Table Of Contents
- What Is Rental Arbitrage?
- Is Rental Arbitrage For You ( Pros & Cons)?
- Things to Consider Before Starting A Rental Arbitrage Business
- Rental Arbitrage: How To Get Started? [Easy Steps]
- How To Find Rental Arbitrage Properties?
- Rental Arbitrage: How To Calculate ROI?
- Best U.S. Cities For Rental Arbitrage
- The Forms Your Business Will Need
- Rental Arbitrage: FAQs
What Is Rental Arbitrage?
Rental arbitrage is similar to subletting as it involves renting out a property that you are leasing from the property owner. The difference between rental arbitrage and subletting 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.
“Is rental arbitrage worth it?” If this question always pops up in your mind or whether starting a rental arbitrage business is a good idea for you, then this guide you cannot miss. Here’s an overview of the pros and cons of rental arbitrage, things you need to consider before getting started, and what you’ll need to run a successful business.
Pros and Cons
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, it 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
- Rental arbitrage is fast – no need to search for the right property to buy and go through the closing process; with it, 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, it 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 terms allow for the business you’re planning to run.
- Third, are there any other requirements or local laws to consider? This business 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.
Rental Arbitrage: How To Get Started? [Easy Steps]
- Choose a market to invest in. One with high demand and low inventory is ideal.
- Research the market and find a property that meets your investment criteria.
- Make an offer on the property and get it under contract.
- Have the property inspected and appraised.
- Close on the property and begin collecting rent checks!
How To Find Rental Arbitrage Properties?
Search for the best rental listing sites
The #1 way to find rental arbitrage properties is to hunt for the best rental listing sites. The best rental listing sites are the ones with the most comprehensive listings and that allows you to filter by price, size, location, and other amenities. Some of the most popular rental listing sites include Apartments.com, Zumper, Rentometer and Zillow.
Look for landlords that permit Airbnb online
Another way to find your first property is by looking for landlords that allow Airbnb online. This will give you a list of potential properties to invest in. You can then do some research on the areas to ensure that they meet your investment criteria.
Speak to your local real estate agents
They will be able to advise you on the best areas to invest in the rental property and will have access to a range of properties that may be suitable for this type of investment. It’s also worth looking online at property websites and classifieds, as well as speaking with landlords in the area you’re interested in. always do your own research before investing in any property, however, as it’s important to know what you’re getting yourself into!
Use a real estate database or search engine
You can use a real estate search engine or database to find these “distressed” or discounted properties, which are usually sold below market value due to the seller’s financial difficulties. With rental arbitrage, you can purchase the discounted property, rent it out for more than what it cost you, pocketing the difference from rent as profit. However, proceed with caution when determining the true cost of purchase since there could be additional costs or needed investments that could consume your entire expected profit margin if not accounted for.
Attend Foreclosure Auctions
Investors can attend foreclosure auctions and bid on properties before they are listed on the open market.Taking advantage of a rental arbitrage business model through foreclosure auctions can bring the savvy real estate investor a great deal of potential income. By studying current rental markets, investors can identify areas with high rental rates and monitor foreclosure auctions that offer distressed properties at discounted rates. The investor then has the opportunity to purchase these homes before they appear on the open rental market, allowing them to rent out the property at a rate above their investment cost. This strategy requires savvy research and dedication, but provides a great way for investors to increase their portfolio without taking large risks with the open rental market.
Networking with brokers, agents, and other investors can be a great way to uncover rental arbitrage opportunities. By getting in touch with those involved in the local rental market, you can learn who may have access to off-market deals or properties before others do. In fact, rental arbitrage itself is based on being able to identify rental opportunities quickly and without your competitors knowing about them. Building relationships with brokers, agents, and other investors give you the chance to find these rental deals before anyone else, giving you a competitive edge.
Target Redevelopment Areas
By targeting areas that are undergoing gentrification or redevelopment, investors can capitalize on the rising rental rates and property values of their rental property investments. It is important to take the time to identify areas that are likely to experience rapid growth, as doing so can drastically enhance the scalability and profitability of rental arbitrage investments. It is also important for landlords to remain patient when investing in this type of real estate investing strategy, as rental prices can take years or decades before they reach a level where rental arbitrage yields a substantial return on investment.
Rental Arbitrage: How To Calculate ROI?
In the end, your goal is to generate more revenue than you initially invested. In the correct markets, a rental arbitrage property’s Return On Investment can be pretty profitable. The ROI will vary depending on geography, start-up costs, running costs, and a number of other factors, just like any other business.
ROI = (Cost of Investment / Net Return on Investment) * 100%
First, we need to understand how to calculate the cost of investment and net return on investment. The cost of investment is the sum of the first month’s rent, damage deposit, furniture, and decor. Net Return on investment is calculated by subtracting annual operating costs from annual revenue from bookings. So, to calculate ROI, we need the cost of investment, annual operating costs, and annual revenue from bookings.
Let’s understand how you can calculate the cost of investment first.
