What is Airbnb Arbitrage? Definitions and Strategies for Success

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What is Airbnb Arbitrage? Definitions and Strategies for Success

October 26, 2023

What is Airbnb Arbitrage?

Airbnb arbitrage is a business strategy that involves finding a long-term rental owned by another landlord and subletting it as a short or mid term rental on the Airbnb platform. The Airbnb arbitrage method is one way you can make money on Airbnb without owning property. Airbnb arbitrage works in the vacation rental market the same as any other listing; in fact, your renters won’t know the difference.

What is rental arbitrage? Rental arbitrage is a business model where you rent a property and lease it to another party. Rental arbitrage can occur on VRBO, Airbnb, Apartments.com, or on another vacation rental platform. Arbitrage, in general, is a business strategy where you find an asset for a low price and sell it at a higher price.

Is Airbnb Arbitrage Legal?

Yes, Airbnb arbitrage is legal in most areas. But, Airbnb is regulated in most areas as well. For instance, some cities in the US are also tight on their real estate arbitrage regulations, even though it's “legal”. Conversely, regulations for rental arbitrage Texas are fairly lax. So, you must look up the rules and regulations in the area you wish to host. International examples include:

What is Airbnb arbitrage Australia? Airbnb arbitrage in Australia involves renting a property and then renting it out to travelers. Sydney, Australia has a higher demand for short-term rental arbitrage. In Australia, you must register the property and follow strict regulations.
What is Airbnb arbitrage Canada? Airbnb arbitrage in Canada is the act of renting out an apartment, house, or other property and then renting it to another party at a higher cost for a profit. Canada also has strict local regulations for rentals. If you live in certain cities in Canada, you must list the rental property as your primary residence if you don’t own it.
What is Airbnb arbitrage UK? In the UK, Airbnb arbitrage involves making a profit when charging renters more than you pay in rent for the same property on a short-term basis.

How Do You Start Airbnb Arbitrage

To find properties to arbitrage on Airbnb, start with your local area. Check for landlords that accept Airbnb. If there are none in your area, build out your search circumference. You can also find these opportunities through real estate investor networking events or Facebook groups. Learn how to be successful in this business in the Successful Airbnb Hosting course.
Make sure it’s legal to do Airbnb arbitrage in the area.
Prepare for your new business. You may need an LLC for Airbnb arbitrage, depending on the location of the rental. Even if it’s not a requirement, having an LLC will protect your personal assets if someone sues your business. It will also help you appear more professional to landlords. You also don’t need special insurance when running an Airbnb arbitrage business, but it’s another layer of protection. Consider landlord insurance and a short-term rental policy.
Begin negotiations with the landlord. To convince your landlord to rent your arbitrage, tell them how they'll benefit. Mention your plan to handle all maintenance, offer to fill vacant rooms, and pay additional security deposits. Do not offer to share profits or Airbnb revenue. To ask your landlord for Airbnb arbitrage permission, meet them in person and give a good, professional impression. That way, they are more likely to see you as a responsible property manager.
Put a tenancy-at-will contract in place between you and the landlord, or a lease addendum. A lease addendum is much less intimidating than an entirely new lease, and typically easier for a landlord to accept.
Set up the apartment. There’s quite a bit of work needed upfront to get the property ready for Airbnb guests, especially if you do not outsource furniture moving and clearing. Get the apartment furnished, decorated, staged, and cleaned.
List your rental on Airbnb. Consider offering a discount to the first few renters that sign up.

How Much Does it Cost to Start Airbnb Arbitrage?

It costs between $5,000 and $10,000 to start Airbnb arbitrage. Your costs include signing up for an LLC, getting appropriate insurance, the monthly rent of the rental, any security deposit agreed upon by the landlord, furniture, and possibly kitchen appliances.

Can You Start Airbnb Arbitrage with No Money?

Yes, you can start Airbnb arbitrage with no money, but you will have to rent an extra room in the rental you already live in. You will do so with no added protection from an LLC or insurance policy. During negotiations with your landlord, you must not include any added security deposits.

What are the Benefits of Airbnb Arbitrage?

Easier to scale to multiple properties once you have your process down

Less risk than property ownership

No hassle of buying investment property

No down payment (although you may do a security deposit)

Ability to stop at almost any time if you’re not happy with the Airbnb business

No mortgages

You can use the rental property yourself

Experience property management for yourself and see if it's for you without the commitment

What are the Downsides of Airbnb Arbitrage?

You will be responsible for any damages, not the property owner or your tenant

Difficult to find willing landlords

Margins are small because it’s difficult to inflate rent. For a mid term rental, you might pay $2000 in rent/month on your long-term lease, but charge $2600/month. That’s only $600 profit, if everything goes well and you don’t have any other expenses.

If you can’t find enough renters, you’ll have to cover the difference, halting your cash flow.

