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Airbnb Rental Arbitrage in Palm Springs | What to Know!

Airbnb Rental Arbitrage in Palm Springs | What to Know!

The rapid expansion of Airbnb has caused many people to wonder how they will be able to use its platform for their own business with as little risk and investment as possible. Most people believe that renting out property through Airbnb is the only way to generate revenue. Airbnb rental arbitrage is one way to avoid the risks of property investment. Below, we'll uncover several risks and rewards associated with this technique.

What Is Airbnb Rental Arbitrage?

Airbnb rental arbitrage is the practice of renting properties and subletting them on the Airbnb platform. It’s becoming more difficult to own property as home prices have far outpaced median incomes. This strategy allows you to build cash flow without the stress and challenges of home ownership. Airbnb rental arbitrage is a tactic that can work well in some markets. Low-cost rental properties can make more money for investors in this way. However, there’s a lot of due diligence required on your part as a property manager or host before jumping in with both feet.

The growing market for short-term rentals has opened up doors for investors in the short-term rental market. However, not every location is conducive to this type of market. The most important factor in determining profits in the Airbnb short-term rental market is the location. But, for Airbnb, location doesn't just mean high demand from guests - it also means affordable properties since high costs can quickly eat into profits. Recent data analysis indicates Palm Springs, CA tops the list by capturing the No. 1 spot in the short-term rental market for vacation rentals.

Get To Know Palm Springs

Palm Springs, city, Riverside county, southern California, U.S. lies in the Coachella Valley, at the foot of Mount San Jacinto. Over the years, Palm Springs has become a glamorous desert resort, frequented by Hollywood film stars and other celebrities, and it is a favorite vacation site for college students in the Los Angeles area. Key features of this exotic city include luxurious hotels, fashionable restaurants and boutiques, and vast recreation areas for tennis, swimming, hiking, skiing, and especially golf.

In the winter, Palm Springs attracts tourists seeking a sunny, warm destination. Additionally, music festivals contribute to the success of the desert town. Coachella and Stagecoach, in particular, draw large crowds. During those two events, most people are able to cover their costs for the entire year.

Introduction To Investing In A Palm Springs Airbnb

According to Forbes, “The Palm Springs Real Estate Market Is Hotter Than Ever”. Having said that, If you are considering investing in an Airbnb in Palm Springs, California, it's one of the wisest and opportune decisions you will make to expand your portfolio in the short-term rental market. Palm Springs is known for and is one of the most popular attractions, with a thriving economy in the tourism industry. It's no surprise why many investors consider Palm Springs one of the best cities for Airbnb investment. And thanks to the online travel platform, starting a vacation rental business has never been easier.

The city of Palm Springs, however, has passed a law restraining vacation rentals despite the many services and features available via Airbnb. While you may be discouraged by this, if you follow the requirements and strict regulations, you could be on your way to making one of the most significant investments of your life.

Further reading: 8 Tips to Growing your Airbnb Revenue, Nightly Rate, and Occupancy Tips to Buying an Airbnb Out of State

Airbnb Palm Springs - Regulations you should know

As far as Airbnb regulations are concerned, Palm Springs has one of the most stringent. In 2008, these regulations were adopted, and they continue to be implemented even today. Owner-occupied and non-owned rentals are subject to the Palm Springs Airbnb rules. This means that if you're an investor looking to rent out your investment property on Airbnb, you must abide by the Airbnb rules. In order to invest in Airbnb Palm Springs, you must meet the following requirements.

Palm Springs Short-term Rental Ordinance

The city's short-term residential rental ordinance establishes requirements for short-term rental hosts in Palm Springs. The ordinance states that you need a Vacation Rental/Homeshare Registration Certificate and a Transient Occupancy Tax permit in order to legally operate any short-term rental. Note that Palm Springs has a strictly enforced vacation rental home city ordinance. These rules govern every vacation rental reservation booked in the city of Palm Springs. These are highlights and major concerns regarding vacation rental homes that the city addresses:

The short-term rental classification in Palm Springs

  1. Home Share

A home share is a rental of one or more bedrooms for 28 or fewer days while the owner resides in the home throughout the duration.

