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 a multifamily house, 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 and easy. 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 California for $1800/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 $2600/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 Airbtics. 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 really 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.
Now for the convincing, rule number one is, 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 for them. So 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 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 monthly lease and keep the situation beneficial for both parties.
Insure 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 neighbors are happy. Many landlords will have this concern when renting out their property to you. They will be worried about neighbors 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.
You can integrate the majority of these tools with a PMS of your choice.
The initial cost of starting rental arbitrage in California?
You can expect to spend anywhere between $5,000 to $10,000. This cost consists of everything including Deposit, Furnishing, Amenities, Legal Paperwork, 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 rental themselves. Also furnishing a place from scratch can add anywhere from $3000 to $10,000 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 California
Thanks to its sunny weather, Hollywood and Silicon Valley, California has seen a lot of growth in Short Term Rentals in the past decade. It can be a haven for people starting out 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.
For Example, Los Angeles has passed a law for its residents to obtain a permit from the city planning department for $89 if they want to do STR. Residents also have to include the registration number in the listing as well when putting it on Airbnb. Also, residents can only rent out the property in which they have been residing for at least 6 months of a year. There are many categories of these permits. Most of them allow residents to do Short Term Rental for not more than 4 months a year but there are exceptions.
In San Francisco, especially Silicon Valley, STR was completely illegal before 2015. But laws have loosened up a bit since then. Now residents can rent out their place of residency for 275 days of a year when living in the same house. They can host it for only 90 days a year when not living in the house by themselves. Also to rent on Airbnb the owner 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.
Similarly in San Diego, till now owners need to get a transient occupancy registration certificate from the city and pay necessary taxes. This might change in 2021 as the government is planning to reduce the number of short-term rentals allowed in the city to half. From then the approval might be via lottery for registered owners.
With these many different regulations for each city and high state tax, many investors are shying away from investing in California. But if you are ready to take on the work and choose the location correctly then you might end up doing great. In the next section, we will be suggesting the 2 best areas to start your rental arbitrage journey in California. For specific neighborhoods of these cities and data of different cities checkout Airbtics.
Best areas for Rental Arbitrage California
There are some obvious places that come to mind when thinking of California like Los Angeles, San Francisco and San Diego. Though they do have good Revenue and occupancy rates. But we have not included them in our top 2 best picks. These cities have very difficult laws that make it very hard for a beginner to do Rental Arbitrage at a small upfront cost. You can consider these cities after you are generating some revenue from your other rentals. The first in our list is:
According to our Airbtics Dashboard, Napa is the top market to start your Rental Arbitrage business. There are more than 912 Airbnb listings with 269 private rooms properties and 189 one-bedroom properties. Monthly revenue for most properties being more than $8327/month with occupancy being more than 52%.
2. Santa Barbara
According to our Airbtics Dashboard, Santa Barbara is the second-best market to start your Rental Arbitrage business. There are more than 793 Airbnb listings with 209 private room properties and 192 two-bedroom properties. Monthly revenue for most properties being more than $7361/month with occupancy being more than 68%.
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