You enjoy far less tax benefits than you do with traditional real estate.

Airbnb arbitrage is hard. The concept is simpler to grasp, and there are fewer local laws, regulations, and strategies to understand than real estate investing. But the biggest risk of renting on Airbnb, or VRBO, is that you won’t have enough short term or mid term renters to make up the difference in the rent you pay the landlord. Also, the profits you make will be eaten up by expenses, repairs, and services to keep your income stream passive. Most of all, there is an end to your income stream- as soon as the renters leave, you have no guaranteed cash flow.

Airbnb arbitrage Reddit backs this up, with many users saying that it's difficult to find landlords, not worth the angry neighbors, and common to have poor tenants that cause damage to the rental arbitrage property.

Is it Really Profitable to Rent an Airbnb then Rent it Out?

It really can be profitable to rent an Airbnb and then rent it out, but you have to keep track of expenses meticulously. After all, you can earn $1100/month just by listing a $2000/month apartment out for $100/night. If you list in a profitable area, you could list $200/night or more, doubling that rental income.

The amount of money you make through Airbnb can be affected by the seasons. May through September are the most profitable months for most of North America, though certain places will have higher peaks during different seasons. For example, if you have a rental in Vail, Colorado, you will probably make more during the wintry ski season. Or, if you have a rental in Fort Lauderdale, Florida, you’ll see a spike in renters during the month of March for spring breakers. Nationwide, for the summer of 2023, you can expect occupancy rates to be between 55% and 75%.

Seasonality isn’t the only thing to keep in mind when boosting profitability by doing Airbnb arbitrage. Location to hospitals for travel nurses, proximity to public transportation, and local niche festivals (like Milwaukee’s Irish or Polish Fests) may be some of the most profitable Airbnb rental arbitrage opportunities in your city.

How Can You Make Your Airbnb Rental Arbitrage Business Successful?

Some ideas to make your Airbnb rental arbitrage business successful:

Be realistic about your costs and budget carefully. You will need to pay for many rental necessities that may not seem obvious, like utilities, Wi-Fi, kitchenware.
Optimize your Airbnb listing with professional, staged photos that show off the aesthetic you want to use to attract renters. Use certain keywords in your titles, like descriptive adjectives (Oasis, contemporary, green), close landmarks (near Mayo Clinic, Grand Canyon, Las Vegas Strip), and property features (like Wi-Fi, subscription services, or on-site upgraded laundry).
If you are able, become a Superhost. Superhosts are available to guests any time of day or night.
Choose rentals in the best cities for Airbnb contract, like Savannah, GA, Honolulu, HI, New Orleans, LA, and Boston, MA. The best cities for Airbnb arbitrage will change, so make sure you conduct market research on Airbnb. This may include offering 1 bedroom rentals where there are mostly 2 bedrooms, or vice versa.
Consider the hotel rates in the area. You can charge higher rates than those offered in nearby hotels, but you must be strategic. Don’t just list your rental higher to make a profit, especially if you’re doing this passive income idea in a small town. You will end up losing renters if you charge $300/night in a town where the Holiday Inn is only $80/night. But, in very touristy areas, you may charge more, especially if you have extra amenities to offer (like a pool, fitness area, or office space).
Gain additional knowledge and proven strategies by joining the best Airbnb arbitrage courses.

What is the Formula for Successful Airbnb Arbitrage?

The formula for successful Airbnb arbitrage is:

Weighted average rate (A) =
(average weekday rental rate from Airbnb x5 + average weekend Airbnb rate x2) / 7

(B) = All monthly costs / 30 for daily cost of property expenses

A / B x10 = Percentage of days per month you will need to rent out your Airbnb property

For example:

$100 = average weekday rental rate

$150 = average weekend rental rate

$3000/month costs

($100 x 5 weekdays) + ($150 x 2 weekend days) = 800 / 7 days =
@ $115 = Weighted average rate

$3000 / 30 days = $100 / day expense

$115 / $100 = $15/day profit

This would be a somewhat successful Airbnb because the ratio equals 1.15. A ratio of 2 or higher will be much more successful. In this case, you would have to charge $200+ per night to turn a $100/day profit from short-term rent, meaning there is less pressure to fill your rental every night of every month.

Is Airbnb Rental Arbitrage Worth It?

Airbnb rental arbitrage is worth it if you can find landlords willing to work with you in areas where there is a need for short and mid term rentals. It’s also worth it if you can scale to 5-10 properties, as this will grow your profits. Still, this will also grow your expenses and potential for damages.

Local lead generation is digital real estate that you rent out to small businesses in local areas. It's kind of like Airbnb arbitrage, except you own the asset, it's online, and you won’t have to worry about renters, damages, leases, and landlords. Rather, you will simply create a service-based website, rank it to the top of Google, and sample leads out to local businesses.

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