Houston, Texas has plenty of great opportunities for property investors. Purchasing an investment property for sale in Houston is not always ideal for those who are on a limited budget. So is there an affordable option? There are two words: Rental arbitrage!
If you’re thinking of starting your rental arbitrage journey in Houston, continue reading. In this article, we’ll feature the best areas to do rental arbitrage in Houston. We also added the initial costs, expected Airbnb revenue in Houston, and more.
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 Texas 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.
The good news is that Airbnb rental arbitrage in Houston is certainly legal. Houston’s Construction and Housing Standards Act regulates construction and standards for the design and maintenance of buildings. This includes regulations on habitability, health, and safety.
As more and more commercial investors enter the vacation rental business, laws and regulations were formulated. The reason for this is to control the general rental market in the region and make accommodation affordable for locals. Check out the various short-term rental laws in Houston:
This law applies to three or more buildings with multiple independent rental units classified into managed leases and non-custodial leases.
This arrangement requires the owner to be in the property for the entire stay. The length of stay of the hosted lease may be limited, but during this period, guests can enter all areas of the rented unit.
Houston’s multi-family housing laws prohibit non-accommodation leases of less than 30 days. The law only applies to “A-class residential buildings” in the area.
When considering a condominium, the landlord should verify whether the building is an “A” class building. In this case, the multiple dwelling law applies. In addition, the building’s Homeowners’ Association (HOA) may have enacted restrictive regulations that make renting space a challenge.
Rent-stable buildings put more restrictions on landlords, especially if you can charge the amount of rent. One thing to remember is that it is actually illegal to make a profit on such buildings through vacation rentals.
However, since these units generally do not have specific regulations on short-term rentals, it’s less likely to have problems. The landlord must be considerate of other people in the building and set specific rules for guests to avoid any mishaps.
Houston has quite a few regulations that need to be scrutinized carefully. Learning about local laws regarding short-term leases will help you worry less about breaching the laws. If necessary, it’s advisable to consult a local attorney’s advice to avoid penalties and be on the right track.
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.
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!
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:
On a side note, you can also integrate the majority of these tools with short-term rental management software such as Hostaway or Guesty.
If you’re wondering, is Airbnb profitable in Houston? We found out using an Airbnb income calculator! Airbtics’ data confirm that an Airbnb host in Houston can earn an average daily rate of $112. This is by operating a 2-bedroom apartment/flat alone! Airbnb hosts are expected to generate an annual revenue of $34,201 with a steady occupancy rate of 62%.
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:
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.
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.
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.
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.
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.
What are the pros and cons of doing rental arbitrage in Houston? Here’s the part where you can set your expectations:
Some of the obvious places that you can think of in Houston are Southwest Houston and Midtown. In general, Houston’s population and employment growth are accompanied by economic growth elastic. This promotes the growth of Houston’s real estate market.
Houston also encourages the city’s Airbnb business. As a real estate investor, given the positive financial metrics of Houston short-term rentals, investing in Airbnb rental properties is recommended because of its positive financial metrics.
According to Airbtics Dashboard, Midtown is the top market to start your rental arbitrage business. There are overall more than 224 Airbnb listings out of which 112 are 1-bedroom properties. The monthly revenue for most properties is more than $1,978 with an occupancy rate of 54%.
Airbtics confirms that Southwest Houston is the second-best market to start your rental arbitrage business. There are more than 1,751 Airbnb listings with 256 private rooms properties and 800 one-bedroom properties. The monthly revenue for most properties is more than $1,728.
In summary, rental arbitrage in Texas can be a very profitable side income. Particularly in Houston as it’s one of the major cities! Since it does not require you to purchase a property, it’s also practical for beginners. The big question is which are the best neighborhoods in Houston to do rental arbitrage?
The good news is that you can easily discover the most profitable Airbnb locations with the help of Airbtics’ Discovery Tool. Leverage your opportunities in rental arbitrage by using a free Airbnb calculator and determine the best areas that will bring long-term profitability!
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