Is rental arbitrage legal? Yes, rental arbitrage is legal in all US states. However, some major cities, like New York City, Los Angeles, San Francisco, and Santa Monica, have made short term rentals (STRs) illegal or heavily restricted.
For instance, you can’t rent out a property in New York City for less than 30 days without being physically present as the host. In Santa Monica, California, you’re required to live on the property you’re renting out, as well as register for a business license and collect a 14% transient occupancy tax on your rental income for Airbnb reservations up to 30 nights. These local laws make it difficult to scale your short term rental arbitrage business to a point that generates significant cash flow.
Even now, more localities (like Atlanta, Georgia and Chattanooga, Tennessee) are cracking down on the short term rental market, and their regulations vary. Some require you to obtain a business license or special permit before listing short term vacation rentals on Airbnb or Vrbo. And some limit the number of days that you’re allowed to rent out your property in a year.
Rental arbitrage allows you to run a short term rental business without owning property or investing in real estate. Because of this flexibility and low barrier to entry, the business model is quite popular, despite the demand for vacation rentals dropping to 10.4% in 2023 from 22.6% in 2021, according to AirDNA. But, navigating the local rules in this ever-changing legal landscape can be a headache. Don't find yourself on the wrong side of the law. Read on to discover the ins and outs of the legality of rental arbitrage in specific states and countries, the risks involved, and the steps to start on the right legal footing.
DISCLAIMER:
Rental arbitrage laws change constantly and vary depending on the location. While regularly updated, this blog post is purely informational and can’t substitute for personalized legal advice. So, consult with a legal professional or contact your local government to double-check your local regulations.
5 Legal Risks of Rental Arbitrage and How to Manage Them
1. Local Regulations and Zoning Laws
Not all areas allow short term rental arbitrage. Many US cities have strict local regulations and zoning laws that can affect how and where you operate. These regulations include registration or licensing requirements and a limit for how many days you can rent out a property. Understand that these laws have a purpose: They’re put in place to manage housing availability, protect the local housing market, control property usage, and keep neighborhoods stable. That’s why more areas around the world are putting regulations in place for short term rentals.
In 2014, San Francisco passed strict STR laws that limited the number of days you can rent out your property to 90 days a year if you don’t live there. And in 2015, the city required all Airbnb hosts to register through a difficult process. While the city eventually settled with Airbnb regarding the registration requirements, Airbnb listings still dropped by almost 50% from 10,000 to 5,500 listings.
Running afoul of local laws can also lead to fines and legal trouble, like in this Wired report about 9 people who built an illegal network of Airbnb units worth $5 million in New York, which is known for its strict short term rental regulations. So, if you’re not updated with these regulations, they can seriously impact your business.
How to Manage the Legal Risk of Local Regulations and Zoning Laws:
2. Lease Agreement Violations
Most lease agreements have clauses that prevent subleasing or engaging in short term rental arbitrage. This is often to protect the property owner from potential property damage and maintain control over the property. Other common lease agreement violations include:
- Racking up noise complaints
- Having occupants that aren’t on lease living on the rental
- Late rent payments
- Unauthorized alterations to the property
- Getting a pet without the landlord’s consent
- Illegal activities being conducted on the property
If you violate the terms of your lease, you could face penalty fees, an eviction notice, or legal action. With rental arbitrage, the landlord has significant control over your business. So, always negotiate and get written permission from the landlord if you’re going to use the property for short-term rental purposes.
How to Manage the Legal Risk of Lease Agreement Violations:
Craft master lease agreements or lease addendums that specifically outline the terms of the rental arrangement, including the duration of subleases, the responsibility for any damage, maintenance requirements, and restrictions on property modifications. If pets are a concern, this agreement can specify the conditions under which they’re allowed, like deposits or fees.
Having the right to do repairs in your lease is generally a great idea. If you leave that responsibility to the landlord, they may not make the necessary repairs in time, leading to bad customer experience and reviews.
Establishing clear rules for noise control or the use of common areas can also be part of the agreement.
