Last updated on September 21st, 2023
Subletting a property in London is legal as long as a custom agreement is settled with the landlord. This process is also known as rental arbitrage, which is an excellent way to generate passive income. Are you looking for expert ways to do rental arbitrage in London but aren’t sure how?
In this guide, we’ll explain rental arbitrage in layman’s terms and provide some expert tips. We also included the best areas to do rental arbitrage in London to help you make the best investment decisions. Stoked to learn more? Continue reading!
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 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.
Is rental arbitrage allowed in London?
Rental arbitrage is allowed in the UK, particularly in London. It’s also good to know that a standard rental agreement cannot be used as this process is a breach of contract. For instance, if you have an Assured Shorthold Tenancy Agreement (AST), it cannot be used as a legal basis to do rental arbitrage. A separate contract indicating that the landlord allows you to sublet the property is necessary to avoid legal charges.
The Government of London provides detailed information about housing rules. This includes occupancy restrictions, guest record keeping, and minimum stay requirements. Violating these requirements may result in penalties and suspension or cancellation of your registration number. Here are some of the Airbnb rules in London that you should take note of:
1. London’s 90-day annual limit
The 90-Day Airbnb rule in London states that a property can’t be let out for more than 90 days per year. This rule only applies to entire houses listed in the Greater London area as of 2023. It’s best not to ignore this rule as you can be fined up to £20,000!
2. Planning Permit
If you’re wondering, do you need a permit for Airbnb in London? Here’s the answer! The planning permit issued by London’s City Council also allows you to rent it out throughout the year. This can be obtained if you want to exceed the 90-day limit. UK regulations state that anyone who rents a home for more than 90 days in a calendar year must obtain planning permission.
This is called temporary sleeping accommodations. If you plan to rent your accommodation as a short-term rental using a third-party platform such as Airbnb or other sites, you must first apply for a building permit from the city hall.
3. Municipal Tax
London’s Deregulation Act also requires all persons responsible for providing short-term rental accommodation to have a legal obligation to pay municipal tax.
In any case, you must obtain a gas safety certificate for the property and conduct a fire risk assessment once a year. Your property must also provide smoke detectors and carbon monoxide alarms.
4. Confirm with your landlord
London’s City Council recommends that you confirm with your landlord first before listing your accommodation on booking sites such as Airbnb. This is regardless if you want to apply for planning permission or not. It is also recommended that you confirm any lease, insurance, or mortgage policy that states restrictions on short-term rentals.
How to start rental arbitrage in London?
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.
How much can I make with Rental Arbitrage in London?
Airbtics’ data confirm that an Airbnb host in London, particularly in the city centre, can earn an average nightly rate of £258. This is by operating a 2-bedroom apartment/flat alone! Airbnb hosts are expected to generate an annual revenue of £66,159 with a steady occupancy rate of 85%.
What are the initial costs of starting Rental Arbitrage in London?
You can expect to spend anywhere between £2,500 to £4,000. 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 £2,500 to £4,000 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 £40 to £2,500 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.
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Best Areas for Rental Arbitrage in London
Some of the obvious places that you can think of in London are Lambeth and Southwark. You can consider these areas when buying investment properties in London.
London’s population and employment growth are accompanied by economic growth elastic. This promotes the growth of London’s real estate market. Lambeth also encourages the city’s Airbnb business. As a real estate investor, given the positive financial metrics of London short-term rentals, investing in Airbnb rental properties is recommended because of London’s positive financial metrics.
According to Airbtics Dashboard, Lambeth is the top market to start your rental arbitrage business. There are overall more than 1,099 Airbnb listings and a host can expect to earn a daily rate of £101. $143. The annual monthly revenue for most properties in Lambeth is £29,095 with an occupancy rate of 93%.
Airbtics’ data confirm that Dashboard, Southwark is the next best area to start your rental arbitrage business. There are more than 1,270 Airbnb listings and a host can expect to earn a daily rate of £119. The annual revenue for most properties in Southwark is £34,653 with an occupancy rate of more than 92%.
In summary, rental arbitrage in London can be a very profitable side income. Since it does not require you to purchase a property, it’s also practical for beginners! The big question is where is the best area to do rental arbitrage in London?
Starting an Airbnb business in the UK can certainly be profitable as long as you find the best areas to begin with. While there are several properties for sale, not all of them will provide excellent returns. This is where accurate data and research can back you up to make the best investment decisions.
Comparing occupancy rates in London has never been easier to do manually. But with the help of an STR analytics tool like Airbtics, it was discovered that the Islington borough has the highest Airbnb occupancy rate of 71%. Leverage your opportunities in rental arbitrage by using a free Airbnb calculator and determine the best areas that will bring long-term profitability!