The Rental Arbitrage Housing Bubble is Quickly Popping on 100,000s
Updated: Mar 26
Warren Buffet said it best.
If you're in the Short Term Rental Industry, you've probably seen the barrage of marketing for these Get-Rich-Quick Airbnb Arbitrage online courses that have popped up in the last 12 months. They're cringe worthy to say the least. A slick guy with a rented Lambo wants to sell you the secret to get rich quick by subletting rental properties on Airbnb:
The courses boast promises like:
"Build a real estate empire with Airbnb without owning property"
"This is how I've built a 3MM per year business from $4000. This is how YOU can do the same. This is your opportunity at a full financial future."
"Financial Freedom without owning property"
The scary thing? 10,000's of people have signed up for these courses and started to sublet long term rentals on Airbnb. That's a huge number... And with this downturn, their risky high-levered business model and low emergency funds, they are completely screwed!
Here are some of the courses on Airbnb Arbitrage...
Even This 22 Year Old's Course Has Signed Up 6800+ Members in the Past Year...
What is Rental Arbitrage?
Rental arbitrage is the act of renting a property long-term and then re-renting it on a short-term basis on Airbnb, HomeAway, or other vacation rental platforms.
Rental Arbitrage Bubble
If we look at the graph, it's clear that this behavior only started about 12 months ago.
An Astonishing Number of People Have Engaged in Rental Arbitrage
The numbers are astounding. It seems eerily similar to the numbers of people who were day trading stocks during the 2000's tech bubble, flipping residential houses before the housing crisis, or being a bitcoin trader in 2017.
As it turns out, between the two most popular courses' marketing alone, they've been able to sell over 14,000 people on this Get-Rich-Quick scheme. The model is designed to work with multiple properties per person. Some rental arbitragers have signed long term leases on dozens of properties. Not to mention, all of the large players that engage in this activity at scale, often against local laws. For example, last year an Airbnb ring was shut down when City officials in NYC discovered a network of converted residential units in 36 buildings into illegal arbitrage rentals earning more than $5 million for booking 24,330 rooms and housing 63,873 guests.
So if we assume that in addition to the people who bought the courses and the Airbnb rings in large cities, there are others out there engaged in this activity, we're conservatively talking about 100,000's of properties that are engaged in this behavior. That's a lot of vacant properties suddenly on the market in the hands of over-levered people who were promised a dream.
Legitimate Airbnb Hosts and VRMs Are Also Struggling
In addition to Arbitragers struggling, more legitimate Airbnb hosts are also struggling. This week it was announced that 40,000 Airbnb Hosts in the U.S have written to Congress for financial relief so far. Since only 13% of Airbnb hosts are in the U.S, one could make the assumption that this is direly affecting 300,000 hosts globally.
The Abrupt End of the Rental Arbitrage Bubble
The past two weeks have all but spelled the inevitable end for 10,000's of rental arbitragers. When Airbnb announced they were responding to coronavirus by offering free cancellations for any reason, most hosts' calendars emptied out overnight. Little new bookings are coming in, as coronavirus uncertainly wages on. Last week, Trump said that this crisis could last beyond August.
Since this behavior started to ramp up a year ago, the Get-Rich-Quick Rental Arbitragers likely have little to no emergency funds. Any savings they had went to buying the online course, furniture and other startup costs for each property. Since they are signing long term leases, they don't have mortgages to refinance to get more liquid.
In some cases, the arbitragers are illegally renting properties to short term renters. This illegal activity means that they are unlikely to qualify for an emergency business loan. Even if they do manage to weather the initial storm of the 2020 Coronavirus Recession, arbitragers typically don't have a long history of glowing reviews, so they are going to have a difficult time competing against more reputable properties in a down market.
Airbnb Purgatory Hell for Arbitragers
This is leading to a special type of Airbnb Purgatory Hell for Arbitragers where they are unable to temporarily convert the properties back to long term rentals. Let me explain.
