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Host, Cohost, or Abitrage - The Rock, Paper, Scissors of Short Term Rentals

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.


1) PROFIT

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.


co-host, host, arbitrage, sublet profit comparison
Profit Comparison

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.


Host, co-host, sublet, arbitrage, capital
Capital Requirements Comparison

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.


Host, co-host, sublet, arbitrage, risk
Overall Risk Comparison

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:

Business Model

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.

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