Being proactive in lease terms and conditions creates a better relationship between you and the landlord. So, ensure all parties involved understand and agree to the terms, and consult a legal expert if necessary to guarantee compliance with all applicable laws.
3. Liability Issues
In rental arbitrage, there’s a heightened liability risk of being held responsible for property damage and injuries occurring on your property. When you sublease your property to guests through platforms like Airbnb or Vrbo, you establish a legal relationship, or privity of contract, with those guests. This relationship means that if anything goes wrong, such as an issue with the property management, your guests have the legal right to sue you.
How to Manage the Legal Risk of Liability Issues:
By forming a limited liability company (LLC), you create a business structure that gives you liability protection when facing legal actions while also giving you some tax benefits. But this is only the first step in protecting your rental arbitrage business. You should also get business insurance with policies that cover STR-related details, like coverage for accidental and intentional property damage caused by guests. When choosing an insurance policy, make sure it includes these features:
- Coverage for loss of income
- Property and contents insurance
- Liability coverage
- Location-specific coverage (for areas prone to flooding or earthquakes)
- No required proof of forced entry for damage and theft coverage
If you’re an Airbnb host, Airbnb’s AirCover provides free added protection that can reimburse up to $3 million in damages and $1 million liability insurance when your guests get hurt or have their valuables damaged or stolen. But don’t rely on this service and only use it as a backup plan.
One great insurance option is Proper Insurance, as it’s specifically made for vacation rental hosts, and you get $1,000,000 in business liability. They also claim to be the only business insurance policy that has no limits on theft coverage and damages caused by a guest. And, you can add your landlord as additionally insured (AI) with the Proper policy, which can be used as a selling point for negotiating rental arbitrage lease agreements.
Other insurance companies you can look into are:
- Allstate
- CBIZ
- American Modern Insurance Group
- Erie Insurance
- Safely
For landlords, liability issues come front and center. Landlords shouldn’t allow rental arbitrage at their properties if the tenant doesn’t have liability insurance. Because if something goes wrong, you may also be held responsible (not just the person engaged in rental arbitrage).
4. Tax Obligations
Rental arbitrage tax obligations require you to report your rental property income. But tax laws around short term rentals can be complex and vary depending on your location. If you don’t adhere to these laws, you could underreport your income or fail to pay your taxes, leading to fines or audits from tax authorities.
How to Manage the Legal Risk of Tax Obligations:
Understand STR tax laws in your area. In the U.S., income from short term rentals is subject to both federal and possibly state and local taxes. Intermediaries like Airbnb, Vrbo, and Booking.com handle some of these taxes. Here are other tax requirements to be aware of, according to tax adviser David Weinstein, MBA CPA CFE:
Renting out part of your primary residence and renting out a separate property for short-term rental also have different tax implications. If you rent out part of your home, you'll need to report that rental income, possibly qualify for a home office deduction, and be aware of how mortgage interest and property taxes apply. Renting for fewer than 15 days might even be tax-free under certain conditions.
On the other hand, renting a separate property involves reporting all rental income and paying both state and local taxes. You can reduce your overall tax liability through tax write-offs, like rental expenses (advertising, cleaning, maintenance, etc.), depreciation of the property, and insurance premiums. Always keep detailed records of the deductions that apply to your business.
There's also a tax loophole worth mentioning, as explained by real estate investor Clint Coons, Esq: By setting up a self-directed IRA (SDIRA), which is a type of Roth IRA, and an LLC that's 100% owned by your Roth, you can negotiate and contract properties using this structure for tax-free short-term rental income. It's a more complex strategy that may be worth exploring with a tax prep expert. Hiring a tax professional experienced in short term rental taxation in your jurisdiction is always a smart move.
5. Landlord-Tenant Laws
Landlord-tenant laws govern the relationship between property owners and tenants. In rental arbitrage, you're both a tenant and a landlord. This puts you in a unique legal position that can be fraught with risk.
