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What is Rental Arbitrage and Is It for You?

by Emily Koelsch
rental arbitrage

Table Of Contents

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 or real estate arbitrage, things you need to consider before getting started, and what you’ll need to run a successful business.

Is Rental Arbitrage For You ( Pros & 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.

Pros

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
  • It 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
Cons

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 or real estate 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.

Best U.S. Cities For Rental Arbitrage

  • Nashville
  • Jacksonville
  • San Diego
  • Miami
  • Tampa
  • Austin
  • Las Vegas
  • Savannah
  • Portland
  • Charleston
  • New York City
  • San Antonio
  • Chicago
  • Indianapolis

Risks of Rental Arbitrage

Rental arbitrage, which involves subleasing a property for profit, carries certain risks that should be considered:

  • Property damage and liability: Subtenants may cause damage to the property, resulting in repair costs and disputes.
  • Non-payment or late payment: Subtenants may fail to pay rent on time or not pay at all, creating financial strain for the sublessor.
  • Unreliable guests: Subleasing to strangers increases the risk of disruptive or problematic guests who can harm the property’s reputation.
  • Legal and regulatory compliance: Short-term rentals may be subject to specific laws, regulations, and taxes that must be followed.
  • Financial risks: Fluctuating market conditions, unexpected expenses, or low occupancy rates can impact profitability.
  • Reputation management: Negative guest experiences or reviews can tarnish the sublessor’s reputation and impact future bookings.
  • Competitive market: High competition among rental hosts can make it challenging to attract guests and maintain occupancy rates.

5 Ways to Find Rental Arbitrage Properties

  1. Search for Properties on the Greatest Rental Listing Websites

Start your rental arbitrage journey by scouting the finest rental listing websites available. These platforms, such as Zillow, Realtor.com, or Craigslist, are goldmines of property listings. Narrow down your search by specifying your desired location, budget, and property type. Pay close attention to properties that have been listed for a while or offer attractive discounts, as these may present excellent arbitrage opportunities.

  1. Participate in Local Real Estate Investor Meetings & Initiate Meaningful Connections

Networking is key in the real estate world. Attend local real estate investor meetings or join real estate investment groups in your area. These gatherings are excellent opportunities to connect with experienced investors who might have insights into potential arbitrage properties. Building relationships with other investors can also lead to joint ventures or access to off-market properties.

  1. Articulate to Your Local Real Estate Agents

Local real estate agents are valuable resources for identifying the best rental arbitrage properties. They have access to the Multiple Listing Service (MLS) and can provide you with information on properties that match your criteria. Discuss your intentions with them, and they can keep an eye out for suitable opportunities or even offer guidance on areas with high rental demand.

  1. Discover an Airbnb-Friendly Landlord

When searching for properties to lease, it’s advantageous to find landlords who are open to Airbnb arrangements. Reach out to property owners or property management companies and inquire about their willingness to accommodate short-term rentals. Airbnb-friendly landlords are often more receptive to discussing flexible leasing terms, making it easier for you to set up a rental arbitrage arrangement.

  1. Talk to Airbnb Hosts

Existing Airbnb hosts can be a wealth of knowledge when it comes to identifying potential rental arbitrage properties. They understand the local market dynamics, occupancy rates, and which neighborhoods are most desirable for short-term rentals. Reach out to Airbnb hosts through the platform or attend local Airbnb host meetups to gather insights and possibly uncover opportunities they are looking to offload or collaborate on.

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.

FAQs

How profitable is rental arbitrage?

With this business, you have a fantastic opportunity to make a lot of money. On average, you can earn two or three times the amount you pay for rent. For example, if your monthly rent is $3,000, you could earn $9,000 each month, leaving you with an extra $6,000 to keep. It’s an excellent method to boost your earnings!

Is Airbnb arbitrage illegal?

It’s important to know that Airbnb rental arbitrage can be legal, but it depends on the short-term rental rules in your area. It is important to conduct thorough research prior to commencing. Keep in mind that regulations for short-term rentals are changing in many big cities worldwide. Stay informed to ensure you’re following the current laws.

How risky is rental arbitrage?

Rental arbitrage comes with some risks to consider. Since you don’t own the property you’re renting out, there is a higher chance of losing money if something goes wrong. Also, as a renter, you may have limited control over the property compared to owning it. It’s important to be aware of these factors before engaging in this business.

