You don’t have to own a property to make money from Airbnb and other short-term rental platforms. In fact, thanks to an increasingly popular strategy called rental arbitrage, getting in on the vacation rental game is now easier than ever.
Are you looking to jump on the short-term rental bandwagon but don’t have a property to do it with (or the cash to buy one)? Here’s how rental arbitrage can help.
What is rental arbitrage?
Much like subletting, rental arbitrage is the act of renting out an already rented property. Here’s how it works: You lease a long-term rental (usually for at least a year). Then, you list that property on Airbnb, VRBO, or various other vacation rental platforms, and re-rent it out on a short-term basis to travelers.
Basically, you’re paying the rent with the stays your property books and then pocketing the difference.
Rental arbitrage has taken off in the multifamily space in recent years, with many developers letting short-term rental companies take over and market vacant units. Both Stay Alfred (now defunct due to COVID) and Sonder operate under a similar business model.
How much can you make doing rental arbitrage?
Profitability in rental or Airbnb arbitrage really depends on your market. To calculate how much you could make on a property, you have to consider the average monthly rent in your market, versus the average Airbnb rate per night for the area.
If you’re looking at renting a three-bedroom house for $1,500 a month, and the typical three-bed Airbnb goes for $300 a night, you’d only need to rent the property out five times to make your rent each month. If you’re confident you can book the home for much more than that, you’re looking at decent profits.
Pros of rental arbitrage
One of the biggest benefits of rental arbitrage is that you don’t have to buy a home to cash in on the short-term rental trend. That means no saving up for a hefty down payment, no closing costs, and no expensive mortgage loan. You just need cash for furniture and supplies, and that’s it.
You can also get your Airbnb business started pretty fast. As long as you find a landlord who’s willing (and local laws don’t prevent you), all you have to do is sign the lease, set up the home, and start making cash.
Another big perk? You can also use the property yourself. If you’re leasing a home in a great vacation area or somewhere you actively want to visit, then feel free to take advantage of the property as needed (though you’ll lose out on income for those days).
Last, rental arbitrage may be a good way to build up capital for other investments you’re looking to take on. Want to buy a long-term rental or fix-and-flip? Your profits from arbitraging might help fund your next move as a real estate investor.
- No need to purchase a property.
- Few start-up costs.
- Easy and fast to get started.
- You can use the property yourself.
- Potential savings for other investments.
Cons of rental arbitrage
The downside of arbitrage is that it’s pretty risky. Ultimately, the home isn’t yours, so if a renter does damage while the lease is in your name, you’re the one who will be held responsible (both legally and financially).
The seasonality of a vacation rental is also a risk. Depending on where you live and what’s going on with COVID, bookings on your property are going to ebb and flow. If you’re not careful, you could find yourself short on rent for the month (or possibly for the duration of your long-term lease).
Another downside is what you’re responsible for as a short-term rental host. You’ll need to cover the costs of utilities and various bills, and you’ll need to manage the maintenance, cleaning, and any repairs of the property (which might happen often due to higher use). These extra fees will certainly eat into your profits.
Finally, it might be hard to find a property to get started with. Not only do you need to locate a market where short-term rentals are allowed, but you'll also need to find a landlord who will agree to the arrangement. Additionally, many homeowners and condo associations have rules against this practice, so that’s another hurdle you may need to jump through.
- You’re responsible for any damage done by renters.
- Bookings will fluctuate, which might make it hard to pay rent.
- It might be hard to find the right property and landlord.
- Potentially more wear and tear if your property is booked often.
- You’ll need to cover utilities and cable/internet bills.
- You’ll need to handle regular maintenance, upkeep, and repairs.
- Your landlord can halt your operation if they no longer want to continue.
Getting started with Airbnb rental arbitrage
Before you can start a rental arbitrage operation, you have to find out if short-term rentals are allowed in your market (or the market you’re considering buying in). You’ll also need to study up on local rents and what a short-term vacation rental goes for in your area. You should also look at the average occupancy rate for local rentals.
If the market seems to have potential, then you can start looking for arbitrage opportunities.
Since you'll ultimately market the property to travelers, location will be key. You’ll also need to sell the landlord on letting you re-rent the property to short-term tenants. To do this, make sure the landlord has the following assurances:
- They’re getting a long-term lease and a guaranteed profit every month.
- You’re motivated to keep the home in top condition (your business depends on it).
- You’ll get the appropriate insurance to cover any possible damage.
If you’re sure a property has solid potential, you might also want to offer a share of each booking to sweeten the deal.
Tips for success
Once you’re set on renting a property to list on Airbnb, get your finances in order. You may not need a down payment, but you’ll probably owe a hefty security deposit, and you’ll need to cover property expenses -- things like your insurance, any local permit fees and, of course, the furniture and decor for the property.
You should also make arrangements for cleaning between guests and work with your landlord to install a smart lock or another system that can make for easy check-in and check-out for guests. These technologies can also make your time as an Airbnb host easier (and less risky).
Lastly, meet with a real estate attorney to make sure everything is kosher. Laws regarding short-term rentals are constantly changing, so just double check that you’re in the clear -- both with your landlord and your short-term rental business.
Rental arbitrage from the property owner's perspective
Are you on the other side of the equation, and a potential tenant is asking for an arbitrage arrangement on your rental property? There’s a lot to consider here.
For a property owner, rental arbitrage can be risky. It means a lot of in and out on the property (and probably more wear and tear), and you don’t get to vet everyone who comes in and out of your house.
On the upside, though, you fill a vacancy and guarantee long-term rental income. There might also be more incentive for the lessee to take care of the property, and you could even charge more for rent or require a premium from each stay booked.
If you do opt to go through with the arrangement, make sure to vet the lessee carefully. Do they have a good track record with Airbnb or rental investing? A business plan in place? What are their plans for marketing the Airbnb listing or maintaining the property? Get the full scoop, and work with an attorney to make sure the master lease appropriately covers the arrangement.