  1. Vacation Rental

A vacation rental is any accommodation that is available for 28 or fewer days without the owner present

The registration and permit process

Each Palm Springs vacation rental or home-share must have a valid, annual permit. It is prohibited to operate a short-term rental without a Vacation Rental Registration Certificate. It is an extremely serious violation not to register and operate without a permit. You can be fined $5,000 by the City of Palm Springs and you will be permanently ineligible for vacation rental operations. You can learn more about requirements in the City's short-term vacation rental toolkit.

An investor in short-term rentals is allowed to hold only one registration certificate at a time. Which as a result, means you cannot own more than one Airbnb investment property in Palm Springs. Moreover, Airbnb Palm Springs hosts should make sure their registration certificates are clearly visible and displayed in the unit and on any advertising regarding the rental, including web-based services, host platforms, and print publications. The city will be able to identify unregistered vacation rentals by doing so.

Transient Occupancy Tax (TOT)

Transient lodging taxes are assessed on hotels, inns, vacation rental properties, and other short-term rentals in Palm Springs. Transient Occupancy Tax must be reported and paid to the City each month. This is applicable even if there was no guest activity or you have not received a payment for the given month.

The Transient Occupancy Tax rate in Palm Springs is 11.5%.

It should be noted, if you fail to file a TOT form as required, the penalty is 10% of the TOT amount due or $50.00 whichever is greater, and interest will apply.

Check the City’s Vacation Rental TOT Information page for more information.

Advertising requirements

A four-digit City ID number will be provided for you once you complete the Vacation Rental/Home Share Certificate application. You need to include that number in the description of your listing in the following format:

“The City of Palm Springs ID #XXXX”.

TBID Assessment

The Greater Palm Springs Tourism Business Improvement District (TBID) was re-established in 2020 and includes short-term vacation rentals. As of July 1, 2021, all vacation rental lodging in the district, including Palm Springs, must pay the 1% TBID assessment on short-term stays of less than 28 days. Visit the TBID website to learn more.

Safety Standards and Measures

Palm Springs enforces rules and regulations with respect to the habitability, health, and safety of short-term rental units. During the initial application process for the Vacation Rental Certificate, and each time it is renewed, your short-term rental property will be subject to a safety inspection. Check the City’s Vacation Rental and Homeshare Safety Inspection Form for information on what’s included in an inspection.

The property’s owner (Host / Property Manager / Agent) must be present during the said inspection. Furthermore, the owner is required to carry an insurance policy covering short-term rentals or personal liability for the duration of the registration period with a minimum limit of $500,000. At the time of application or renewal, you'll need to provide proof of insurance.

Other rules

  • Remember to check with your community about other types of local rules if your home belongs to a condo complex, HOA, time-share, or other tenant organization.

  • If your property is on a lease, check your contract or contact your landlord to make sure you’re permitted to sublet.

  • Each Palm Springs investment property must have a local contact who can respond to any issue or complaint within minutes whether it concerns the property itself or the surrounding area.

  • An apartment cannot be converted into a vacation rental by evicting a tenant or ending the lease

  • The ordinance carries criminal penalties as well as administrative penalties for anyone who violates it. In the event of three violations in a 12-month period, the permit of the property will be suspended for 2 years.

Vacation Rental Contracts with Guests / Occupants

Airbnb property managers or property owners must enter into a contract before allowing guests to stay at the property.

There’s a variety of requirements for what the contracts must specify.

