Rental arbitrage is similar to subletting as it involves renting out a property that you are leasing from the property owner. The difference between subletting and rental arbitrage is that with rental arbitrage you rent the space out to multiple subletters for short-term stays. The idea is that you sign a long-term Lease Agreement and then rent the property out on a nightly, weekly, or monthly basis.
The vacation rental market has grown substantially in recent years, with sites like Airbnb and VRBO providing a way for property owners to easily advertise and rent out everything from rooms to entire homes. Seeing the potential profit from this type of rental, many experienced Landlords and new investors are interested in acquiring a vacation rental.
However, with rising prices and competitive markets, this can be hard to do. This is where rental arbitrage comes in. It allows investors to start a vacation rental business without having to purchase the property.
To help you decide whether starting a rental arbitrage business is a good idea for you, here’s an overview of the pros and cons of this type of rental, things you need to consider before getting started, and what you’ll need to run a successful rental arbitrage business.
Pros and Cons of Rental Arbitrage
Rental arbitrage can be a great way for investors to enter a new rental market and can lead to substantial profit, but there are some distinct pros and cons to consider before deciding it’s the right choice for you.
On the positive side, rental arbitrage means:
- You can take advantage of the short-term rental craze without making a long-term investment
- Fewer startup costs
- You have more cash available, which can be used to furnish and cover the rental costs or for other investments
- It’s fast – no need to search for the right property to buy and go through the closing process; with rental arbitrage, you can get your vacation rental business up and running quickly
- If it’s in a location you like, you can use it when it’s not rented out
While all of those factors are attractive for investors, rental arbitrage does not come without some challenges and risks, including:
- Finding a Landlord that will allow subleasing for short-term rentals
- Complying with all state, city, and county regulations
- Managing changes in demand, as many vacation rentals are seasonal businesses that see ebbs and flows throughout the year
- The costs you’re responsible for, including utilities, cleaning, and in many cases, maintenance and repairs
- The risk that comes with lots of Tenants in a property – you don’t get to screen them like you do with long-term Tenants, which can result in damage or issues that you’re responsible for
Despite the risks, rental arbitrage can be a lucrative practice for investors and landlords, particularly in the current market.
Things to Consider Before Getting Started
The key to a successful rental arbitrage business is doing plenty of research before leasing a property. It’s important to be well informed about:
- State, city, and county ordinances that impact short-term rentals. For example, some cities prohibit vacation rentals, require a minimum number of nights, or require hosts to have a hospitality license. It’s vital that you know any local regulations to make sure your business is legal.
- Rental markets. It’s important to know the demand – including average demand and seasonal shifts – and average nightly rates where you’re considering renting out property. This will let you know whether you’re able to make a profit. For example, you should know the average nightly rate you can charge and the number of nights per month that you’ll need to have occupants in order to make a profit.
Once you’ve done your research and found the right market, there are still some key factors to consider.
- First, do you have enough available cash? While startup costs are lower than purchasing a property, you will still need plenty of cash at the outset. This will cover things like the security deposit, the first month’s rent, and furnishing the property.
- Second, are there Landlords in the area that allow for short-term subletting? It’s important to talk with your Landlord before Leasing a property to become familiar with his or her policies on rental arbitrage. This is an essential step that cannot be overlooked – you need to be upfront with the Landlord about your plans, understand all related policies, and make sure that the Lease termsallow for the business you’re planning to run.
- Third, are there any other requirements or local laws to consider? Rental arbitrage can be tricky, so it’s not a bad idea to meet with a local attorney to discuss your plans and to make sure that you’re complying with all local laws.
- Fourth, do you have the time to take on this type of rental? Short-term rentals involve more of a time commitment than long-term rentals. You have to deal with bookings, cleaning, more maintenance issues, and lots of logistics. Before getting started, it’s important to determine whether you have the necessary time for this type of rental arrangement.
The Forms Your Business Will Need
If you’re ready to move forward and start a short-term rental business, one of the keys is having all the tools you need to make the process as easy as possible. This will help to make sure that your business is legal, you limit your risks, and everything goes as smoothly as possible. Here are a few forms that you’ll need:
- State-specific Lease. Before entering into a long-term Lease, it’s important to make sure that all terms of short-term renting are addressed. If your Landlord will allow it, it should be addressed in the Lease to make sure that you’re protected and there’s no opportunity for your Landlord to have a change of heart. Obviously, it’s typically the Landlord that provides the Lease, but make sure you thoroughly review it and offer to provide a better, more thorough one if needed.
- Vacation Rental Agreement. While it’s not always required when using platforms like Airbnb or VRBO, it’s a good idea to have a Vacation Rental Agreement that Tenants sign before staying in your property. This will mean more protection for you and fewer risks.
- Vacation Rental Pre-Arrival Instructions. This form makes your job a little easier. It provides Tenants with all the information they need for arrival and check-in.
- Reservation Confirmation Invoice and Receipt. This form helps make sure you have smooth reservation and billing processes by keeping track of reservations and payments received.
Ready for a Long-Term or Short-Term Rental Agreement
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