- Derek Cheung learned about rental arbitrage during an internship in 2019.
- He researched a list of available properties in Austin, Texas, then pitched his idea to landlords.
- Cheung used his profits and negotiated deals to grow his short-term-rental business.
In February 2019, Derek Cheung took a big leap of faith into real estate when he signed leases on two apartments in Austin, Texas, to be used as short-term rentals. At the time, he was attending the University of Texas at Austin, working toward a joint bachelor’s degree in business administration and finance while living in a dorm and using student loans to cover his expenses, he said.
He wanted to work for himself and had recently discovered the world of rental arbitrage — leasing apartments to sublet as short-term rentals — and how it had allowed others to attain their goals of being self-employed and financially independent. He had always aspired to be an entrepreneur after reading Robert Kiyosaki’s “Rich Dad Poor Dad.” He hadn’t told his parents what he was up to, fearing they wouldn’t approve.
Cheung got the idea while he was doing an internship at a private-equity firm. During one of the meetings, an investment partner mentioned a company called Sonder, a firm that manages short-term rentals it doesn’t own. Cheung was particularly interested in rental arbitration because of the low barrier to entry. He was also inspired by the founder of Sonder, Francis Davidson, who started the company out of his college apartment.
That meeting would change the course of Cheung’s life. Within a couple of weeks, he would land his first two apartments. By 2021 — three years into his rental-arbitrage career — he told Insider he had more than 50 properties nationwide.
In 2021, his business, Hikaru LLC, had a net income of $754,547 from a gross profit of $1,989,839, according to the profit-and-loss statement viewed by Insider. His expenses for the same period came to $1,249,916. His highest expense was rent, to the tune of about $503,500. Cleaning expenses were second, at $128,500. Other big-ticket expenses included paying for repairs and maintenance at the apartments, which cost $45,700; property-manager fees of $55,515; and total advertising costs of $18,465.45.
Getting his foot in the door
Cheung started his journey in rental arbitrage by doing research online and reading a lot of blog posts about experiences others had with the business model.
There were two key takeaways from what he was reading. First, he needed an LLC because he would be signing a lease to conduct business rather than occupy the units as a resident. Second, he realized that some landlords actually had a preference for working with rental-arbitrage operators over traditional long-term renters, because operators took care of the property, cleaned it regularly, and fixed anything their guests may be at fault for breaking, he said. Cheung considered these key points when he drafted his pitch to landlords.
He then went on to build his list of available properties. He searched websites like Zillow, RentCafe, and Apartments.com for available occupancy in Austin, and then created an Excel sheet with about 160 leads with contact information.
With a scripted pitch, he called or emailed landlords outside his area of interest, in San Antonio, Texas. He did this to practice before reaching out to properties in Austin. He would adjust the script based on objections and concerns the landlords voiced. He told Insider he reached out to about 100 leads before he landed on a person willing to entertain his pitch — a broker who had listed a property on behalf of a landlord.
Since the agent represented other landlords, Cheung explained his business model and convinced her to tap her network to find other landlords who might be interested in working with him. The agent set him up with his first “yes,” from a building manager who agreed to lease him his first two units in the same building in Austin.
By February 2019, he signed his first one-year leases. The first apartment was a one-bedroom for $1,215 a month; the second was a studio apartment for $999 a month, according to the contracts viewed by Insider. He paid the first month’s rent plus an additional $500 security deposit for each unit, for a total of $3,214. He had an additional contract allowing him to operate short-term rentals at the property.
He told Insider that at the time, he had $8,000 in cash saved from his server job in high school and his internship. He also had a credit card that had a $5,000 available limit. He spent about $5,000 furnishing the units with used items purchased through Facebook Marketplace. Two of his friends helped him move furniture using a U-Haul rental. Once everything was set up, he took photos and posted the units on Airbnb.
To his surprise, he landed his first booking — for two days at the one-bedroom unit — the same day he listed them.
“I was insanely excited and it was pretty much like instant. As soon as I listed, someone was inquiring,” Cheung said of the experience. “And as soon as they inquired, I was talking to them. And then when the booking got solidified, it really validated the business model in my mind.”
Cheung recalled his revenue was about $4,000 a month, with a profit of about $1,500 for both units combined. He said he had an occupancy rate of about 80% to 86%. In the first two months, he would make a point to talk to every guest, leave small gifts, and point them to the best spots in town.
The turning point that scaled him
A few months in, he hosted a guest that stayed in one of his units for 60 days — a construction-company owner who told Cheung he was in town for a project his company had landed. The business owner needed housing for 33 of his crew members. Cheung offered to help him find places for his employees at a cheaper rate than a hotel. This deal landed him the biggest check he had ever seen: $45,000 for two months of rentals. Cheung had three weeks to secure furnished accommodations.