Right now Airbnb Hosts are unable to cancel future bookings after April 14th, without ruining their Airbnb profile. However, as the virus inevitably worsens, Airbnb will likely keep stringing along hosts by periodically extending their extenuation policy to allow free cancellations, leading to more last minute cancellations and the inability to convert to long term rentals. It's a vicious cycle.
100's of Social Media Comments From Rental Arbitragers Have Confirmed the Bubble is Popping
....And this just a small sample of the countless messages seen on Facebook, Reddit, Twitter and Youtube.
Arbitrage Course Marketers are Blaming Airbnb for this Bubble Ending
One of the Arbitrage Course Creators came out with this video saying "We're Losing So Much Right Now. It's Sick."
As much as the Arbitrage course creators want to blame Airbnb 100% for their customers financial losses and impending bankruptcies, the fact is that we're now in a global recession, and arbitrage businesses are the first to be wiped out in a recession.
Despite Airbnb's controversial policy that many hosts are legitimately upset over, it's ultimately not Airbnb's fault these arbitragers are going to go under and lose their life savings in the process. It's a global crisis that is affecting everyone, and exposing the faulty business model.
By Definition, Arbitrage Never Works in the Long Run
Arbitrage opportunities don't typically last long, but this one came crashing down especially quickly.
Taking the coronavirus out of the equation, this idea was never a good one to begin with. Like every Get-Rich-Quick Scheme, the only people who came out on top from this are the people who sold the "secrets".
Anyone that has a basic economic education knows that arbitrage only works in the short term. In the long term, all arbitrage opportunities go away. As long as there is an arbitrage opportunity and low barriers to entry, more competition will enter the market, which leads to said arbitrage opportunity eventually going away... especially when "gurus" are broadcasting their arbitrage "secrets".
The Bad News: Housing Market Will Suffer in the Medium Term
There is no doubt that Airbnb property demand from investors has led to higher residential real estate prices in the last few years. Investors have done back-of-the-napkin math and converted residential properties to the new asset class of short-term-rental investment properties. This has led to higher housing prices in many residential markets.
With that said, housing prices will feel the affects of these arbitragers going under. A lot of these speculative properties are destined to go on sale. Contracts with landlords will be broken. Houses will be foreclosed on or sold in short sales. If these properties are converted back to long term rentals, the rents will go down due to a larger housing supply, leading to lower real estate prices. Any way you look at it, it looks like the housing market is in for a rough patch.
The Real Estate Market Has Already Seen a Huge Hit
Due to the unique circumstances we find ourselves in, no one is able to sell their properties right now. Realtors aren't allowed to work, people can't go look at house, etc. Therefore the only indication of where the housing market truly stands right now is in the public markets. This is Vanguard's real estate fund that is down 30% since the coronavirus started!
Not to mention, there is economic indicators that a housing bubble is long overdue, due to low interest rates and the ease of obtaining a mortgage again.
What Does this Mean for Legitimate VRMs and STR Property Owners?
Yes, VRMs are greatly affected by this Airbnb policy too, but they are in much better shape to survive than arbitragers. Generally speaking, VRMs and STR property owners have better reviews, more diversified OTAs, and have a more flexible business model to weather the storm (as painful as it may be). Additionally, many of these arbitrage rentals are being illegally rented against HOA and local regulations. Most of these arbitragers don't have legitimate enough businesses to get SBA loans.
Here's how business cycles always work:
1. The economic downturn starts and highly levered companies go out of business
2. Strong companies make sacrifices to weather the storm
3. Economy picks up again and strongest companies have less competition and do better than ever
This bubble is no different.
This Coronavirus Crisis Will Benefit the VRM Industry in the Long Run
During any economic downturn, the strongest businesses and business models always come out on top when all said and done. Market downturns shake a lot of the weaker competition out, leaving room for more profits and better business practices. VRMs business model is inherently better suited to weather the storm. VRM's aren't on the hook for monthly rent obligations like arbitragers are.
Instead of having to compete with fly-by-night arbitragers who are cutting all the corners, renting out properties illegally, etc, you will be competing with less players who are more ethical and give the market a better reputation. So just remember, however bad this might seem for you and your owners, remember, it could always be a lot worse.
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