Rental arbitrage is when you rent a property like an apartment or a house or even a tent cabin from the owner and then list it on an online travel agency (OTA) like Airbnb or VRBO, essentially re-renting it for short periods of time.
Rental arbitrage is a low-risk, low investment business strategy for engaging in the short-term vacation rental industry. Because you don’t have to own property, you don’t make a large capital outlay purchasing or mortgaging the property. It also allows you to expand your property portfolio at a much greater speed than if you were waiting to afford a downpayment on each and every property. (For a detailed look at rental arbitrage read our blog What is Airbnb Rental Arbitrage?.)
Nashville is a great city for rental arbitrage.
Tourism is Tennessee’s second-largest industry, bringing in $23 billion in domestic and international travel spending in 2019 with Nashville, accounting for a significant portion of this number. And while the pandemic brought tourism to a halt, it is now steadily picking up, with a reported two-thirds of US citizens now ready to travel.
The Music City, with its plethora of tourist attractions, from music and theatre to architecture, history, culture, food, wildlife, and parks, is all set to recover and regain its lost tourist dollars. In fact, Nashville ranked among the top 30 most-desired domestic destinations this year and saw an increase of 200% in travelers at the Nashville International Airport in April 2021. It’s also one of the few US cities named a Safe Travels destination by the World Travel & Tourism Council and has seen the opening of over 20 new restaurants. These additional considerations also make Nashville attractive to those looking for vacation rentals in a new city from which they can continue to work remotely.
According to AirDNA, the world’s leading provider of short-term vacation rental data and analytics, Nashville is one of the top vacation rental markets in the US. And because it offers affordable rates, despite being an iconic and highly popular tourist destination, it also attracts budget-conscious travelers, an important segment in today’s economy.
According to Airdna 2021 data, Nashville is
the 4th best city for rental arbitrage, by STR premium (158.9%)
the 6th best city by average monthly revenue ($3,412)
the 5th best city by average daily rate ($216)
the 4th best city by average nights to cover rent (6.1 days)
Nashville also enjoys an average occupancy rate of 51.9%. Properties with 3+ bedrooms have the highest earning potential, accounting for an average revenue of over $6,000 with an average ADR of $432.
The best Nashville submarkets are East Nashville and West Nashville, accounting for an average monthly revenue of over $3,700 and only 5 nights to cover the rent, followed closely by North Nashville, South Nashville, and Central Nashville. Franklin/Brentwood is an emerging submarket with potential.
Nashville imposes a number of laws, regulations, and requirements on the operation of short-term vacation rentals in the city. As the property manager listing the rented property on an OTA, you are responsible for ensuring compliance with all applicable city codes, as well as relevant county and state laws and regulations.
The Metro Government of Nashville and Davidson County defines a short-term rental property as
“a residential unit containing not more than four sleeping rooms that is used and/or advertised for rent for transient occupancy by guests as those terms are defined in Section 5.12.010 of the metropolitan code”.
In the case of such a residential dwelling unit being rented to the same occupant continuously for more than 30 days, it is not considered to be a short-term rental property.
Yes, you must first obtain a permit from the Metro Government of Nashville and Davidson County before listing your rented property on any OTA. Listing a property online before receiving the permit will bar you from applying for one for a year.
Nashville has two types of short-term rental property permits:
Also known as short-term rental property permits for investor-owned properties, you will only be permitted to list rented property in certain non-residentially zoned properties.
The process of applying for a permit consists of several steps, including but not limited to:
An official or hand-drawn floor plan that includes all the rooms available for rent
Proof of homeowner’s fire, hazard, and liability insurance. (You are allowed to add relevant insurance provided by the OTA you are listing on, for example, Airbnb’s Host Protection Insurance.)
Proof of written notification to adjacent property owners
Proof of payment of all taxes due, including property taxes, permit renewals, and all applicable room, occupancy, and sales taxes
A locally responsible party residing within a 25-mile radius of the short-term vacation rental property must be named, who can be onsite in case of an emergency or complaint.
A statement confirming that by operating the proposed short-term vacation rental, no Homeowners Association agreement or bylaws; Condominium agreement, covenants, codes, and restrictions; or any other agreement governing and limiting the use of the proposed short-term rental property would not be violated.
A notarized affidavit confirming that all of the information provided is true.
Once you have collected all the necessary information and documentation, you can apply for a permit and meet with a zoning examiner. Once the permit is entered, you will be expected to schedule a fire inspection for the property you want to list online. Once the inspection is completed and your property is approved, all you have to do is pay the permit fee and you are ready to list on your choice of OTA. Permits are only valid for 365 days however and must be renewed each year.
The Metro Government of Nashville and Davidson County imposes a number of rules and requirements on short-term rental property. These include but are not limited to:
Abiding by all applicable noise restrictions contained in the Metropolitan Code
Abiding by all applicable waste management provisions of the Metropolitan Code
Maintain smoke alarms in all locations required by the Fire Marshal
Ensuring no recreational vehicles, buses, or trailers will be visible on the street or on the property in conjunction with the use of the short-term rental property.
Making sure the principal renter of a unit is at least 21 years of age
Ensuring the maximum number of occupants permitted on a property at any one time does not exceed more than twice the number of permitted sleeping rooms plus four (up to a maximum of 12)
Limiting rental to a single party of individuals
Posting the name and telephone number of the local responsible party conspicuously within the property and making sure the responsible party answers calls 24 hours a day, 7 days a week, for the duration of each short-term rental period to address any concerns with the property
Remitting all appropriate taxes in due time
As the property manager of the short-term vacation rental property, you are responsible for all relevant taxes as per city, county, and state laws. However, some OTAs like Airbnb and VRBO will charge guests certain taxes as part of their reservation and remit them directly to the appropriate agency.
For example, Airbnb will collect and remit the following taxes for listings in Nashville:
Any change in ownership will result in your permit being canceled. This includes changing ownership from an individual to a trust or an LLC or vice versa.
As the permit holder, you are considered responsible for the activity of your short-term vacation rental property guests. It is advisable to research guests at the time of booking to make sure they won’t cause you trouble.
The Metropolitan Government of Nashville and Davidson County takes complaints including noise, parking, trash, and other nuisance complaints pertaining to short-term vacation rentals seriously and has even established a hotline open 24/7. As complaints, if proven, can lead to your permit being cancelled, make sure your guests don’t violate any zoning ordinances.