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Property Management vs Rental Arbitrage | Which Strategy is Better?

Property Management vs Rental Arbitrage | Which Strategy is Better?

Short-term rentals are fast becoming one of the hottest segments in the rental industry due to their high profitability and rapid growth. With technology helping to simplify property management and rental, annual vacation rental revenues are significantly rising, exceeding $100 billion worldwide and growing every year!

According to iPropertyManagement, about 70% of vacation rental companies are small, managing 1-19 units, while 20% of the companies are medium-sized, and the balance is large companies that manage over 100 units. The various online marketing platforms for Short-term rentals include companies such as Airbnb, VRBO, HomeAway, Booking.com, TripAdvisor who are some of the top contenders.

You are probably at crossroads about figuring out which strategy to take to get into this lucrative market or how to be a part of it. The question of approach - whether it is rental arbitrage or property management continues to be debated. As we get into the details in this article, you'll be able to decide which strategy is best for you and which business model will be most beneficial for long-term success.

What Is Property Management?

When it comes to property management, there are few approaches you can explore. Managing your property can be as simple as managing it yourself, hiring a property manager, or a combination of the two with the right property management system.

Property management in the short-term rental market entails listing the rentals on online booking channels, pricing each rental and adjusting prices for specific calendar dates, answering inquiries from potential guests and communicating with existing guests, coordinating with cleaning and maintenance staff to ensure the rentals are prepared for each stay and more. Ownership over day-to-day tasks such as repairs and ongoing maintenance, security, and upkeep of the property is all part and parcel of the duties. Since managing short-term and vacation rentals entails a lot of work, many homeowners opt to outsource these operations to vacation and short-term rental management companies.

Benefits of Owning a property in the vacation rental market

Earning extra income + Gaining a vacation home! Ultimately, this is why you're considering owning vacation rental properties in the first place. It would be great to have extra income. The type of property, location, and where you buy will all affect your rental income. You also gain a getaway vacation home you can use whenever you want to take a vacation!

Pro Tip: Look at the nightly rate that other owners are charging and see how the rates and availability change depending on peak season and offseason. You can do some research in your area by looking up listings on Airbnb, Vrbo, Booking.com, TripAdvisor or other OTA to get an idea and determine rates accordingly.

Appreciating property value The ideal situation is that your investment property will appreciate in value over time so that when it's time to sell, you can get more money. Investing in an area with high demand will give your property value appreciation year after year. If you're planning to buy in a given market, take a look at its past and current trends before making a decision.

Exemptions from Taxes Renting is a business for you, which means you can deduct any business-related expenses if you pay taxes on your rental income. You might be able to claim deductions for housekeeping, restocking, and property management services. Don't forget to keep the receipts. The interest on your mortgage, property taxes, and insurance might also be deducted. Speak with a tax professional in your area if you need to find out which deductions you are eligible to claim.

Pro Tip: Pay for expenses related to your vacation rental with a business credit card so you can track everything you spend.

The downside of property management

High Startup Cost A mortgage loan can sometimes be secured with a down payment of less than 5% if you are buying a primary residence. For properties used as vacation rentals, the rules differ. You can expect to put down 20-30% of the value of your next home if you don't plan to live there permanently. Additionally, due to the fact that you'll be taking on more debt, your credit score requirements might be higher for this vacation home.

Extra taxes and fees If you rent your house out for fewer than 14 days a year, you won't have to pay taxes. The federal government requires you to pay income taxes if you rent out your property for more than 14 days. Additionally, you'll owe property taxes, state taxes, and local taxes. You may be required to obtain a business license, pay sales tax, or pay hotel taxes as well, depending on your local tax laws. In terms of fees, you will likely need to pay a booking fee for the websites you use to market your vacation rental.

Unexpected Expenses At a vacation home, things can break or stop working at any time. It is your responsibility to pay for the cost of fixing this if it happens. If the air conditioner fails, or a water pipe ruptures, you can't prepare for them. At least 1% of the purchase price should be set aside each year for unexpected repairs as such.

Always Pressed for Time! Maintaining and repairing the rental property is part of your duty, as is making the guests' stay as pleasant as possible. Responding to the guest's concerns, hiring housekeeping and restocking if needed, creating listings for sites across OTA’s as well as responding to reviews, and updating the booking calendar all take a chunk of time. Also, consider the time and costs of traveling between your primary residence and the vacation rental when you need to make repairs at the rental.

Our recommendation is to hire a virtual assistant or a co-host to help delegate some of the tasks. Together, these factors and a good property management system can make your vacation rental a success.

Restrictions & Regulations Vacation rental restrictions and regulations vary from city to city and even from HOA to HOA. As soon as you decide where to invest, you will need to research local rental policies.

What Is Rental Arbitrage?

