Benzinga - One young entrepreneur generates approximately $2 million a year signing long-term leases on apartments and renting them out to someone else for short periods of time.
What To Know: Inspired by Robert Kiyosaki's "Rich Dad Poor Dad," Derek Cheung dropped out of college and started a rental arbitrage business in 2019. A couple of years later, he had built up a portfolio of leases on more than 50 properties, which generate over $750,000 in net income annually, per Business Insider.
Cheung got started by consuming as much information on rental arbitration as he could find. The strategy involves making a profit on the difference between what it costs to rent a property long-term and what someone is willing to pay for that same property in the short-term rental market.
After searching housing websites like Zillow Group Inc (NASDAQ: ZG) (NASDAQ: Z) for available occupancy in his local area, Cheung began calling landlords to see who might be interested in renting to a rental-arbitrage operator.
In early 2019, he signed a pair of one-year leases: a one-bedroom apartment for about $1,200 a month and a studio for about $1,000 a month. He spent approximately $5,000 furnishing the two units and then posted the pair on Airbnb Inc (NASDAQ: ABNB). He got a hit right away.
"I was insanely excited and it was pretty much like instant. As soon as I listed, someone was inquiring," Cheung said.
He started generating about $4,000 per month on Airbnb from the two units, leaving him with close to $1,500 a month in profit. A few months later, he landed a 60-day rental in one of his units from a construction manager who was looking to find short-term housing for more than 30 other workers.
He got right to work looking for other properties he could lease long-term, and then rent to the workers who were going to be staying in town for two months working on a construction project.
He was able to land three three-bedroom houses and a duplex that had a total of six rooms. He quickly set up one-year leases and furnished the places before the construction crew made it to town.
"It was pretty scary having $10,000 a month in liability and rent expenses," Cheung said.
He soon found himself netting about $4,000 a month in profit from the construction crew's stay, and then he began targeting other construction crews that would be coming to town and looking for similar short-term housing opportunities.
As his operation scaled, he couldn't keep up with all the maintenance, so he hired a cleaning crew to take over in between listings. Then the pandemic hit.
In 2020 the travel industry took a turn as a result of COVID-19 lockdowns. He managed to survive the year by renting out his properties for slightly longer periods of time, and by early 2021 he stepped into a buyer's market.
He ultimately arranged leases for multiple units, occasionally inking deals that included one or two months of free rent. By the end of 2021, he had leases on over 50 properties and occupancy jumped back up.
"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.
In 2021, Cheung's business generated gross profits of close to $2 million. His expenses for the year came in at approximately $1.25 million, leaving him with about $750,000 in net profit.
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This story is part of a new series of features on the subject of success, Benzinga Inspire.
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