Last updated on June 26th, 2023
Introduction
Owning a property in the heart of California is probably one of the greatest accomplishments that a property investor can brag about. Not only will you be in the center of film, travel, or health care, but you’ll also get a chance to achieve financial freedom.
If you’re looking to start your Airbnb rental arbitrage journey in California, then this article is for you! Continue reading as we feature expert tips, initial costs, profitability, and more. Bonus: You’ll also learn about the best areas to do rental arbitrage in California!
What is Rental Arbitrage?
Rental Arbitrage is an expert technique where you sublease a property for the sole purpose of Airbnb. This is initially allowed with the property owner’s or landlord’s approval. Rental arbitrage is somehow similar to house hacking, except that you don’t own the property. Instead, you convince a landlord to lease you a property that you can then furnish and sublease on Airbnb and VRBO.
Rental Arbitrage is an efficient method for multifamily houses, duplexes, or triplexes. You can easily use the money from your short-term rental to pay off your lease and profit some more. If done right, this can be a full-fledged business!
If you own a duplex or triplex property, then it is pretty straightforward. You can live in one part of the house and rent out the other. This process is known as house hacking. Property investors try this method after taking a loan on a property and use the rent to pay off the mortgage. The short-term rent will help you pay for your property’s long-term lease. This helps you keep the difference at the month-end after paying for the long-term lease.
Here’s a perfect example to understand how rental arbitrage works. Assume that you are renting a duplex in California for $1,800/month. You are living by yourself in the property and you decide to sublease an extra room on Airbnb. Let’s say you listed it for $100/day and got 80% occupancy. This will generate 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.
Is rental arbitrage allowed in California?
Yes, rental arbitrage is legal in California! With the landlord’s approval and a legal contract with the lessee, there are no restrictions in operating rental arbitrage. Thanks to its sunny weather, there has been a lot of growth in short-term rentals in the past decade – particularly in Hollywood and Silicon Valley, California.
It can be a haven for people starting in STR and Rental Arbitrage. But recently due to the residential housing shortage in the market, the government is starting to regulate the STR market. Especially in cities like Los Angeles and San Francisco where the rents and property prices are skyrocketing.
This is due to the high influx of investors buying residential and commercial properties for Rental. People are allowed to start their short-term rental business very easily in most parts of California, but in some parts, it can be quite challenging. This is considering the regulations and high state income tax as well.
Airbnb rules in Los Angeles
The City of Los Angeles has passed a law for its residents to obtain a permit from the city planning department to operate short-term rentals. Residents also have to include the registration number in the listing and display it on Airbnb.
Residents can only rent out the property in which they have been residing for at least 6 months in a year. These permits vary according to different categories, so it’s best to visit your local city hall for detailed information.
In San Francisco, particularly in Silicon Valley, STR was completely illegal before 2015. But laws have loosened up a bit since then. Currently, residents can rent out their place of residency for 275 days a year if they live in the same house.
They can host it for only 90 days a year if they don’t reside on the property. The owner also needs to register as a business or LLC with the city and get the certification. This certification number needs to be mentioned in the listing on Airbnb or any other form of short-term rental advertising.
Airbnb rules in San Francisco
Laws in San Francisco state that only permanent residents are allowed to operate short-term rentals. To be a permanent resident, you must reside in your unit for at least 275 nights per year. It’s also necessary to register with the city as a business and as a short-term rental.
How to start rental arbitrage in California?
1. Convince the landlord
Let’s say you want to get into rental arbitrage. You may be wondering, how do I find rental arbitrage properties and how should I 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 a landlord to do rental arbitrage. 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 about the popularity of Airbnb in your area. Having good communication skills will also come in handy! Here’s one thing that you should always keep in mind: never sublease without informing the landlord. There will be a huge number of people coming in and out when you’re sub-renting, so the landlord will most likely figure out that you are subletting and you might end up getting in trouble.
When convincing the landlord, rule number one is to always talk 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 in return, they lease the property to you instead of renting it by themselves.
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 until their property is well maintained. This brings us to our next point. - You’ll take care of the house better than a normal renter. As you are using the property for Airbnb, you will maintain it very well 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 the landlord.
In conclusion, you need to take care of the property and treat it like your own. Make sure to timely pay the monthly lease and keep the situation beneficial for both parties. You can also use a free rental arbitrage email template and propose your ideas to landlords!