Rental arbitrage is when you sign a long-term lease with a landlord, then sublet the property as a short-term rental. The goal is to make a profit on the difference between the monthly rent you pay to the landlord and the income you bring in from using it as a sublease or short-term rental.

For example,

  • A 12-month property lease costs $2000.
  • If you can rent it out for 50% occupancy rate - which adds to 15 nights a month — at $250 a night, you make $3750 (15 x $250)
  • $3750-$2000 = $1750
  • That leaves you with $1750 in profit!

It's easy to see why this can be an attractive business model, since startup costs are much lower than those of traditional rental properties.

When you first consider investing in real estate, you probably don't consider using properties owned by other people. Also, passive income generated by short-term rentals is often regarded as being the sole domain of those who can afford to buy property for large sums of money. Rental arbitrage, on the other hand, permits almost anyone to invest in short-term rentals. Rental arbitrage is a great way to grow your business without the capital to invest in multiple properties.

Benefits of Rental arbitrage

Owning property is unnecessary Rental arbitrage makes it possible for hosts who do not own properties to earn income. Renting a property will leave you free from the cost of buying land or building a structure. Its a low risk investment since you will not be weighted down with mortgages, large down payments or closing costs.

Start-up costs are limited Renting a property would require you to make it your own by furnishing it or otherwise modifying it. In general, you can recover your start-up costs as your rental income increases. Even if OTA's charge fees, bookings can still recover the cost.

You enjoy autonomy Rental arbitrage is advantageous over property management because you only have to pay the landlord, and you keep 100% of the income. (Nevertheless, utility and maintenance bills must also be accounted!)

Property is beneficial for Personal Use An added bonus is when you have access to a variety of properties around the nation, your ability to use those properties yourself while still making passive income.

Risks of Rental Arbitrage

Investment strategies are never risk-free. Here are some of the risks pertaining to rental arbitrage:

Guest Damages
In the event a guest damages your property while the lease is in your name, you will be held financially and legally responsible. At the end of the day, it is your responsibility to take care of the property. While some OTA’s offer insurance for guest damages, it becomes your responsibility to fix any damage to the property.

Maintenance Costs and Utility Bills Besides paying utilities and other bills, you'll be responsible for maintaining, cleaning, and making repairs to the property (which might occur often due to a high level of use). These extra expenses will certainly cut into your profits. Make sure it is all accounted for when drawing up your business plan.

Income fluctuation You should consider your vacation rental's likelihood of bookings when planning your likely income. It may be busy at times and slow at other times. To combat the off-season, you can offer special discounts and offers for weekly stays to encourage guests to stay at your short-term rental. Using this method, you will be able to pay your landlord's monthly rent without falling behind.

Changing market conditions The market conditions are constantly changing, and your property might be affected. Consider your area's housing market stability before engaging in rental arbitrage.

Unexpected risks Consider the weather in the area of choice before investing in rental arbitrage. Is the area a hurricane-prone area? What about earthquakes and mudslides? It may not be fun to think about these things when you're planning on hosting, but it's important to be prepared. Your choice of destination can be adversely affected by a natural disaster. Consider the risks of your area and what your backup income plan is. Planning ahead can prevent unforeseen risks.

Rental Regulations If you plan on starting a vacation rental in a particular city / town, you should also evaluate the regulations and laws that govern the area. Be sure to consider taxes, homeowner association fees, and any other costs associated with setting up a vacation rental.

Learn more about Airbnb Rental Arbitrage here.

Which Strategy Is Better?

In principle, we cannot say which path is profoundly the right one to take. In both cases, there are benefits and risks. The vacation rental industry offers a number of benefits aside from the risk potential, like in any investment. We hope we have provided you with a few key driving points that can help you decide which direction you want to steer your business. Vacation rentals have evolved into a burgeoning industry that has started attracting serious investment interest. The vacation rental market is emerging as a multi-billion dollar asset and the way forward for many entrepreneurs globally!

How Can Hostaway Help?

Hostaway is the market-leading all-in-one tool for vacation rental property managers. The powerful PMS and Channel Manager give you all the tools to automate and manage marketing, reporting, communication, payments, cleanings, pricing, and staff.

At Hostaway we make it easy for you to get more out of your business while spending less time on tedious manual tasks. Schedule a demo call at your preferred time with one of our product experts to receive actionable advice and discover how Hostaway can fit your property management business & unlock growth potentials for you!

Ready to find out how Hostaway can transform your business?

Hostaway is proud to support thousands of Property Managers and Airbnb Hosts Around the world. We take pride in being Top Ranked in Vacation Rental Software Review Sites: Capterra, G2, Software Advice, Trust Pilot, to name just a few! Check out our reviews and read the Hostaway Case Studies from real successful and growing Short-Term Rental Managers!