312. From Wall Street to Short-Term Rentals: How to Build a 38-Property Empire with Michael Chang

Summary

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Podcast Summary

Tax Smart Real Estate Investors Podcast

Episode 312: From Wall Street to Short-Term Rentals—How to Build a 38-Property Empire with Michael Chang
Release Date: February 13, 2025
Host: Hall CPA — Ryan, Thomas, Brennan
Guest: Michael Chang (Short-Term Rental Investor, former Investment Banker, Host of STR Like the Best)

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Episode Overview

This episode features Michael Chang, a former Wall Street investment banker, who shares his journey transitioning from a high-income finance professional to building and managing a 38-property short-term rental (STR) empire. Michael details his start in real estate, explains the nuances of rental arbitrage versus ownership, and gives practical insights into managing remotely, leveraging technology and tax strategies. The conversation caters to professionals seeking financial freedom and tax efficiency through real estate, with a focus on the evolution and optimization of STR operations.

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Key Discussion Points & Insights

1. Michael Chang’s Background and Leap from Wall Street

Timestamps: [01:25]–[02:52]

• Michael spent a decade as an M&A investment banker at Citi and Merrill Lynch and holds an MBA from Cornell.
• He and his wife sought financial freedom and better work-life balance to build a family, leading them to real estate investing.
• Discovery of the short-term rental (STR) “tax loophole” in 2019 was pivotal.
• Started side-hustling in STRs while working full-time, motivated by high tax burdens (50% effective rate).

“I was just figuring out a solution on how do I invest in real estate, how do I diversify my portfolio and be more tax efficient... This is like 2019 and I had read something about the short term tax loophole on Twitter. My first instinct was like, this is too good to be true.”
— Michael Chang [01:31]

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2. Getting Started: The First STRs and Portfolio Growth

Timestamps: [03:07]–[08:01]

• First venture: Helped Liz’s father rent an apartment in NYC as a short-term rental; launched with minimal initial investment ($10K). Their first Airbnb netted ~$5K/month in winter.
• Success gave them a tangible path to quitting corporate jobs and scaling.
• Portfolio today includes:
  • 30 arbitrage/leased apartments in Philadelphia.
  • 6 owned properties in Smoky Mountains, Tennessee.
  • 1 newly-purchased luxury property in the Catskills.
  • 3 managed plus 2 owned Hamptons properties with a mentee.
• All properties managed remotely; shifted old NYC units to long-term rentals as regulations evolved.

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3. Why Rental Arbitrage? Definition and Benefits

Timestamps: [08:11]–[10:27]

• Rental Arbitrage = Leasing properties long-term (with owner’s permission), then renting them on STR platforms for higher margins.
• Chosen for low risk, fast scalability, and high cash flow (~40%+), making it a robust entry point for beginners without major capital.
• Allowed fast iteration, “copy-paste” of a working model, and quick payback.
• Michael underscores the analytical approach and importance of thorough underwriting.

“With rental arbitrage, you can grow very quickly... And the payback was also very quick... you have a business that generates cash flow for you that in my 10 years in investment banking, I hadn’t seen a business model like that.”
— Michael Chang [09:00]

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4. Is Rental Arbitrage Still Viable in 2025?

Timestamps: [10:27]–[11:46]

• Rental arbitrage remains compelling due to softened rent prices post-COVID and an influx of multifamily supply.
• STR operators provide valuable solutions to developers needing to fill new buildings.
• Analytical “rule of thumb”: Generate at least $2 of gross STR income for every $1 of rent.

“Now is better than it has been over the last two years because the rent part of the equation has come down materially. Revenue has moderated, but ... there’s still, you know, material opportunity out there.”
— Michael Chang [10:30]

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5. Managing Short-Term Rentals Remotely

Timestamps: [13:32]–[17:37]

• Modern tech (property management systems, remote team coordination) has made remote management straightforward.
• Essential structure:
  • Centralized software for automation and communication.
  • On-site team: cleaners, handyman.
  • Offshore virtual assistants (VAs) for admin tasks.
  • Strong documented SOPs (standard operating procedures).
• Arbitrage is a great “sandbox” to learn operations before risking large capital buying properties—develop business “muscle” before scaling.

