There’s a common misconception that you have to become a landlord and own a property to get started, but that’s untrue. One way around the heavy investment of owning a property to start a short-term rental business is rental arbitrage.
Whether you’re a landlord or tenant, we’ve laid out the basics of rental arbitrage, potential rewards, risks for each party, and how to get started so you can determine if this business is right for you.
What is Rental Arbitrage?
Rental arbitrage is the practice of renting out a long-term rental on a short-term basis. Typically, a tenant will sign a long-term lease agreement and then list that property on various vacation rental platforms such as Airbnb or VRBO.
As a tenant, rental arbitrage is a way to start a vacation rental business without the large investment of owning a property — which most tenants don’t have the income to do on their own.
Is Rental Arbitrage Legal?
Rental arbitrage is entirely legal depending on two major factors: your area’s short-term rental laws and the property owner.
First, make sure that short-term rental options like Airbnb or VRBO are allowed in your area. Short-term rental laws are evolving in major cities across the U.S. such as Dallas. If your area permits short-term rentals, then look up if you’ll be required to apply for a hospitality license.
Next, you’ll need to make sure your landlord allows rental arbitrage. Sometimes the lease will explicitly say whether or not this is permitted. Nevertheless, you must check with your landlord before doing rental arbitrage or you could potentially be evicted.
How Much Can You Make Doing Rental Arbitrage?
Depending on your market, you can turn a decent profit from rental arbitrage. To figure out how much you could potentially make on a property, you’ll need to calculate the monthly rent versus the average vacation rental rate per night in that area.
For instance, if a three-bedroom rental property has a monthly rent of $2,000 and the typical three-bedroom vacation rental in your area goes for $300 a night, you’d be able to pay the rent in just a week. Any additional days you book that month you’ll be able to pocket.
If you’re confident you can book a property enough times each month to pay the rent and earn additional income, then rental arbitrage may be a great business model for you.
The Pros and Cons of Rental Arbitrage for Landlords
As a landlord, the thought of a tenant renting your property as a vacation rental can be worrisome. Although there are a few drawbacks, there’s also a list of compelling reasons why allowing rental arbitrage on your property could be very beneficial on your end.
Nevertheless, crafting a lease agreement to protect yourself and stay compliant with your state’s landlord-tenant laws is critical in a rental arbitrage agreement. To help you determine if this is the right fit, check out these pros and cons of rental arbitrage for a landlord.
The Pros
- Fill a vacancy: You’ll fill a vacancy and be guaranteed long-term rental income.
- Could have the tenant take care of the property maintenance: Since the property is a part of your tenant’s business, you can require them to be in charge of any maintenance needed caused by their traveling guests.
- Could charge more rent or require a premium: You could potentially earn more by charging more rent or requiring a premium from each stay booked.
The Cons
- More wear and tear on your property: Since you’ll have multiple people in and out of your property, more wear and tear is guaranteed.
- Don’t get to vet everyone who stays on your property: Since your tenant is running the operation, you won’t get to screen each guest who stays on your property.
- Potential for late rent payments: Due to unforeseen events or seasonality, your tenant may not make enough money on their arbitrage business to make rent.
The Pros and Cons of Rental Arbitrage for Tenants
Before a tenant decides to start a rental arbitrage business, it’s important to consider the advantages and disadvantages:
The Pros
- No need to purchase a property: You won’t need to make the expensive investment to purchase your own property.
- Few start-up costs: All you’ll need to do is make sure the rental is furnished and has supplies such as cookware, utensils, towels, etc.
- Easy and fast to get started: As long as your landlord approves and rental laws aren’t preventing you, all you have to do is sign the lease, set up the home and start making money.
- Build your income for other investments: Your profits from arbitraging might help fund your next move as a real estate investor or start a new business.
The Cons
- Responsible for any damages: You’ll need to handle any damages caused by your vacation renters and take care of any wear and tear if your property is booked often.
- Bookings will fluctuate: Due to seasonality or other unforecasted events (such as COVID-19), you could have a hard time earning money, and thus, paying rent.
- You’ll need to cover the additional hosting costs: Things like utilities, internet, maintenance, and cleaning costs are all your responsibility which may eat into your profits and time.
- Your landlord can halt your operation anytime: Since you aren’t the owner of the property, your landlord has the right to end your arbitrage business at any time.
How to Get Started With Rental Arbitrage + Tips for Success
Before you begin a rental arbitrage operation, there’s a few things you need to take into consideration to understand if it’ll be successful or not:
Do Your Research
The first thing you’ll want to do is research your area and determine if there’s any promising opportunities. To do so, make sure you:
- Find out if short-term rentals are allowed in your market.
- Study up on local rents in your area.
- Figure out what a local short-term vacation rental goes for.
- Find out the average occupancy rate for rentals in your area.
- Determine if your property is near any tourist destinations or local activities that’d draw in travelers.
If the market shows potential, then you can start looking into prospective arbitrage opportunities.
Ask Permission From the Property Owner
After you’ve determined if your property and market has potential, you’ll need to ask your landlord or property owner for permission. Since a proposition like this can look super risky from a landlord’s perspective, you’ll need to sell your landlord on the idea. To do so, some intriguing proposals include:
- Mentioning that they are guaranteed a long-term lease and a guaranteed profit each month.
- Tell them you’re motivated to keep the home in top condition since your business depends on it.
- You’ll be responsible for and get the appropriate insurance to cover any potential damages.
- Offering a premium for each stay booked so your landlord can get in on the deal.
If your landlord agrees, then you’re set to get started with an arbitrage business.
Get Your Finances in Order
Next, you’ll need to get all your finances in order to help you have a successful vacation rental business. You may not have the hefty start-up costs of a traditional vacation rental business like a down payment, but you’ll need to cover a security deposit and overhead property expenses such as insurance and any local permit fees.
In order to be competitive, you’ll also need to invest in nice furniture and decor. The basics won’t cover it in a competitive market, so if you don’t have any eye for design, you could hire a professional to help you make the rental property look desirable.
Don’t forget other investments such as cookware, dishes, towels, soaps and anything else you’d need in a rental you were staying at on vacation.
Make the Proper Arrangements
Since you’ll be managing the property as a business, you’ll need to make the proper arrangements to take care of it. Ensure you have a cleaning system in place after each guest by either taking care of it on your own or hiring a professional.
You should also work with your landlord to install a smart lock and other security measurements. A smart lock will make it easier for your guests to check in and out and security technologies such as a video doorbell will help you manage a short-term rental better.
Meet With a Real Estate Attorney
Lastly, you should meet with a real estate attorney to ensure everything is good to go. Since laws regarding short-term rentals are constantly changing, double check with an attorney that you’re in the clear with your landlord and your vacation rental business.
Rental arbitrage is an exciting opportunity, not only for a tenant, but for a landlord as well. As a landlord, a rental arbitrage agreement poses its risks, but ultimately could be a great arrangement for you. If you opt to go through with an arbitrage arrangement, make sure you perform extensive tenant screening and work out a lease agreement with an attorney that covers the arrangement.
