Real Estate Arbitrage Explained [2023 Guide]

Real estate arbitrage is one of the most profitable ways to make money in real estate. It’s a business model that has been growing in popularity over the years, and with good reason. This real estate arbitrage model allows investors—even brand new beginners—to make money through real estate investing with far less risk than ever before.

What is Real Estate Arbitrage?

Real estate arbitrage is when an investor locates a long-term property, and either buys and sells it or leases it and subleases it for a profit. That means that you can create lump-sum profits or passive income from this type of real estate investing model.

How Real Estate Arbitrage Works

Real estate arbitrage is split up into four distinct categories: flipping, wholesaling, master leasing, and Airbnb arbitrage. We’ll discuss these in greater detail below, but all of these types of real estate arbitrage require one thing: under-market value/profit potential. Real estate arbitrage works by you finding properties that aren’t meeting their full potential and profiting from the opportunity.

Real Estate Arbitrage Benefits

Real estate arbitrage in general is a great investment property strategy. Here’s why you should give it a try:

• Cash Flow: With some of these strategies, you can be making thousands in cash flow as soon as you get into the deal. 
• Scalability: Because you aren’t buying a property, you can scale your arbitrage empire faster, and oftentimes cheaper, than buying properties!
• Minor Upfront Investment: No need to save up down payments. Just rent, flip, or wholesale your way to real estate riches!

Real Estate Arbitrage Drawbacks

While real estate arbitrage can be a lucrative way to make money in the world of real estate, it does have some drawbacks.

• Legal Constraints: Some strategies like wholesaling and Airbnb arbitrage come with a minefield of legal problems. Our advice: talk to an attorney before you start.
• Additional Expenses: Maintaining leased properties, flipping homes, and building a wholesaler team does require some added expenses.
• No Equity Upside: For all the above strategies except for flipping, you fail to actualize any equity in your deals!

4 Types of Real Estate Arbitrage

As mentioned above, there are four main types of real estate arbitrage. All of them have their own distinct strengths and weaknesses and almost all of them are heavily niched. One investor may like a certain form of arbitrage while another solely sticks to their separate niche. Find the one that works for you and start making money!

1. Airbnb Arbitrage

Airbnb arbitrage (sometimes referred to as rental arbitrage) is a strategy almost too simple to pass up. You rent out a property and then sublease it out on short-term and mid-term rental sites like Airbnb and VRBO. You must get the landlord’s permission before doing this, but it can be an incredibly lucrative way to make passive income without owning a single property.

Airbnb Arbitrage Example

Amy the arbitrageur sees a house for rent in the downtown of her city. She knows that the nightly rent for this property could go for $150/night on Airbnb, but the rental price is only $1,200/month. Amy asks the landlord if she, an experienced Airbnb manager, can rent out the property and sublease it on Airbnb. The landlord agrees, and Amy puts the property on Airbnb and makes a great profit.

Pros of Airbnb Arbitrage 

Airbnb arbitrage has more upside than downside, so here are some reasons to start:

• No need to have a down payment, you can make passive income as a renter
• Reasonable maintenance and repairs are often covered by the landlord
• Cash flow is usually high, sometimes $1,000 – $3,000 per month!

Cons of Airbnb Arbitrage

Like any other form of real estate, there are ways you can get got in Airbnb arbitrage:

• The landlord can raise your rent at any time/cancel your lease
• It’s hard to find a landlord who will allow Airbnb arbitrage in their unit
• You get no equity upside of the property, only cash flow

If you can deal with these cons, then Airbnb arbitrage may be worth a try!

2. House Flipping

House flipping is a simple concept to understand. You buy an outdated, sometimes unlivable house, and renovate it up to modern standards. Your work, often called “sweat equity,” is what makes the home shine, and what allows you to walk away with a profit.

House Flipping Example

Irene the investor sees a house on her street with overgrown grass, peeling paint, and an outdated interior. She knows that the house next door, an updated modern home with the same bedroom/bathroom count, just sold for $500K. Irene offers the outdated home’s owner $300K. The outdated home’s owner accepts because they’d rather get cash than have to deal with the hassle of a renovation. Irene then spends $100K renovating the home over six months, before selling the home for $500K. Irene walks away with a six-figure profit and is ready to do her next deal!

Pros of Flipping Houses

Flipping houses is profitable, but it’s not easy by any means. If you know what you’re doing you could walk away with five, six, and even seven-figure profits. Here are some main pros:

• Quick Profits (usually under a year)
• Large Margins (if you run your numbers right)
• Easily repeatable business model once your systems are set up

Cons of Flipping Homes

Unfortunately, flipping isn’t all fun and games. Here’s what can happen when you go in unprepared:

• Huge holding costs (hard money fees, taxes, insurance, etc.)
• Construction and remodeling experience is required
• There are many ways to screw up (running numbers wrong, working with shady contractors, etc.)

Is flipping for you? It could be! But make sure you have the skill set that allows you to succeed in this type of real estate arbitrage.

