Last updated on June 26th, 2023
Rental arbitrage in Texas is one of the popular ways to earn a passive side income through Airbnb. If you wish to start but don’t know how – then you’ve come to the right article!
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 Texas and a comparison between Texas cities. At the end of the article, you’ll learn how to make the best investment decision by doing rental arbitrage in Texas. 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 legal in Texas?
Here’s the good news: short-term rental laws in Texas are minimal and it’s certainly legal to do rental arbitrage.! Property investors are keen to invest in this location since short-term rentals are allowed in Texas. According to Texas STR laws, Texas does not impose any state-level regulations and limitations. However, major cities have various licensing requirements for Airbnb hosts.
For instance, Airbnb rules in Houston follow a Code of Ordinance that defines and regulates short-term rentals within city limits. All hosts should strictly follow laws regarding building and housing standards. Whether it is for multiple dwellings, condominiums, or rent-stabilized buildings, it’s always best to visit the local city hall to learn more about their process.
Short-term rental restrictions in Austin
Although sections of the code have been successfully challenged in court, Airbnb property investment in Austin reveals that some of the best neighborhoods for Airbnb are Zilker, West Oak Hill, and North Austin. The good news is that short-term rentals are permitted in Austin. This cityAustin has established restrictions on short-term rentals within its city limits. There are three types of short-term rental facilities identified in the ordinance:
- Single-family, multifamily, or duplex properties that are owned by the same person.
- Non-owner-occupied single-family or duplex properties
- Non-owner-occupied multifamily properties
Austin’s Airbnb rules For each type of property, the city requires a short-term rental license to operate for all property types. Type 2 properties are subject to the most restrictions, limiting them to commercially zoned areas such as the Central Business District (CBD) and the Downtown Mixed Use (DMU) region.
How to start rental arbitrage in Texas?
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.
Pros and Cons
What are the pros and cons of doing rental arbitrage in Texas? Here’s the part where you can set your expectations:
- No need to own, invest, or purchase a property
- Low upfront costs
- Higher chances to repeat and scale easily
- Generated profit can be used for other investments or businesses
Invest money and time in furnishing the property
What are the initial costs of starting Rental Arbitrage in Texas?
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:
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 $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.
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 $50 – $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 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.
How much do Airbnb hosts make in Texas?
Airbtics’ data confirm that an Airbnb host in Texas, particularly in Dallas, can earn an average daily rate of $141. 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%.
Best areas for Rental Arbitrage Texas
In order to gauge the top places for rental arbitrage in Texas, it is necessary to create a comparison of occupancy rates in Texas cities. Let’s take a look at the top 2 locations:
1. OAK LAWN
According to Airbtics’ Dashboard, Oak Lawn is the top market to start your rental arbitrage business. There are more than 535 Airbnb listings with 15 private rooms properties and 321 one-bedroom properties. The monthly revenue for most properties is more than $3,253.
Airbtics confirms that Downtown Austin is the second-best market to start your rental arbitrage business. There are more than 370 Airbnb listings with 20 private rooms properties and 157 one-bedroom properties. The monthly revenue for most properties is more than $5,173.
In summary, rental arbitrage in Texas 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 to do rental arbitrage – Houston, Dallas, San Antonio, or other cities?
Comparing occupancy rates in Texas cities has never been easier to do manually. But with the help of an STR analytics tool like Airbtics, it was discovered that Austin has the highest Airbnb occupancy rate of 66%. Leverage your opportunities in rental arbitrage by using a free Airbnb calculator and determine the best areas that will bring long-term profitability!