So you want to start investing in real estate. The only problem: you’ve got no money to do so. But, there’s a new way to make quick cash flow without putting 20% down or owning a property at all. Welcome to the newest real estate investing play: rental arbitrage. The (almost) too easy way to start building massive amounts of passive income in far less time than “regular” real estate investing.
What is Rental Arbitrage?
Rental arbitrage is when you sublease an apartment, house, or any other type of rental property on Airbnb, VRBO, or other short-term hosting sites. The profit you make comes from signing a long-term lease or master lease while listing the property for nightly, weekly, or monthly rental rates. All of this is done without ever owning the property.
Airbnb vs. Rental Arbitrage
Airbnb arbitrage is specific to short-term rentals shown on Airbnb. Meanwhile, rental arbitrage encompasses Airbnb arbitrage in addition to other short-term hosting sites.
But let’s give credit where credit is due; Airbnb plays a key role in building a rental arbitrage empire. Most arbitrageurs will take advantage of short-term stay sites like Airbnb, VRBO, and Vacasa, to list their new stays. It’s important to know that the majority of homes listed on sites like Airbnb are host-owned and operated, meaning it’s their house, their rules, etc. They may have a bit more flexibility over their listing than you (a rental arbitrageur) since you’re a renter, not an owner.
Think of Airbnb as one of the valuable tools in your rental arbitrage toolbelt. You’ll need to learn the system, know the host guidelines, and do everything else possible to make your listing stand out above the rest. If you’re specifically looking to do apartment Airbnb arbitrage, check out our guide on how to find apartments that allow Airbnb in just 7 steps.
Is Rental Arbitrage Legal?
Rental arbitrage is completely legal. You’re not doing anything wrong by renting a home for the amount of time you need and then subletting it to another person. This is how many homes on Airbnb get listed in the first place! The only thing that could be considered illegal would be if you subleased a home without a landlord’s permission. Always remember to check the long-term lease you signed as well as get written permission from the landlord to lease out the home.
Top Benefits of Rental Arbitrage
There are many benefits to rental arbitrage, but here are five of the most important:
Cash Flow
One of the biggest benefits is cash flow. Rental arbitrage can help you build up your passive income and pay off student loans and credit card debt, or build up a down payment for your own home faster. It’s also a great way to supplement your monthly income if you’re already working full-time as an employee.
Minimal Upfront Investment Needed
You don’t need a lot of money to get started with rental arbitrage. You can start with as little as $5,000 and build your business from there. You won’t need to scrounge together closing costs, a down payment, safety reserves, or other large amounts that a regular landlord requires. You’ll simply need the first month’s rent, a safety deposit, and money for furnishings and cleanings.
Scalability
The scalability of rental arbitrage is one of its best features. You can grow your rental business as fast or slow as you want. You don’t need to rent more properties or manage more guests if you don’t want to. You could even scale back your investment in the future and just focus on collecting rent checks each month while enjoying the passive income that comes with it. But, if you’re looking to scale bigger and better, hiring out property management and cleaning can be done quite easily.
Speed to Start
Starting a rental arbitrage business is one of the fastest ways to get started and see results. You can start in less than a week and collect rent checks within 30 days. Compare this timeline to the 30-60 day closings of real estate purchases, months’ worth of time spent on rehab, and weeks spent screening tenants. Rental arbitrage cuts down this timeline significantly.
Low Risk
Rental arbitrage is a low-risk way to get started in real estate. You’re not buying property, so you don’t have to worry about the entire investment being lost if something goes wrong. If you do your research and find good properties, then you should be able to collect rent for years without any issues.
Disadvantages of Rental Arbitrage
Although rental arbitrage has significantly less risk than traditional real estate investing, there are still some pitfalls to watch out for.
Additional Expenses
It’s easy to overlook the fact that rental arbitrage requires some additional expenses. You may need to pay for property management, marketing, cleaning services, furniture, and sometimes higher-priced tenant insurance. All of these costs can add up over time. Some of these costs can be cut down, as you COULD manage and clean the properties yourself, but this isn’t optimal if you’re trying to scale.
Legal Constraints
Some jurisdictions have laws that make it illegal to rent out a property for less than a certain amount of time. If this is the case, you’ll need to find another way of making money in that area or move to a more arbitrage-friendly city. You also may be at fault if your guests trash the rental unit since the landlord will be coming after you if anything goes awry during the time you’re subleasing.
Fluctuating Occupancy
As with any short-term or vacation rental investment, occupancy rarely stays at 100%. If you’re in a small city, or a city that has a limited tourist population, you could be looking at a pretty grim picture for long-term occupancy. Thankfully, with tools like AirDNA, you can find area-specific occupancy data that may save your investment before you even start.
