There are over a million searches on Google for the term “What is rental arbitrage”.
With the coronavirus crisis hitting the short-term rental industry like a hurricane, people are quickly reworking their vacation rental business plans to be sure they’re picking the right model.
You can take advantage of the short-term rental market without needing to own property. There are two ways to do this:
- Rental arbitrage
- Property management
Today, we’ll be talking about how to make money with Airbnb arbitrage.
In short, corporate rental arbitrage is the process of renting a residential property long-term and then re-renting it as a short-term or vacation rental on Airbnb or other short-term rental platforms.
Making money on short-term rentals isn’t exclusive to people who were born rich or who already have assets. That’s why today I’m talking about one method to scale your Airbnb business without owning property.
This is one beautiful reason more and more people are able to list on Airbnb: rental arbitrage. And anybody can get in on it.
Related Post: iGMS Review: Manage Multiple Airbnb Accounts
What is rental arbitrage?
It’s simple math.
If you pay less in daily rent than what you’d make renting out your apartment on Airbnb (which is often the case), you have good business potential for rental arbitrage. For example: you currently pay $2,000 a month for your one-bedroom in San Diego.
On Airbnb, prices for the same kind of apartment in the same area are around $170/day. You could pay your whole rent with just 11 days of doing this! If you move in with your girlfriend and rent out your apartment full-time, you could make a $3,000/month profit.
This is rental arbitrage.
Benefits of Airbnb rental arbitrage
Fewer and fewer people are able to buy homes in today’s economy. Across the US, not only are the prices for purchasing a home increasing, but the median wages are not meeting the level necessary to be able to purchase homes.
The average salary needed to buy a home is $61,453.51 but the average US salary is $47,060. This excludes a lot of people not just from owning a home to live in, but also wannabe entrepreneurs from taking the traditional short-term rental route (who could eventually buy a home with their profits!).
Luckily, buying property isn’t the only way.
Now, even if you can’t afford to buy a home, you can rent a property from a landlord, list it on Airbnb and pocket the difference.
Airbnb is reported to have over 150 million users and was last valued at $31 billion. That’s a lot of business potential.
It’s a win-win for everyone but hotel owners. People need somewhere to stay for a short period of time and hotels are too expensive. Plus, with traveling increasing for both business and leisure, people want somewhere to stay where they can feel at home.
Why not your rental apartment?
Profit potential
The profit potential for Airbnb arbitrage is high.
If you do your research, pick the right properties, find motivated landlords and manage it well, you can expect to make about 1.5x — 3x the cost of your rental. So if you are renting a $2,000 apartment, making $5,000 (minus $1,000 in expenses), you can make $2,000/month just from one property.
At 10 properties, you could be making $20,000 a month, provided you find the right landlords in the right areas.
More autonomy
On top of the higher profit potential the benefit is that, unlike the property management business model, you won’t have to be dependent on your clients — the homeowners whose Airbnb businesses you’re managing.
For instance, as a property manager, if you have 10 properties and suddenly 5 of your clients decide to go with someone else, you’ll be screwed. With that in mind, you have to keep your clients happy — one weekend they may suddenly decide they want to let their mom use the unit even though you’ve it rented out already. You can’t do anything about that.
With rental arbitrage, you’re completely independent. Just gotta pay rent to the landlord. And you take 100% of the cut.
Disadvantages of rental arbitrage
The business potential in Airbnb arbitrage is endless. But there are a few disadvantages to consider before you decide to take this route.
Legally operating your Airbnb arbitrage
The main issue is business acquisition: finding units where the landlord will allow you to rent it out on Airbnb and where you can do it legally. Maybe you have a place in LA that you can easily make $4,000 in profit from.
Wondering how to continue your Airbnb arbitrage business through the crisis? We create a Coronavirus Survival Kit for Airbnb hosts
That doesn’t mean you’ll find a landlord that approves it or that you’ll be allowed to use the property that way.
Investment
Sure, you don’t have to buy a house, but there is still some investment involved.
Let’s say you find a perfect spot to run your Airbnb, costing you $3,000/month. Your landlord wants 2 months’ deposit and 2 months’ rent upfront. That’s a $12,000 investment.
On top of that investment, you may need to fix a few things up in the unit, buy some furniture, and throw on an extra layer of paint. You’re quickly looking at $10k-$15k of up-front investment per unit.
If you want to do 10 units, it’s closer to $100k-150k investment. That makes it difficult to scale quickly.
Let’s say you have $15k saved, realistically you can get one or maybe two units going.
Now you need to wait until you’ve saved another $10,000 before you can start another unit. That’s another 6-12 months for the 3rd unit. If you want a 4th, add another 4-8 months’ wait.
This also not even calculating the cost of your property rental expenses.
It’ll be a while before you can hit $20,000 months.
The property management model has much less overhead. If you find 10 people who want to be hosts you can onboard those listings. I know some property managers who have onboarding processes that last 2 days (but property management has far smaller profit potential).
More risk
Rental arbitrage has more risk because you’re taking on the lease. That’s a contract in your name and it’s not a light one.
Imagine you take on a 3-year lease and one year later there are new regulations and Airbnb arbitrage isn’t legal anymore. And then you’re stuck with the property for another two years.
That’s a big risk to consider.
Is Airbnb arbitrage legal?
Airbnb arbitrage is perfectly legal in many places. But not all. And sometimes only under specific circumstances.
You can check on the Airbnb website itself about the regulations, where you can also find contact information for the local authorities. You can also Google information about the regulations in the city of the property you’d like to rent.
There’s no shortcut or database of regulations. They’re all different; every jurisdiction has its own regulation. You have to do the work — either do the above or go to the city hall and ask directly what the regulations are.
Real estate arbitrage has been a long-term tactic used by many. The main point is to ask your landlord and make sure they’re on the same page as you. Some will be, some won’t.
Ask before you rent and if they don’t like the idea, move on to the next property.
Wondering how to continue your Airbnb arbitrage business through the crisis? We create a Coronavirus Survival Kit for Airbnb hosts
Rental arbitrage business plan
The first and hardest step is acquiring properties to rent out that:
- Are in a profitable location
- Have the landlord’s buy-in
- Are in a location where arbitrage is legal and regulations are in your favor
You can use tools like Mashvisor or Airdna to determine the best locations for properties and then you have to do the dirty work yourself to reach out to landlords and discuss what you plan to do with their rental.
*Read my detailed Mashvisor review
*Read my detailed Airdna review
Then you can start listing your property on Airbnb and other platforms, use software to automate the majority of the tasks, increase sales and optimize your Airbnb for better visibility.
Want to learn more? Check out my A-Z guide on growing your Airbnb business without owning any property.
Download a complete list of the best US cities for Airbnb arbitrage in 2020