One way for real estate investors to start their portfolio is through Airbnb rental arbitrage. Our guide discusses how you can do this.
As vacation rentals and home-sharing become more popular among tourists and business travelers, investors in real estate would want to take advantage of this opportunity. But what if you cannot afford to buy a house or apartment for the purpose of listing it on Airbnb?
Airbnb rental arbitrage is the answer. In this blog post, you will learn all about this practice, including:
- An example of how short term rental arbitrage can generate income
- The laws surrounding short-term rentals and Airbnb arbitrage
- The five best cities for Airbnb arbitrage, based on potential profit and regulations
- How you can convince your landlord to list the apartment you are renting on Airbnb
- A step-by-step guide on how to set up and manage your Airbnb rental
Watch our video below to find out how to get started with Airbnb rental arbitrage:
If you want to start your rental investment without buying a property, keep reading.
What Is Airbnb Arbitrage?
Airbnb rental arbitrage is the practice of renting a property or multiple properties and then subletting them on short-rental platforms like Airbnb. As house prices rise while income stagnates, homeownership has become more difficult to achieve. This is a great step for those who want to start investing in real estate but cannot afford to buy a property. In fact, you can use this strategy to save enough money to purchase your first house.
Here is an example of how the rental arbitrage model works: You rent a one-bedroom apartment in Honolulu, HI for $1,000 per month. If you sublet that unit on Airbnb for one month at $140 per night, you would be able to pay off your rent for the month in 8 days. Should you be able to have guests for 28 days in that month, you would have earned $3,920.
After deducting your rent, that leaves you $2,920 in profit. And even if you further deduct your expenses related to property maintenance, you should still be able to save and grow your income without owning the apartment.
This may seem too good to be true, but there are many property investors who have been successful in using this tactic. But before you jump in, you need to go over a few hurdles first.
Is Airbnb Rental Arbitrage Legal?
Whether it is legal to set up an Airbnb rental arbitrage depends on where you plan to rent and sublet. Many local laws and HOA bylaws have regulations regarding short-term rentals, so you have to make sure that you are allowed to do this in your area before moving on to the next step. And if it is legal, you must check if you have to apply for a particular license or permit to operate.
Once you are certain that short-term and vacation rentals are legal in the area where you wish to do business, you have to talk to your landlord. This is probably the most intimidating step for most, but it is also the most important. If you rent out to guests behind your landlord’s back, you put yourself at risk of getting evicted.
If they agree, you have to draft a new agreement with your landlord. You must also make sure that you are protected and covered in case of damages caused by your guests and even natural disasters. Airbnb offers Host Protection Insurance, but you should also consider getting short-term rental insurance.
5 Best Cities for Airbnb Rental Arbitrage
Using Mashvisor’s data, we found the five best cities for rental arbitrage based on potential profit and their local laws surrounding short-term rentals.
1. Annapolis, MD
Maryland’s capital city enjoys an influx of visitors almost all year because of the sailboat races, an eight-acre woodland garden, and easy access to Baltimore and Washington, DC. Hosts of short-term stays and rental arbitrage Airbnb in Anne Arundel County are required to register their rental property with the County. Visit the Anne Arundel County website to learn more.
- Airbnb Cash on Cash Return: 6.19%
- Airbnb Daily Rate: $334
- Airbnb Rental Income: $6,943
- Airbnb Occupancy Rate: 68%
- Median Property Price: $797,902
- Property Price per Square Foot: $376
- Days on Market: 108
2. Nashville, TN
Quickly becoming one of the most popular cities to visit in the south, Nashville offers up-and-coming restaurants, live music venues, and the County Music Hall of Fame. Hosts are required to apply for a Short Term Rental Property permit. You can learn more about the process by visiting the Nashville government website.
- Airbnb Cash on Cash Return: 5.1%
- Airbnb Daily Rate: $255
- Airbnb Rental Income: $3,905
- Airbnb Occupancy Rate: 58%
- Median Property Price: $509,892
- Property Price per Square Foot: $356
- Days on Market: 65
3. North Las Vegas, NV
Visitors go to North Las Vegas for high-octane events and festivals at the Las Vegas Motor Speedway. Owners of short-term rental properties and Airbnb rental arbitrage must obtain a Conditional Use Permit and business license.
- Airbnb Cash on Cash Return: 6.22%
- Airbnb Daily Rate: $273
- Airbnb Rental Income: $3,852
- Airbnb Occupancy Rate: 61%
- Median Property Price: $410,295
- Property Price per Square Foot: $219
- Days on Market: 55
4. Oklahoma City, OK
Oklahoma City is a hidden gem as far as tourism is concerned; its rich history, cowboy culture, art, parks, and unique districts make it a great place to visit. The City only allows home shares in residential zones, and hosts must obtain a home-sharing license for each unit they are renting out.
- Airbnb Cash on Cash Return: 5.79%
- Airbnb Daily Rate: $94
- Airbnb Rental Income: $2,669
- Airbnb Occupancy Rate: 74.86%
- Median Property Price: $329,991
- Property Price per Square Foot: $157
- Days on Market: 58
5. Saint Paul, MN
Thanks to Saint Paul’s active tourism campaigns, the city gets visitors year-round. Tourists go there mostly for the breathtaking views, especially during the fall. Hosts must obtain a Short Term Rental Host license from the city’s Department of Safety and Inspections.
