Wealth Podcast Post

Airbnb Arbitrage with Jorge Contreras

George Grombacher March 16, 2023

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Airbnb Arbitrage with Jorge Contreras

LifeBlood: We talked about Airbnb arbitrage, what it is, how to get started, how to identify potential properties, and what it takes for sustainable success, with Jorge Contreras, Airbnb Coach, investor, and developer of the R.E.A.L System.   

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You can learn more about Jorge at TheRealSystem.com, Facebook, Instagram, YouTube and LinkedIn.

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Our Guests

George Grombacher

Jorge contreras

Jorge Contreras

Episode Transcript

george grombacher 0:02
Let’s see. This is George G. And the time is right welcome. Today’s guests are not powerful. Jorge Contreras. Jorge, you’re ready to do this.

Jorge Contreras 0:08
I am ready to do this. Thanks for having me on the show here, George. Appreciate the opportunity.

george grombacher 0:13
Yeah, excited to have you on. Jorge is an Airbnb coach who’s developed the ar e a l, the real system for helping people generate passive income through Airbnb without actually owning the properties. Jorge, I’m excited to have you on Tulsa, talk about your personal lives more about your work and why you do what you do.

Unknown Speaker 0:33
Awesome, man. So yeah, 35 years young, based out of Orange County, California, happily married, I have two daughters. I’ve been investing in real estate since 2011. Got into Airbnb in 2017. I currently have a portfolio of 18 properties, we have eight that we own seven that we sublease three that we manage. And I also have a couple of developments for unit and a 25 unit ground of developments that we’re working on as well.

george grombacher 1:00
Nice. So this this idea of or practice of making money through Airbnb without actually owning the property? Is this a new concept? Tell me a little bit about where this came from?

Unknown Speaker 1:15
That’s a good question. You know, this, this concept of arbitrage has been around forever. It’s exactly how the banks have been operating how they make their money, right? Let’s say John walks into the bank deposits $10,000, they pay him 0.1% on his money, I walk in to borrow those $10,000 to go launch, and Airbnb, they charged me 10% on John’s money, and the bank just made 9.9. Right, basically, they’re creating money out of thin air, we do a very similar model where we rent properties from an owner, we pay them the fair market rents, we arbitrage and we maximize the revenue through short term rentals with high nightly rates, and the difference is our profit. And in real estate, you can either own the real estate or you can control it through a contract. So here we are controlling. And you know, I always tell people that they should make it their goal to own as much real estate as possible, because that is where you create long term wealth. That said, most people are not in a position to go buy multiple properties in order to replace our nine to five. And that’s where this arbitrage model is a great way to get some experience and to get their feet wet.

george grombacher 2:20
Yeah, that makes a ton of sense. I love it. So when when you started out, you said, you’re the 2017, you you went down this path, tell us how you sort of got started and what your thinking was and how it’s how it’s kind of evolved?

Unknown Speaker 2:36
Absolutely. So when I launched my first four Airbnbs in March of 2017, I started with units that I already owned. These leases were ending at the end of at the beginning of the year, did a little bit of upgrades furnished, got some pictures. And then I launched these four units, again, that I already owned, it was a low hanging fruit opportunity. I had a student in 2016, from my previous dance business owner told me how she was making three and a half times more on Airbnb than what she was making with her long term rentals. And she was doing this with two duplexes in Fresno, California. And I was mind blowing. And I was like, what this is crazy, I gotta try this myself. So once those leases were ending, that’s exactly what I did. And so I was able to essentially, my previous business that I have, since I was 20 years young, I always refer to that business as my job, because if I wasn’t there, it wouldn’t make money. And so I was able to replace that business’s income. And essentially, I was now like, out of the rat race, I no longer needed to do that business I was covering on my monthly living expenses. Now the next goal was to replace my wife’s nine to five. And we calculated that we were going to need about, you know, three Airbnbs to replace her six figure income. And we didn’t have the money to go and buy three properties. But we did have the money to go and implement this arbitrage model that I had heard about. And that’s exactly what we did. We went a business partner and I launched seven sub leases in 2019. And then that’s how I replaced my wife’s nine to five and the rest is history.

george grombacher 4:12
Nice. Love it. All right. So I think that that I certainly like conceptually understand the idea here is that if I do not currently have the cash to buy my own property, but that’s a bit I’m interested in working towards because of what you’ve been talking about. So I am interested in finding this arbitrage. So how do I identify current owners of Airbnbs? Who might be amenable to this deal? And what’s in it for them?

