Last updated on June 26th, 2023
What is Rental Arbitrage?
Rental Arbitrage is a method similar to house hacking. But unlike house hacking in Rental Arbitrage, you don’t own the house. Instead, you convince a landlord to lease you a property which you then furnish and sublease on Airbnb and VRBO.
Rental Arbitrage is a really good method to do in multifamily houses, duplexes, or triplexes. You can easily use the money from your short-term rental to pay off your lease and also profit some more. If done right this can be a full-fledged business in itself. If you own a duplex or triplex then it is pretty straightforward. You can live in one section and rent out the other. This is known as house hacking. People use this after taking a loan on a property and use the rent to pay off the mortgage. The short-term rent helps you pay for the long-term lease that you have on the house. This helps you keep the difference at the month-end after paying for the long-term lease. Let’s take an example to help you understand Rental Arbitrage better.
Assume you are renting a duplex in Seattle for $1,800/month. You are living by yourself on one of the sides and you decide to sublease the other on Airbnb. Let’s say you listed it for $100/day and got 80% occupancy. This will bring in approx $2,600/month in revenue. Not only will it help you pay off your complete rent, but give you a profit of $800. This, in a nutshell, is called Rental Arbitrage.
Things to do before getting started?
How to convince the landlord
Let’s say you want to get into Rental Arbitrage. Now comes the big question, how to find a good property and how to convince the landlord. Later in the blog, we’ll be explaining how to find a good property by doing proper research using short-term rental analytics. In this section, we will be focusing more on how to convince landlords. As you’ll begin your Rental Arbitrage journey, you’ll come to know that this is the hardest part of the whole process.
You need to be prepared and well researched, good communication skills come in handy here. Also, one thing to always keep in mind: never sublease without informing the landlord, there will be a huge number of people coming in and going out when you’re sub renting, it will not be hard for the landlord to figure out that you are subletting and you might end up getting in trouble.
For the convincing, rule number one is always talking about the upsides. If you can rent the property on Airbnb, so can the landlord himself. You need to make a deal with the landlord that is beneficial to them. So they lease the property to you instead of renting it by themselves.
Learn the step-by-step procedures of Rental Arbitrage and become a pro in the business!
Points to tell an indecisive landlord.
- Doing Rental Arbitrage is a full-time business. It doesn’t generate passive income like long-term leasing. You should try approaching older people who are looking for some sort of passive income. They are more likely to agree to a fixed long-term lease. You can also reach out to full-time working professionals or business owners. They will also be happy with a source of passive income till their property is well maintained. This brings us to our next point.
- You are more likely to take care of the house than a normal renter. As you are using the property to do business you will take good care of it to make sure you get better reviews. Having a beat-up property isn’t good for business and you are more likely to monitor it often. Not monitoring it will affect your revenue a lot. You may end up paying a huge sum of money for damages done by someone else. So telling this to the landlord might instill some confidence in them.
- You can ensure timely monthly rent. You can tell the landlord that doing Rental Arbitrage is a full-time business with ups and downs. It doesn’t guarantee fixed income at all like long-term leasing. But if they lease it to you, you’ll make sure to pay the lease no matter what. Either from the money made after rental arbitrage or from your savings. You need to ensure timely monthly lease payments to gain the trust of a landlord.
In conclusion, you need to take care of the property like your own. Make sure to timely pay the monthly lease and keep the situation beneficial for both parties.
Ensure the Property and Gain landlords’ trust
Being on the safe side is always a good idea. From trouble guests to bothering landlords. You need to make sure you are using the right tools to ensure the property is safe and neighbours are happy. Many landlords will have this concern when renting out their property to you. They will be worried about neighbours raising noise complaints. It is a legitimate concern. To help you with all these problems, here are some suggestions that you can implement and have peace of mind.
- Simply Safe – These are home monitoring tools that you can install in the house to make sure no suspicious activity is happening there. Make sure to let the guests know about them and have their consent.
- Auto host – Automatically screens problematic tenants.
- Alexa Guard: If you already own an Alexa, you can use its Alexa guard feature to detect parties. It is an inbuilt feature that monitors changes in sound and sends you an alert in case the guests are having a party and making too much noise.
- InsuraGuest – This insurance and tech company helps you with risk analysis and gives protection beyond Airbnb and VRBO policies.
- Airbnb Profit Calculator – Give your landlord ease of mind by providing income estimates backed by Airbnb data.
You can integrate the majority of these tools with a PMS of your choice.
Pro’s and Con’s
The initial cost of starting Rental Arbitrage Seattle?
You can expect to spend anywhere between $3,000 to $5,000. This cost consists of everything including deposit, furnishing, amenities, legal paperwork, and LLC Incorporation.
But doesn’t this contradict the low upfront cost of Rental Arbitrage? Well, these estimates vary from city to city. There is a possibility to do Rental Arbitrage for even less than this depending upon your situation and the type of property you lease.
Still, the amount is much less than investing in a new property and getting a mortgage of thousands of dollars. Plus you won’t be on the hook for property maintenance expenses and being stuck for years with debt.