- Airbnb Cash on Cash Return: 5.15%
- Airbnb Daily Rate: $179
- Airbnb Rental Income: $2,846
- Airbnb Occupancy Rate: 64%
- Median Property Price: $293,336
- Property Price per Square Foot: $204
- Days on Market: 58
If you want to learn how to find rental arbitrage properties by yourself, you can start by making a list of cities in your state that allow short-term rentals. Then use Mashvisor’s Property Analytics features to determine which ones have the highest profit potential. You can use our platform to calculate your potential rental income, cash flow, and investment payback.
How to Convince Your Landlord to Agree to an Airbnb Rental Arbitrage
So you have selected the area where you want to start your Airbnb business and understood the rules and regulations in that city. Your next crucial step is to find a landlord who will let you rent their property and then sublet it as a short-term rental. How do you do that?
The two main reasons why enterprising tenants are hesitant to talk to their landlord about this arrangement are:
- They might say no; and,
- They might steal their tenant’s idea and directly list it on Airbnb instead of leasing it.
So if you want to convince your landlord to let you do this, you need to address their concerns and make the arrangement beneficial to them.
You Will Keep the Unit in Pristine Condition
It is important to keep the apartment clean and possibly even Instagram-worthy if you want to get 5-star reviews. For the landlord, a well-kept unit will also save them the hassle and cost of repairs and renovations.
You Will Pay on Time
Because you intend to run the rental as a lucrative business, you can ensure on-time payments toward your landlord. This may mean a lot to them already as it can be difficult to chase down tenants for their monthly payments.
Running a Short-Term Rental Business Is Hands-On
Your landlord may think that hosting their property directly on Airbnb would bring them higher income than a long-term lease would. While this is true, you need to show them how much work it takes to manage at least one Airbnb property. Hopefully, they will not want to be bothered by so much work and will agree to the arbitrage instead.
Once they agree to an arbitrage, you must amend your lease to include a rental arbitrage contract. A rental arbitrage lease agreement template would include:
- Who takes the fall for any fines and penalty
- If liability insurance is needed and who will pay for it
- How much of your profit you will share with your landlord
- If you should give advanced notice to your landlord about any guests and how will you communicate about it
- If you should pay an additional security deposit
How to Run a Successful Airbnb Rental Arbitrage Business
Once your landlord is on board, it is time to set up your first rental. Here are the next steps:
Calculate Your Starting Costs
Any rental property investment requires upfront costs. Even if you do not have to buy a house or apartment that you will rent out, you still need to factor in the following expenses so you know how much you need to earn back:
- Application fee for any permit or license needed to operate
- Deposit (e.g. security deposit, first and last month’s rent, etc.)
- Insurance
- Legal fees
- Repairs on the property
- Furnishings and decoration
- Wi-Fi
- Entertainment subscriptions (e.g. Netflix, Amazon Prime, Disney+)
- Professional cleaning service
- Utilities
- Toiletries and kitchenware
Aside from calculating these costs, you need to set aside emergency funds in case you get fewer bookings than you expect in the first six months.
Prepare Your Unit for Rent
When you are comfortable with your finances, it is time to furnish and decorate the unit. With vacation rentals, having a clean apartment is not enough. Unless you have a good eye on design, you might want to consult with an interior designer. It would also be good to add amenities like a washer and dryer, TV, crib, dishwasher, coffee maker, and free parking. Some guests consider these as must-haves when looking for a place to stay in.
List Your Property
Once your unit is ready for rent, it is time to advertise it. Even though we have been referring to short-term rentals as “Airbnb”, it is not the only booking platform out there. You can also list your property on Vrbo, Booking.com, HomeToGo, TripAdvisor, and more. If you do a multi-channel distribution strategy, though, you will need an automation tool to boost your marketing and prevent double bookings. Then when your occupancy rate is 90%, you can increase your rate.
Keep Optimizing Your Listing
Managing an Airbnb is not about listing and forgetting. If you are still working toward getting your first booking, you must make sure that your property shows up in search results. Make sure that you take beautiful pictures of the property and show off the amenities that guests are looking for. Try testing out one variable each week so you know which part of your listing is working or not.
Discover Your Airbnb Arbitrage Opportunity With Mashvisor
An Airbnb rental arbitrage business is a great way to start your real estate investment without having to buy a property. You can use this to build capital to buy your own rental home or test out the location before renting another Airbnb arbitrage property.
But first, you have to make sure that it is legal to operate short-term rental homes in your area. If it is not, or if you are looking for a city that will give you optimal profits, you could give these five cities a try:
- Annapolis, MD
- Nashville, TN
- North Las Vegas, NV
- Oklahoma City, OK
- Saint Paul, MN
However, if you want to do your own research, you can use Mashvisor to analyze which neighborhoods or cities near you can be lucrative for rental investments. Search any city and you will not only find a list of properties for sale, but you will also see a quick analysis of the following metrics:
- Cash on cash return
- Average rental income
- Occupancy rate
- Optimal rental strategy (traditional or Airbnb)
- Investment payback
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