Rental arbitrage has become a HIGHLY LUCRATIVE business for short-term rental (STR) investors.
It’s definitely popular among those who desire financial freedom through passive income.
The appeal of rental arbitrage is that investors do not need to own property in order to start this business. However, many potential rental property investors are unsure of the true profitability of rental arbitrage. As with every business, there are always risks.
More importantly, first-time Airbnb hosts need to know the ins-and-outs of rental arbitrage before jumping to the conclusion that it’s not profitable.
So when it comes to rental arbitrage, is it actually profitable? How can you get started? Where do you even find the rental property?
Keep reading — We’ll explain everything you need to know.
What is rental arbitrage?
Rental arbitrage is the practice of renting out long-term properties and re-renting them out to others on a short-term basis through short-term rental platforms such as Airbnb or HomeAway.
Contrary to popular belief, rental arbitrage is a legal business, as long as you adhere to the specific laws and liability guidelines in your region.
Basically, rental arbitrage is a way to operate an STR business without actually owning property and for people to start earning passive income through real estate.
Here are some real-life examples of successful Airbnb hosts who started doing rental arbitrage in their own apartment:
Doing rental arbitrage vs owning rental property
STR property investors can either buy their own property or start rental arbitrage for their business. There are several differences as well as pros and cons to both methods, but rental arbitrage seems to be a more popular method among those who want consistent cash flow.
Here’s a closer look at the differences between owning property and doing rental arbitrage for an STR business:
- Don’t need to own property
- Provides a steady stream of passive income
- Enables serial renting (renting multiple properties)
- No property taxes
- No need to insure appliances (landlord’s responsibility)
- Enables the ability to grow in small increments and reinvest profits monthly
- Allows the opportunity to end the lease early- LESS COMMITMENT
- Need to put 20% down payment on the property (non-FHA loan)
- Need to pay for property taxes, HOA fees and utilities
- Requires a whole year or more to regenerate the original investment money amount and buy a second property
- Requires high commitment to a mortgage (if the property is in an unpopular area for Airbnb, you’re stuck with the mortgage so you need to turn it into a long-term rental property or sell the home)
How to start a rental arbitrage business without owning property
There are many phases to getting started with your rental arbitrage business, but here is a general list of action items to help:
Step 1. Find a “goldmine” area for Airbnb
(Skip this step if you have already decided where to start your rental arbitrage business. Instead, move onto Step #2)
As a first-time Airbnb/STR business owner, the most convenient and realistic option is to start looking at rental properties in the area that you live. This option is the most convenient for you to handle guest or property issues in real-time and more quickly if you live close to the property.
On the other hand, it’s not ideal to limit your business to the area you are currently living in because the opportunities are endless when it comes to rental arbitrage. The STR market may be booming in other cities far from where you live so it’s important to keep this in mind when choosing the location. You always have the option to expand your rental arbitrage business to other locations after experimenting with your current area.
Remember, the key point is to find a location that produces the most profit and the biggest difference in the short-term rental price (bid) and the amount of short-term rental revenue (ask).
Let’s put this into perspective with a more realistic situation. If you are looking to start a rental arbitrage business and currently live in London, UK, you might choose to find profitable regions that are within a 3-hour drive from London.
The first step you should take is to identify the locations where there is sufficient short-term rental demand and a high volume of transactions. This step will ensure that you can keep occupancy rates high for your business. One important metric to consider during this step is the Average Occupancy Rate, which is a great indicator of overall supply and demand in the market. Use this data to determine how many days your property might be booked out of all the days the property is available.
We spoke to 50+ Airbnb hosts to get an idea of the different ways that hosts found a location and we found that they get their information from various sources.
Here are some of the different methods used by Airbnb hosts:
- Connecting with local property managers in their area
- Participating in Airbnb host communities on social media platforms
- Asking questions in the real estate forum, BiggerPockets
- Manually researching individual listings on Airbnb for various locations
Whichever method or combination of methods you choose to use, keep in mind that all businesses and hosts are different. One host might run their business differently from another host in the same area, thus gaining more profit despite the similar location.
We recommend that you use a more methodical approach to setting up your business by using software to research different rental arbitrage locations. Our exclusive Tailored Region Explorer allows you to define your own region to gain more tailored and accurate insights. The advantage of this data is that our software tools account for geographical pricing differences across different regions, so the data is more accurate and truly reflects the location’s pricing trends.
Instead of blindly starting your business based on someone else’s experience and knowledge, start your own journey by doing your own research. Make more informed decisions using precise data that is tailored to your specific business needs so you don’t have to rely on others’ knowledge. We built our STR software tools so you can use others’ knowledge as a supplement to your rental arbitrage business, not a primary source.
To get started on our dashboard, you can draw up to 20 different regions that you would like to explore.
After drawing your tailored region, our analytics software will provide you with information that may look something like this:
Gain Insider Access
The average occupancy rate is more useful to filter out locations that are unnecessary or irrelevant for your business.
Once you have found a couple of locations that you would like to further investigate, move on to Step #2.
