Rental arbitrage is now easier than ever, thanks to platforms like Airbnb.
But what is rental arbitrage to begin with?
Is it worth getting into in 2023?
Those are the questions we’re going to be answering in this post.
As Airbnb rises, so does the number of folks who are curious to make money off it.
One common myth is that you need to be a property owner to make money with Airbnb.
One approach to mitigate the dangers of investing in properties is through the use of rental arbitrage.
As you’ll see in the article below, there are potential benefits and drawbacks to this method.
Are you ready to learn more? Then let’s get to it!
What is Rental Arbitrage?
Let’s address the glaring question here: what does ‘rental arbitrage’ mean?
Let me paint you a picture.
Let’s say you’re renting a condo from a landlord. Now, you sublet that condo and use Airbnb to rent out that space for shorter periods.
You, as the renter, act as a property manager of sorts. You’re the one who arranges the rental of the condo to others.
That’s what Airbnb rental arbitrage refers to.
The popularity of rental websites like Airbnb over the past decade has increased interest in the short term rental industry.
Naturally, a new set of challenges and opportunities have arisen as a result of tenants asking landlords to rent out their spaces.
Profits from short-term subletting can sometimes exceed those from a longer-term lease!
Since the prices for short-term rentals are usually much higher, the renter can make significant gains by adopting this strategy.
So, is there a difference between rental arbitrage and subletting? Not really.
Rental arbitrage is essentially a certain type of subletting.
When a lease is sublet, it is typically given to a single tenant for the remainder of the lease term.
Conversely, the term “rental arbitrage” is commonly used to describe a situation in which multiple short-term tenants are involved.
Is Airbnb Rental Arbitrage Legal?
Let’s move over to the fine print. This hustle feels a little bit like hacking the system, doesn’t it?
Well, listing a space that you’re renting on a platform like Airbnb is technically legal.
BUT it is only legal if the landlord permits you to rent out the property for short periods of time.
In some cases, the landlord will state under the lease that this is not authorized or will only be allowed in exceptional circumstances.
Subletting policies, conditions, and obligations should be laid out in detail in any relevant contracts.
Make sure your lease agreements clearly state your rules about this matter.
By doing so, you can be assured that your rental property is safe from the carelessness of short-term renters.
Because you’re going to be liable if something should happen.
How To Set Up an Airbnb Rental Arbitrage Business
If you want to jump into this business opportunity, let’s get you ready, shall we?
Here are the steps you can take to make sure your new venture goes smoothly.
1. Do Market Research
I can’t stress enough how important it is to do thorough market research before making the decision to become an Airbnb host.
The first step is to think about which cities and regions would be of most interest to you.
The secret to a great rental arbitrage business is to find a property in a profitable area, preferably one that will attract tourists.
If you go for some random property without any research, it can be difficult to maintain a steady stream of income from it.
The ROI on the rental is another crucial aspect to think about.
Try to rent properties that are within walking distance of the city’s major sights and conveniences.
Although renting a property on the outskirts of the city may seem like a more cost-effection option, it won’t do well in the short-term rental market.
2. Leverage Multiple Rental Listing Sites
Airbnb is a big one, but you should check out other rental listing sites as well.
This way, you can quickly compare rental properties in your area of choice. You’ll also get a much clearer picture with more details like square footage and amenities.
Here are some other platforms to look into:
3. Familiarize Yourself with Local Regulations
Before you can start making money with rental arbitrage, it’s important to consider local restrictions and laws.
Note that in recent years, many municipalities have tightened their control on short-term rentals.
To add to the complications, short-term rentals may be outright banned in some cities. Others may impose strict limits on the number of nights that guests can stay each year.
What if the rental arbitrage property you’re eyeing can only be rented out 90 days out of the year? Is it appealing enough to charge higher rates?
If not, this is something to consider if you want to stay in the green.
4. Look For a Willing Landlord
At this point, you’ve probably chosen the best spot for your Airbnb and know the ins and out of the local regulations.
The next step is to find a landlord who will allow you to rent their property and sublet it to short-term tenants.
You might run into a speed bump here.
There are probably two reasons why you would feel hesitant to approach a landlord.
The first is they might say no.
The second is they might take your idea and list their property on Airbnb instead.
If you’re going to convince a skeptical landlord to let you do your thing, you need to address the following concerns and make this deal mutually beneficial.
Keep The Place in Pristine Condition
If you want consistent five-star reviews, it’s crucial to keep the property looking tidy and maybe even Instagram-worthy.
The landlord will be on board with this idea because it will save them the hassle of repairs and renovations.
A well-maintained rental benefits both the tenant and the landlord!
Timely Payments
You can guarantee prompt payments to your landlord because you plan to use the property as a profitable business.
Given how challenging it can be to collect rent from a long term tenant sometimes, this may mean a great deal to them.
Take on Most of The Work
What if the landlord thinks that they can make more money by listing their property on Airbnb themselves?
How can you convince them that it’s okay to have a middleman?
First, you can explain the effort required to manage even one Airbnb listing. It’s no piece of cake.
