Owning versus renting. Which is better? Which do you choose? A debate in the real estate world for ages. The new conversation of owning versus renting has revolved around short-term rentals or rental arbitrage. Do you buy a property for it or do you engage in rental arbitrage? Like any debate, there are positives and negatives to both sides, and depending on how they impact you personally, you can find out which option would be best for you. What strategy should you employ?
Owning is straight and to the point as far as what it means, you’ve purchased or acquired a property that you now have full rights to do whatever you want with said property. This has been the original strategy for short-term rental businesses, and for some time seemed like the only way you could participate in short-term renting, owning the space you were renting out. Rental arbitrage on the other hand is when you yourself rent a property and you then sub-lease the property as a short-term rental in the hopes of making a profit with the difference between what you regularly owe and what you bring in through your business.
Now that we’ve covered the basics let’s get into the differentiators, positive and negative.
Ownership is the most familiar strategy and is just a shorter version of long-term renting at the end of the day which is done through various platforms unique from traditional long-term renting outlets, platforms, and agencies.
Ownership can provide you with a number of advantages. The first being flexibility. You’re the boss in this situation so there’s no one to be answering to throughout your business, you call the shots, and everything starts and ends with you. Short-term rentals during the heat of the pandemic weren’t being utilized near as much and if you owned the property you could switch to longer-term renting to adjust as many did. You wouldn’t have the freedom if you didn’t own the space.
Also, if we’re talking money, as we should, in most cases mortgage payments are lower than monthly rent owned in an arbitrage situation. Mortgage payments usually fall in line with current long-term rental rates. The profits made from long-term renting often cover most if not all property expenses for the owners. If the market is down, this could keep a small short-term rental business utilizing ownership in a better position versus a rental arbitrage strategy.
There are two main ways of creating cash flow with ownership. Income created by your set rental rates is one, that gives you income in hand immediately. Utilizing this income to pay down a mortgage also helps you build equity in your property. That bonus means you can use it to boost your business along the way where you can.
Alright, enough of the good stuff because obviously, every rose has its thorns. The biggest negative to note is the cost. Yes, a mortgage payment is usually lower than a monthly rent payment. However, it’s the original upfront investment that is the real kicker, the down payment. The cost of entry into this strategy is no easy feat. No wonder rental arbitrage has become the feeding frenzy that it has, it makes this profit-building opportunity more accessible!
If you’re wondering, there are ways to finance that down payment that involve what you’ve already got. Always get informed and explore your options!
Expanding by the day, we don’t think it far-fetched to say that this strategy is here to stay. Small businesses have become serious grand operations in a short amount of time. Sub-leasing rentals have allowed many to acquire extra funds, but the dip in the market caused by the pandemic turned this strategy on its head for a while, making some question its stability and whether or not it’s the best strategy.
Where the initial cost is ownership’s biggest deterrent it remains arbitrage’s biggest attractor. Little upfront cost is required to get your hands dirty in this strategy and is relatively easy compared to the whole process of acquiring an owning property. When renting to rent, the cost of entry is essentially just a first month’s rent, a security deposit (which you could get back depending on the state of your property by the end of the lease), and capital to furnish, decorate, or set up your stay for short-term renting (for some this isn’t much and for others they want to do full-on flips, it’s whatever you make it).
Unlike the high barriers to entry that are required for ownership, short-term rental businesses can grow their business by adding additional properties relatively fast because it doesn’t cost an arm, leg, and a loan to do so. The only hindrance to growth is the legal restrictions that apply in some areas, disallowing people and properties in several places to engage in this strategy. It wasn’t and isn’t uncommon for some operators to do this without an owner’s consent, we do not endorse doing so and always encourage anyone to look up the laws and regulations before starting a short-term rental business somewhere. The growing popularity of short-term rentals and renting as a side or main hustle has created a stir in the legal systems dictating these rules and more inventory is opening up meaning less secrecy and more legitimacy.
There aren’t too many negatives with renting to rent out, but some notable limitations. For example, the threshold of profit possibility remains somewhat capped for each property one is working with compared to the ownership method. The low entry cost usually means higher monthly prices. Your standard rental rate would have profit for the owner built-in. You may be paying premium rental rates though, compared to the market, for the right to rent out the property. That means less profit per property in your pocket, not to mention no equity is being built or gained through this method.
As we’ve covered before, arbitrage doesn’t allow you to be as flexible with a changing market as ownership does. If you thought the market was better for more long-term renting abruptly when you’d been renting out short-term and made this clear with the owner from the start, the terms of your lease may not allow you to utilize the property for anything else other than short-term rental subleasing. An increase in rent expenses could also make it less advantageous to switch to long-term renting in the midst of market shifts.
Since there is no form of ownership in arbitrage the stability of your property inventory is less stable. An owner has every right in most situations to change lease terms, up rent, and kick you out for breaking their rules. So, while the growth potential may seem intriguing, a decline in success can come just as quickly as it came.
Which Is Better For You?
Each strategy has its pros to be sure, there is no one size fits all answer to which is best. It completely depends on your situation, what capital you have to play with at the start, and how you best operate.
From a general viewpoint, arbitrage can produce higher growth rates, but not without high-risk potential. Slower growth rates can come from ownership typically but without risk because of the flexibility, it affords. Not scared to take a small leap and take on a little bit of risk in the hope of high returns? Arbitrage may be your game, otherwise nothing wrong with sticking to the tried and true ownership strategy for your business. It all depends on you, get your goals, strengths, weaknesses, and assets down and you’ll see which option best suits your next move!