In the dynamic world of real estate and hospitality, Airbnb rental arbitrage is a strategic approach, offering a unique pathway to success without the conventional hurdles of property ownership. Imagine leveraging the appeal of Airbnb's (and/or other OTAs’) global platform combined with subleasing to create a profitable venture using properties you don’t even own.
What is Airbnb Rental Arbitrage?
Airbnb rental arbitrage is a business model that focuses on leveraging other people’s properties through sub-lease agreements and renting those properties on platforms like Airbnb, Vrbo or Hopper. In essence, rental arbitrage hosts will rent properties from the long-term rental market and resell them on the short-term marketplace. This approach is particularly effective when combined with vacation rental software which simplifies the management of multiple properties, streamlines booking processes and enhances guest experience.
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 Advantages 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:
Little upfront investment
Since you’re not buying the property, you do not need to outlay thousands of dollars for a downpayment. All you need to do is pay your first month’s rent and damage deposit and buy any furniture, linens or amenities needed to get your property Airbnb ready.
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.
Scale quickly
In order for your business to succeed, it needs to be scalable and that is exactly what rental arbitrage offers. With the use of short term rental software like a property management system or channel manager, you can scale to manage multiple properties in multiple locations.
Less bookkeeping headache
Landlords have to manage and pay multiple expenses such as HOA fees, mortgage, utilities, maintenance, etc. Instead, the rental arbitrage host only has to pay one flat fee to the landlord each month — rent — apart from operational costs.
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:
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.
Property damage
If one of your guests damages the property, whether by accident or on purpose, you as the leaseholder is responsible for the repairs. In some cases, Airbnb’s AirCover and/or your vacation rental insurance provider may help cover the costs.
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.
Legality & permission
You will need to understand the local laws, HOA bylaws and in some cases receive permission from neighbors. Many cities, states and HOA councils do not want Airbnb vacation rentals opening up everywhere so often there are strict rules in place to limit where and how short term rentals can operate.
Again, every business has its pros and cons, so do your 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:
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.
Here are 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 get 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, cold calling still works. Pick up the phone and start dialing prospective landlords and ask them if they’re interested in subletting their property to you.
Alternatives to Airbnb Rental Arbitrage
Rental arbitrage is a popular and good strategy but it is not a good fit for everyone. There are several other options available for hosts to operate and grow their business.
1. Buy-and-hold
The strategy most real estate investors adopt, it provides the building blocks needed to substantially grow your wealth over decades.
Appreciation
Historically, real estate prices rise. As a result, the value of your equity in the property also increases over time.
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.
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.
2. The Commission model
A less commonly used model, it 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 OTAs while also making use of it from time-to-time. Companies like Vacasa utilize this model and have thousands of properties across North America.
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.
Immediate cash flow
Since you take a commission from the revenue, you immediately get paid each and every time you make a booking.
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 their property’s online listings. In other words, they would have to start from the beginning again.
3. The co-host model
This 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.
Little to no risk
Similar to the commission model, the homeowner is responsible for setting up and maintaining the property.
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 than each other. The best choice for you depends on your personal and professional objectives.
Is Airbnb Rental Arbitrage Your Next Big Move?
Airbnb rental arbitrage, bolstered by the effective use of vacation rental software, presents a unique and exciting opportunity for entrepreneurs looking to enter the world of real estate while bypassing traditional barriers. While not without its challenges, the strategy offers many advantages including low initial investment, rapid scalability and reduced risk.
Whether you choose rental arbitrage or an alternative strategy, the key is to align your strategy with your capabilities and long-term objectives. The world of Airbnb rental arbitrage is ripe with potential — could it be the right fit for your entrepreneurial aspirations?
