What does the future hold for rental arbitrage?

Worldwide: Ryan Luke, founder and CEO of short-term rental property management agency Luke Capital Group, addresses what the future holds for the rental arbitrage / rent-to-rent business model and what its potential success will depend on.

Rent-to-rent, as it is known in the UK, or rental arbitrage as it is known pretty much everywhere else in the world, is a great strategy to get started in the property industry. Especially if you have limited to no funds, as I found out when I first started my journey several years ago.

The power of strategy combined with the short-term rental game provides a great platform to be able to use other people’s properties and make a healthy profit from hosting guests – a much higher nightly rate combined over the month than what you will be paying for your bills to the landlord and operations. 

However, like any industry that offers a good thing, there are a lot of people that jump on the bandwagon. Unfortunately, a lot of unprofessional and sometimes unethical people can ruin it for the majority that operate in the right manner. It does not take much for the news to pick up an article from an Airbnb guest that has destroyed a property. Ultimately, this makes landlords very nervous about renting their properties out to short-term rental providers like ourselves.

Which, in turn, makes the acquisition part of the process a lot more difficult. But not impossible.

The importance of trust

Trust is a huge role in any business. However, I think it is even more important in this business. With your guests, you will need to ensure the money is protected; this is now certified through [global verification and membership platform] I-PRAC which is a huge step in the right direction in terms of professional operators working under a banner which identifies who is trustworthy and who is not. 

There is still, however, a role to be played on the other end – landlords being able to trust the operators to look after their properties, pay their rents and manage the property in the manner they set out to manage them in the contract that they sign with the landlord.

As we have come out of the pandemic, landlords’ trust has been diminished somewhat. Many operators struggled to keep their heads above water during the crisis and handed keys back, especially the ones that had offered rent guarantees. That has left a bitter taste in the mouth of the landlords and therefore, they may not want to go back into such a contract with an operator again. 

I personally paid every single rent during the pandemic as I knew it would serve my business in good stead moving forward and it has done exactly that. I am a firm believer that what goes around comes around – I knew that if I supported the landlords when they were experiencing times of difficulty and expectations of rents not being paid, then it would pay me back. It did just that – we became the first choice for all of their other properties and any new acquisitions that they had purchased as well.

The growth of the rental arbitrage model

When you focus on looking after the landlord, your rental arbitrage game should be in a great place and be able to last for the coming decades. I don’t think the industry is going anywhere. In fact, I think it is only going to get bigger. Many hotels have now started to operate as self check-in automated Airbnb-style properties and the traveller is now looking for more than just a hotel room. This lends itself nicely to the properties that we would typically rent from landlords – apartments, villas, houses etc – as they have all of the amenities that a guest is now looking for for their experience, which typically revolves around lounge spaces, TVs, kitchens and a home away from home.

Don’t get me wrong – many cities are trying to make life a bit difficult with maximum stay rules and / or flat out bans on this style of renting. However, there are still many cities that do allow it and quite often properties outside of the cities work incredibly well – professionals need to travel and the majority of corporate stays are to be found in locations outside of city centres. 

I also think that many governments, especially in the UK, did not do themselves any favours with landlords during the pandemic. Their increased protection rules for the tenants quite often left the landlords high and dry. Although there were a lot of short-term rental operators handing the keys back, there were also a lot of landlords that were not receiving any rent from tenants; they were protected for months and months from paying no rent at all before they could legally be evicted. It did not sit well with the landlords and has left a bit of a bitter taste in the mouth.

As such, this opens up the door for professional short-term rental businesses that can echo trustworthiness and a brand that is already established. I think these are the players that will succeed in the market going forward versus the ones that are treating it as a hobby. 

Viewing the professionalisation of the short-term rental property market

The game has changed since the pandemic. The standards that your property now has to be at, and the slickness of your operation to get guests in and out has been raised to a new level – a level that only professional hosts will be able to compete at for the long term.

Regulation is coming in and is already in place in many cities around the world. Personally, I think this is a good thing for professional short-term rental hosts and also for the guests. It ensures that they are protected, they are staying in safe environments and the hosts are doing what they should be doing to offer an experience that delivers value for money while protecting the guests as well as the property.

Right now, the property market is very hot and landlords are able to find tenants very quickly, especially in the UK where the housing shortage just gets worse and worse. Councils cannot approve planning quickly enough which means competition is fierce and rents are going to be higher than they once were. But we are also seeing an increase in demand for short-term rental properties and therefore the average daily rates are on the increase as well. This makes it possible to pay the high rents and still make this a very profitable business in the main.

The process of renting from a landlord is quite simple, and if you just focus on finding out their needs and pain points, you will more than likely be able to put a win-win solution together and acquire a lot of property on this strategy which will serve you for a long time. Landlords do not want tenant turnovers and would much prefer a long-term tenant who looks after the property any day of the week. That is what we can offer as professional operators and this is what will help the industry continue to flourish over the coming years as more and more people look to book holidays via travel platforms such as Airbnb and Booking.com – they have opened up the doors for any host with a property to be able to look after guests.

What does the future hold?

I personally see the short-term rental game combined with rental arbitrage continuing for decades to come as more and more property gets developed and more and more landlords decide who they take into their properties. Let’s be honest, the worse estate agents get – there is a lot that goes wrong in that industry that could be put right quite easily but it is not. I think this again plays into our hands, especially when we are talking directly to landlords who have had bad experiences with estate agencies.

I have recently expanded my operation internationally using the rental arbitrage strategy and found it to be exactly the same. Landlords experiencing the same pain points and wanting to move away from void properties that have potentially been damaged by past tenants. They are looking for a long-term strategy with lower risk and that is exactly what we can offer them as professional operators – this is why we have gathered a lot of stock in locations such as Dubai using the exact same principles that are required for a lot of stock in the UK.

I cannot stress enough about being a professional operator in this game if you want to survive. I think there have been more than enough signs of this now in terms of the standards, the regulations and even the way that guest behaviour is starting to change, in terms of who they book with. All you have to do is investigate who your avatar is and start asking some questions to find out what really makes them tick and what makes them book a certain property. What you find high on the list is brand loyalty, brand trust and knowing that their money is secure – they’re going to turn up to a property that is as described and have the experience that they anticipated when making the booking. 

The more views you have, the better. And the more you can showcase that you are a professional operator with a clean website that works well, with an easy-to-book platform, a friendly profile on the booking channels, and everything else you would expect from a professional business, you will succeed in this amazing industry. 

However, if you are cutting corners and not delivering the service and the product that you are selling online [unfortunately, many do], then the business model is flawed and your success will be limited. This is where the rental arbitrage game falls down as the host cannot generate enough money to pay the rents and ultimately ends up having to give the keys back to the landlord; that puts a negative spin on the whole industry for everybody else that’s operating professionally.

Conclusion

In summary, I believe this is a great game and it has allowed me to not only enter the space of short-term renting, it has also helped me build an asset portfolio using the cash flow that was generated from my rental arbitrage portfolio. I think the industry is here to stay for quite some time so anybody who is willing to put in the hard work and operate as a professional brand will have great success over the coming years by putting all the pieces of the puzzle together. I find it very rewarding, as so many hosts have, as the industry falls in line with a lot of people’s life plans. 

The fact that you can operate these type of businesses from your mobile phone, pretty much anywhere in the world, and it gives you a lot of flexibility – this is why it is such a popular strategy to get involved with.