According to Airbnb, landlord-tenant laws grant guests additional legal rights if they stay in your property for a period defined by your jurisdiction. This means local tenancy laws will protect them, and you’ll have to adhere to strict eviction processes to remove them from your property.
Ken McElroy, the CEO of MC Companies, highlights a practical reality: Tenants can be troublesome, and the process to evict them varies depending on the state. For instance, Phoenix allows you to get someone out in 30 days, but the rules are different in places like California, Oregon, and New York. These state-specific regulations can either favor the landlord or the tenant.
How to Manage the Legal Risk of Landlord-Tenant Laws:
It’s best to consult with a legal professional who knows the ins and outs of landlord-tenant laws in your area. This will ensure that your rental agreements are above board and that you're on solid ground legally, both as a tenant renting from someone else and as a host renting to your own guests.
Is Rental Arbitrage Legal in California?
Yes, rental arbitrage is legal in California. On a state level, California is STR-friendly, particularly if the unit is your primary residence. In fact, a state law that was passed in 2017 prevents local municipalities from prohibiting additional dwelling units (ADUs), though regulations still vary across different localities. For instance:
Recent residential housing shortages have led to increased regulation of the STR market in places like Los Angeles and San Francisco. High state income tax also deters some investors, but with proper planning and selecting good locations, like Napa and Santa Barbara, you can succeed in doing rental arbitrage in California.
Is Rental Arbitrage Legal in Florida?
Yes, rental arbitrage is legal in Florida, and the state has generally lax regulations on short-term rental markets. In cities like Panama City Beach and Fort Lauderdale, all you need to do is pay some registration fees, get building inspections, and obtain a license. On the state level, if you plan on renting your property for less than 30 days at a time, you’ll need a license from the Florida Department of Business and Professional Regulation (DBPR) under their Division of Hotels and Restaurants. There are different applications depending on whether you're dealing with condos or dwellings, like single-family homes or townhomes.
If you're renting your property for 30 days or more, there's no state license required, but you’ll still need to collect the Florida Tourist Development Tax for rentals up to 6 months. The tax rates can differ by county. For instance, in Brevard County, you'll be responsible for collecting 6% state sales tax, 1% discretionary surtax, and 5% tourist development tax. Also, be mindful of specific municipal regulations, especially in places like Miami Beach, where the short-term rental market is under tighter control due to the impact on residential house prices.
Is Rental Arbitrage Legal in Texas?
Yes, rental arbitrage is legal in Texas. It’s also one of the top vacation rental markets in the United States. In Texas, the state-level regulations are minimal, and they largely allow city governments to enact their own laws related to short-term rentals.
The only significant requirement at the state level is that Airbnb hosts must register with the Texas Comptroller's Office to collect a state hotel occupancy tax. There are no state-level licenses or expiration dates to be concerned about, which makes the process relatively simple and streamlined. However, different cities in Texas have their own specific rules:
Is Rental Arbitrage Legal in Georgia?
Yes, rental arbitrage is legal in Georgia. The state doesn’t impose state-wide regulations for short-term rentals, and you’re only required to pay a 4% sales tax and hotel-motel taxes, which are remitted by platforms like Airbnb or Vrbo. You’ll also have to register with the Georgia Department of Revenue, but it’s a straightforward process. City-level regulations are more complex:
Is Rental Arbitrage Legal in New Jersey?
Yes, rental arbitrage is legal in New Jersey, but it requires strategy. The state’s rental rules fall under the Continuing Certificate of Occupancy (CCO), which varies from town to town. And because each town can change its CCO at any time, some make it exceedingly complicated to do rental arbitrage by regulating how long you can rent out a property and how many guests you can have.
Some towns, like Cresskill, Englewood Cliffs, Fort Lee, and Weehawken, have gone as far as banning short-term rentals altogether or limiting rentals to 30 days or longer. Others have imposed fees and inspections that can become so costly and logistically complex that property owners just give up.