The best-case scenario is that they will agree to the arbitrage rather than deal with all this hassle.
If you get them to agree, the least must be written out in a way that incorporates the following arbitration clauses:
- Who will pay for liability insurance
- If you should notify your landlord about every new renter
- Who will cover fines and penalties
- How much of your profit you will share with your landlord
- If you should cover an additional security deposit
- And so on…
PRO TIP:
Having trouble renting properties with a willing landlord?
Many ex-pats aren’t really good at finding renters. Some of them rely on Facebook groups to fill their rental units.
They usually aren’t even in the city, so they want someone to take over their properties in exchange for good maintenance.
You could prowl these Facebook group pages and scout someone who needs your help!
The trick is to network.
Getting in touch with the right folks and making a compelling pitch to see if they have any leads on your desired property is a breeze when you have a strong network behind you.
You can also attend local real estate-related events and be friendly!
5. Gather Your Starting Costs
Since this is a business, you’re going to need capital.
Rental fees are just one expense to think about. The following are some of the items you should consider:
- Application fees
- Deposit
- Insurance
- Legal fees (licenses, permits, etc.)
- Furnishings
- Appliances
- Repairs
- WiFi
- Entertainment subscriptions
- Professional cleaning service
- Utilities
- Toiletries and kitchenware
You might have to shell out quite a bit for this, but these expenses will lessen significantly over time.
In addition to figuring out these expenses, you should put some money aside in case bookings are slower than expected for the first couple of months.
However, this will only work if you choose your property well and run a tight business.
6. Put Up Your Listing
Once everything is in order at your rental property, you can start advertising it.
While Airbnb arbitrage has become the common term for short-term rentals, that’s not the only booking site available.
You can put up listings for your property on sites like Vrbo, HomeToGo, Booking.com, TripAdvisor, and more.
Multi-channel distribution strategies can boost your marketing efforts and prevent multiple bookings. You’ll just have to find the right automation solution.
And if you reach 90% occupancy, you can consider a price hike!
7. Optimize Your Listing
Now that you’ve put up your listing, most of your efforts now should be around boosting its visibility.
If you don’t boost your listing’s standing on vacation rental platforms, rental arbitrage won’t be a lucrative business for you.
The goal is to attract more potential guests to your listing and, ultimately, your short-term rental.
Airbnb management is more involved than just putting up a listing and forgetting all about it.
You have to take stunning photos that highlight the property’s best features. You also have to write accurate and thorough descriptions of the property, so potential guests know what to expect.
Try putting one variable in your listing to the test every week to see whether it makes a difference.
8. Start Automating
Managing a property can be a pretty demanding job. It will take a lot of your time, especially when you’re first starting out.
And since Airbnb hosts juggle many responsibilities, they seldom find the time to expand their operations.
What’s the solution?
Using business automation tools.
Start with rental software that can help you keep track of bookings, communicate with guests, and schedule maintenance.
These are other aspects that you may want to automate:
- Check-in and checkout
- Smart amenities (digital welcome book, smart thermostat, etc.)
- Bookkeeping
You can improve the quality of service you provide to guests and increase your revenue through rental arbitrage if you streamline your operations.
Rental Arbitrage: The Pros and Cons
I’m sure you want to weigh the pros and cons of this business endeavor regardless of your strategy going in.
If you want to ensure your long-term financial security, you need to arm yourself with as much knowledge as possible.
PROS
- Lower startup costs
- Pretty easy to set up online
- Can be expanded
- Can use the property for personal use
- Landlord gains you as a long-term renter
- Lower overall vacancies
- Potential to increase rent or offer premium bookings
CONS
- More responsibilities
- Seasonality can affect your profits
- Shouldering startup costs
- Covering utilities
- Dealing with damages and natural wear and tear
Rental Artibitrage FAQs
Can you find a landlord on Airbnb?
This is something you probably weren’t expecting!
Consider reaching out to Airbnb hosts whose listings have no ratings, poor-quality photos, and vague descriptions.
This is an awesome strategy if you’re having trouble finding a willing landlord to work with.
Why?
These hosts are already willing to rent out their homes on a short-term basis. They might be interested in the idea if you can promise them a certain amount of money each month for the next year or two.
Is rental arbitrage always profitable?
There’s no assurance that you will make a profit from rental arbitrage any more than there is from any other rental business.
Vacation rentals can be a lucrative side business, but it requires effort like any other venture.
Only you can “guarantee” your success.
Do you need to register as an LLC to do rental arbitrage?
The short answer is no.
However, this is a good idea for property owners and investors. Setting up an LLC before renting out your property will shield your personal assets from any potential lawsuits.
There are also substantial tax advantages and legal protections for setting up a business this way.
Related Reading: 10 income streams – Check Them Out Here
Final Thoughts On Airbnb Rental Arbitrage
You now have a rough blueprint of how you’re going to run a rental arbitrage business. If you do well, you might be able to acquire more properties and turn this into a full-blown enterprise.
The good news is that you don’t have to break your back to accomplish this.
Eventually, you can automate most of your operations and turn your rental arbitrage business into a well-oiled machine!
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