But this doesn’t mean Rental Arbitrage can be done with no or very tight budget. There will be some upfront costs that you would have to bear. Having some extra cash is also a good thing to have. It will help pay off the lease in not-so-profitable months in case bookings don’t happen right away.
Expense 1: Rental Deposits
A rental Deposit is going to be one of the first and major expenses. You would need money to be able to sign a long-term lease with the landlord. For that, you will need a Security deposit, First and Last month’s rent. Sometimes you can negotiate with the landlord and use the first month’s rent as a security deposit.
Expense 2: Furnishing
Most of the time you should always aim to lease a place that is semi-furnished. As someone with a fully furnished home might be doing short-term rentals themselves. Also furnishing a place from scratch can add anywhere from $3,000 to $5,000 to your initial capital. Not choosing the right property can make Rental Arbitrage not so low cost, so choose wisely.
If the place is semi-furnished, then your best bet is to shop cheap for the rest of the stuff. You can go and find cheap supplies from places like Home Depot and IKEA. Sometimes even Walmart can have a hidden gem if you look closely.
Expense 3: Photography
Do it yourself!!! iPhones have good cameras. Will save you some money.
Expense 4: Cleaning Services
This is not a starting cost, but you will end up spending on cleaning eventually. The best way to save money is to do it yourself initially if you have the skills and experience.
If you have no experience or you don’t want to invest time in cleaning a place. Then your best bet will be to hire a professional cleaner. This can cost you anywhere from $50 to $250 depending upon the size and location.
Expense 5: Legal Consultation
Maintaining a professional relationship with a Real Estate lawyer can be very helpful in the Airbnb business. Airbnb regulations keep updating and you would need some legal guidance on the way to adjust your business accordingly.
They can also come in handy if you face any legal issues with the landlord or guests. They can help in damage claims and insurance as well in case of any mishappening.
Legality and Regulations in Seattle
License Criteria
The City of Seattle’s short-term rental code sets clear rules and license needs for short-term rental hosts. You may need to apply for one of four distinct types of licenses.
Here’s a quick rundown of each license:
Tax certificate for a business license
Business license taxes are payable by anyone providing short-term stays in Seattle. It is necessary to get this certificate before applying for your short-term rental or bed & breakfast operator’s license. Each calendar year, a Seattle business license is valid until the end of December. For all your listings, you only need one business license. Each calendar year, a Seattle business license is valid until the end of December.
Operator’s license for STRs
If you want to host short-term stays in Seattle, you’ll need a short-term rental operator’s license. Short-term rental licenses are set to expire on their anniversary date. The City of Seattle allows you to apply for a license online. You’ll need to add the number and end date to your Airbnb listings once you get your short-term rental operator’s license.
A short-term rental operator’s license permits you to rent out up to two of your own housing units for brief periods of time. Your primary house must be where you keep your motor vehicle, driver’s license, voter registration, or other similar documents, the city says. The other could be a supplementary dwelling, such as a vacation home or second home, that you also own.
Ordinance on Rental Regulation and Inspection (RRIO)
If you host a second house, such as a vacation home or second house, you’ll need a Rental Registration and Inspection Ordinance (RRIO) registration number. By meeting these requirements, the property can be inspected by the city.
It’s worth noting that RRIO demands an inspection during the first two years of registration. You don’t have to wait for an inspection before applying for an STR license.
License for a bed and breakfast operator
A bed and breakfast operator’s license is necessary if you operate a bed and breakfast. The City of Seattle allows you to apply for a license online. The license is $75 and has an end date. You’ll need to add your bed and breakfast operator’s license to your business license after you get it.
Taxes on the local level
Rentals within the city of Seattle are subject to a short-term rental tax. Yet, inside the state of Washington, Airbnb collects and remits state and local taxes on your behalf. The guest handles all state and local taxes.
Use of the land
Land use in Seattle neighborhoods is governed by the Seattle Land Use Code. In Seattle, short-term rental is a type of lodging operation that involves renting a dwelling unit, including a partial unit, for less than 30 consecutive nights. Some types of properties, such as waterfront properties and properties on the water, such as houseboats, do not allow short-term rentals. Other standards that pertain to your property, such as parking and noise rules, must also be met.
Code of the Building and Construction Industry
The Seattle Building and Construction Code covers construction, design, maintenance, habitability, health, and safety. Unless they are RVs, tents, garages, treehouses, tiny houses, boats, or live/work units, you can arrange short-term rentals in most buildings created as dwellings.
Best areas for Rental Arbitrage in Seattle
Some obvious places come to mind when thinking of Seattle like West Seattle, Central District, and many more. According to Airbtics Dashboard, two of the best areas to invest in Seattle are:
1. Wallingford
According to our Airbtics Dashboard, Wallingford is the top market to start your Rental Arbitrage business. Currently, there are overall more than 132 Airbnb properties with an average occupancy rate of 89%, a daily rate of $152, and annual revenue of $50,102.
2. Ballard
According to our Airbtics Dashboard, Ballard is the second-best market to start your Rental Arbitrage business. There are more than 193 Airbnb listings with an average occupancy rate of 88%, a daily rate of $133 and an annual revenue of $46,004.
