Blackberry or Blockbuster.
These corporate giants refused to adapt and innovate and they paid the price by going out of business. This will happen again as shareholders and CEO’s foolishly think that more of the same is better. The truth is as people and technology change so do our wants, needs, and preferences. As it turns out millions of people enjoy staying in a “home away from home” over a corporate looking hotel building. And people with extra real estate are more than willing make an extra buck by providing their own mini hotel service. It’s a win/win and it creates the perfect scenario of property owners getting rich and customers getting a better experience. At the end of the day, hotels are more expensive and don’t provide the same quality user experience as Airbnb.
Since its inception in 2008 Airbnb has steadily grown in popularity year over year. Right now Airbnb currently has more than 150 million users, 6+ million listings worldwide and is valued at around $35 billion. It has experienced a 153% compound growth rate since 2009 and a 62.5% increase in guest arrivals over the past year with the United States controlling the largest share of the market. This company and others like it in the short term rental space are exploding and now is the time to get in. Airbnb is gaining some huge momentum and will soon take over the industry but that’s not the case yet. There’s enough time to start rolling up properties left and right to control your own local market before someone else beats you to it. In my estimate, those who get into this business “right now” have the potential to become market leaders making 10’s of millions of dollars in the next 5 to 10 years. And trust me there’s plenty of pie to go around for all of us at the moment but it won’t always be like that.
Here’s a short story about making the decision to take action. Back in 2008 when the real estate market took a downturn, several people, in my local market began something called wholesaling real estate. This is where you basically negotiate with a property owner to sell you a property at a certain price and then you turn around and sell it to another investor for a fee. This is called “flipping” or “assigning” contracts. I know several people who entered that space back then when no one else did. Today many of those people completely control the entire wholesaling market and are making millions. By now they’ve got so much market share and infrastructure that you can’t even find a deal without them already knowing about it. Many people wrote them off and considered it a bad time to get into the market but now who’s laughing.
I don’t know about you but I certainly don’t want to be one of those people who passed up on one of the greatest opportunities to build wealth in the last 10 years. Airbnb is about to explode and you’re either going to be on the side of the fortunate ones who took advantage of the opportunity or you’re going to be sitting on the sidelines wishing you had. I’ve noticed in my life that great opportunities to create rapid and sudden success don’t pass by very often so we’ve got to take decisive action even if it’s uncomfortable.
So whether you’re just getting started in business or if you’re a seasoned veteran with a couple successful businesses under your belt I encourage you to give this business model a shot. I’ve never seen a more clear cut way to go from zero to $100,000+ per year without acquiring years of experience and a ton of start-up capital.
P.S. if you found this article useful and you want to learn how to start your own Airbnb business without making painful mistakes and losing your hard-earned money through trial and error then check out The Airbnb Empire (affiliate link), a full course on how to build an Airbnb business from scratch. And if you use the coupon code: REALEST you can get instant access to 25% off.
Over the last 10 years Jason Allen has started and operated businesses in real estate, internet marketing and eCommerce. Today Jason is an expert on Airbnb arbitrage which is a business model that allows investors to generate considerable cashflow without ever having to own a single property. When Jason isn’t growing his business interests he enjoys hiking, traveling and extreme sports. If you have any questions about Airbnb or business in general don’t hesitate to ask or check out the link in the description. Good luck!