Step 2. Find a unique gap in your market
There are opportunities in every location and you simply need to find the unique gap in the market where there’s low supply and high demand. Since you are renting instead of buying property, you have more options to choose from.
Here are a few things you need to think about.
- Which niche do you want to focus on? (handicap-friendly homes, business traveler-friendly, anime-themed rooms, etc.)
- What type of property do you want? (studio, 5-bedroom house, 3-bedroom apartment, etc.)
- How many bedrooms do you want to invest in? What is the number limit of people you want to accomodate for?
- What kind of amenities are you looking for? (hot tubs, pools, gyms, recreational rooms, etc.)
There are so many factors that you must think of before launching your rental arbitrage business, so we did some of the work for you. According to our research, studio units tend to have higher occupancy rates and relatively higher average daily rates (ADR) compared to the monthly, long-term rental fees. It’s also usually worth it to buy a few extra beds so that you can accommodate more people.
We want your business to run smoothly with the help of innovative software, so make sure to check out our dedicated market research to generate detailed reports and insights as a basis for your business decisions.
Our market research reports include data such as occupancy rate differences by the number of rooms and revenue earnings for a certain property type each month.
Step 3. Check real estate laws and regulations
There are different regulations and rules for the STR industry in regard to rental arbitrage depending on the location. Make sure to apply for any required permits for rental arbitrage in your target location.
For a more detailed location-specific list of legal and regulatory issues to consider before hosting on Airbnb, visit Airbnb’s official page.
Step 4. Secure your credibility to prepare your pitch to property owners
Before you dive head-first into crafting your pitch to property owners, here are a few things to consider:
- Maintain good credit
- Save enough funds (extra money to offer for rent)
- Have some references available
- Agree to cover minor maintenance issues up to an agreed value
- Provide your own liability insurance (especially if taking direct bookings)
All of these suggestions will help you alleviate some of the property owner’s concerns or issues with your rental arbitrage pitch. Preparation is key to the time you spend getting ready to pitch to property owners, so make sure not to skip this step.
Step 5. Furnish the property
This step is where most of your expenses should go because great quality design and furniture can appeal to different types of guests.
Make sure to budget a few thousand dollars to cover all of the basics: a sofa, a high-quality mattress and bedframe, great pillows, kitchen utensils, towels, and more. The details are solely up to you, but try to consider adding some extra special touches here and there to truly make your home stand out to guests.
How to pitch to property owners
There are different kinds of property owners, from single-family property owners to multi-family and even whole apartment buildings.
The key to pitching to different property owners is to look closely at that specific property owner’s needs.
Try not to focus on YOUR needs as a first-time STR business owner.
The whole point of pitching to property owners is to focus on what their present or future needs are and how you can help them with your business.
For example, you can emphasize the fact that they can also expand their real estate investments by using you as a guaranteed tenant if they choose to buy another property. This approach would focus on their future financial desires to expand their real estate portfolio.
If the property you are looking at is a newly-built apartment building, this means the property needs to pay off a hefty bank loan.
They have a financial need to increase their occupancy to at least around 70% in order to pay the banks back.
You can leverage your understanding of this and ensure a profitable cash flow if they allow you to run Airbnb from that property.
If you’re dealing with a landlord who owns a single-family home, convince them that you can be the one to handle management of the property. They have a supervisory need to deal with tenants and to handle rental property needs.
Who likes to deal with tenants on a daily basis?
Not many people.
If you offer to be the sole point of contact and property manager for both the tenants and the landlord, you can make the landlord’s life easier.
When negotiating your rental arbitrage business, keep in mind that some homeowners may be sensitive to the fact that their property was attained through years of hard work and saving money.
Their property is a huge and significant asset that might not be easily negotiated.
You need to be sensitive when approaching this topic and show respect for their property.
Additionally, you can start targeting homeowners who don’t have as much success renting out their properties because they have more of a financial need and will be more open-minded.
Here are some key compromises to consider when pitching your rental arbitrage business to homeowners:
- Suggest that you will fix anything that needs maintenance
- Offer to do a background check on every tenant
- Possibly negotiate a profit-share
- Offer a slight premium on rent
Is rental arbitrage profitable?
The profitability of rental arbitrage is based on a certain number of factors, such as location, type of amenities, the current market, historical or future trends, occupancy rates and more.
As a first-time rental investor or Airbnb host, we understand that it may be difficult to research all of these factors independently by yourself, especially among the long laundry list of items you need to accomplish.
We made it easier for you by compiling all the information you need about specific Airbnb locations in our market research dashboard, such as the average daily rate (ADR), occupancy rate, guest origins and more. Understanding and regular monitoring of this data are essential to knowing how potentially profitable your rental property can be.
Airbnb Analytics Dashboard
Once you start to generate profit from your rental properties, the best practice is to use those profits to reinvest in new properties.
Because people who succeed in business understand how to scale it even further.
Take Elon Musk, for example. We all know him for his success with Tesla and SpaceX, but what most people don’t know is that he has been launching several other companies since 1995.