“I already knew that as long as I put in enough time to make the calls, I’m going to be able to land as many deals as I need,” Cheung said. “So I was already pretty confident that as long as I put in the volume, I can get the houses, no problem.”
He planned to land a few houses with numerous bedrooms. He hit the books and spent about a week calling properties before he secured three three-bedroom houses and a duplex that had six bedrooms in Austin. He spoke to the landlords and explained the situation, noting that after the employees left, he would be listing the properties on Airbnb over the term of the one-year lease.
Cheung was now on the hook for another $8,000 each month in rent. He used the cash deposit to pay for the first two months’ rent and furnish the properties. He was now managing and cleaning six properties.
“It was pretty scary having $10,000 a month in liability and rent expenses. Basically, I just saw that I needed to get it booked as far in advance as I could,” Cheung said of the situation. “I put all of the listings on Airbnb. I put them on Vrbo as well. And I actually bought a subscription to a database for construction companies so I could see which companies landed new jobs in the area. And I did the same thing where I built a lead list, and I made my email scripts and templates.”
To his benefit, the first construction company extended its rentals beyond the initial two months, staying from September 2019 until May 2020, he said. He told Insider he received about $12,000 a month (netting a $4,000 profit a month) from this deal. He used the new cash flow to sign another three leases for units in the first building.
At first, he was wary of expanding because he was trying to save twice the rent he owed on all units as a security nest egg. But he was worried that if he didn’t lock down the available units, they would get leased and he would lose out on the opportunity. So he powered through, telling himself that in order to make money, he had to risk money.
During his fall semester, he hired his first cleaning company to take over the duties he was handling. He quickly realized it was difficult to secure a partnership with a reliable company and cycled through three or four companies, he said. At times, he found himself going in to clean the units himself if they hadn’t done a good job.
“Now what I do is whenever I take on a new cleaning team, I have about four cleaning teams come in to interview. I set specific traps where I would place Kleenex under the couch, et cetera, just to see if they are detail-oriented and they catch those items,” he said.
If guests find a unit unclean, Airbnb can issue a refund, leaving the property manager on the hook for the money, he noted.
Hitting a wall
One of his biggest mistakes was expanding to three additional units in March 2020, as the country went into COVID lockdown. Travel slowed and bookings were drying up.
Events like South by Southwest, a major festival that takes place in Austin every year, was canceled. People were canceling bookings left and right, he said.
He was facing $20,000 a month in liabilities that he was responsible for. He began to cold-call and email construction companies, corporate-relocation firms, and insurance housing to offer his units on a weekly basis. He posted his units on every platform he could, including Zillow, Corporate Housing by Owner, Furnished Finder, and Craigslist. He also prioritized guests that booked for 60 days or more.
“A lot of the hosts went out of business, but I basically was spending every single waking hour trying to get my units booked, adjusting the pricing and things of that nature,” Cheung said.
He eventually dropped out of college, and by June 2020, he had to leave his dorm room. He was left sleeping in his Nissan Altima for about two and a half months, he said. At times, he would sleep in one of his vacant Airbnb units.
His goal was to reduce his rates just enough so he could break even or make a slight profit. He also focused on landing longer-term guests. He began booking locals who were between leases, people who were evicted from their homes, and insurance companies booking temporary accommodations.
He broke even in March and May, thanks to the construction company that had extended. And he was able to make a slight profit in April, he said. His big takeaway: Pay attention to the macroeconomic environment.
Other buildings in Austin were also struggling with pandemic-related vacancies. By the time 2021 rolled around, Cheung told Insider he was able to pick up several units in one building in exchange for one to two months of free rent.
He also opened business credit cards with Chase and Amex and charged furniture costs, so he didn’t have to pay anything out of pocket for those first months. He said he made back the cost of furniture within two months.
By August 2021, bookings began to pick up. By the end of 2021, he had accumulated 50 properties, 44 of which were already operational. He told Insider his nightly rates run between $101 to $223 on average. He added that the occupancy rate for his units are between 72% to 97%, depending on the month. After Airbnb fees are deducted, his aggregate average for 2021 was about $134 a night on an 87% occupancy rate, he said.
He has continued to expand his short-term-rental business, growing by roughly 22% in revenue this year, according to his company’s profit-and-loss statement. Based on the challenges he faced, he feels confident his business will be a success.
“That was probably the biggest challenge I faced in my time with the Airbnb business, was taking it through COVID, and obviously I did get through,” Cheung said.
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