What Is Airbnb Rental Arbitrage?

What Is Airbnb Rental Arbitrage?

Airbnb rental arbitrage is a business model that focuses on leveraging other peoples properties through sub-lease agreements and renting those properties on platforms like Airbnb, VRBO, or Homeaway. In essence, rental arbitrage hosts will rent properties from the long-term rental market and resell them on the short term marketplace.

Rental arbitrage is an age-old business model that transcends almost every industry in the world. In theory it is very simple, buy ‘product A’, turn it into ‘Product B’, then sell that product at a higher price. Because of the simplicity of the business model, the Airbnb community has widely-adopted it. In fact, you have probably stayed in an Airbnb that operated as a rental arbitrage unit, without even knowing it!

What Are the Benefits of Rental Arbitrage?

There are plenty of benefits from operating your business with a rental arbitrage model. In fact, many of the leading Airbnb hosts in the world operate their businesses this way. Sean Rakidzich, a highly successful Airbnb operator, Youtuber, and businessman, scaled his portfolio from zero to over a hundred units using nothing else but the rental arbitrage business model.

Here are some benefits of rental arbitrage:

  1. Little Upfront Investment Needed - Since you’re not buying the property, you do not need to outlay thousands of dollars for a down payment. All you need to do is pay your first months rent, damage deposit, and any furniture, linens, or amenities needed to get your property Airbnb ready.
  2. Little Risk - Again, you don’t own the property, so if the roof needs to be replaced it's on the landlord to fix it. If the property does not generate enough bookings to cover your costs you can walk away from the lease.
  3. You Can Scale Quickly - In order for you business to succeed it needs to be scalable and that is exactly what rental arbitrage offers. Most rental arbitrage hosts utilize channel manager software to assist in managing multiple locations.
  4. Less Bookkeeping Headache - Landlords have to manage and pay multiple expenses, from HOA fees, mortgage, utilities, maintenance, and much more. Instead, the rental arbitrage host only has to pay one flat fee to the landlord each month: rent.

As you can see, rental arbitrage provides several key benefits to a host. The ability to get started for very little, scale rapidly, and do so with very little risk are all huge advantages for any business owner.

What Are the Disadvantages of Rental Arbitrage?

While sublease agreements provide a lot of benefits, they also come with several important disadvantages. It is important to note that every business model has its pros and cons, especially in the Airbnb industry.

Here are some disadvantages of rental arbitrage:

  1. Rent - Whether you made any bookings or not your landlord is going to expect you to pay rent each and every month. If you’re late to pay, or avoid paying altogether, you may face charges, eviction, or in some cases, lawsuits.
  2. Property Damage - If one of your guests damages the property, whether that be by accident or on purpose, you as the leaseholder is responsible for the repairs. In some cases, Airbnb and/or your insurance provider may help cover the costs.
  3. Leasehold Agreements - You will need to write out very detailed agreements with the landlord to ensure that you, the landlord, and the guests are all protected. These documents can be time-consuming and costly to have created, oftentimes requiring the assistance of a lawyer.
  4. Legality & Permission - You will need to understand the local laws, HOA bylaws, and in some cases receive permission from neighbors. Cities, states, and HOA councils do not want Airbnb’s opening up everywhere so there are very strict rules in place to limit where short term rentals can operate.

Again, every business has its pros and cons, so do you due diligence and evaluate which property is worth taking the risk for, and avoid any properties that you suspect will have issues.

How To Calculate ROI for Rental Arbitrage

At the end of the day, you’re in the business to make more money than you invested into it. The Return On Investment (ROI) of a rental arbitrage property can be very lucrative in the right markets. Like any business, the ROI will vary depending on location, start-up costs, operating expenses, and various other factors.

ROI = (Cost of Investment / Net Return on Investment) X 100%

Here is an example of a simple rental arbitrage deal:

Start-up Costs

Expense Cost
First Month’s Rent $1,000
Damage Deposit $500
Furniture $2,500
Decor $1,000
TOTAL __$5,000 __

Annual Operating Expenses

Expense Cost
Rent $12,000
Cleaners Pay $4,500
Utilities $3,600
Maintenance $1,200
Licenses / Permits $300
TOTAL $21,600

Annual Revenue From Bookings

Revenue
Bookings $22,000
Cleaning Fees $4,500
TOTAL $26,500

Annual Revenue From Bookings - Annual Operating Expenses = Net Return on Investment $26,500 - $21,600 = $4,900 Annual Profit

ROI = (Start-up Costs / Annual Profit) X 100% ROI = ($5,000 / $4,900) X 100% Annual ROI = 98%

How To Get Your First Rental Arbitrage Property

Talking about rental arbitrage can be fun, but actually doing it can be challenging if you don’t know where to start. We have compiled a few tips to help you get started.

  • Join Real Estate Investor Facebook Groups: Engage with fellow investors in your local area and let them know how you can make them more money.
  • Build A Website: Promote your services on a website. This will instantly build credibility and if done correctly you will be having landlords contacting you!
  • Networking Events: Every city has a real estate investors networking event. Regularly drop-by those events and see if any of the investors would be interested in partnering with you on a deal.
  • Cold Call: Believe it or not, but cold calling still works. Pick up the phone and start dialing prospective landlords and ask them if they’re interested in subletting the space to you.

Is Airbnb Rental Arbitrage Right For You?

There are several other options available for hosts to operate and grow their business. While rental arbitrage is a very common strategy it is not a good fit for everyone. Let’s uncover the most common business models available.

  1. Buy-and-Hold is the strategy most real estate investors adopt. It provides the building blocks needed to substantially grow your wealth over decades.
  2. Appreciation: Historically real estate prices rise and as a result your equity in the property would increase.
  3. Debt Paydown: As you work to pay off the mortgage the principal payments will slowly grow your wealth, month-after-month. Tax Deductions: There are huge tax benefits to owning real estate, especially rental real estate. Consult with your tax accountant about what tax advantages are available to you.
  4. More Control: Since you own the real estate you have more control over your business. You’ll never have to worry about being evicted because you’re in complete control of your asset.
  5. The Commission Model tends to be less common, but provides some of the benefits of buy-and-hold and some of the benefits of rental arbitrage. The commission model works by partnering with a homeowner and splitting the revenues and/or profits. Homeowners have the up-side benefit of listing their property on lucrative OTAs like Airbnb, VRBO, and Homeaway, while also making use of it from time-to-time. Companies like Vacasa utilize this model and have thousands of properties across North America.
  6. Little to no risk: The homeowner is responsible for the cost of maintaining the property, paying all homeowner expenses, and any up-front setup costs.
  7. Immediate Cash Flow: Since you take a commission from the revenue, you immediately get paid each and every time you make a booking.
  8. You’re in Control of the Listing: The homeowner does not own the online listing, so if they choose to fire you from managing their property they do NOT get to keep the properties online listings. In other words, they would have to start from the beginning again.
  9. The Co-host Model: allows you to partner with an already established Airbnb property and Host. Many hosts do not have the time or resources to manage the property themselves so they hire co-hosts to assist them with the property. This business model is similar to the commission model in terms of how you get paid, but you’re acting underneath the homeowner, rather than acting for the homeowner.
  10. Little to no risk: Similar to the commission model, the homeowner is responsible for setting up and maintaining the property.
  11. Immediate Cash Flow: This depends on the agreement between you and the homeowner, but typically you get paid each and every month.

As you can see, there are several different types of business models that you can use to grow your business. Neither of these options are better, or worse, then each other - it completely depends on your personal and professional objectives.

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