Musk used the profits from his previous companies to fund and create even more successful companies. This method of scaling and funding your business with your previous investments is key to your ROI.
Reinvesting your money on a monthly basis instead of annually, as you would if you actually owned the properties, will substantially increase your rental arbitrage profitability.
Rental arbitrage can be absolutely profitable as long as you have the correct tools and resources to help you maintain your rental properties.
We want you to succeed in your investments, so we’ve created a free Airbnb Income Calculator to help you simulate your potential profit from your rental properties. Using these calculations, you can feel more confident in making decisions with the help of accurate data.
Calculating potential rental arbitrage profit is only the tip of the iceberg, so let’s take a look at real-life success stories.
Even throughout the COVID-19 pandemic, some Airbnb hosts have found success with their rental arbitrage properties and we’ve featured their stories on our podcast: Into the Airbnb.
One Airbnb host in Dallas, Texas who does Airbnb rental arbitrage on four listings achieved a 70% occupancy rate even during the pandemic. His story is just one of many among others who have successfully mastered rental arbitrage despite the uncertain economy.
At Airbtics, we provide the most accurate and relevant data that you may need as a first-time STR investor or even a veteran. We recommend that the best practice to increase rental arbitrage profitability is to understand the data and create a data-based business strategy to scale your investments.
Best cities for rental arbitrage
Rental arbitrage is a business that continues to evolve, especially as people continue to pivot their travel plans or living situations during the ongoing pandemic. To pinpoint only a handful of places as the “best cities for rental arbitrage” is not a conclusive answer to your search for the best location.
The factors that determine how great a location is are not always controllable. Some Airbnb hosts may have been successful with their properties in booming tourist areas before the pandemic hit, but now those specific cities may not be doing well anymore.
Location analysis must be one of your top priorities when deciding on a rental location in order to increase profitability during such volatile times, especially while the pandemic continues to impact the rental market.
Let’s take a closer look at the progress of some cities during the pandemic (Jan. 2020- June 2020) that reflect COVID-19’s impact.
All the data here without explicit references are sourced and processed by our technologies.
To see more snapshots of the US Airbnb market (June 2020), visit our blog post analysis here.
As we can see from the graphs, one could argue that Honolulu could have been considered one of the best cities to do rental arbitrage before the pandemic hit. Now, Honolulu has yet to show signs of recovery from the pandemic and would not be a prime choice of location for rental arbitrage at the moment.
Looking at Big Bear Lake in California, the amount of growth it experienced during these recent months is a great indicator of the current trends of traveling domestically and enjoying “staycations” rather than international travel.
These unprecedented times have changed the factors of success for STR properties. As we continue to navigate the post-COVID landscape in the rental arbitrage industry, it’s important to regularly monitor the progress and data of each specific location.
Gain Insider Access
Despite the future’s uncertainty, using data to your advantage will help you determine the best location for your rental arbitrage business. We have included the most useful metrics in our vacation rental insights dashboard so you have the flexibility to decide which locations are best for you.
As mentioned before, if your current rental arbitrage properties are not doing well, you always have the choice to cut the leases and move your business to another location. This kind of low commitment is the appeal of rental arbitrage as you decide which cities are the best for you.
Why is market research important and how can you use it?
Market research is highly valuable for your rental arbitrage business and the potential to earn substantial profit because data = knowledge.
You can use data to identify the cause of problems, predict future trends, make informed decisions and implement evidence-based strategies for your rental arbitrage business.
Other than having the determination to succeed in rental arbitrage, understanding data is one of your strongest assets to strategize in your business.
We’ve seen from the pandemic this year that crises throw out several unexpected problems and obstacles for business owners, but there is strong potential to bounce back as long as you know how to utilize the data to your advantage.
Here’s a closer look at our case study of the STR market during COVID-19 in the US:
To see YoY growth for cities in Europe and China and what we found from this data, visit our detailed blog post here.
Market research is always important in knowing how to take the next step in your business. In our analytics dashboard, we include specific metrics to help you make better decisions.
Here’s a snapshot of current occupancy rates and ADR of specific cities that reflect their current performance:
We strongly recommend that you create actionable strategies for your business according to the data.
For example, if the data shows that despite COVID-19’s impact on the economy, specific cities still see a significant number of bookings, it’s time to pivot your business strategy.
You can see which cities are doing well or doing poorly and decide to move locations accordingly. This is the charm of rental arbitrage because you are not tied down to a mortgage but instead to a lease, which is a lot less commitment than a 15 or 30-year fixed mortgage loan.
If you would like to gain access to this kind of helpful data, contact us here.
When identifying an underperforming factor that causes your profitability or booking numbers to decrease, you can use data to find any concrete evidence that points to the specific problem.
At Airbtics, our mission is to help you manifest success with your rental arbitrage or any STR business endeavours. We invite you to interact with our resources and start making data-based decisions that will boost the profitability of your rental arbitrage properties, and help create the passive income stream you’ve always dreamed of!