“It’s much easier to manage remotely now than it has been ever... You develop processes that allow you to utilize the technology so that you can run your business... from either two hours away...or 15 hours away...”
— Michael Chang [13:53]

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6. Tax Implications: Rental Arbitrage vs. Ownership

Timestamps: [18:29]–[22:56]

a. Tax Benefits of Arbitrage

• Rental arbitrage is business income (no real estate to depreciate), so lacks the powerful STR “tax loophole” available when you own.
• Deductible expenses focus on furniture and operations; may qualify for immediate expensing under de minimis/property rules.

b. STR “Tax Loophole”

• Owning STR property with average guest stays under 7 days allows you to offset active W2/business income with losses (mainly accelerated depreciation/bonus depreciation).
• Rental arbitrage (leasing, not owning) does not qualify for this loophole.

c. Schedule E vs. Schedule C—Clarification

• If average guest stay is under 7 days and you provide no substantial services, income from rental arbitrage can be reported on Schedule E, thus avoiding self-employment tax.
• Long-term rental tax principles and passive/active guidance still apply.
• Keep careful records of hours for material participation.

“Don’t do anything, don’t step outside of just clean the place. Some people want to do tours or...chef and all these other things...once you step out of [rental activity], you have to pay self-employment tax...Little chance that’s going to come out to be a net positive for you.”
— Michael Chang [22:21]

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7. Scaling Operations: Team, VAs, and Material Participation

Timestamps: [23:57]–[25:28]

• VAs, often offshore, handle routine guest messaging and admin. This supports scale and operational efficiency.
• For tax compliance, Michael and his wife meticulously track active hours (using tools like “reps tracker”) to prove material participation and eligibility for RE pro status.
• Team optimization is about maintaining compliance and balancing operational delegation.

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8. The Role of AI in STR Business

Timestamps: [25:28]–[28:22]

• Michael actively tests and deploys AI chatbots to automate 90%+ of guest messaging, reducing human workload and overhead.
• AI is rapidly transforming STR, especially for lower-skill, repeatable tasks—operators need to “level up” or risk obsolescence.
• The AI advantage: lower costs, improved response times, competitiveness, ability to scale.
• Future opportunities include custom GPT apps for reviews, automated procurement, and process management.
• Michael notes the “pyramid of staff” where levels 1–2 are most automatable.

“If you’re level one or two in anything that you do...you’re going to be disintermediated with someone using AI...as that technology gets better, you have to continue to level up your skills.”
— Michael Chang [25:48]

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Notable Quotes & Memorable Moments

• On starting out:
  “...if you’re going to learn to drive a car...do you want to start with the Civic, not the Ferrari.” — Michael Chang [18:07]

• On arbitrage scalability:
  “The scalability and the fact that you can generate cash flows north of 40% was very, very appealing.” — Michael Chang [08:11]

• On taxes:
  “I’m not a fan of the self employment tax.” — Ryan [23:16]

• On the tech future:
  “AI train is real. Like, you get on it, you get run over by it, right?” — Michael Chang [28:22]

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Timestamps for Important Segments

• [01:25] Michael Chang’s background & why STRs
• [03:07] First STR deal in NYC and scaling journey
• [06:06] Overview of current portfolio (Philly, Smokies, Catskills, Hamptons)
• [08:11] Why & how to start with rental arbitrage
• [10:27] Is arbitrage still viable today?
• [13:32] Managing remotely—tech, teams, and automation
• [18:29] Tax differences: arbitrage vs. ownership, loophole explained
• [20:13] Schedule E vs. Schedule C for arbitrage income
• [23:57] Virtual assistants, material participation, and operations
• [25:28] AI transformation in short-term rentals

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Resources & Where to Connect with Michael Chang

• Instagram: Michael Chang BNB
• LinkedIn: Michael Chang
• Podcast: STR Like the Best — short-term rentals focus

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Closing Thoughts

Michael’s episode is a tactical masterclass for transitioning professionals, emphasizing how to intelligently scale an STR business, leverage arbitrage for cash flow, optimize taxes, and harness emerging technology. He demonstrates that deliberate process, data-driven underwriting, and relentless adaptation are the backbone of successful, scalable real estate operations.

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Transcript

[Thomas]

You're now listening to the Tax Smart REI Podcast, the number one tax podcast for real estate investors.

[Hall CPA Host]

Your source for all things real estate accounting and tax. Here we reveal our secrets that can save you thousands in taxes, streamline your accounting process, and help grow your business. Stay tuned to hear insightful interviews with industry experts, successful real estate investors, and current clients on what strategies they use to grow their business and how they steer clear of Uncle Sam.