Is rental arbitrage successful?

This business can be successful, but it depends on various factors like location, market demand, and your management skills. Conduct thorough research, understand the risks, and develop a solid strategy. Success is possible with careful planning and diligent execution.

How to find rental arbitrage properties?

To discover rental arbitrage properties, research popular areas for short-term rentals using platforms like Airbnb and vacation rental websites. Contact landlords who permit Airbnb and negotiate favorable terms. Utilize tools such as Airbtics and ShortTermSage for market insights. Network with real estate agents and online communities for additional opportunities. Analyze profitability and local regulations before finalizing any deals.

What is arbitrage in real estate?

Arbitrage in real estate means profiting from price differences or market inefficiencies. It’s about finding undervalued properties in one market and renting them at a higher rate in another market, like short-term rentals or Airbnb. This strategy helps investors maximize their returns by taking advantage of these gaps in pricing and demand.

What is short-term rental arbitrage?

Short-term rental arbitrage is a strategy where individuals lease properties from landlords. They then sublease these properties to travelers as short-term rentals, charging a higher price. This approach helps close the disparity between long-term rental rates and the income generated from short-term rentals. Ultimately, individuals can earn a profit by capitalizing on this difference in pricing.

How to get started in rental arbitrage?

To begin rental arbitrage, follow these steps:

  • Research popular areas with high demand for short-term rentals.
  • Identify landlords who permit short-term rentals and negotiate favorable terms.
  • List your property on platforms like Airbnb or VRBO to attract guests.
  • Provide excellent customer service and manage bookings effectively.
  • Continuously analyze and adjust pricing to maximize profitability.
What is an example of rental arbitrage?

Here’s a real-life rental arbitrage example: Rent a city apartment all year, then list it on apps like Airbnb for short stays at higher rates. But be cautious – balancing rules and profit is key to success.

How much money do you need to start Airbnb arbitrage?

The money needed to start Airbnb arbitrage varies. It includes upfront costs such as deposits and furnishings. Ongoing expenses like rent and utilities are also important to consider. Plan and budget wisely for a successful start in this exciting opportunity.

What is Airbnb arbitrage?

Airbnb arbitrage is when people lease properties from landlords and list them on Airbnb for short-term rentals. The goal is to make a profit by charging more than the lease cost. By tapping into the high demand for short-term stays, individuals can earn income without actually owning the properties involved.

How to start Airbnb arbitrage?

To begin Airbnb arbitrage, follow these steps:

  • Find areas where there is a strong demand for short-term rentals.
  • Lease properties from landlords who permit Airbnb.
  • Furnish and decorate the properties attractively.
  • List them on Airbnb and optimize your listings.
  • Provide exceptional guest experiences and manage bookings efficiently.
How to pitch landlords on Airbnb?

When pitching landlords on Airbnb:

  • Highlight benefits like guaranteed rental income and responsible guests.
  • Assure them of your commitment to property maintenance.
  • Offer higher rent, long-term leases, or revenue-sharing.
  • Share success stories or references from other landlords.
  • Address concerns and emphasize open communication.
How to start an Airbnb with no money?

Starting an Airbnb with no money is possible! Use your existing space, like a spare room or couch, to host guests. Negotiate with your landlord or consider renting out your home while staying elsewhere temporarily. 

Can you make a living off of arbitrage?

Yes, it’s possible to make a living off of arbitrage. By capitalizing on price differences in different markets, individuals can buy low and sell high to earn profits. However, success requires understanding, research, and skillful execution of arbitrage strategies.

How to find landlords for Airbnb arbitrage?

Start by networking within real estate circles, exploring online property platforms, and attending local property events. Emphasize the benefits of a consistent rental income and responsible management. Building trust and showcasing your expertise is key to securing win-win partnerships in property management.

Does rental arbitrage really work?

Rental arbitrage means renting a place and then renting it out to others for a higher price. If you do it smartly, you can make way more money than what you pay for the place. Like, if you pay $1,500 each month for rent, you could rent it out for $250 per night just on weekends and make a lot more.

Why would a landlord agree to rental arbitrage?

A landlord might agree to rental arbitrage because it offers them a hassle-free income stream. They can earn consistent rent without the burdens of tenant management. By leasing to a subletter who rents out at a higher rate, landlords enjoy passive income and avoid the headaches of property management.

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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