Airbnb Arbitrage in San Francisco | What to Know!

Airbnb Arbitrage in San Francisco | What to Know!

“Are you seeking business opportunities to make profits without owning any property?”

If this has piqued your interest, we are going to share the secret of how you can become a successful Airbnb property manager or host without owning any property in the colorful city of San Francisco.

What is Airbnb Rental Arbitrage?

Rental arbitrage is the practice of renting out long-term properties and re-renting them out to others on a short-term basis through short-term rental platforms such as Airbnb. In other words, you pay your long-term lease with short-term rentals and pocket the difference. Despite popular belief, rental arbitrage is a legal business, so long as you follow the regional laws and liability guidelines.

Rental arbitrage allows individuals to generate passive income through real estate without actually owning the property.

__Benefits of rental arbitrage : __

  • Owning property isn't necessary
  • Ensures a steady flow of passive income
  • The ability to rent multiple properties
  • Allows for incremental growth and monthly reinvestment
  • Leases can be terminated early - meaningless commitment

The key to success in rental arbitrage is to find a location that produces the most profit. Identify the location where there is sufficient short-term rental demand and a high volume of transactions. Rental arbitrage offers endless opportunities for both beginners and seasoned property managers.

Rental Arbitrage in San Francisco

Discover the Golden Gate City - San Francisco

The county and city of San Francisco are the cultural, commercial, and financial hubs of the U.S. state of California. The city of San Francisco in Northern California is the 17th most populous city in the United States and the fourth most populous in California. It was founded by colonists from Spain on June 29, 1776, and named after Francis of Assisi. Presidio of San Francisco was established at the Golden Gate, and the Missionary, a few miles away, was built in honor of St. Francis of Assisi.

San Francisco is one of the most vibrant colorful and interesting cities in the world. It offers visitors must-see attractions, thousands of unique events, and several diverse districts. A San Francisco is a popular tourist destination known for its cool summers, fog, steep rolling hills, eclectic mix of architecture, and landmarks, such as the Golden Gate Bridge, cable cars, former federal prison Alcatraz, Fisherman's Wharf, and Chinatown.

A look at the tourism impact in San Francisco

San Francisco Travel reported a total of 25.8 million visitors to the city in 2018, up 1.2 percent from 25.5 million in 2017. Visitor spending reached $10 billion, an increase of 2.3 percent over $9.8 billion in 2017 (including meetings and conventions).

In San Francisco, Tourism plays a major role in terms of being a source of income to the economy. According to Joe D’Alessandro, president and CEO of San Francisco Travel, the record-breaking outcomes for San Francisco’s tourism industry accounted for the 25.8 million visitors and $10 billion in spending created 82,538 jobs and supported services for people throughout the city and the entire Bay Area.

San Francisco is an incredibly beautiful city with colorful neighborhoods and breathtaking views, and it attracts artists, foodies, and adventurers who pursue edgy art and exciting cuisine from around the globe. According to the U.S. News & World Report travel rankings, San Francisco Ranked the #1 Best Foodie Cities in the U.S and the #2 best places to visit in California. Some of its many attractions include The bridges, Coit Tower, the museums, the restaurants, Chinatown, North Beach, the Victorian mansions, crooked Lombard Street, and the dazzling Fairmont Hotel are major attractions;

However, Fisherman's Wharf remains the most popular. Aside from dozens of souvenir shops, street entertainers, restaurants, and bakeries that sell the city's artisan specialty, sourdough bread, visitors can watch fishermen prepare their crab catch and repair their nets.

Airbnb Laws, Rules and Regulations in San Francisco

San Francisco enacted an ordinance effective February 1, 2015, legalizing short-term rentals in the city. Before this, San Francisco banned residential rentals of less than 30 days in multi-unit buildings—a ban that effectively made most Airbnb-type rentals illegal.

However, the 2015 law imposes a number of restrictions on short-term rentals, and below are an overview of the Laws, rules, and regulations governing the city of San Francisco.

Requirements for Short-Term rentals in San Francisco

Property owners or tenants who wish to host short-term rentals in San Francisco must meet all the following eligibility requirements. These requirements apply to all buildings containing one or more residential units, including single-family homes. If you don't meet these requirements, you may not be a short-term host and rental platforms like Airbnb are not allowed to list your unit.

Can you become a legal host in San Francisco?

Only permanent residents of San Francisco are allowed to be short-term hosts. To be a permanent resident, you must reside in your unit for at least 275 nights per year. Absentee owners who live in San Francisco less than 275 days per year are not eligible to engage in short-term rentals. Permanent residents are allowed to rent out their primary residences, but not locations in which they don't live, or second or vacation homes. An owner of a multi-unit building may only register and rent the specific residential unit in which he or she resides. However, bedrooms in the same unit may be rented and listed separately.

Air Cover by Airbnb

Insurance

Hosts are required to be covered by liability insurance with at least $500,000 in coverage. Alternatively, they may offer their units for rent through a hosting service that offers at least this much coverage. Airbnb, for example, automatically provides hosts with $1 million in Aircover coverage.

