Rock, Paper, or Scissors?
There are 3 main business models in the short term rental world. These are Hosting, Co-Hosting, and Arbitrage. There are many pros and cons for each method. Here is the breakdown for each model:
HOSTING - Owning the property you rent short-term.
CO-HOSTING - Operating a property that rents short term and charging the owner a percentage, similar to 'property manager' for long-term rentals.
ARBITRAGE - Renting a property from an owner and subletting it short-term.
There are many things to consider when selecting your ideal business model. Some are: 1) Profit, 2) Capital Requirements, and 3) Overall Risk.
Profit is highest when hosting a property. For example, in my area and from what I have seen, for every $100 made in profit for my hosted properties, about $50 is made in my arbitraged and $25 is made through co-host. This means that profit on hosting a property is roughly double than arbitrage and 4-times greater than co-hosting.
2) CAPITAL REQUIREMENTS
Although hosting has the highest profit margin, it also has the highest capital requirements. If we assume that furnishing a $175k one-bedroom will cost $5000, hosting will have about 8-times more capital required than arbitrage. Co-hosting is best in this category having virtually zero capital required.
3) OVERALL RISK
Again, hosting is by-far the worst in this category. When owning a property you have to pay significant costs to maintain it if anything would happen. A special assessment or a disaster can happen at any time and the owner of the property will pay. Arbitrage is the middle ground here where there is still some risk having a long-term lease required to pay every month. Co-hosting has virtually zero risk -- if anything happens to the property it will be the owners responsibility to shoulder the burden.
WHICH BUSINESS MODEL IS RIGHT FOR YOU?
That depends on your risk profile and what you wanted out of your business.
- Hosting is better if you want to own/manage fewer properties over a long time with a high profit margin. Also if you own the property you can get the benefit of appreciation over time.
- Arbitrage is better if you want to maximize overall revenue. Using the formula above, you will be able to rent out 8 units through arbitrage for every 1 unit through hosting which will bring in approximately $400 for 8 units vs. $100 for one unit. To make the same money through co-hosting, you would need 16 units!
- Co-hosting is better if you want to minimize risk. There are no capital requirements hence it is a very low risk profile. If your customer has a bad month, you still get paid no-matter what. If you are starting out in short term rentals it is definitely better to get your feet wet with co-hosting.
WHAT I DO
I personally don't like risk so I have a co-host-centric business model. I think of my company as a pyramid where the strong base is low-risk co-hosted properties. These low-risk properties make up the bulk of my portfolio. Moving up the pyramid, I have arbitraged properties in the middle. Arbitraged properties are fewer than co-hosted but are more than hosted. At the top of the pyramid I have my hosted properties. These are few!
In terms of numbers, I think for every 1 hosted property I should have 3 arbitraged and 9 co-hosted properties. Here is the status of my hosted, cohosted, and arbitraged properties as of Oct 2019:
As you can see, I am currently a little top-heavy with 2 hosted properties. I need to increase the arbitrage and co-hosting portion of my portfolio to get the ideal mix.