Rental arbitrage is the practice of signing a property lease, furnishing the property, and then renting the property on a nightly, weekly, or monthly basis. The new lease holder will hopefully earn more renting the place on a shorter term basis than what they have to pay to the landlord.
Rental arbitrage is only legal as long as you are allowed to. If your lease states you are not allowed to sublease then you shouldn’t be renting out your property to people.
If you plan on listing the rental on sites like Airbnb and allowing guests to stay short-term then you also need to make sure it is allowed from your local county. Your county may not allow or have specific rules for allowing guests to stay short-term. For instance, the county may be okay if you rent out the property on a monthly basis but may have specific restrictions if you rent out to a guest less than 30 days a month.
You can read more about how to find out regulations for short term rentals here.
Here’s an example scenario:
A landlord rents a property for $1000 a month.
You sign the lease for the property and pay the landlord $1000 a month for the rent.
You furnish and rent out the property online and earn $2000 in a month.
You pay the landlord the rent payment (-$1000)
You pay for the utilities (-$100)
You pay for insurance ($-70)
You are now left with $830 profit.
Of course, this is also contingent on many factors such as your location, demand, appeal, and multiple other factors.
You can read more about how to analyze a short term rental for profitability here
A typical startup cost can be anywhere from $4k-$15k. This all depends on the type of furniture you are buying, the lease and security deposit, and other things like designers and labor.
There is more potential profit but there is also a lot more work. This is a hospitality business, not real estate. Everyone has different needs and not everyone wants to run a hospitality business. You’ll need to find a landlord that has a pain such as being tired of tenants who don’t take care of their property or are always causing problems. You want to find landlords that wants to deal with a professionals rather than regular tenants.
Pros:
Cons:
If you are looking to build a business on Airbnb and want to start managing properties then rental arbitrage is a powerful strategy to do this. There are costs and risks involved with renting out a property as you are ultimately responsible for all the costs associated and a lease which you are legally bound to. Rental arbitrage is a tool in your short term rental toolbox. If you don’t want to invest the money or take on the risks then you can also try renting out a room in your home to start to see if this is a business you are interested in. You can also try managing other peoples properties through cohosting.
If you’d like to learn how to get started with no upfront costs or risks involved you can read more about cohosting here.
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