Building Code Compliance

You may not have any unresolved complaints related to your building, housing, or planning code. You can check this by searching for your property on the San Francisco Property Information Map. Hosts are also required to post a clearly printed sign inside the front door of the unit showing the location of all fire extinguishers in the unit and building, gas shut off valves, fire exits, and pull fire alarms.

Tenant Hosts (Arbitrager)

Any tenant who wants to become a host should read his or her lease carefully to determine whether it bars subletting the unit without the landlord's permission--such restrictions are common. If permission is required, the tenant should obtain it before registering the unit.

If a tenant registers his or her rental unit with the Office of Short-Term Rentals, the Office will send the landlord a letter notifying the landlord of the tenant's intention to be a host. San Francisco's short-term rental law does not affect lease restrictions against subletting. A landlord may evict a tenant who violates such a lease restriction. However, a tenant must be given 30 days' notice to cure the first violation before an eviction is allowed.

Registration Requirements

Hosts must register with both the San Francisco Treasurer & Tax Collector and Office of Short-Term Rentals.

Register with Treasurer & Tax Collector

All hosts must register with the San Francisco Treasurer and Tax Collector and obtain a business registration number, also called a Business Account Number or BAN. Such registration is free.

Register with Office of Short-Term Rentals

Hosts are also required to register with the Office of Short-Term Rentals and pay a $250 fee. Such registration may be done online, by mail, or in person. You must have your BAN number to complete this registration. If your application is approved, the Office of Short-Term Rentals will issue a short-term rental certificate by postal mail. The certificate is good for two years.

Your short-term rental will be listed and tracked by the city in a registry. The registry listings are available to the public, with the permanent resident names redacted.

Compliance

Once you become a registered short-term rental host, you must perform ongoing compliance tasks.

Comply with 90-Day Rental Limit

San Francisco's short-term rental law limits rentals where the host is not present in the unit to a maximum of 90 days per year. Violators who continue to rent out their apartments beyond the 90 days are subject to a daily fine of $484 for first offenders and up to $968 for repeat offenders. "Hosted rentals"--rentals where the host is present in the unit--are not subject to this limit.

File Quarterly Reports

The law does not require hosting websites such as Airbnb to track how many days a year a unit listed on its website is rented or attempt to enforce the 90-day rule through booking restrictions. In its place, hosts must keep track and self-report the number of days a unit is rented as a short-term rental. You are required to file such a report with the Office of Short Term Rentals each calendar quarter.

Rent Control Laws

Hosts who are tenants in rent-controlled units are not allowed to charge their guests more rent in any month than they are paying to their landlord. Tenants who violate this provision may be fined up to $1,000 per day and could have their units de-listed.

Transient Occupancy Tax

The 14% San Francisco hotel tax--called the "Transient Occupancy Tax"--must be collected from renters and paid to the city. Hosts who list their rental through a "qualified website company" need not collect or remit the hotel tax themselves--the rental platform can do it for them. Currently, Airbnb collects and pays such taxes for its hosts.

Hosts that don't rent through a qualified website company must collect and remit the hotel tax themselves. Any such host who earns more than $40,000 per year must obtain a certificate of authority to collect taxes from the Treasurer & Tax Collector and pay the tax monthly; others may pay the tax annually.

Business Personal Property Tax

Hosts are required to report an inventory of their business personal property and potentially pay a tax on that property annually. Hosts are required to submit Form 571-STR with the City of San Francisco Assessors Office. If you have previously submitted Form 571-STR for your hosting services and your personal property was valued at less than $50,000, you may not need to re-submit again. Visit the Assessors website to learn more about this exclusion.

Business Certificate

You must renew your business registration certificate every year with the Treasurer & Tax Collector. Renewals are due every May 31st and can be submitted online.

Renew OSTR Certificate Biannually

You must renew your certificate issued by the Office of Short-Term Rentals every two years and pay a $250 renewal fee.

You can read San Francisco's short-term rental ordinance online, and the city has created a Short-Term Residential Rental Starter Kit that provides detailed explanations of its regulations.

Brief Overview of Short Term Rentals in San Francisco

According to AirDNA San Francisco has 4605 active rentals of which 82% are listed on Airbnb.

Average Daily Rate : $222 Median Occupancy Rate : 74% Median Revenue : $2,771

Rental Arbitrage Potential in San Francisco

San Francisco has also been hard hit by the pandemic's aftereffects: with closed borders, no tourists, and rentals that have had to rely solely on residents for the past two years have taken its toll plummeting San Francisco into ranking at the bottom of the list for 1-Bedroom Properties.

Rental Arbitrage in San Francisco

AirDNA reports that The Bay Area (which includes San Francisco, San Jose, and Oakland) and New York City are two of the most expensive rental markets in the United States, so it's not surprising that they're at the bottom of the list for arbitrage opportunities in the United States.

The following information, however, sparks hope for the five best submarkets in San Francisco, which are emerging as opportunities for rental arbitrage.

Rental Arbitrage in San Francisco

Rental Arbitrage Formula

If you are curious to know more about how to calculate the rental arbitrage potential here is the formula for your understanding.

Monthly Rent – Average Monthly RevPAR (from the Last Twelve Months) = Monthly Arbitrage Potential

Find out more about the top metrics to track with Airbnb Vacation Rental KPIs: The Top Metrics to Track

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