[Thomas]

Hey, thanks for tuning into this week's.

[Ryan]

Episode of the Tax Smart REI Podcast.

[Thomas]

Today we're joined with short term rental investor Michael Chang. We're going to learn about how he.

[Ryan]

Went from Wall street to short term rental investor, how he did it, and a whole bunch more. So if you're into short term rentals, if you're a professional, you're going to want to stick around for this one for sure. We'll be diving into all that in just one minute.

[Thomas]

Hey, Tax Smart investors, big announcement. We're adding another episode to lineup and it's going to be a Q and A episode where we will be taking questions from the listeners. Our first episode will go live this Thursday, February 20, and be released every third Thursday of each month. If you'd like us to feature your question in a future episode, send it to contacttherealestatecpa.com or post it in the Taxpayer Investors Facebook group. We look forward to connecting with you and answering your questions, but for now, we'll dive right into today's episode.

[Ryan]

All right, and we are back.

[Thomas]

Michael, thanks so much for joining us.

[Ryan]

Here on the show today. Can you give our listeners a brief overview of your background and how you got involved Short term rentals?

[Michael Chang]

Sure. Thomas Ryan, thank you for having me on the show. Longtime listener, first time caller, so appreciate the invitation. My background and I think this show would be great for if you're a high income professional and trying to figure out how to use real estate to lower your taxes. That was basically my journey. I was investment banking here in New York City for 10 years as an M and a investment banker at Citi and Merrill, did my MBA at Cornell, so was very much on that traditional track. Ten years, had some savings, paid a ton of taxes, 50% effective tax rate. And I was just figuring out a solution on how do I invest in real estate, how do I diversify my portfolio and be more tax efficient. This is like 2019 and I had read something about the short term tax loophole on Twitter. My first instinct was like this is too good to be true. And then I kind of put on My investment banker hat. And it's like, okay, well, let's dive in here and let's see if this is real or not. After a bunch of research, it is indeed very real and it's been transformational for me. It's helped me, my wife and I exit our jobs. We do this full time Now. We have 38 properties and we've saved a lot of taxes. So. Happy to hopefully illuminate some of this stuff for the audience.

[Ryan]

No, that's, that's awesome to be able to jump out like that at 38 properties at this point. Could you take us through a little bit of how you started? Like, were you still in investment banking when you started building your portfolio or did you straight up leave and go full time, like just all in?

[Michael Chang]

No, definitely did not jump straight in. I locked the trust fund, hopefully that I can hopefully pass on to my kids. So I, the paycheck was important to me.

[Ryan]

Yeah.

[Michael Chang]

And also just a lot of, there's just a lot of, you know, time and energy spent getting into that seat. But it was, you know, my then girlfriend, now wife, Liz. Liz and I were looking for something, a business that we could start together while we were both working. She was working at Kate Spade, I was still at Merrill, and you know, a lot of hours in investment banking. So I didn't have a ton of time to dedicate this. But, you know, something that I was, that was important that we want to do together before we got married because, you know, ultimately we wanted to raise a family and working 100 hour weeks and be on the road for 5 days a week just wasn't the lifestyle that we both wanted after we started a family. So, you know, she had the interest in real estate, so I was really on her side. And you know, we started thinking about Airbnb and we're like, ah, what's this? This is 2016. So it's still relatively new. And you know, we had read about it, we talked to some people and then, you know, her dad had a, had a house here in New York. He lived on one level and then two levels. He rented out and there was one, there was a vacancy. And we're like, hey, can we do short term rentals? He's like, what? And I was like, oh, well, we researched it. We'll pay the rent and we'll make sure nothing bad happens. He's like, ah, you guys do what you're going to do and just return it back to me if it doesn't work out. It's like, okay, fine. And this was. We launched December 28, 2016. I remember because we worked at Christmas because we wanted to get it launched. And it was low season here in New York. It's cold. And the design was pretty basic. It was like called an Ikea special. Just got some random furniture, put it together and took some photos on an iPhone and kind of see what it did, what it would do. And by March, it would do like $10,000 of gross revenue a month. After the rent and the costs, we were netting like 5k low season. And you didn't have to be an investment Banker or an MBA graduate to realize that, hey, if I took 5,000, we're gonna do 5,000 per unit multiplied by X. You know, there was a pretty decent line of sight to getting her out of her job. So that happened, you know, by July of that year. And then, you know, we continued to grow and learn and got me out of my job eventually. And, you know, we do this full time. We have two young kids and, and it's been nice. We've been able to create a life that we both wanted and, you know, very thankful for short term rentals and the short term tax loophole that, you know, were enablers to help us get to where we wanted in I guess like seven years now.