No Equity Upside
When you own a home, you build equity. When you’re subleasing, there’s no equity growth. You’re just paying a monthly fee that can increase if the landlord raises the rent. This is why so many rental arbitrageurs use their initial profits to fund the purchase of rental properties. At some point, you’ll want to start banking on equity!
Temporary Income
Since you don’t own the property, this income can be thought of as temporary more than anything. As soon as the landlord wants you out, sells the property, or starts raising rent a little too much for your taste, you can say goodnight to your cash-flowing rental arbitrage unit.
Difficulty in Finding Landlords
Finding landlords who will allow you to sublease their properties can be difficult. Most landlords either want headache-free long-term tenants, or they may prefer to get all the profits from a short-term rental themselves. That being said, there are still many landlords out there who would allow you to sublease their properties, IF you can prove that it’ll mean more money and less time managing the property for the landlord.
Little to No Tax Benefits
When you sublease a property, you don’t get any tax benefits from it. You’ll have to pay income tax on the rent you earn and self-employment taxes on top of that. This can add up quickly, especially if you’re earning a significant amount of income from subleasing these types of properties.
How Much Money Can You Make with Rental Arbitrage?
There’s no set amount of money that rental arbitrageurs make. And, as a result of that, you can make as much or as little as you like. Most real estate arbitrage units make at least a few hundred dollars a month in profit, while others could bring in thousands depending on how low the rent is and how high the price of their nightly rental.
Calculating ROI on a Rental Arbitrage Property
Before you run out and rent the first property you see, you’ll need to know how much you can actually make from rental arbitrage in your area. The ROI (return on investment) formula for this is fairly simple, but you’ll need to know a few factors.
- Revenue: how much money you’ll bring in monthly
- Expenses: rent, cleaning fees, utilities, etc.
- Startup Costs: security deposit, furniture, LLC formation costs, etc.
Then simply put them into this formula:
ROI = (Revenue – Expenses) / Startup Costs
Example of The ROI Of a Rental Arbitrage Deal
Let’s say you find a house listed for rent in your area at $1,500 per month. You know that you can rent this house out for around $125 per night and that it’ll most likely be occupied for about 25 days of the month. You agree to give the landlord a $1,500 deposit and spend $3,000 furnishing the apartment. You’ll also be paying $500 per month for your cleaning service and another $150 in utilities.
Let’s go through those figures again:
- Revenue: $125 x 25 = $3,125
- Expenses: $1,500 + $500 + $150 = $2,150
- Startup Costs: $1,500 + $3,000 = $4,500
Then the ROI formula would look like this:
($3,125 – $2,150) / $4,500 = 21.6% ROI.
That’s already a great ROI, and that’s only the MONTHLY ROI!
Top 5 Cities for Rental Arbitrage Opportunities
While rental arbitrage is a business that can be done anywhere, there are some cities where it’s easier to succeed. The following five cities have some of the highest potential for success. If you want to uncover more cities and stats, check out our comprehensive guide on the best cities for rental arbitrage:
1. Honolulu, HI
As one of the foremost vacation destinations in the world, Honolulu offers strong short-term rental demand, with an ever-flowing amount of tourists, travelers, businesspeople, and more arriving on the island.
Quick Stats:
Avg. Daily Rate: $214/Night
Avg. Occupancy Rate: 83%
Avg. Monthly Revenue: $4K
2. Lake Tahoe, CA
Another tourist destination, Lake Tahoe has a constant flood of skiers, snowboarders, hikers, and aquatic enthusiasts. As a mature vacation market, Lake Tahoe may offer an easier opportunity to operate rental arbitrage than other cities.
Quick Stats:
Avg. Daily Rate: $424/Night
Avg. Occupancy Rate: 65%
Avg. Monthly Revenue: $5.6K
3. Charleston, SC
Not everyone can afford the high rents of the western states. Thankfully, a more affordable (and fun) option like Charleston, South Carolina exists. As a flourishing vacation destination for Carolinians, Charleston offers affordable stays while being minutes away from the beach.
Quick Stats:
Avg. Daily Rate: $301/Night
Avg. Occupancy Rate: 77%
Avg. Monthly Revenue: $5.4K
4. Savannah, GA
If you like Spanish moss, beautiful old buildings, and slightly haunted houses, then Savannah, Georgia is your next rental arbitrage destination. With world-renowned architecture, arts, and scenery, this affordable vacation destination is a hot spot for the entire east coast.
Quick Stats:
Avg. Daily Rate:$263/Night
Avg. Occupancy Rate: 70%
Avg. Monthly Revenue: $4.5K
5. Chattanooga, TN
Chattanooga doesn’t have the same type of vacation market that the others on this list do, but it still does bring in over three million visitors a year, and many business travelers, traveling nurses, and other working professionals.