3. Wholesaling

Wholesaling (in real estate at least) is a term only investors use. Think of wholesalers as the deal finders for flippers. Wholesalers find under-valued properties and send them to flippers while charging a finders fee. They can save flippers a TON of time. In fact, I used a wholesaler to buy my most recent purchase, a self-storage facility!

Wholesaling Example

Holly the wholesaler drives all around the city looking for outdated, often neglected homes. She finds a dumpy property in a great neighborhood. She knows that once it’s fixed up, it’ll sell for $500K. She offers the seller of the house $300K for the home and the seller accepts. Then Holly calls Irene, her flipping friend, and tells her the situation. Holly offers the house to Irene at $300K, with a $15K finders fee. Irene agrees, thanks to the large profit margin. Holly then “assigns” the sales contract to Irene, who pays the seller, and flips the house.

Pros of Wholesaling

Wholesaling is an industry favorite when getting started in real estate investing. It’s low cost and the skills needed to get started are minimal. Here are some other pros:

• No license required (you’re not operating as an agent)
• Rock-bottom startup costs (most wholesalers get started for a few hundred bucks)
• Huge one-time-fee potential (wholesalers often make $10K per transaction)

Cons of Wholesaling

But, it’s not all sunshine and rainbows when wholesaling. Here are some cons:

• Very labor and time intensive (you’ll be walking, driving, and calling A LOT)
• Easy to screw up a deal (without the right contract)
• There are many, many wholesalers out there so the market is saturated

If you have the time, but not the money, to get into real estate, wholesaling may be the way to go!

4. Master Leasing

If you’ve got the skills, but no money, for real estate investing, then the master lease is for you! A master lease is a lease that gives you, the tenant, almost all the same rights as the owner, and often comes with the option for you to buy the property at a future date. Why would you use a master lease? A few scenarios would be that a property isn’t financeable yet, a seller wants a steady stream of income instead of a large lump sum, or you simply want to make money off of someone else’s property.

Master Leasing Example

Jeff owns a 10-unit apartment complex. He’s close to retirement age and wants to sell it so he has some money to live off of. Ian the investor who happens to be in the market for apartments that allow Airbnb, sees that the apartment complex is for sale, but after running the numbers, realizes that it’s making too little money for a bank to help him finance it. Ian knows that he can renovate and raise rents on this property enough to get it financeable. He approaches the owner, Jeff, and proposes a master lease option for two years, and after that two years, Ian will buy the property from Jeff with bank financing. Jeff agrees, signs the master lease, and now Ian can make renovations and raise rents as he pleases.

Pros of Master Leases

At first glance, a master lease seems too good to be true. And sometimes, it is true! Here are some common pros of using master leases:

• The ability to renovate/raise rents on the property without being its legal owner
• Allows you to increase a property’s financeability before buying it
• Gives you passive income without purchasing a property

Cons of Master Lease

A master lease is a phenomenal tool in your property purchasing toolbelt, but it can backfire at times.

• As the tenant, you’ll be liable for paying the lease even if your tenants stop paying rent
• Unexpected repairs can lead to higher-than-anticipated costs
• As the temporary “owner” you’ll be on the hook for all maintenance and tenant complaints

Now you know, before you sign a master lease, make sure you’re ready for it!

Tips to Start Real Estate Arbitraging

Now that you have the basics of real estate arbitrage, it’s time to put them into action. Here are some tips on how to get started:

Pick Your Strategy

This is the most important step. You need to identify which strategy fits your goals and risk tolerance level. Find one that interests you and works with your skill set, access to capital, and schedule!

Form an LLC

It’s important to have an LLC set up for real estate arbitrage. It provides you with limited liability protection in case something goes wrong with your deals. You can also use it to hold multiple properties, which is a great way to diversify your portfolio and create a layer of asset protection.

Find a Market

The next step is to find a market that has profit potential. You can do this by looking at the home prices, vacancy rates, and other economic factors within the area. You can also check out local real estate blogs that focus on your market to see what types of properties are selling/renting well—and which ones aren’t at all! Use tools like AirDNA or Realtor to do this market research. Or, if you’re interested in Airbnb arbitrage, check out our best cities for rental arbitrage list!

Run the Numbers

Once you’ve found a market that has potential, it’s time to run the numbers. You can do this by looking at the current home prices, rental rates, and nightly rates within your target area. Then, calculate how much profit (or loss) you could make if you were to invest in that particular market.

Make That Money!

You’ve picked your strategy, found your market, ran the numbers, and gotten the deal done. Now, start collecting income!

The Bottom Line About Arbitrage in Real Estate Investing 

There are many ways to use arbitrage in real estate. Some are perfect for newbies while others veer towards more experienced investors. Regardless, this guide has given you everything needed for making an informed decision about whether or not real estate arbitrage is right for your needs right now!

Real Estate Arbitrage FAQs

You’re pumped up and ready to start investing in real estate arbitrage. Still got some questions? Check out these frequently asked real estate arbitrage Q&As: