Last updated on March 9th, 2023
Owning a house is every Filipino’s dream, and renting out is already considered a luxury afforded to just a few. But what if we tell you that you can rent out a property without actually owning it? Rental Arbitrage enables this setup. It is a smart way to earn passive income with only minimal investment!
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 the Philippines to help you make the best investment decisions. Stoked to learn more? Continue reading!
What is Rental Arbitrage?
Rental Arbitrage is a method similar to house hacking, where you rent out a spare room in your property. The difference between these two is you don’t need to own the house in rental arbitrage. Instead, you convince the property owner to allow you to sublease the house on Airbnb and VRBO.
Rental Arbitrage is applicable to multi-room apartments, houses, and condo units – as well as duplexes, and triplexes. It is a smart way to add a stream of income through the short-term rental of your subtenants. This allows you to pay your own rent and earn more.
Assume that you are renting a three-story house in Makati for $1,800 (approximately Php 99,000) per month. You are living by yourself on the top floor, and you decide to sublease the rest of the house on Airbnb.
Let’s say you listed it for $100 (Php 5,500) per day and got 80% occupancy. This will bring in approximately $2,600 or Php 143,000 monthly revenue. Not only will it fully cover your rent, but it will give you a profit of $800 (Php 44,000). This, in a nutshell, is called Rental Arbitrage.
Is Rental Arbitrage allowed in the Philippines?
Condominium apartments mostly comprise the listings on Airbnb Philippines. This entices owners to buy and rent out adjacent units for a steady stream of passive income. However, the comings and goings of short-term renters in the neighborhood are seen as a compromise on the building’s security. Furthermore, some condominium unit owners place a high value on the development’s exclusivity. They view short-term rental as a business that lowers property values.
Some condominium communities have established bylaws that discourage Airbnb lessors within the buildings. One of which is the association prohibiting rent of fewer than 60 days. Since Airbnb monthly rentals in the Philippines rarely meet this condition, this restriction prevents short-term rental operations from taking place at all.
The Condominium Act of 1966 governs the legal relationships between developers and condominium unit owners. The act spells forth the rights and responsibilities of a condominium unit buyer, as well as the authorities of the condominium association or company that oversees the project.
Owners who do not support Airbnb business miss a very important point. The Act clearly grants condominium unit owners the right to ownership, which allows them to lease their units to any renters as part of their ownership rights.
The Act only grants the building management’s corporate functions, which only cover “common areas…project management, and such other purposes as may be required, incidental, or convenient to the fulfillment of said purposes.” While condominium associations can justify prohibiting short-term rental operations on the grounds of building security, these concerns are not at all significant and cannot encroach on any individual’s right to ownership. As long as you Airbnb business permit in the Philippines, your short-term rental business is legal to operate.
How To Start Rental Arbitrage in the Philippines?
1. Convince the landlord
Let’s say you want to get into Rental Arbitrage. Now comes the big question, how to find a suitable 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 Airbnb analytics. 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 about the Airbnb demand in your area. Good communication skills will also come in handy here. Another thing to 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. It will only be a matter of time before the landlord figures out what you’re up to, and you might end up getting in trouble.
For convincing the landlord, rule number one is always talking 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 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 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 landlord’s trust
Being on the safe side is always a good idea. Use the right tools to ensure the property is safe, and the neighbors can go on with their lives happily while you do rental arbitrage. 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.
- 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.
- Airbnb Calculator – Give your landlord ease of mind by providing income estimates backed by Airbnb data.
You can integrate the majority of these tools with a PMS of your choice.
Pros and Cons
Be prepared for what you can expect from Rental Arbitrage in the Philippines:
- No purchase of property required
- Low upfront costs
- Opportunity to repeat and scale easily
- Generate profit for other investments or business
- Invest money and time in furnishing the property
How Much Can I Make from Rental Arbitrage in the Philippines?
Airbtics’ data confirm that an Airbnb host in Manila, particularly in Makati City, can earn an average nightly rate of $49 or approximately Php 2695. This is by operating a 2-bedroom apartment/flat alone! Airbnb hosts are expected to generate an annual revenue of $6,166 (Php 339,130) with a steady occupancy rate of 34%.
What are the initial costs of starting Rental Arbitrage in the Philippines?
You can expect to spend anywhere between Php 165,000 ($3,000) to 275,000 ($5,000). This cost 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 much less than investing in a new property and getting a mortgage of millions of pesos. 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 zero or on a very tight budget. There will be some upfront costs that you will have to prepare for by having some extra cash on hand. It will help pay off the lease during the off-season.
Expense 1: Rental Deposits
A rental deposit is going to be your first major expense. You will need money to be able to sign a long-term lease with the landlord. For that, you will need a security deposit for your first and previous month’s rent. Sometimes you can negotiate with the landlord and use the first month’s rent as a security deposit.
Expense 2: Furnishing
Ideally, you should aim to lease a place that is semi-furnished. Furnishing a place from scratch can add anywhere from Php 165,000 to Php 275,000 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 CW Home Depot and IKEA. Sometimes even Puregold can have a hidden gem 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 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 Php 2,500 to Php 8,000 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.
Best areas for Rental Arbitrage Philippines
According to Airbtics Dashboard, Dasmariñas is the top market to start your rental arbitrage business. There are more than 47 Airbnb listings with 390 private rooms properties and 267 one-bedroom properties. The annual revenue for most properties is more than $1,183 or Php 65,065 with occupancy being more than 9%.
2. Maharlika Village
According to Airbtics Dashboard, Maharlika Village is the second-best market to start your Rental Arbitrage business. There are more than 23 Airbnb listings with 438 private rooms properties and 746 one-bedroom properties. The annual revenue for most properties is more than $1,023 or Php 56,265 with occupancy being more than 5%.
In summary, rental arbitrage in the Philippines can be a very profitable side income. Since it does not require you to purchase a property, it’s also practical for beginners trying to be landlords without spending millions.
Leverage your opportunities in rental arbitrage by using a free Airbnb calculator and determine the best areas that will bring long-term profitability!