2. Ensure the property and gain the landlords’ trust
Being on the safe side is always a good idea. You need to make sure you are using the right tools to ensure that the property is safe and neighbors aren’t bothered by guests. Many landlords will have this concern when renting out their property to you. They will be worried about neighbors raising noise complaints and it’s a legitimate concern. To help you with all these problems, here are some suggestions that you can implement:
- SimpliSafe– 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.
- 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.
On a side note, you can also integrate the majority of these tools with short-term rental management software such as Hostaway or Guesty.
Pros and Cons
What are the pros and cons of doing rental arbitrage in California? Here’s the part where you can set your expectations:
Pros
- No need to own, invest, or purchase a property
- Low upfront costs
- Higher chances to repeat and scale easily
- Generated profit can be used for other investments or businesses
Cons
Invest money and time in furnishing the property
How much do Airbnb hosts make in California?
Airbtics’ data confirm that an Airbnb host in California, particularly in San Diego, can earn an average daily rate of $211. This is by operating a 2-bedroom apartment/flat alone! Airbnb hosts are expected to generate an annual revenue of $62,065 with a steady occupancy rate of 80%.
What are the initial costs of starting Rental Arbitrage in California?
You can expect to spend anywhere between $3,000 to $5,000. This includes 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 lesser than investing in a new property and getting a mortgage of thousands of dollars. In addition to this, you won’t be on the hook for property maintenance expenses and being stuck for years with debt.
But this doesn’t mean that rental arbitrage can be done with zero or a very tight budget. There will be some upfront costs that you have to expect so it’s ideal to own some extra cash is also a good thing to have. This will help pay off the lease during the off-season in case bookings don’t happen right away. Check out some of the expenses that you have to prepare for:
Expense 1: Rental Deposits
A rental deposit is going to be one of the first major expenses. You will need money to be able to sign a long-term lease with the landlord. For that, you will need a security deposit and the 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. 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 for cheap and affordable amenities. You can go and find cheap supplies from places like Home Depot and IKEA. Sometimes even Walmart offers hidden gems if you look closely.
Expense 3: Photography
It’s highly recommended to try DIY photography as a start to save money. You can even learn how to take the best Airbnb photos to highlight your listing! But if you have the budget, hiring a professional photographer is also an excellent option.
Expense 4: Cleaning Services
This is not a starting cost, but you will eventually end up spending on cleaning services. The best way to save money is to do the cleaning by yourself if you have the time, skills, and experience.
If you have no experience or 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 – $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 are constantly changing and you will need some legal guidance to adjust your business accordingly.
Legal guidance can also come in handy if you face any legal issues with the landlord or guests. They can help in damage claims and insurance in case of any mishappening.
Best areas for Rental Arbitrage California
Some of the major cities in California are Los Angeles, San Francisco, and San Diego. Though they do have good revenue and occupancy rates, these major cities were not included in our top 2 best picks because of their strict short-term rental laws.
Apart from the fact that a beginner will have a hard time to do rental arbitrage in the mentioned cities, it also comes at a small upfront cost. However, it’s also ideal to compare the best neighborhoods for Airbnb in Los Angeles to have a better outlook in the market.
You can consider these cities after you are generating some revenue from your other rentals. Here are the most recommended areas for rental arbitrage in California:
1. Napa
According to Airbtics Dashboard, Napa is the top market to start your rental arbitrage business. There are more than 820 Airbnb listings with 189 condo properties and 188 one-bedroom properties. The monthly revenue for most properties is more than $6,197.
2. Santa Barbara
Airbtics confirms that Santa Barbara is the second-best market to start your rental arbitrage business. There are more than 688 Airbnb listings with 143 private room properties and 176 one-bedroom properties. The monthly revenue for most properties is more than $8,023.
Conclusion
The State of California is certainly an eye-catcher to property investors. Not to mention the number of celebrities and tourists visiting the state for a sunny vacation! So if you’re planning to invest anywhere in California, make the best investment decision by using an accurate short-term rental analytics tool.
You can easily predict your property’s revenue with an Airbnb profit estimator. And in one click, you can also discover emerging markets and even speed up against your competitors by looking at their performance.
Learn more about Airbnb rental arbitrage in California: in this video!