Cost of Investment = First Month’s Rent + Damage Deposit + Furniture + Decor
First Month’s Rent – $900
Damage Deposit – $400
Furniture – $2000
Decor – $900
So, Cost of Investment = $900+$400+$2000+$900 = $5100
Now understand how to calculate Net Return on Investment
Net Return on Investment = Annual Revenue From Bookings – Annual Operating Costs
Annual Revenue From Bookings = Bookings + Cleaning Fees
Bookings – $22000
Cleaning Fees – $4000
So, Annual Revenue From Bookings = $24000 + $4000 = $26000.
Now, let’s calculate Annual Operating Costs,
Annual Operating Costs = Annual Rent + Cleaners Pay + Utilities + Maintenance + Licenses / Permits
Annual Rent – $900*12 = $10800
Cleaners Pay – $4000
Utilities – $3000
Maintenance – $3000
Licenses / Permits – $400
Total = $21200
So, Net Return on Investment = Annual Revenue From Bookings – Annual Operating Costs
= $26000 – $21200 = $4,800.
ROI = ( $5100 / $4,800) * 100 = 106%
Best U.S. Cities For Rental Arbitrage
- San Diego
- Las Vegas
- New York City
- San Antonio
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.
Rental Arbitrage: FAQs
What is Airbnb rental arbitrage?
Airbnb rental arbitrage is a business strategy that focuses on using sublease agreements to rent out other people’s rental properties or houses on the Airbnb website.
Does rental arbitrage actually work?
Yes, in the correct markets, a rental arbitrage property’s Return On Investment can be quite profitable. The ROI will vary depending on start-up costs, location, running costs, and a number of other factors, just like any other business.
Is rental arbitrage legal?
Yes, it is legal. The basic idea behind it is that you find a property that’s being rented for less than it’s worth and then you buy it and rent it out for more. You can make a profit as long as the difference between what you pay for the property and what you charge in rent is greater than your monthly mortgage payment, taxes, and insurance.
Is rental arbitrage a good investment?
There are a lot of factors to consider when answering this question, but in general it can be a good investment if you do your research and are strategic about where and how you invest.
One important thing to keep in mind is that not all markets are created equal. You’ll have a better chance of success if you invest in areas that have high demand and low supply – that is, areas where there aren’t many available rentals or where the competition for rentals is high.
Another thing to consider is your costs. Make sure you’re aware of all the expenses involved in acquiring and managing a rental property, such as closing costs, repairs, and management fees.
Can you make money with rental arbitrage?
Through rental arbitrage, even if the house isn’t yours, you can start hosting guests on Airbnb. It is the best option for people who lack the funds to buy a house. They still have the opportunity to make six-figure wages and live the life of a landlord.
Is rental arbitrage hard?
In most of California, people have little trouble starting their own short-term rental company, but in some areas, it can be rather difficult. This takes into account the rules and the hefty state income tax as well.
How is rental arbitrage legal?
It is acceptable or legal if both the property owner and the area where the property is located allow or permit it. Moreover, if it follows city, state, and country regulations.
Should Landlords Allow Rental Arbitrage At Their Properties?
If you are a landlord, consider whether you are prepared to cope with the primary problems that landlords have when allowing rental arbitrage. Landlords are mostly concerned with timely payments and the state of the rental. The unit will suffer more wear and tear if there are frequent visitors, therefore the tenant must ensure they can keep it tidy and maintained. This won’t be an issue for reputable investors. Most will agree that they need to maintain the property in top shape in order to be able to rent it out as frequently as feasible.
Like any other renter, a tenant should be tracked down and supervised. Before agreeing to a lease, properly vet the tenants. If rent is not paid on time, a notice should be sent, and action should be taken as soon as feasible to evict the tenant.
If you can control the risks associated with these two issues, permitting rental arbitrage may enable you to secure a long-term rental while also assisting another investment in launching their venture. That seems like a win-win situation to many.
Is rental arbitrage still profitable?
In the correct markets, the Return On Investment (ROI) of a rental arbitrage property can be quite profitable. Including any business, the ROI will vary based on factors like location, start-up costs, ongoing running costs, and numerous other considerations.
Is rental arbitrage good?
Rental arbitrage is an extremely difficult way to conduct business. If you wish to invest in short-term rental properties, I advise that you only make up 10 to 20 percent of your overall rental portfolio; the remainder should be long-term rentals. Avoid engaging in this business.
Does Airbnb allow rental arbitrage?
Yes, Airbnb allows rental arbitrage. Rental arbitrage is the process of taking advantage of a price difference between two markets to earn a profit. For example, you might find a listing on Airbnb for a lower price than what you can find on other websites, or you may be able to rent out your own property for more money on Airbnb than you could through traditional methods like leasing or long-term rentals.
How do I convince my landlord to rent my arbitrage?
Begin by inquiring about any available spaces or properties and letting them know that you want to use them as part of a rental arbitrage strategy. They might also be able to suggest nearby residents or acquaintances who are enthusiastic about this concept!
There’s no surefire way to convince your landlord to rent your arbitrage, but here are a few tips that may help:
- Make a compelling argument. Your landlord is likely looking for reliable tenants who will pay their rent on time and take good care of the property. Make sure your argument emphasizes these points, and be prepared to back them up with evidence.