Profitable rental arbitrage in the state seems to hinge on targeting areas near attractions like the Jersey Shore and ski towns, particularly in medium-sized towns with fewer hotels and more lenient laws, such as Point Pleasant down to Cape May. Conversely, places like Jersey City, despite Airbnb's $4 million campaign to overturn one of their STR laws, have placed such heavy restrictions that they’re practically off-limits.
Is Rental Arbitrage Legal in New York?
Yes, rental arbitrage is legal in New York, but the city has strict short term rental laws. City officials are intent on constraining platforms like Airbnb and Vrbo due to impacts on housing shortages. So, they’ve implemented laws that forbid renting entire homes for fewer than 30 days without the owner present. Even private room rentals have specific limitations such as restricting to no more than two guests and maintaining free access to every room and exit within the apartment.
The rules have tightened even further with a de facto ban on short-term rentals starting September 5, 2023. Hosts now must register with the city or face deactivation or conversion to long-term stays, and existing reservations with check-in dates after December 1 face cancellation.
Is Rental Arbitrage Legal in UK?
Yes, rental arbitrage is legal in UK, as long as you have a custom agreement with your landlord explicitly stating how you’ll be using the unit – an assured shorthold tenancy agreement won't suffice. And similar to the US, short term rental laws vary by region:
Is Rental Arbitrage Legal in Canada?
Yes, rental arbitrage is legal in Canada, but regulations vary across different municipalities. Most cities classify short-term rentals as tenancy lasting 30 consecutive days or less, and anything exceeding this limit falls under different rules. Specific cities also have distinct regulations:
Is Rental Arbitrage Legal in Ontario?
Yes, rental arbitrage is legal in Ontario, with its Municipal Act and City of Toronto Act giving individual cities the authority to regulate short-term rentals. That means different cities have unique rules for zoning, licensing, noise, and safety:
Is Rental Arbitrage Legal in Australia?
Yes, rental arbitrage is legal in Australia, but the government imposes specific shared housing laws to regulate the short-term rental industry in the country. These laws include occupancy restrictions, guest record keeping, and minimum stay requirements. Breaking these rules can result in severe consequences like suspension or cancellation of your registration number, not to mention fines.
And each state has its own set of laws. For example, in New South Wales, local councils can decide if you can list stays on Airbnb. Without proper approval or the landlord's consent for subleasing, sanctions can be carried out under local and state laws. Plus, all rental income must be declared to the Australian Tax Office.
Is Airbnb Rental Arbitrage Legal?
Yes, Airbnb rental arbitrage is legal. Airbnb arbitrage involves renting a property long-term, turning it into an Airbnb property, and then subleasing it to an Airbnb guest for a higher short-term price. Airbnb allows rental arbitrage, but you’ll have to comply with local laws and lease terms. Otherwise, you’ll be facing legal troubles, including fines. Rental arbitrage is also allowed on other platforms like Vrbo and Booking.com.
Airbnb vs Long Term Rental Business
Both Airbnb and long term rental businesses are attractive opportunities in the real estate market. A short-term rental or Airbnb arbitrage business promises higher income, diversified risk, and the flexibility of using the rental arbitrage property for personal reasons. However, these advantages come with more extensive management, furniture maintenance, and strict adherence to local laws and regulations. For example, in Las Vegas, Airbnbs are essentially illegal because they’d rather direct tourists to the casinos and strip, whereas Airbnbs are permitted in the neighboring city of Henderson.
On the other hand, long term rental businesses have minimal management and less furnishing. With a long term tenant, you’re looking at a more stable income. But when it comes to ROI, Airbnbs tend to be more profitable, especially for properties in great locations.
Airbnb approved apartments are a collaboration between Airbnb and building owners in the U.S. that allows renters to host part-time. They’re more officially called Airbnb-friendly apartments, and there are currently over 175 buildings in 25+ markets participating in the program. This initiative aligns with Airbnb's efforts to financially empower renters amid rising living costs.
