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What is Rental Arbitrage and Is It for You?

by Emily Koelsch
rental arbitrage

Table Of Contents

Rental Arbitrage: What Is It?

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, 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 terms allow 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.

Top 3 Ways 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 rental arbitrage properties 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!

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?

Even if the house isn’t yours, you can start hosting guests on Airbnb via rental arbitrage. 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?

Rental arbitrage 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.

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 WriterEmily Koelsch is a freelance writer and blogger, who primarily writes about business, real estate, and technology.

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