Understanding Nightly Rentals #4

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We’re going to finish up our discussion of short-term rentals with a real estate investing topic called arbitrage. What is arbitrage?

Arbitrage, basically, is the simultaneous buying and selling of an asset. For example, if you lease a property from the owner (the “buying” part) then turn around and lease the property to a tenant (the “selling” part), that’s arbitrage. You are simultaneously buying and selling an asset. The terms “buying” and “selling” have a more broad definition that actually purchasing and selling real estate. In our world, what I just described is commonly known as a lease sandwich.

Another term you might be familiar with is wholetailing. This is where you actually do buy a property (you become the owner) but immediately sell it. In fact, it’s common that the investor will put it under contract for sale before she buys it. This is also arbitrage.

So why are we talking arbitrage, lease sandwiches and wholetailing? Because that’s how many real estate investors are picking up both short- and long-term rentals, and other deals. In the long-term rental world, that’s a lease sandwich. But you can do the exact same thing for short-term rentals.

The process is mostly the same and doesn’t matter how long you’re renting out the property for. The key here is that when you lease the property from the owner you will need a “master” lease. A master lease is just a fancy name for a lease where the tenant (you, the investor) has the right to sub-lease the property. This is generally not the lease you’ve been using for your tenants in your long-term rental properties. So, you may need to modify your lease or get a master lease.

Most investor will sign a multi-year lease with the property owner naming their property management LLC (see our previous blog). Then, that property management company will lease out the property on a short-term basis, collect rents, do cleaning and etc. They will pay the owner their monthly rent and keep the rest. And they never own the property!

There are certainly liability issues and other considerations for a lease sandwich, whether short-term or long-term. That’s why in our next set of blogs, I will be covering the lease agreement, the master lease and lease sandwiches. So stay tuned and keep reading!

Jeffrey S. Breglio, Esq.
Breglio Law Office and REI Mastery U
www.reimasteryu.com
jeff@bregliolaw.com
(801) 560-2180



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