Unknown Speaker 4:41
Yeah, great question. So what’s in it for them is if you look at our population, right, jords 95% of the US population are employees and only 5% are business owners, self employed or entrepreneurs. And about two to 3% are self employed meaning it’s like a one or two You know, man or woman, person team, and they still have an employee mindset because they’re wearing all the hats, they don’t have any leverage any scalability. So it’s only about like 2%, maybe 3% of the US actually thinks like a real business owner where they think the way they think teams and systems and leverage, and they know how to hire and delegating, automate and SOPs. So when you look at the average landlord, their tip, most of them are not part of that two to 3%. Right? They’re part of that 97% that things like an employee, and they don’t know how to run businesses that require an operation. And this is why George when you go to what your favorite restaurant or a barber shop, or you know, or somebody goes to a nail salon, typically the people that own the business don’t own the real estate, the people who own the real estate, just want mailbox money, they don’t think to themselves, well, wow, there’s a lot of money to be made in this restaurant, why don’t I just do the restaurant myself, it’s the same thing with Airbnb, right? This is a operation intensive business, and they don’t have the experience or the will to actually go out and do it themselves. So what’s in it for them is that if their property doesn’t get rented, they don’t make money. And at the end of the day, they’re just looking for a great tenant. So if you have strong financials, and great credit, you present yourself in a professional manner,

george grombacher 6:14
then they’re they’ll work with you. That makes a ton of sense. That’s a perfect analogy. I appreciate that. That’s nail salon, they don’t necessarily own the building, they’re just, they’re sending the owner of the building the money, and the owner of the building doesn’t need to worry about it. So, okay. I like it. And then the opportunity is, I say, Okay, we’ll just use John, as the owner of the Airbnb, he’s spread super thin, he’s got a family and he’s got this, he just wants money coming in consistently, he doesn’t have the headspace or whatever to be actually managing the thing. So you say, I will take this over, I will try and how does that work?

Unknown Speaker 6:55
Yeah, essentially, what we do is we’ll we’ll say, hey, we do clarify, because when we introduce the opportunity, that we’re going to be doing short term rentals and their property, they might think that what they’re going to receive my fluctuate, so I’ll clarify and say, John, just to clarify, here’s how it works. I will rent your property on a 12 month lease, I will pay you those $3,000 a month that you’re asking for fair market rent, we’ll set up an auto pay, you’ll get the money not just on time, but days early. With your permission on writing, I will then use the property to run my short term rental business, where I will work with you know, working professionals, families coming on vacation, I will handle everything, all the operations, this is going to be a hands off experience for you, you get your money. Obviously, I’ll make my money from running my business. And the types of repairs that are caused by my guests I will be responsible for we’ll put that in writing. For me, it’s just going to be a passage of costs, I will charge the guests just like a hotel would. And I’ll make sure that they care about three things they want to get paid on time, they want to make sure the property is taken care of. They want to make sure that the neighbors are happy, you do those three things, they will renew the lease year after year and even start offering you other properties that they may have in their portfolio. There is two other things that are very important as well. And it’s in this order. Anytime you’re looking to launch a short term rental, the very first thing you should do is call the local building department and verify if you can get a permit. You should only operate in cities where you can get a permit. Once you can no you once you know you can get a permit, you need to figure out if the property can actually make money. And in real estate when you’re buying property. They look at something called the comps. Right? The comparable sales have similar properties. Well, when it comes to Airbnb, the comp software that we use as air DNA, they have a section called the rental iser, you put an address, and it’ll give you the projected revenue based on similar properties based on bedrooms, bathrooms, square footage, amenities, and location. So if you see that the property is projected to make, you know, say $60,000 a year, and your rent is going to be 2000 a month, then that’s how you know it’s a good deal. So you verify over the permit to make sure you can generate double or more whatever you’re going to be paying in rent. You get permission in writing from the owner and you’re off to the races. I love it.

george grombacher 9:18
Cool. So how to identify would be partners, the folks that actually owned the units.