[Brennan]

So that's awesome. All right, you mentioned being in New York City and you mentioned starting in New York City. I know there's been the Airbnb ban. Like not all 38 are in New York City. Right. You've got some in other states and things like that.

[Michael Chang]

Yeah. So let me talk a little about the portfolio. So we have, we have 38 properties that like to say we control and or own. So we started in New York just because it was close. But you're right, there are new rules that were passed. We were out of the city by that time. Covid was not. You know, when travel died down, we flipped that back into a long term rental and we had some stuff in New York and we were able to, to exit gracefully. But we have 30 apartments that we have under long term leases in Philadelphia, which is about an hour and a half away. They are licensed and they're all done in the proper way. Those cash flow very well and we've taken those profits and we've reinvested those into owning properties. So we own six in the Smoky Mountains in Sevierville, Tennessee, about 12 hours away. So everything's managed remotely. We live in New York, but everything's managed remotely. We have six properties. First one we bought was we closed September 2020, so not that early, but, you know, early enough. And then we ended up buying six before. The last one we bought was June of 2023. And then, you know, that was all 100% bonus, which was really nice. And then we just bought one about six months ago. We closed in June of 24, our nicest property in the Catskills, which is about two and a half hours north of New York City here. And you know, it's a million dollar house. We put a bunch of money into it to make it really nice. And, and that's our 7 short term rental. So it's 37. And then I help other investors execute the same game plan. So I have a mentee that works with me. She's a very successful real estate broker here in New York City. Seven figure commissions every year for the last 10 years, et cetera. She owns three very nice houses in the Hamptons and then two we manage for her. There are like 3 million plus houses that do, you know, six figures plus a year. So we manage those two for her and then one that she uses for herself. So that's 38.

[Ryan]

Nice, nice. So I know you mentioned you kind of started off in rental arbitrage. Why start in rental arbitrage and how has that specifically helped you to reach your goals of, you know, financial freedom?

[Michael Chang]

Yeah. So maybe just to zoom out, just definitionally, what is rental arbitrage? I think there are a lot of people, there's, there's a misconception. So I want to clear that up. So rental arbitrage in very kind of simple terms is you have a property that you control under a long term lease and you have the owner's permission to re rent it on Airbnb and the short term rental platforms. And the goal is that there is an arbitrage between the short term rental revenue that you earn less, the expenses on the rent and the opex, and then that's your profit. So we started rental arbitrage one because we didn't know what the heck we were doing. So buying something, and this is back in 2016, there was a lot less education available. We weren't ready and we wanted to find something that we can do for what was a fairly nominal investment, about $10,000, and to see if there was something here that we can actually do. So if we lost all that money, it wouldn't have been no big deal, wouldn't have been happy, but it wouldn't have changed our lifestyle in any way. We could execute it quickly and proof of concept was there and we continued to grow that because primarily because of the cash flow. We wanted to generate enough cash flow so that it could replace my wife's then salary. And you know, with rental arbitrage, you can grow very quickly. You have something that works, you effectively copy and paste that to the extent possible. And so it's a very, very scalable model. You don't have to buy something and then, you know, the mortgage and everything else. Right. It's hey, this works, this formula works. Let's rinse and repeat that as much as we can. And the scalability and the fact that you can generate cash flows north of 40% was very, very appealing. And the payback was also very quick. Because you have a relatively nominal amount going in, call it $10,000, you can get that money back fairly quickly and you have a business that generates cash flow for you that in my 10 years in investment banking, I hadn't seen a business model like that. And once I saw it and I saw the numbers, anyone with a calculator can figure this out pretty easily. So, you know, we really focused on that now. We probably should have bought in 18. You know, hindsight saw it was 20 20, I'd be a lot closer to retirement had I done that. Because everything, you know, doubled or tripled since then. But you know, it got us started. And we continue to run that playbook now for the last seven years.

[Ryan]

Does our rental arbitrage still work in today's market?

