Airbnb Arbitrage: How to Make Money Without Owning Property

In This Article

Subleasing was frowned upon for a long time, but in today’s era of Airbnb popularity, it’s making a solid comeback and can be a great real estate investment strategy. 

Airbnb arbitrage allows you to rent properties to tenants that you rent from a landlord. You act as the middleman between the owner and tenants and take a piece of the pie without the need to own physical real estate yourself.

Is rental arbitrage right for you? Check out our in-depth guide to find out.

What Is Airbnb Arbitrage?

Airbnb arbitrage is a unique real estate business model that allows long-term renters to sublease properties on Airbnb for short-term rentals. Since long-term rental prices are typically lower than what you could charge for short-term rent, you may potentially make a profit.

For example, if you pay $1,500 a month in rent but can charge $200 a day to rent the property, you would cover your own rental expense in eight days. Any days you rent the property beyond those eight days become profit after any costs you incur. 

Pros of Airbnb arbitrage

• Little capital needed: Unlike purchasing a property, you don’t need a lot of upfront capital to rent a property long term. At the most, you’ll need the security deposit and monthly rent.
• Fewer expenses: As a tenant, you aren’t responsible for the major repair expenses or property taxes. Your responsibility is the rent and smaller expenses, such as cleaning, furniture, decor, basic maintenance, and booking fees.
• Easier to leave: If you don’t own the property, you could exit the lease when allowed in the agreement if it doesn’t pan out to be as profitable as you hoped. You don’t have to worry about selling the property.
• Easier to scale: If you want to rent out multiple properties, it’s much easier to scale your business when you don’t need a significant upfront investment to qualify for mortgage financing. You can rent multiple properties much more easily and then sublease them to reach your business goals.

Cons of Airbnb arbitrage

• Local laws may be complicated: Every state and city has different laws regarding short-term rentals and rental arbitrage in general; you must know your local requirements and may need legal support.
• You’re responsible for the property: You signed a lease with your landlord, which means you’re responsible for any damage from tenants when you sublease the property.
• You’re responsible for rent payments: Even if you cannot sublease the property or have nonpaying tenants, you must still pay your landlord or risk defaulting on your lease.

Airbnb Arbitrage vs. Ownership: Understanding the Differences

Comparing the difference between Airbnb arbitrage and ownership is important. In some situations, especially in cities or states where the laws regarding retail arbitrage are strict, ownership may be the only viable option.

Required investment

The main difference between Airbnb arbitrage and ownership is the required investment. When you own the property, you must come up with the down payment, pay the property taxes and insurance, and keep up with your mortgage payment.

You are only responsible for the required security deposit and rent payments when you rent. The landlord is responsible for covering the property taxes, insurance, and property upkeep, minus any damage your tenants cause.

Risk

The risk for Airbnb arbitrage is somewhat less than that of ownership, but they both have some risk. If the market conditions change and demand for rent decreases, you must still meet the terms of your rental or mortgage agreement. If you’re unable to collect rent, you might face financial difficulties covering the payments.

Finding tenants

There is a major difference between Airbnb arbitrage and owning an investment property to rent to tenants. With rental arbitrage, you are always looking for new tenants, whereas with ownership, you typically issue a one-year or longer lease.

This could have its pros and cons. If your long-term tenants are easy to manage, this may be preferable because it takes less work. But if they aren’t, it could be a nightmare you’re stuck in for at least 12 months, if not longer.

Rental arbitrage allows you to have tenants for a short time, but may make filling vacancies more challenging, especially during slow times.

ROI

ROI is impossible to predict in either situation, but you may have more flexibility in ownership because you are in charge. You can choose to improve the property to charge higher rent, or you can charge rental prices that more than cover your mortgage payment.

You have somewhat less flexibility with rental arbitrage because you’re at the mercy of the rent charged by the landlord and their desire to improve the property. If you’re already paying premium rent, seeing a high ROI in some areas can be hard.

Legal Landscape & Compliance

In most cities and states, rental arbitrage is legal, but local ordinances must always be checked. Focus on short-term rental regulations, including whether Airbnb is allowed in that city. Understand the limits, including the maximum number of nights you can offer a short-term lease.

In addition to the local laws and regulations, you must ensure your landlord allows it. Your landlord may exclude it from your lease, so if you want to do Airbnb arbitrage, find a landlord who will allow it.

How to Get Your Landlord on Board

Convincing your landlord to allow Airbnb arbitrage could be your largest hurdle when attempting this real estate investment opportunity.

To convince your landlord of the possibility of this business opportunity, focus on how this will ensure you keep up with the property because it also provides you with income. 

Yes, there are risks that the tenants will damage the property, but landlords take that risk no matter who they rent to, both short- and long-term.

Airbnb provides $1 million liability insurance policies for hosts, and you can always layer in third-party insurance, including it in your costs and rent charges to tenants. This helps provide the landlord with as much coverage as possible for potential damages.

If you rent in an area where you can charge high rent to short-term tenants and earn a nice profit, you can consider sharing a percentage with your landlord or entering into a multiple-property lease with them in exchange for the option to sublease. The key is to make it as attractive for landlords as possible.

Be ready to combat any objections your landlord has, including:

• Noise issues: How will you ensure your tenants keep the noise level down so as not to bother others in the area?
• Turnover bothering other tenants: How will you screen potential tenants so you know they won’t be a nuisance to current tenants in the building?
• Property maintenance: Constant turnover means the property will need more maintenance and repairs, so have a plan to work with the landlord on how to handle it.

Estimating Your ROI & Start-Up Costs

Estimating your ROI and start-up costs can help determine if Airbnb arbitrage makes sense in the area you are planning to do it. Using an Airbnb calculator, you can estimate the potential income and compare it to the rent charged.

To keep things simple, assume a 50% occupancy rate monthly, or you’ll earn rent subleasing 15 days a month. Determine the average rate for the area, and multiply it by 15 days to see how much you can average. 

Compare this number to the cost of renting the property, plus upkeep expenses, to determine your ROI.

Running Your Successful Airbnb Arbitrage Business

Running a successful Airbnb arbitrage business takes time, patience, and knowledge. Here are some quick tips to get you started; you can read more in our in-depth guide on investing in short-term rental properties.

• Overestimate your start-up costs: This reduces the risk of getting in over your head and realizing a loss for much of the rental period. Think insurance costs, legal fees, decor, furniture, extra insurance, cleaning service, and maintenance.
• Build up a direct booking site: Airbnb arbitrage is great for beginners, but once you get experience, you can eliminate the middleman and reduce Airbnb commissions, increasing your ROI.
• Know the market and its seasonality: Know the pull of tourism in the area you’re considering investing in, and closely evaluate its seasonality so you can be realistic about vacancies and potential profits.
• Automate guest reviews: You need reviews to entice more renters, so make the guest review process automated so you aren’t chasing down tenants for reviews or forgetting and missing this important piece of the marketing puzzle.
• Assemble a professional team: You can’t run a short-term rental business yourself. You’ll need powerhouses like real estate attorneys, property managers, cleaning crews, and a great real estate agent.

Final Thoughts

If you lack a lot of capital or don’t want the hassle of owning real estate yourself, Airbnb arbitrage can be a happy medium that can yield great profits. Finding the right area to rent and working with a willing landlord is key.

Airbnb arbitrage is one of the easier businesses to scale and can quickly help you build a real estate portfolio that turns a handsome ROI without owning property yourself.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.