Renters in this program earn an average of $900 per month. If you’re interested, you can join the program through Airbnb’s Real Estate Programs page. To better gauge your financial prospects, calculate your average Airbnb daily rate for both weekdays and weekends, and then determine the weighted average Airbnb rate:
(Weekday Rate * 5 + Weekend Rate * 2) / 7
By comparing this rate to your daily rental cost, you can assess the feasibility of renting out your apartment on Airbnb.
How to Airbnb Without Getting Caught
To Airbnb without getting caught, you simply do it with as much secrecy as you can and hope for the best. But this approach is reckless, dishonest, and fraught with legal risks. People who try to run under-the-radar Airbnb operations often throw together properties cheaply, renting them out at the bare minimum to scrape some profit, all while sending sketchy check-in instructions to keep the process low-key.
But these shady tactics won't go unnoticed forever. Airbnb has even partnered with cities like New York to crack down on illegal rentals. From troublesome guests who can't follow basic instructions to the increased scrutiny from neighbors and city authorities, attempting to cheat the system is a risky game that could leave you with a tarnished reputation, legal citations, or an eviction on your record.
How to Start Rental Arbitrage Legally
To start rental arbitrage legally:
To make your rental arbitrage business successful, do your research, know your numbers, secure the right property, understand local regulations, and follow all the steps above.
What Are the Legal Requirements for Starting a Rental Arbitrage Business?
The legal requirements for starting a rental arbitrage business vary per state, county, and city. Here are some common requirements for the rental arbitrage model, particularly in strictly-regulated US cities, like New York, San Francisco, and Las Vegas:
What Is a Rental Arbitrage Contract Template?
A rental arbitrage contract template is a fillable contract that you can use when negotiating rental arbitrage lease agreements with landlords. You can get contract templates by purchasing rental arbitrage courses, like Greg Pimentel’s Rental Arbitrage Academy or Sam Zuo’s Passive Airbnb. You can also find free downloadable templates online, or you can create your own. The main elements that go into an effective rental arbitrage agreement include:
Top 7 Legit Short Term Rental Platforms
The top 7 legit short term rental platforms are Airbnb, VRBO, Booking.com, FlipKey, HomeToGo, Homestay.com, and Expedia. Airbnb leads the market with over 6 million active listings, offering a range of accommodations to potential guests, while VRBO has specialized in the vacation rental sector since 1995, providing whole-home rentals, such as beach houses, cabins, and even castles.
Booking.com doesn’t just offer hotels anymore but has extended its reach to short term vacation rentals, and FlipKey, a subsidiary of Tripadvisor Rentals since 2008, has more than 830,000 properties worldwide. HomeToGo, Homestay.com, and Expedia each add unique elements, with HomeToGo aggregating millions of short term rental offers from other platforms, Homestay.com focusing on cultural connections, and Expedia offering broad travel solutions, like flights, cars, and activities, not just vacation rentals.What Is Rental Arbitrage?
Rental arbitrage is the practice of leasing a property under a long term lease and then renting it out as a short term rental property, like a vacation rental. You generate a profit by securing a property at a low long-term rate (say $2,500 per month) and then re-renting it on platforms like Airbnb at higher short-term rates ($150 per night). Rental arbitrage is popular within the real estate industry, appealing to those who want to tap into the rental market without owning property.
How does this differ from subletting? The difference between rental arbitrage and subletting is that rental arbitrage is more business-oriented, with ongoing efforts to maximize occupancy and revenue. Subletting, on the other hand, typically involves a tenant renting out their space temporarily, often to someone they know, and usually without making a profit or with the primary intention of covering their own rent during an absence.
Is Rental Arbitrage Worth It?
Rental arbitrage is worth it for those looking to enter the real estate market without the heavy investment tied to traditional property ownership. If you’re a real estate investor, you can capitalize on the rental arbitrage model, which requires relatively low startup costs and opens doors to a vast market in the vacation rental industry.
Rental arbitrage is right for you if you're willing to invest time in understanding STR market dynamics, regulatory compliance, and strategically selecting properties with high-profit potential. On the other hand, rental arbitrage is not a good idea if you're risk-averse, unwilling to invest time in research and management, or if you're operating in markets with strict regulations that may limit your ability to do rental arbitrage.