Unknown Speaker 9:26
How do you identify partners, like how do you identify the properties and Okay, so we use Zillow, we just call on Zillow. And let’s say I want to launch in you know, Scottsdale, Arizona, call the city Yes, I can get a permit. I go on their DNA. I see that properties are making money. So then I go on Zillow, and I find you know properties that are available for rent. Typically, the phone number is going to be there of the owner agent or property manager. And I just give them a phone call pitch my short term rental strategy and that’s how we identify these opportunities.

george grombacher 10:00
That makes a ton of sense. And I’m sure that you get all kinds of different answers. Some people are like, sure some people tell you to get lost. Exactly. And everywhere in between.

Unknown Speaker 10:09
Yeah, it’s everything in between. I’ve had people say, like, don’t call me, this is a waste of my time. I’ve had people say, hey, this sounds good. Let me talk to my spouse, or hey, like you’re gonna get, you’re gonna get everything in between, right? Just like when you’re buying properties to do flips, or wholesale. Typically, these guys out of 100 properties that they look at, then they submit like 30 Crazy offers, and then they end up closing on like, one out of those 100. Right. For us, we get about a 30 30% of the time they say yes, 70% of the time, they say no.

george grombacher 10:40
Got it. That’s, that is. That’s, that’s still pretty good. So all right. So obviously, we want to not get as many as possible, because we want to make sure that our financials are in order. So walk me through that process. If I say yes, hooray, this sounds great. What do I need to get started from from from an upfront financial perspective?

Unknown Speaker 11:03
Great question. So there’s three main things you need the first month’s rent the deposit, which is typically equal to the first month’s rent. So in this case, it’s 2000 for the first month 2000 for the deposit, and then you’re gonna need to pay for the furniture. And that furniture includes also like small appliances, the core and then photography. So if you’re doing a studio, or like a one bedroom apartment, you’re looking at about 10,000 If you’re doing like a three or four bedroom house, you know, now you might be looking at like a 15 to 25k range. Got it?

george grombacher 11:36
Well, that certainly doesn’t make sense. Okay. So I do all those things, I, I get the deal. And for the most part, I’m able to pay on a monthly basis, save the first month and the posit but then moving forward with, with with with the deals that I’m making, I can just pay on a monthly basis to the actual owner of the property.

Unknown Speaker 11:57
Exactly. Ideally, you’ll take you know, if you’re generating 5000 in gross revenue and your rents 2000 you’re paying them from the generate from the money that you are generating right through the deal. And the good thing is you get paid from Airbnb like as soon as somebody checks in like you receive that money and within one business day it’s in your bank account. And then every first of the month you you know you have that auto pay with the landlord and the money just goes out so all the money flows into your LLC for your Airbnb business and and all the expenses flow out.

george grombacher 12:29
How does Airbnb feel about this?

Unknown Speaker 12:33
I mean, they love it because the more air like think about it right? If you own Airbnb and your Brian Chesky if you have more Airbnb is paying you 3% on the host side and 14% on the guest side, you’re basically making 17% from all these bookings without actually having the hotels or the unit’s yourself, right. So then it’s the largest hotel in the world, but they don’t own any hotels. So they’re just making 17% fees on every you know, booking on every transaction. So their Airbnb is perfectly fine with it. Like they honestly don’t really care what you launch, you could do a bedroom, you could do a garage conversion. And people do tree houses, they do glamping setups that you see our V’s on there, you see just all kinds of unique strategy. So anything where people are going to have a great time at a fraction of the cost. Airbnb is perfectly fine. In fact, when you’re creating the listing on Airbnb, they don’t even ask you if you own it, they really don’t care.

george grombacher 13:35
Nice. That’s awesome. I didn’t realize that Airbnb was making 17% on each one of these deals.

Unknown Speaker 13:42
Yeah, so they’ll charge the guest 14%. And then as us as a host, they’ll take 3%. So we get to keep 97%, I think that’s a great deal. Because they do all the marketing all the payment processing, they do a lot of customer service, you don’t need a website, you don’t need to do advertising, like they bring you all the bookings, you just need to make sure you have a, you know, good property in the right location and be able to provide a great experience.

george grombacher 14:05
Nice. Well, I appreciate that. So appreciate you, you know, being super transparent and upfront about that you’re going to need the money for the appliances and the furniture and all that. So it’s not something to just casually get into. What are some of the other characteristics that people that are successful at this?

