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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 Chicago 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.
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 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.
Pros of Rental Arbitrage
Undoubtedly one of the biggest benefits of Rental Arbitrage is not owning a property. You don’t need to invest any amount upfront or pay a mortgage for 30 years with interest. You just need some good convincing skill, some capital to furnish, and voila.
- Low Upfront Cost
- No need to invest in a property
- Opportunity to repeat and scale pretty easily
- Use the property as your vacation house
- Use profits for other investments and businesses
Cons of Rental Arbitrage
- You will need to pay for amenities and utilities like Wifi and TV
- The landlord can stop subleasing if he doesn’t wish to continue
- You will need to invest in furnishing the place
- It can get tricky to find the right landlord
- You would have to pay for wear and tear done by guests
- Bookings will not be constant and you might have to pay from your savings to cover the lease
- You will be taking care of maintenance and damages, which can add up
The initial cost of starting rental arbitrage in Chicago?
You can expect to spend anywhere between $3,000 to $5,000. 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 $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 Chicago
Chicago Government site provides more information about Chicago’s shared housing rules, including occupancy restrictions, guest record keeping, and minimum stay requirements. Penalties for violating these requirements may result in the suspension or cancellation of your registration number. You may also be fined.
Visit the City of Chicago website for more information.
The City of Chicago requires a “vacation rental” license. Section 46300 of the Municipal Code contains information on licensing procedures and the responsibilities of holiday rental permit holders.
Vacation rental houses can advertise or publish rental houses through platforms such as Airbnb, but they must be registered and approved by BACP before they can be listed on the intermediary platform.
The landlord must publish the permit number of his property on his listing. Additional details are provided on the City of Chicago Commercial Licensing page, including fee and process information.
Bed and Breakfast Permit
The City of Chicago requires a “Bed and Breakfast” permit. Section 46290 of the Municipal Code contains information on the licensing procedures and duties of bed and breakfast licensees.
B&B can advertise or publish rental information through platforms such as Airbnb, but it must be registered and approved by BACP before it can be listed on the intermediary platform. The landlord must publish the permit number of his property on his listing. Additional details are provided on the City of Chicago Commercial Licensing page, including fee and process information.
The City of Chicago requires a “hotel” license. Section 46180 of the Municipal Code contains information on licensing procedures and the duties of hotel license holders.
hotels can advertise or publish rents through platforms such as Airbnb, but they must first register and obtain BACP approval before they can be listed on the intermediary platform. The landlord must publish the permit number of his property on his listing. Additional details are provided on the City of Chicago Commercial Licensing page, including fee and process information.
The Chicago Zoning Regulations stipulate the city’s zoning requirements and land use. You should refer to the Zoning Regulations and the Shared Housing Amendments to the Municipal Code in 2016, 2017, and 2020-here to see if your list covers any zoning requirements or definitions of use.
Chicago imposes a 4.5% hotel room tax, a 4% shared housing surcharge, and a 2% domestic violence surcharge, including any cleaning fees for bookings of 29 nights or less. Airbnb collects and remits these taxes and fees in Chicago. For more information, please click here.
Cook County also imposes a 1% hotel accommodation tax on list prices, including any cleaning fees for bookings of 29 nights or less. Airbnb collects and remits this tax in Cook County.
It is also important to understand and abide by other contracts or rules that require you, such as rules for leases, apartments or cooperative committees, rules for homeowners’ associations, or rules set by tenant organizations. Read your lease, and if applicable, consult your landlord.
Reasons for these laws and regulations
As more and more commercial investors enter the vacation rental business, these laws and regulations are formulated to control the general rental market in the region and make accommodation affordable for locals.
In the next section, we will be suggesting the 2 best areas to start your rental arbitrage journey in Chicago. For specific neighbourhoods of these cities and data of different cities checkout Airbtics.
Best areas for Rental Arbitrage Chicago
There are some obvious places that come to mind when thinking of Chicago like Heart of Chicago, West town. You can consider these areas when buying investment properties in these neighbourhoods of the Chicago real estate market.
Chicago’s population and employment growth are accompanied by economic growth elastic, which promotes the growth of the Chicago real estate market. West town promotes the city’s Airbnb business. As a real estate investor, given the positive financial metrics of Chicago short-term rentals, investing in Airbnb rental properties in Chicago is recommended.
1. West town
According to our Airbtics Dashboard, West town is the top market to start your Rental Arbitrage business. There are overall more than 9948 Airbnb listings out of which 1 bedroom is 3112 in Chicago where Airbnb helped in Monthly revenue for most properties being more than $2000/month with occupancy being more than 44%.
2. Heart of Chicago
According to our Airbtics Dashboard, Heart of Chicago is the top area to start your Rental Arbitrage business. There are overall more than 4000 Airbnb listings out of which 1 bedroom is 1400 in Chicago where Airbnb helped in Monthly revenue for most properties being more than $2258/month with occupancy being more than 45%.