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Thinking about signing a lease arbitrage contract? Make sure you consider the following essential terms to put in your contract. They break down into three main categories:
- Protect Yourself Personally
- Don’t personally guarantee your lease
- Give Yourself an Escape Hatch
- Force majeure clauses / regulatory changes
- Protect Your Profits
- Guards against profit sharing and get permission to do short-term rentals
One of the key strategies in the short term rental space is lease arbitrage (aka “lease arb”). In regular terms that just means you’re leasing a space, furnishing it, and releasing it on Airbnb (VRBO, Homestay, Onefinestay etc.) for more. Your profit is the difference (the arb) between what your expenses are and what you can generate at a short term rental (STR). This is a really popular method of scaling and growing your vacation rental business quickly, specifically because you can lay out a small amount of money upfront and turn a profit quickly. Unlike property management, where you’re taking a percentage of profits for an owner, this is an uncapped upside type structure where the sky’s the limit for profits.
With greater reward comes greater risks. If things turn sour for whatever reason, you don’t want to be on the hook. Here are some contract terms to keep in mind when you’re setting up a lease arbitrage contract with a new landlord to help minimize the risks and protect your profits.
- Personal Protection.
- If possible, have the contract be between your company name and the landlord, not in your personal name. This also means you are not adding a personal guarantee to the contract. If things go south (for any reason) you can walk away and the landlord would only be able to come after the assets of your COMPANY rather than you PERSONALLY.
- While this isn’t foolproof, it will definitely add some hurdles and additional protection to insulate you from liability.
- Escape Hatch. Add terms that say when things go wrong, you can cancel your agreement.
- For example, in the event of any force majuere event (INCLUDING IF THERE’S A PANDEMIC), you can walk away.
- Also consider adding a clause that says if the laws change or regulations come in that say you cannot do short term rentals anymore, you can cancel your agreement.
- Here’s an example of that: “TENANT shall be permitted to terminate this lease in the event TENANT is no longer permitted to assign or sublease the lease on a less than monthly basis to assignees or sublessees.”
- Protect Your Profits.
- Make sure that you are allowed to do short term rentals in your lease, to whomever you want, AND that you can keep your profits. If you don’t have permission to Airbnb, your landlord can come to you and try to kick you out for doing it. Also some states / cities have laws that say that if you don’t have permission to do it and keep the profits, your landlord can come to you later and ask for his share (or all of) the profits you made!
- Here’s an example of that type of language: TENANT may assign or transfer this Agreement and any rights granted hereunder, in whole or in part, for any period of the term, to any party without LANDLORD’S consent. TENANT shall not be required to deliver any portion of any increased rent it receives from any such assignment or sublease.
- Getting pushback on not personally guaranteeing your lease? Try increasing how much security deposit you’re willing to put down. Maybe offer to put 3-4 months down upfront. In more complex situations you can ask to put down a larger deposit upfront and ask for some of the deposit back after the first year when you prove your trustworthiness.
- Have a lease ready that you like to send over in case the Landlord asks for one, at the very least have these clauses (and any others that are important to you) ready to send over to be added to the contract.
Have any other helpful tips? Shoot us a line at firstname.lastname@example.org and let us know, we’ll update the article and add it for future readers.