Quick Stats:
Avg. Daily Rate: $168/Night
Avg. Occupancy Rate: 73%
Avg. Monthly Revenue: $2.9K
How to Start Doing Rental Arbitrage
Rental arbitrage isn’t complicated, but it does require a fair amount of small steps to be followed before you can start. If you’re still wondering what your next step is, follow along with this list:
Have Your Finances in Order
You want to make more money. That’s great! But, you’ll need to have your personal finances locked in before you start investing in other ventures. Make sure you have a fair amount of monthly savings, a strong emergency reserve, and other sources of income before you become the king or queen of rental property arbitrage.
Pick a Market
Often the best market to choose is the one in your own backyard. But, your city may be too small to successfully run a short-term rental business. Look at cities surrounding you if yours doesn’t fit the bill, and be sure to use tools like AirDNA or Mashvisor before you start.
Learn the Laws
Know the lay of the land on short-term rental laws in your area. Does your city/area allow for stays less than 30 days? If so, do you need to stay within certain geographic areas? These are the questions to ask before you start!
Set Up an LLC
An LLC can create the legal buffer you need to keep your business assets and your personal assets separate. Contact a local attorney to draft up your LLC or use websites like LegalZoom to create an LLC for only a few hundred bucks.
Find a Home
Now that you know which area is worth investing in, it’s time to look for rental units. Use websites like Zillow and Realtor to search for rental properties in the most optimal part of town. Anywhere close to public transportation, within walking distance of major sites, or in high-demand neighborhoods should work.
Run the Numbers
Now you know how to accurately calculate ROI, you’ll want to calculate how much a potential rental arbitrage property can make you. Calculate your ROI, your profit, and your monthly expenses to know what to expect if and when you rent out the property.
Get Landlord Permission
Getting written landlord permission to sublease is an important step in rental arbitrage. Sure, you could rely on a lease that doesn’t outright ban subleasing, but, if any legal problems pop up, having a written agreement should be enough to show you’re in the clear.
Furnish and Decorate
Once you have the property leased up, it’s time to find furniture. You can get cheap, homey furniture from places like Facebook marketplace or Craigslist, but if you’re renting out a high-end property, buying new furniture may be your best bet for guests.
List Your First Rental Arbitrage Property
Once you’ve furnished your property, it’s time to take pictures (preferably professional ones), write a description, and list it on sites like Airbnb and VRBO. Make sure you carefully articulate all the benefits and amenities of your property. Read through other top listings to see what they say and do your best to recreate their value propositions.
Get Paid
Everything is set to go for you to welcome your first guest. Do a great job hosting, ensure some early rave reviews, and get paid!
4 Tips to Get Your First Rental Arbitrage Deal
Now you know what to do, but what steps should you take to get your first rental arbitrage deal?
1. Network
Attend local real estate meetups or try to join local short-term rental investing Facebook groups. It’s incredibly valuable to get insights from other business owners within your area. Plus they may send some deals your way!
2. Learn the Business
You’re running a short-term rental business, so treat it that way! Read books on short-term rental investing, find new ways to optimize your bookings and cleanings, and always be looking for new ways to expand and grow. This information will help jumpstart your first investment or allow you to expand once you’ve mastered the basics.
3. Pick a Niche
Don’t just have a rental, be THE best rental for your niche. Who will you cater to? Large families, couples taking vacations, traveling nurses, corporate travelers? Know your customer and build your business plan to fit THEIR needs.
4. LLCs Look Legit
LLCs not only legally protect your business, but they also look much better in a landlord’s eyes. If a landlord sees you as a business, and less as some random real estate junkie, they’ll be more open to renting out their space to you.
Final Thoughts on Rental Arbitrage
If you’re looking for quick cash flow, rental arbitrage is the strategy for you. It doesn’t require much upfront investment, it’s relatively easy to manage, and almost anyone can do it. Just be sure you’re using the money you make to diversify into other, long-lasting, forms of real estate. You want to end up as the owner of a rental property portfolio, not the renter of one!
Rental Arbitrage FAQs
You made it to the end of the guide, congrats! You’re ready to start your rental arbitrage empire. Before you go, let’s review some of the key questions:
Can You Make Money with Rental Arbitrage?
Yes! As long as you’re smart about it, rental arbitrage can be a great way to make money. Just remember, it takes time and effort to find the right properties and attract good guests to them.
What States Allow Rental Arbitrage?
Most states allow some form of rental arbitrage, but you should research the laws in your area before starting. The best way to find out is by talking with a local attorney or real estate agent who specializes in short-term rental properties.
Do Landlords Allow Rental Arbitrage?
Landlords may be more willing to work with you if you can provide references and show that you have experience in rental arbitrage/short-term rental operating. If they don’t allow it, ask them why not and see if there’s anything you can do to change their mind.