[Michael Chang]

Absolutely. It actually probably works better now than it has in the last two years. Rents have moderated, you know, kind of post Covid bump. There was a lack of supply, a lot of demand for this type of product. You know, now there's more supply coming on market. A lot of stuff was built from 2020 on. So a lot of inventory is coming online now. And you know, effectively what you're doing is you're providing a business solution to these developers that have built these buildings. They need occupancy now more than ever. So they're good deals. You can, you know, negotiate structure something that is beneficial to both sides. You are running a business, they know what you're doing. You're paying the rent, they're covering their mortgage, their investors are happy. So that's a very nice way to present a business solution to property owners that, you know, when you're starting a new building, you're looking at, you know, 200. We're going into a building that has 150 units that is launching in April. And you know, they're looking at sub 10% occupancy. So it's a mutually beneficial solution and now is better than it has been over the last two years because the rent part of the equation has come down materially. Revenue has moderated, but if you find the right product, right market, there's still, you know, material opportunity out there.

[Ryan]

Yeah, it makes a lot of sense because, yeah, the supply dynamic, I know that a lot of like multifamily properties have seen a lot of supply increase over the last year or two. So that makes sense that the rents are coming down and that's like a main cost of the rental arbitrage business. Right. It has to be the rent expense. Right.

[Michael Chang]

Yeah. I'll let you in and your listeners on what I teach. Right. I take a very analytical approach to this. If you're seeing stuff online, people a little younger, a little less experienced, we do this for seven years. I'm proud to say we've never lost money on a deal. And a lot of it is the investment banking background. Just being very tight on what our underwriting is and understanding what revenue looks like, what our cost is and figuring out that equation and, you know, doing this for so long, every dollar of rent you pay, if you can generate $2 of short term rental income, you're in a good place generally. South of that gets a little tighter. North of that, you know, time to quit your job and do it full time.

[Ryan]

Yeah, that makes a lot of sense.

[Thomas]

With 2024 officially in the rearview mirror, now's the perfect time to start planning for how you're going to maximize your tax savings in 2025. With major tax changes looming under the new administration and IRS audits on the rise, navigating the task code alone is now riskier than ever. With whether you're leveraging the short term rental loophole, claiming the real estate professional status, utilizing passive losses, 1031 exchanges or anything in between, our expert team of tax advisors at Hall CPA has your back. We'll help you uncover hidden opportunities and avoid costly mistakes that could put you at risk during an audit. With potentially tens of thousands of dollars of tax savings online, why wait? Visit www.therealeestatecpa.com podcast to request your free 30 minute discovery call today. Again, that's ww.therealestatecpa.com podcast for a free consultation. Let's help you ensure you keep more of what you earn in 2025. That's all for now and we'll dive right back into today's episode.

[Ryan]

I know you mentioned before that it's all managed remotely. And sometimes, you know, we have listeners come on the show, whether they're buying their short term rentals themselves or they're doing arbitrage, whatever the case is for them, sometimes they have concerns about managing something remotely because they're not. The property is not in their quote unquote backyard. What tips do you have for automating and optimizing systems to manage a property remotely?

[Michael Chang]

Yeah, that's a great question. The technology has come a long way since 2016. It's much easier to manage remotely now than it has been ever. So. Actually, just reminds me, I just got off the phone with one of my mentees and he's a very successful business owner in the Midwest, has a business that does seven figures plus of free cash flow. And he just closed on a property yesterday actually, and it's the exact same question. He was like, hey, Michael, all right, we closed now. Like, what do we do there? You know, without kind of going to all the gory details, right? You need the technology in place so that everybody can automate it through a central system called a property management system. So, like, that piece is very important. And then you need to build a team, right? You know, the people on the ground, the people that can. People on the ground. So your cleaners, your handyman, and then someone remotely, generally based overseas, that can help you with a lot of the add and work things that can be delivered electronically. And then you wrap that all in business processes, right? SOPs standard operating procedures, and you develop processes that allow you to utilize the technology so that you can run your business from either two hours away from me, which is in Philadelphia, or 15 hours away from me, which is in Tennessee. I haven't been to Tennessee in over a year. I haven't been to Philly in a few months, although I might go back down. Well, I'll wait. I'll wait until they clean the debris up after the super bowl and go down there. Yeah, but it's all very, very doable. You just have to do it the right way. You know, there's a formula you can follow and you can do it the right way. And you know, the operator quality, your ability to execute the operator. I think that's something that people don't think as much about. You know, they go on these data websites and you know, look at a property like, okay, you know, 1, 2, 3, Broadway can do, say $100,000, right? You're not going to get a hundred thousand dollars. That's his false precision Right. You're going to be plus or minus of that now, a big driver of that. You know, one, there's the unknown unknowns, like things can happen and the market changes and you know, that's this kind of business risk. But what the things you can control is like the operator quality, right? Like, are you going to do better than the incumbent there or someone that's close by to you? And that's something where through education and through experience, you can over index that and do better than the average. And that for us has been something that we hang our hat on. We do. We're definitely top quartile, top decile in many cases. And that allows us to generate outsize free cash flow, which allows us to grow our business. And one thing for people to know, for all the finance folks out there, look, it's a highly leveraged business model, right? Like, you know, leases are leverage, mortgages are leverage. So you have to do this in a way that if you're doing arbitrage, there's no appreciation, there's limited tax benefits. So you just got to be really dialed in and kind of squeeze that thing for cash, right? You have a bunch of cash and then you go to Thomas or Ryan here and say, hey, I have this profit and I owe the IRS now X amount of dollars now what do I do? And then, you know, the short term rental, taxable, the things around buying real estate really come into play. And the beauty of it is once you start running arbitrage, you've kind of developed the muscle and how to manage, manage remotely, how to optimize your operation. So you're starting with, you know, kind of this sandbox that if you fail or like the magnitude, your mistakes are limited. When you buy something, the magnitude of your mistakes can be pretty detrimental depending on how levered you are and the profile of that property. So we always tell people like, start with arbitrage, if you can, you learn it buy. And once you buy, you just put it onto your platform. You already have the technology, the systems and the people already set up so that you can hit the ground running when you buy your property. And it works really well.

[Ryan]

Yeah, it sounds like there's a lot of benefits for starting with arbitrage because you know, this lower risk, lower investment, you get to learn all the ins and outs, get to probably make your mistakes or whatever in the arbitrage business. And then when you finally do start and it also gives you cash flow, right? To be able to have the money to go buy a property. Now, once you buy the property, you already know what you're doing, your risk is lowered, and now you get to take advantage of the tax benefits of owning real estate. But you're not taking on the risks necessarily of having to learn everything with a property you just sunk a lot of money into.

[Michael Chang]

Exactly, exactly. It's like if you're going to learn to drive a car, right? Like, do you want to start with the Civic, not the Ferrari.

[Ryan]

Right. You don't want to crash the Ferrari.

[Michael Chang]

You don't want to crash the Ferrari. Unless it's Ryan's Ferrari. Ryan, when can we get a ride? When can you take it out for a spin?

[Brennan]

I think that's Tom that's got the Ferrari.

[Michael Chang]

It's probably Brennan, actually. He's not even here right now.

[Ryan]

He's out driving Ferraris.

[Michael Chang]

Exactly.

[Ryan]

All right, cool.

[Thomas]

So let's take a second real quick.

[Ryan]

To talk about the tax implications of doing short term rental arbitrage versus actually acquiring the property yourself. So with short term rental arbitrage, it's more or less you're running a business, but there's no physical assets. Right. So there's not much to appreciate. You might have some furniture and some other things around that you might be purchasing for your business that might be able to be depreciated or might just qualify for the safe harbor. A lot of the furniture will. Well, just. You'll be able to immediately deduct it. If you're buying computers and other type of equipment like that, that's probably to be tax deductible. But there's no physical real estate to depreciate. So that's the first thing to realize is with rental arbitrage, you're not going to be using the short term rental loophole, which for anybody who's. If this is the first time you're hearing about the short term rental loophole, you, you must be new to the show. But basically, long story short, it allows you to take the losses from your rental properties, your short term rental properties specifically, and use them to offset your active income, say a W2 job or a business that you might be running. So that's not possible with short term rental arbitrage, but it is possible when you actually physically buy the real estate. Ryan, I don't know if there's anything you want to add in here.

[Brennan]

Yeah, I love that you said you can't use the short term rental loophole. Like four short term rental arbitrage, it's like two different things. Because the loophole, you own the property and Arbitrage, you don't, you're just renting it, right? And as you're the arbitrage side, you've got that major expense which is usually rent, right? Maybe some other supplies and cleaning people or handyman, whatever that is. But usually like you don't own it, but your expense is the rent. And in replace of that you've got the ownership for the short term rental loophole there we do care about the average day being less. You're materially participating specifically in the properties that you own. In the short term rental arbitrage, we don't care about the average day, to be honest.

[Michael Chang]

Could I clarify something there actually and tell me if I'm wrong here? So what I understand is the one material you know and definitely agree with you on, there's no bonus because you actually don't own the real estate. So you know, everything that you're buying the FF&E is either de minimis deduction or I think, I guess you can you179 that, right?

[Ryan]

Or no, I mean I think it's commercial, right? Because it's a rerunning of this commercial. Yeah, section one.

[Michael Chang]

So I'm curious on your feedback here. So what I understand is that for arbitrage in order to step out of it being active income, so not paying the self employment tax, if you materially participate fewer than a seven day stay and you don't provide substantial services, then it can still be schedule E like it would qualify as a long term rental activity. So you would step out of. So I think this is a big point that a lot of people I get questions on is is it schedule C or schedule E? And I always tell people it's schedule E because if you fear in seven days material participate and no substantial services, then it falls in schedule E and then you don't have the supplement tax. And if you have losses from your, you know, other real estate, you can use that to offset, you know, if say you're starting that calendar year and you have a bunch of stuff that you have now, passive losses on you can offset that against any other passive gain. Is that accurate or. That's my understanding, yeah.

[Ryan]

So short term rental arbitrage definitely goes on schedule E because you're still renting, it's still a rental activity. Like that's still the underlying nature of what you're doing. And with that it kind of follows the same rules as any other rental business. If it does have an average period of customer use of seven days or less, then it could qualify for Non passive treatment if there are losses. If not it would be passive and those losses could then offset if there are any losses, any other kind of passive income you might have from long term rental properties. But yeah, basically the end of the day it's true, like any other rental business, if it's an average stay of seven days or less, it will be non passive. If it's above seven days or less, it's going to be passive. Unless you are a real estate professional. That's long story short what you're looking at for this type of treatment. It's not going to be self subject to self employment tax unless you're providing those substantial services.

[Michael Chang]

So that's why I always tell people don't do anything, don't step outside of just clean the place. Some people want to do tours or rental, you know, you know, chef and just all these other things and try to like add the bells and whistles. I just tell people like look, you want to really optimize just the rental activity. One, you don't step, you know, you don't have to pay the 15.3% because you, once you step out of that, I don't care how much money you're making on you know, tours and all that other stuff like you're paying 15.3% of your tax like just very little chance that that's going to come out to be a net positive for you.

[Ryan]

Yeah, once you start providing substantial services you are reaching into that self employment tax territory. And for that to really make sense you have to really ask yourself, you know, are you making a substantially more money to make that tax worth it? And if it is, I mean maybe it is worth the extra effort, the hassle, set all that up. But to be honest with you, we've worked with a lot of short term rental investors and I've not seen many really that do go that level of substantial services. Most of the time they are just renting the space. That's what they're doing just like and it seems to be working out for a lot of people. So it. Yeah, I'm not a fan of the self employment tax.

[Michael Chang]

Me neither.

[Brennan]

Michael, maybe my last question here. So as you think about being efficient with operations and you know you've got 38 properties, I'm sure you're not the one who's sitting there messaging every single guest if they have a question. So tell us a little bit more about kind of virtual assistants. We kind of mentioned that. Yeah, you're using people offshore things like that. Tell us a Bit more about that. And like, you know, if you're new in this, how might our listeners kind of use that to what you're using to be efficient?

[Michael Chang]

That's a great question. You know, virtual assistants, you know, people that you hire that are offshore, you know, maybe in Latin America or in Asia can be a real resource in helping you run your business more efficiently. So we definitely utilize a team of VAs that help us with a lot of the admin tasks of running our short term rental portfolio. And we understand that there's a difference between material participation and real estate professional status. You know, there's some really good content that you guys have put out on that. But we want to make sure that, you know, we're hitting one of the seven rules. I think the fact that neither one of us is a W2 is helpful and you know, that fact pattern. But we want to make sure that between my wife and I that we are clipping 500 hours a year. And then, you know, we use reps tracker and we log every single day. Like what we're doing has it on our calendar, in our PMS system, in all our technology. We just make sure that if we're ever asked we can prove and have kind of real time proof that we're actually doing this. And it's easier when you have your spouse doing it with you because it's 250 hours a year, so less than an hour a day on average for both of us, which easily attainable and making sure that our record keeping us good because the last thing we want to do is, you know, get that letter and you know, scramble which you know, from my understanding is, you know, something that has happened, you know, a fair amount to, to folks. So we try to balance the VA efficiency with making sure that we materially participate and you know, have our grouping election so that everything is, you know, all nice and tight.