Unknown Speaker 14:22
Yeah, for sure. A couple of the things that are super important is especially right now, in the recession, you want to make sure that you are sticking to primary locations and stay away from secondary and tertiary locations. So out of the out of the 18 properties that I have 1717 of them are, you know, in positive cash flow, and I got one property that is losing $5,000 a month. And this is actually one of the ones that I own. It’s in a city. Not sure if you’re familiar with Joshua Tree, California, but that’s a perfect example of a tertiary market. And when we are in a recession, whether it’s rents or just the value of homes, primary cities always hold their value, right? Because primary cities is typically where everybody wants to live, it’s typically more expensive. You attract people with higher incomes, better credit scores, you when you go into the secondary and tertiary, it’s more affordable. But again, you also pay for what you get, and cheaper is not better. So in short, all my other properties are mostly primary and then secondary, so they’re doing good, but those tertiary locations are really struggling right now. So you have to make sure that you stick to the solid locations like if you want to launch in Florida, stick to the Miami’s in Orlando, if you want to launch in Texas, stick to Dallas, stick to Austin, right? If you’re in California, stick to San Diego stick to Los Angeles, those primary markets are what’s gonna are what are going to do well, during this time. The other thing that is very important, we are definitely playing a game of who has the boat the most and best amenities wins. So if you have a pool, a jacuzzi and a game room, you’re going to do way better than a property that doesn’t have those things.

george grombacher 16:08
Yeah, that makes a ton of sense. What are you going to do with the Joshua tree property? Or?

Unknown Speaker 16:14
Excuse me? You know, that’s a good question. I’m actually, right now we have it on Zillow, we’re looking for a tenant that might want to live there for the next, you know, six or 12 months. So at least a mortgage and the expenses get paid for good thing is we did buy the property for like couple 100,000 under market value. So that’s the game plan is just breakeven, just write it out. And you know, the average recession is 18 months. So hopefully in the next 12 months, we’re out of this recession. And typically those areas actually do really well. Like if, if this was a like a year and a half ago, that property would easily make 12,000 a month like 150k in a year. Because it is a very popular area for for tourism, for travelers just not during the recession. So that’s the game plan is hold on tight. Have it pay for itself, and we’ll see what we do in the near future.

george grombacher 17:07
I like it. At the beginning you mentioned used to be the dance business. What is that?

Unknown Speaker 17:12
I used to be a professional Bachata dance instructor. But chat is essential part of dance from the Dominican Republic. That’s the first business I started when I was 20. So I had a choreography company. I used to run a nightclub, and I used to own two of the largest Bachata dance festivals on the West Coast.

george grombacher 17:29
Amazing. Yeah, I love it. Pretty cool. Beautiful. Well, Jorge, thank you so much for coming on. Where can people learn more about you? And how can they how can they take advantage of of your training and your system?

Unknown Speaker 17:43
Yeah, I’m hosting a weekly free training so you guys can take check out the link in my bio on Instagram. Just go to at the Jorge Contreras. That’s th e and then my name Cory Contreras. There is a lot of fake accounts out there. So make sure it’s the one with like 143,000 followers because Yeah, and you can always, you know, ask for a video and I can send you a video or a voice message make sure but yeah, hopefully we can link the account and that way they get the right Instagram.

george grombacher 18:10
Yep, for sure. Awesome. Well, if you enjoyed as much as I did Shahar here your appreciation and share today share with a friend who also appreciates good ideas, follow Jorge or find them on Instagram, at the Jorge Contreras. I was a little better that time. Wasn’t very good. I was pretty good. It’s so I will certainly link that in the notes of the show. And you know, I certainly enjoyed your transparency and, and your the way you explain this first time I’d heard about it, and now it makes a ton of sense. So I appreciate that. Thanks again. Hooray.

Unknown Speaker 18:47
Thanks for the opportunity. Have a great day.

george grombacher 18:49
And until next time, remember, do your part by doing your best

Transcribed by https://otter.ai

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