Is Rental Arbitrage Still Profitable?
Yes, rental arbitrage is still profitable, but less so in 2023 compared to 2021 and 2022, as the demand for vacation rentals dropped to 10.4% from 22.6% in 2021 and 18.1% in 2022, according to this year’s STR mid-year outlook report by AirDNA. However, this rate is better than the anticipated 5.5% projection at the end of 2022. While this business model won’t make you a millionaire (unless you lease hundreds of properties, which is difficult with ongoing STR crackdowns across the US), you can make $1,000 to $5,000+ in rent per property doing rental arbitrage.
Rental Arbitrage Reddit Reviews
Rental arbitrage discussions on Reddit swing between success stories and cautionary tales. Entrepreneurs on the platform generally agree that short term rental arbitrage is high-risk and definitely not passive income. Some highlight how leases are legally binding, and ignoring those terms for your Airbnb rental can leave you screwed in court. Others share that they've made it work by being exceptional tenants, taking on maintenance, targeting out-of-state landlords, and having high credit scores.
Still, many Redditors warn of low-profit margins unless you manage multiple units, and even then, you might attract problematic guests that annoy neighbors. The work involves around-the-clock commitment, from guest communication to property maintenance.
Pros and Cons of Rental Arbitrage
The pros of rental arbitrage come down to quick cash flow and low barriers to entry. You don't need a hefty down payment, making it a low-risk venture compared to traditional real estate investing. Your upfront costs can be as little as $7,000 to $10,000, which is significantly less than buying an investment property outright. And it's easier to qualify for a lease than a mortgage, especially if you don’t have good credit. Because you're not the property owner, the property manager or landlord is responsible for repairs and maintenance. Rental arbitrage won’t make you a millionaire overnight, but it's a solid start, especially if you have an eye for attracting potential guests and marketing the space well.
The cons of rental arbitrage include not having complete control over your rental income stream. Your landlord can pull the plug anytime—whether by selling the property or just not renewing your lease. You're also not building any equity, and regulations are a landmine; cities can change short-term rental laws on a whim, and you're out on the street with leases to break and furniture to offload.
Rental arbitrage is not passive income. It's more like a full-time job disguised as an investment. You're always dealing with guests, landlords, maintenance issues, and changing regulations. As for ethics, rental arbitrage is not ethical if you're doing it without the explicit consent of the property owner or if you're violating the terms of the lease or local housing laws. The business model can also cause stress to local housing markets and rub neighbors the wrong way.
Rental Arbitrage Related Articles
What Is a Better Investment Than Rental Arbitrage?
Local lead generation is a better investment than rental arbitrage. While rental arbitrage is a good way to enter the real estate market without owning property, it’s susceptible to regulatory changes and unpredictable market conditions that lead to unstable income. You’re also required to spend at least $5,000 in startup costs to secure just one property. Your potential revenue ranges from $1,000 to $5,000+ per month per property, but it’s not consistent, and you probably won’t break even for the first few months.
In contrast, local lead generation focuses on digital real estate, requiring less upfront investment (as little as $500), while offering more stability and potentially higher returns. The idea is to rank lead gen websites at the top of Google, capturing 53% of organic search traffic, which converts better than paid ads.
You then profit from this inflow of leads by renting out your website to local businesses in exchange for the leads you generate for them, and depending on your niche, you can charge $1,000 to $5,000+ per month per website. It’s almost the same as rental arbitrage but with less overhead costs, and it’s more consistent. Plus, unlike rental arbitrage, you have more control because you own your online assets. If your local business partner decides that they don’t want to rent your website anymore, you simply find a different client.
Local lead generation is also more scalable, as you don’t have to worry about adapting to different local short term rental regulations – you simply repeat the same process for each website. Once you get the ball rolling, your income here can become completely passive. To find out more about this strategy, learn how to own your slice of digital real estate through local lead gen coaching.
