Whether you’re in a bustling city or the middle of nowhere, buying a property to run as an Airbnb business can be a great way to earn passive income.
Of course, buying a house takes a significant amount of capital.
A lesser-known (but still viable) strategy for making money on sites like Airbnb and VRBO is short-term rental arbitrage, which doesn’t require you to own real estate.
In this guide, we’ll explain how the strategy works and how to find opportunities to start this type of real estate rental business.
What Is Rental Arbitrage?
The concept of arbitrage is a continuation of the “buy low, sell high” rule that drives all businesses.
Here’s an example: if you buy a single-serving bottle of water in bulk at the grocery store, it might cost $1. But if you buy that same bottle from a vending machine, it will probably cost at least $2. If you buy it at a stadium or an airport, the same bottle might cost $5.
The product didn’t change, but its value is different depending on where and how it’s sold.
Rental arbitrage works the same way. An apartment might rent for $2,000 per month (about $67 per day) on a 12-month lease. But when rented on a per-night basis, it may command a significantly higher price.
Some savvy people have figured out how to take advantage of this difference in pricing: they sign a lease for an apartment, house or condo, then sublet the space to others on a nightly basis on apps like Airbnb and VRBO.
Then they pocket the difference, which is known in the industry as a premium.
Is Rental Arbitrage Legal?
Rental arbitrage is legal, but it comes with two big asterisks.
First of all, the city in which the property is located must allow short-term rentals. Many cities large and small (along with some HOAs) have banned or placed limitations on short-term rental properties for a number of reasons, so it’s imperative to do your homework before trying this out as a money-making strategy. Failing to do so could result in expensive fines or lawsuits.
Unfortunately, there is no single website or app that will allow you to quickly look up whether your jurisdiction allows short-term rentals, so you’ll have to check your local regulations. These are likely contained in your city’s zoning code, planning code or city ordinances. Airbnb has a helpful guide on how to find your local regulations.
The second hurdle is the language contained in the lease of the property you want to sublet. Some landlords don’t want the additional risk of unvetted tenants coming in and out of their property, so the lease may explicitly prohibit subletting. In this case, renting out the place on a nightly basis would fall under any “no subletting” clause.
Even if your lease is mum on the subject of subletting, don’t assume you’re good to go. Other provisions — such as an obligation to inform your landlord of overnight guests or using a property for business purposes — may also prohibit you from leveraging rental arbitrage.
Our view is that it’s best to be upfront with potential landlords about your intentions. Many are just fine with arbitrage arrangements, so long as they get paid as expected.
How to Find Properties for Airbnb Arbitrage
Finding properties that will work for a short-term rental arbitrage business can be challenging. Here are a few ideas for generating a pipeline of properties to sublet.
- Ask expat owners. Many people who go overseas for a temporary job, mission work or military service just want to ensure that their property is taken care of while they’re gone. You may be able to find expats willing to let you run an Airbnb out of their otherwise vacant house. Search in expat Facebook groups or forums like Expat Exchange.
- Find accidental landlords. Many people end up as landlords who didn’t plan to be. This situation can arise when someone can’t or doesn’t want to sell their house, but is required to move. Homeowners want to rent to tenants to cover the mortgage, but some of these folks may not know what they’re getting into. Accidental landlords who want their property to earn cash but don’t know the ins and outs of running a business may be the perfect opportunity for an arbitrage situation.
- Talk to real estate agents. These professionals have a good pulse on the real estate industry as well as the local market. Well-established agents will have a wide network of contacts and may know just the person to connect you with to start your business.
- Attend local real estate meetups. This is a great opportunity to get your name out there and meet others who may need your services, or who are a step or two ahead of you in the process.
- Talk to burned-out Airbnb hosts. Running a short-term rental business can be challenging, especially if you have another job. Overwhelmed and/or unsuccessful Airbnb hosts may be happy to let you have the reins and take over.
How to Convince a Landlord to Let You Do Airbnb Arbitrage
If you’re planning to use an apartment, house or condo for rental arbitrage, the best approach is to be upfront with the landlord about your intentions. That way, everything is above-board and you don’t have to worry about being caught, evicted or fined.
If the property owner is reticent or unfamiliar with the short-term rental arbitrage model, here are a few tips for convincing them that allowing you to sublet is a great idea.
- Present yourself as a property manager. The owner likely wants a piece of the short-term rental pie, but doesn’t want the headache of furnishing, listing and maintaining an Airbnb rental. That’s where you come in. Frame the discussion in terms of you helping them earn more money from their property with little additional risk or hassle.
- Offer a premium rental price. Landlords operate rentals as investments to grow their portfolio. If you’re willing to offer a higher rental price in exchange for the additional risk that subletting represents, that may be enough for the landlord to take a chance.
- Showcase your insurance. One of a landlord’s chief concerns is protecting their asset from unruly tenants. If you can prove that you have adequate insurance, you can allay some of the owner’s concerns.
- Display your track record. If this isn’t your first Airbnb property, let the owner take a look at the other rentals you operate. Show them your listings as well as your reviews so they know you know what you’re doing.
- Propose a profit-sharing model. Again, a landlord rents a property to make money. Introduce them to the premiums gained through Airbnb arbitrage and offer to give them a percentage of the profit in addition to your monthly rent check.
- Highlight added scrutiny as a benefit. With an Airbnb unit, you’ll likely provide additional technology and care such as an exterior security camera, Ring doorbell, professional cleaning, and regular maintenance to keep up with your listings. This is a boon for property owners who want to see their units well cared for.