- Show that you’re knowledgeable about arbitrage. If your landlord already knows something about arbitrage, be sure to show that you know what you’re talking about too. This can help build trust and demonstrate that you’re serious about renting the property.
What does it cost to establish a rental arbitrage business?
Between $5,000 and $10,000. You’ll need to invest in a good quality rental property in a good location and you’ll also need to cover the costs of renovations, repairs, and property management.
How do I find a property to rent arbitrage?
You can find a property to rent arbitrage through various websites such as property websites, Craiglist, realtors, or social media.
Can I legally rent my house as an Airbnb?
It depends on your city and state laws. Generally, you can rent out a room in your house for less than 30 days, but you need to check with your local authorities to be sure.
Many cities are now starting to regulate Airbnb rentals, so it’s important to be familiar with the rules in your area. In some cities, you may need a permit or license to run an Airbnb rental. And in some cases, you may be required to pay hotel taxes on the income from your Airbnb rental. So it’s important to do your homework and make sure you’re following the rules.
How do I start Airbnb arbitrage?
Arbitrage is the process of buying something in one place and selling it immediately in another for a higher price. So, to start Airbnb arbitrage, you need to find a property in a low-cost area that you can purchase and then quickly list on Airbnb for a higher price.
The key to success with this strategy is finding properties that are in high demand but that are still available at a lower price. You’ll also need to be prepared to manage the property yourself or hire someone to do it for you. And, lastly, make sure you have enough capital saved up to cover both the purchase and listing prices as well as any additional costs that may come up.
How do I start Airbnb with no money?
You can start Airbnb without money by using your own vacant property. You’ll need to take some photos of the property, create a listing, and then wait for guests to book.
You may also want to consider investing in some of the following items to make your listing more appealing: bedding, towels, kitchen supplies, toiletries, and a Wi-Fi hotspot. And be sure to keep your property clean and tidy between guests!
Another way to get started without any money is by becoming an Airbnb affiliate. An Airbnb affiliate is someone who promotes Airbnb on their website or blog and receives a commission for every booking made as a result of their promotion. This can be a great way to make some extra money by promoting something you believe in.
Is rental arbitrage passive income?
It can be, but it depends on the approach you take. If you’re actively seeking out undervalued rental properties and making repairs/updates as needed in order to increase the property’s value, then it would definitely be considered an active strategy. However, if you’re more passive and are simply buying properties and then sitting back and letting the rent collected cover the mortgage and other associated costs, then it would definitely be considered passive income.
How does rental arbitrage make money?
In the case of rental arbitrage, investors will buy apartments or houses in low-cost areas and then rent them out at a higher price. The profits are made from the difference in rental prices between different areas. As long as there is a discrepancy between rents in different areas, there is potential for profit through this business.
How do I pitch a landlord on Airbnb?
There are a few factors you’ll want to consider when pitching a landlord on Airbnb:
- How much money can you bring in each month?
- What kind of renovations will need to be made to the property?
- Will the landlord be able to keep up with the day-to-day management of the Airbnb listing?
- What kind of contract will be put in place between you and the landlord?
- How much work is needed upfront to get the property ready for Airbnb guests?
Can you lose money with rental arbitrage?
Yes, you can lose money with rental arbitrage. In order to make a profit through it, you need to buy a property for less than it’s worth and then rent it out for more than the mortgage and other associated costs. If the property doesn’t appreciate in value or if you’re unable to find tenants, you may not be able to cover your costs and could end up losing money.
Why is arbitrage difficult?
The difficulty in arbitrage comes from the fact that it’s not easy to find a property with a big enough margin between the rent you’re charging and your mortgage payment (or other costs related to owning the property).
In order for this business to be profitable, you need to find a property where the rent collected is at least 50% more than your mortgage payment (or other costs related to owning the property). This is because you need to cover all of your costs, including repairs, vacancies, property management fees, and taxes. So if your mortgage payment is $1,000 per month, you would need to find a property that has a rent of at least $1,500 per month.
Is Airbnb arbitrage sustainable?
Arbitrage is a trading strategy that involves buying a security or commodity in one market and then selling it immediately in another market at a higher price. So the question is, can this type of strategy be used to make money in the Airbnb market?
The answer is yes, but only if you’re able to find discrepancies in rental prices between markets. For example, if you can find a city where rentals are cheaper than the average price for that city, then you could make a profit by renting out your property there and then re-listing it at a higher price. However, this strategy is not without risk, as rental prices can change quickly and without warning.
Ready for a Long-Term or Short-Term Rental Agreement
Whatever type of rental arrangement you’re planning, ezLandlordforms.com has the forms, tools, and support you need. From Tenant Screening to Move-Out, we’ve got everything investors and Landlords want. Visit ezLandlordforms.com to learn more or to start customizing your property management forms.
Emily Koelsch, ezLandlordForms Contributing Writer
Emily Koelsch is a freelance writer and blogger, who primarily writes about business, real estate, and technology.