[Ryan]

All right, I got one more question. It's along the same lines. I think I've seen a post on this. I think it was LinkedIn from you. And it's about AI and how AI is totally changing up. Like the short term rental space is like taking people's jobs and whatnot, but with that it reduces costs for short term rental operators. So I guess my question is how are you currently using AI to optimize costs on your rental business?

[Michael Chang]

That's a great question. It's top of mind. We've been testing different, you know, AI technologies. We landed on AI Chatbot that has worked really, really well for us right now it can automatically answer 90 plus percent of the guest messaging. There's little onboarding, it can just go read, it can automatically go in and read all the prior message history and just learn. And it can tune immediately on answering fairly detailed questions on your property. So that's been a game changer for us that's allowed us to be able to scale more efficiently. As we have attrition in our staff, we don't need to replace the people because the technology is making our existing staff more efficient. On my LinkedIn, actually I posted something, it's called the triangle of. It's a pyramid of your staff effectively. And there's like level one, level two, level three, level four, level five basically shows that like if you're level one or two in anything that you do, you know you're going to be disintermediated with someone using AI because all that stuff can all be done now using these LLMs. And then as that technology gets better, you know, you have to continue to level up your skills. And for our VAs, you know, we really try to make sure that we're hiring folks that can think on their own, can create processes and really utilize AI as a tool and they're not just parroting back like what's the WI fi and copy and pasting that. Like that person that can only do that is not going to have a job in 2026. So you know, the more this technology that we use, we get more efficient, reduces our cost, allows us to be more competitive on our pricing, gives us an edge over our competitors and we're exploring other, other things. I don't want to give out all my secrets, but there's, you know, things with GPT Operator and you know, creating custom apps that can do a lot of this workflow more efficiently, whether it's responding to reviews, finding reviews that are unfair, to ordering things automatically. There's. The plane of opportunity is vast and it's just exciting times ahead and we're really excited that you know, we're able to one have a time to explore this and it's kind of just intellectual curiosity and be able to implement some of this technology into our business. If you're a terminal operator, I think really any business owner, I actually have another mentee who has a network of medical offices and he has a number of Airbnbs and he's going to utilize his chatbot technology in his medical practices because a lot of that stuff is answering questions and deliver information and that's going to all be done by AI. So long way of saying, you know, this AI train is real. Like, you get on it, you get run over by it, right?

[Ryan]

No. A hundred percent people out there, you got to learn how to use AI to your advantage. Because if it's here, it's not going anywhere and it's only going to get better. And it's, it's seemingly moving at such a rapid clip. It's just insane. It's like at first it was unbelievable when I started seeing what AI can do, but it's here, that's for sure. Mike, I want to thank you for joining us on the show today, sharing a lot of your knowledge here with our listeners, talking rental arbitrage, all that good stuff. Where could our listeners learn more about you and what you have going on? And maybe if they wanted to work with you or become one of your students or mentees, how would they do that?

[Michael Chang]

So the easiest way to find me is on Instagram. My name is Michael Chang. BNB M I C H A E L C H A N G Or you can find me on LinkedIn under Michael Chang. And I also have a podcast called STR like the best. So short term, I don't like the best. STR like the best. So, you know, it's very much focused on just short term rentals and, you know, talking with other investors that are in the business and, you know, if you're interested about short term rentals, hopefully it'd be a good resource to further increase your knowledge in this subject. It's fun times right now. It's. Things are changing rapidly, but there's still, I think, pretty material opportunity out here. This is still relatively new, right? Airbnb started in 2010. The professional part didn't really happen. Maybe 2017, 2018. So we're like less than 10 years, really in the second chapter. So I'm excited.

[Ryan]

Yeah, absolutely. We're going to go ahead and drop that into the notes for everybody out there. We know a lot of people in our audience are into short term rentals or wanting to jump into the game. So you can find that into the show notes. Thanks again, Mike. And I guess I'll catch you soon.

[Michael Chang]

All right, thanks, Thomas. Thanks, Ryan. Appreciate you guys having me on the show.

[Hall CPA Host]

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