Rental arbitrage: Rental arbitrage is when a tenant renting a property from a landlord subleases the apartment to someone else or utilizes platforms like Airbnb to rent the unit out as a short-term rental. Through this process, the tenant becomes a kind of middle manager of the property as they rent it out to other individuals.
Starting an Airbnb business can be an excellent way to earn income. Four million people host Airbnbs around the world, and the average host earns $9,600 per year.
The rental market over the last decade and the prevalence of sites like Airbnb have created a demand for this type of business. Landlords are often asked if they are willing to allow rental arbitrage, which has created a unique set of problems and benefits for the industry.
Subletting rental units in this way can often net more profit than a long-term rental. Short-term rentals are typically priced higher, so doing this consistently can turn big profits for the tenant.
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Rental arbitrage
1. Is Rental Arbitrage Legal?
Generally speaking, it is legal to rent a property yourself and then list it for rent on a site like Airbnb. However, this only holds true if the landlord permits this and renting on short-term vacation sites like Airbnb is legal in the area.
Contracts should include clear terms about subletting policies, conditions, and requirements. Whether or not you want to permit this, make sure that your lease agreements make your rules explicit. This will ensure that your rental investment is protected and not put at risk by someone else’s irresponsibility.
2. Tenant Screening Required
If you decide that allowing rental arbitrage for the right individuals works for your business, you want to ensure that your tenant screening methods are top tier. Trusting a tenant to rent out the property without your involvement in screening is a big step, and it’s essential you thoroughly screen this tenant before signing an agreement.
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Rental arbitrage
3. Is Rental Arbitrage Always Profitable?
Like any other type of rental business, there is no guarantee that rental arbitrage will be profitable for the investor. It can be a great side hustle or even a main business, but it takes work to determine the best way to rent a property and manage it as a short-term rental listing.
Many things need to be done to find success, and various factors can affect how profitable it is or is not. Just a few things to consider while making a plan to try out rental arbitrage include:
- Location: Are short-term rentals in high demand?
- Neighbors: Will they be open to this operation happening next door?
- Budgeting: Is furnishing and stocking the property possible with a profit margin?
- Repairs: Do you have the cash on hand to fix problems?
Running a short-term rental is a business in and of itself, and you must treat it as an investment. Many landlords do not like to allow their tenants to do short-term rentals or subleases for this reason but often agree to permit this activity as long as the investor has a solid plan.
Rental arbitrage
4. Is Rental Arbitrage Legal?
In most cases, yes. Rental arbitrage is legal as long as:
- The property owner allows it
- The area where the property is located permits this type of rental
First, let’s talk about ownership. Landlords who rent their properties out to individuals may or may not permit rental arbitrage through third parties like Airbnb. That’s up to you as a landlord to decide. No matter which side of the equation you are on, clarify what is and what is not allowed on this front in the rental agreement.
When it comes to the area’s laws, you’ll want to ensure that short-term vacation rentals are permitted. Some cities and counties have forbidden this type of rental or placed them under strict limitations due to housing prices skyrocketing and driving out locals. You may need to get a hospitality license or take other specific steps before running this type of rental.
In some cases, only certain areas of the state or city can have short-term vacation rentals. In other cases, they’re entirely forbidden. As a landlord and an investor, it’s in your best interest to be familiar with your area’s rules on rental arbitrage.
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Rental arbitrage
5. The Pros And Cons Of Arbitrage
Are you considering allowing your tenants to try out rental arbitrage at your property or getting into the process yourself at a property you rent?
Regardless of how you approach this business venture, it’s important to learn about the pros and cons to understand what is happening behind the scenes. Being informed will help you make the right decisions for your long-term financial comfort and success.
Pros
For those planning to rent a property and then enter into the short-term market, these are the most significant benefits:
- Limited startup costs
- Relatively easy to set up online
- Helps build capital for future investments
- Can utilize the property for personal use as well
For landlords considering allowing arbitrage at their property, they may see these benefits:
- Fill a long-term rental
- Reduce overall vacancies
- May be able to increase rent or add a premium for bookings
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Cons
Of course, there are cons as well. Those setting up the short-term rentals need to watch out for:
- Increased responsibilities in maintaining the property’s condition
- Seasonality may affect profits and bookings
- Need to have cash on hand to handle rent and fees if needed
- Utilities and extra housing costs need to be covered
Landlords have their own sets of concerns to keep in mind:
- Increased risk for damages
- Increased wear and tear
- Don’t get to screen every single guest
- Seasonality and unseen conditions may affect rent payments by your tenant if their business suffers
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Rental arbitrage
6. Tips for Successful Airbnb Hosting
Hosts have to be crafty and adaptable to make their business successful. Here are some pro tips.
Study the Market
Hosts should study other listings in their area to make sure that their prices and offerings are competitive. They can also meet up with other hosts in their area to compare notes.
Post an Excellent Listing
Airbnb recommends that hosts take special care to make their listings stand out, meaning they should always:
- Use high-quality photos
- Fill out their entire profile and update it regularly
- Describe the space clearly using an attractive description and title
- Be honest and upfront about the property and any house rules