  1. Palm Springs requires the Airbnb guest signing a vacation rental contract to be at least 25 years of age.
  2. A guest must provide his/her name, age, address, and a copy of a government-issued identification card
  3. Conditions of the contract must include occupancy limits, parking policies, and noise restrictions which need to be clearly communicated in the contract.
  4. Airbnb Palm Springs hosts must provide a copy of the “Good Neighbor Brochure” to the occupants/guests on arrival at the property.
  5. The guest must provide a list of guest names, vehicles, and acknowledge that he/she is legally responsible for the compliance of all occupants of the rental.
  6. Hosts must meet and greet guests in person to explain the local rules and regulations
  7. Obtain a signature of receipt of the Statement of Rules and Regulations/Good Neighbor Brochure

Occupancy limits

There are limits on the number of guests, parking, and occupancy in Palm Springs vacation rentals. Palm Springs rental property occupancy limits are determined by the number of bedrooms in the rental unit Occupancy limits

Night limits The number of guest stays for vacation rentals is 32 per calendar year, plus four additional stays during July, August, and September. For the first year following the effective date of the Registration Certificate, the number of stays will be prorated.

Home shares do not have annual limits for guest stays.

Is Airbnb Palm Springs A Profitable Investment?

Now that we've covered the most important rules for investing in Palm Springs real estate short-term rentals, you might wonder if it's worth going ahead and investing.

Let's take a look at a few data analytics to supplement the cause.

What Airbnb has to offer in Palm Springs, California for investors in the short term rental market:

  • Median Property Price: $494,642
  • Airbnb Occupancy Rate: 75%
  • Average Airbnb Daily Rate: $396
  • Monthly Airbnb Rental Income: $4,603
  • Airbnb Cash on Cash Return: 5.3%

How do you choose the best spot for your Airbnb short-term rental property?

  1. The ideal neighborhood - Vacationers typically choose vacation resorts in well-known areas such as Las Palmas, Movie Colony, Deepwell, Twin Palms, La Quinta Cove, PGA West, Racquet Club Estates, etc. Other good neighborhoods can also rent well but rely more on the individual property being appropriate, impressive, and effectively marketed. Walking distance to popular attractions or “downtown” is a huge plus.
  2. Houses and condos can both do well at different price points but it’s important that the property is well laid out for guests to share: Bedrooms that are as equally sized and equipped as possible do better. Multiple “masters” or bedrooms with a bathroom en suite perform best.
  3. The location of the pool, the view, the sun exposure, and the proximity to neighbors are all important factors.

How much rental revenue can an owner expect?

The rental rate of a home should be determined after furnishing by a rental agent. A rental agent can be extremely helpful to you during the buying and furnishing processes in order to ensure maximum returns as well.

The following are examples of rental rates according to Paul Kaplan

These are estimates only; actual rates will depend on the location, amenities, how the property is furnished, and how it is marketed

• 1 BR condos: range from $95/night or $1400/month to $200/night or $3400/month

• 2 BR condos: range from $120/night or $2000/month to $250/night or $4600/month

• 3 BR houses: range from $265/night or $4300/month to $800/night or $12,500/month

• 4 BR houses: range from $325/night or $5300/month to $900/night or $14,000/month

Before We Conclude

Since no property needs to be owned in order to host an Airbnb listing, Airbnb arbitrage is becoming increasingly popular and considered a smart way forward. Conducting extensive market research and gathering all the necessary permissions will enable you to pay for your rent while becoming a prosperous full-time host. Take advantage of this extremely versatile short-term rental market in Palm Springs to diversify your portfolio and watch your business grow in no time at all.

Oftentimes, automating your business is a great way to improve your business and enhance the guest experience. Your vacation rental income will increase when you save time on mundane day-to-day operations. At Hostaway we offer state-of-the-art, Property Management Software integrated with channel manager software with over 200 more applications that can help ease the load off your back, saving you a ton of time.

Schedule an appointment to speak with one of our product experts to arrange for a free demo. We promise - it's an investment worth your while!

Ready to find out how Hostaway can transform your business?

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