- Create solutions for their concerns. Are they worried about unauthorized parties? Use a noise monitor. Are they concerned about too many guests? Install a security camera. Use technology and systems to ensure your guests are well-behaved and that your landlord stays happy.
Rental Arbitrage Pros and Cons
An Airbnb arbitrage business is different from offering short-term rentals of a property you own. Here are some of the advantages and disadvantages.
- Less upstart capital required. Saving up to buy a property (even just a down payment) to use as a short-term rental can take years. By subletting an apartment or condo, all you have to come up with is the initial deposit and furnishings.
- Limited long-term risk. If you own a property and the city (or even an HOA) bans short-term rentals, there’s very little you can do unless you have an alternate exit strategy. By using a rental, the maximum risk is carrying the property for the length of the lease.
- Scalability. It would be difficult to expand your short-term rental empire quickly if you had to buy or own every property you rented. By using rental arbitrage, you can list more properties faster than you would be able to otherwise, since they’re cheaper to acquire.
- Personal perks. Since you’re the leaseholder, you can use the property for yourself or family members when it’s not rented out. This can be a great asset during holidays or for family gatherings.
- Harder to find. If they’re not familiar with or amenable to short-term rentals, landlords can be hesitant to agree to subletting. It can be difficult to find a property owner who will agree to let you use the place for an Airbnb.
- Paying for the lease. You’re on the hook for the full cost of the lease regardless of whether you’re able to book the space. This could result in you losing money on months where bookings are lean, or if your jurisdiction places limits on Airbnbs after you sign.
- Slimmer margins. Rent in desirable neighborhoods can be high, which can make it more difficult to turn a profit on an arbitraged rental.
- Responsible for damages. While there’s a risk of damage to property in any rental property, tracking down the offending party can be difficult when they’re only staying for one night. If you’re running an arbitraged Airbnb, then your furnishings represent a larger part of your initial investment than if you purchased a property.
Airbnb Arbitrage Tools
To conduct a successful business, you’ll need a few tools in your arsenal. If you’re looking to do Airbnb arbitrage, here are a few helpful ones.
- AirDNA. This website gives detailed analytics for short-term rentals in a wide variety of markets. You’ll pay for the information, but for all the detail they give you on rental rates, occupancy and profitability, it’s worth the cost — especially if you’re first starting out.
- Noise monitoring technology. Want to prevent rowdy parties at your Airbnb? Install a noise monitor such as Noise Aware or Minut to keep tabs on unruly guests. It doesn’t listen to specific conversations, but it will alert you when the noise levels get high enough to disturb the neighbors.
- Outdoor surveillance. It’s not legal to keep cameras inside your short-term rental, but front and back porch cameras can tell you a lot about who is coming into your unit, as well as what pets or additional guests they bring.
- Dynamic pricing tool. Several offerings, such as PriceLabs and DPGO, integrate with Airbnb and other listing platforms to help you charge the right price for your listing’s size and location, taking into account factors like the local market demand and time of year.
Airbnb Arbitrage FAQs
Short-term rental arbitrage can seem intimidating and complicated. We’ve compiled a list of frequently asked questions to help you better understand how it works.
There’s a premium for Airbnb arbitrage in most U.S. cities, but many — including Los Angeles, Las Vegas, Miami, New York City, San Francisco and Santa Monica (to name a few) — have made it extremely difficult to rent a place on Airbnb. Others merely require you to have a permit or to register with the city.
A main reason cities ban short-term rentals is that they take away from the supply of long-term rentals in the area, making it difficult for residents to find a place to live. As such, the best cities for Airbnb arbitrage don’t have that concern, so look for municipalities with adequate housing supply and affordable rent.
There are a few Airbnb arbitrage calculators, including BnBCalc and Airbtics. However, both of these require you to subscribe to see results. If you want a free option, you can use any Airbnb calculator (this one from Learnbnb.com is a favorite) and adapt it for an arbitrage situation. Be sure to include furnishings in your initial cost outlay, as well as cleaning costs and hotel taxes in your monthly expenses. Instead of closing costs and a mortgage, enter your deposit and monthly rental calculations.
Airbnb offers AirCover, which gives hosts $3 million in damage protection, though it doesn’t have a reputation for being a very reliable form of insurance. It’s a good idea to get additional renter’s insurance (since you’re technically the renter) or short-term rental insurance. Be sure to go over the policy with a fine-toothed comb to make sure it covers an arbitrage situation.
Airbnb Arbitrage: Does It Work and Is It a Good Business Model?
Using arbitrage to your advantage to run a short-term rental business can work. Even after paying for a long-term lease, furnishing the place, and accounting for other expenses, there is still room for profit in many markets.
However, like any business model, Airbnb arbitrage comes with risk. If you have trouble booking your listing or your city suddenly prohibits short-term rentals (as many places are doing), you could be stuck in an expensive lease with no way to get out or profit from it.
Even though they might not have the high occupancy rates that major cities do, small to medium-sized towns may be easier places to run a short-term rental arbitrage business. These towns are less likely to have been inundated with Airbnb listings, and thereby less likely to have banned them. Rents are often cheaper in smaller cities, which may offer a better premium for Airbnb arbitrage.
Like any real estate transaction, you’ll need to do a lot of market analysis to determine if Airbnb rental arbitrage makes sense for your area and the specific property you’re looking for.