Is rental arbitrage worth it? Rental arbitrage can be worth it for those looking to earn real estate income but who don’t have sufficient capital to own a rental property outright. However, it depends on the market conditions and location of the rental arbitrage property, and the business model still requires a relatively substantial investment to get started.
Chi Ta is a rental arbitrage expert featured in Forbes that was able to scale his Airbnb business to 6 figures from 30 listings in just 9 months, without owning any of the property himself. Chi Ta says it typically costs him $20,000 to $25,000 to set up a property for rental arbitrage to cover the security deposit, first month rent, and furniture. As such, Chi Ta explains that it’s only worth it for him to do rental arbitrage on a property when he can earn at least $2K per month in profit.
Rental arbitrage can work well in locations that consistently attract guests year round. For example, a rental arbitrage business owner on Reddit claims they are doing well in Nashville because of high demand from people looking to enjoy the party scene. Nashville has especially come to attract groups of bachelor and bachelorette parties in recent years, which is perfect for short term rentals.
Rental arbitrage is not worth it for those who can afford to invest in their own property. Rental arbitrage is generally less profitable than doing short term rentals with a property you own because a landlord typically has a mortgage and needs to charge their tenant a higher price than the mortgage to make a profit on the investment. Additionally, many rental contracts do not allow subletting without the landlord's consent. As such, you also may need to accept leasing terms that are higher than the market rate for a landlord to legally allow your short term rental business activities. Investing in your own real estate also allows additional benefits like building equity in a property and tax advantages.
Rental arbitrage can be hectic and risky, so it's better off avoided by those who struggle with periods of high stress. For example, if a rental arbitrage business owner can’t generate enough income to pay rent to the real landlord, they can get evicted from the property. According to Equifax, the landlord can seek compensation for unpaid rent by selling your debt to a collection agency, which can harm your credit score by showing up on your credit report as an unpaid bill.
Those interested in generating recurring rental income without high risk should consider local lead generation. Local lead generation entails creating websites that attract customers for service businesses and then renting the websites out to real service businesses for a monthly fee. Local lead generation avoids the potential financial and legal risks associated with rental arbitrage, while still allowing you to generate substantial recurring income.
In the following article, we'll help you decide if rental arbitrage is worth it by looking at 12 major factors of the business model.
6 Good Reasons Why Rental Arbitrage Can Be Worth It
6 Bad Reasons Why Rental Arbitrage May NOT Be Worth It
What Is Rental Arbitrage?
Rental arbitrage definition
Rental arbitrage is a real estate strategy where an individual or company rents property from a landlord on a long term lease. With consent from the property owner and compliance with local laws, the rented unit is then offered to the short term rental market through vacation rental platforms, such as Airbnb, FlipKey, and VRBO.
In the rental arbitrage model, entrepreneurs function as middlemen and make a profit as they charge tenants from bookings. The goal, of course, is to earn higher than the cost of monthly rent through accumulated short term bookings. Some of the common customers of short term rental businesses include couples, families, tourists, digital nomads, and traveling professionals, among others.
Is Rental Arbitrage Legal?
Rental arbitrage is legal in most areas. However, there are certain locations that implement regulations that may limit or entirely restrict operations of a short term rental business. In fact, some cities and jurisdictions even implement limits on the number of days a rental property can be used for rental arbitrage.
Laws usually vary from one area to another, so it’s always important to check out existing laws in your city before starting your rental arbitrage business. That way, you can make sure you’re not breaking any rules and you can avoid dealing with legal problems and hefty fines. In most cases, you will be asked to pay fees for permits and licenses. Additionally, you may also have to establish a business structure, such as sole proprietorship, partnership, or limited liability company (LLC).
In Los Angeles, for example, YouTuber and rental arbitrage entrepreneur Jeffrey Yamada shares that the city has the LA Short Term Rental Ordinance CF 14-1635-S2. According to him, this law means tenants need to have a written consent from the rental property owner and also have signed, notarized copy of the official document Landlord’s Authorization To Conduct Home-Sharing.
Is Airbnb rental arbitrage legal?
Airbnb rental arbitrage is completely legal. Since its launch in 2018, Airbnb has become the go-to platform for many business owners in the short term rental market. As mentioned, the Airbnb arbitrage business model is subject to local laws, so entrepreneurs should always take time to research and comply with existing regulations. By doing so and by implementing proven business practices, achieving success can be possible.
Case in point, entrepreneur Chi Ta started doing Airbnb years ago as a means of making extra income after his company shut down. At the time, he decided to list his house on Airbnb, spending $3,900 on rent and maintenance. To his surprise, he eventually earned $5,000 from it. Seeing Airbnb’s potential, he began pursuing the arbitrage opportunity and managed to hit 6 figures within 9 months after scaling and offering more properties on Airbnb. Today, Ta is now known as one of the platform’s top earners, making up to $2.4 million a year. He has also created his own 3-tiered BNB University course where he shares his knowledge with interested learners who also want to enter the Airbnb business.
How to start a rental arbitrage business?
To start your rental arbitrage business, you should:
Perform an extensive market research Find a good property in a high-demand location Comply with local laws Furnish the property with the best furniture List the unit on popular rental arbitrage platforms
Use social media to market your listing Provide a satisfying guest experience Invest in professional services and automation tools
1. Perform an extensive market research. Before starting a rental arbitrage business, it’s always wise to learn as much as you can about your market. For example, you’ll want to find out about the average occupancy rate during different times of the year. Also, pay attention to your local competitors. Check out how they are marketing their properties and study their pricing strategies. Determine how you can position your business as a competitive option for your guests.
2. Find a good property in a high-demand location. Naturally, properties located in high-demand areas attract more people. Ideally, look for those that are close to tourist attractions and popular vacation spots. Once you’ve found potential properties for rent, contact the landlord and begin negotiations. Your goal is to convince them to get onboard your business idea and allow you to use their property as a short term rental.
3. Comply with local laws. After obtaining the landlord’s permission, you can start working on meeting local requirements. Visit local government websites to learn about existing regulations on licensing, zoning, and more. Keep in mind that in some cities, authorities shut down Airbnb operators for failure to comply with local laws.
4. Furnish the property with the best furniture. In an interview with Forbes, Chi Ta shared about the importance of having “incredibly sexy furniture.”
“Don't go with all that Craigslist stuff like everybody and have your listing looking like a garage sale,” he told the website. Instead, Airbnb hosts should “go for tasteful furniture, pay attention to detail, and you’d have yourself an actual winning property,” according to Ta.
5. List the unit on popular rental arbitrage platform. As a newbie in the vacation rental industry, you want to gain as much attention from potential customers. You can increase your visibility by signing up with Airbnb, VRBO, and other top platforms. Take note that you also need to maximize your listings by writing detailed descriptions, targeting the right keywords, and posting professional quality photos that highlight the property’s best features. That way, prospective guests will have a clear idea of what you’re offering.
6. Use social media to market your listing. A major percentage of your potential customers are on social media. In fact, some of them instinctively turn to social networking sites to find available rental arbitrage properties in certain areas. So you need to make the most of your online presence by maintaining an active account. Post photos and videos often. Share customer reviews. Join groups and communities. Respond to inquiries and comments to engage your prospective guests.
7. Provide a satisfying guest experience. To attract positive reviews in the first place, you’ll have to deliver a high-quality experience for your guests. Ensure that the place is clean and comfortable before your customers arrive. Make them feel welcome and be available when they need you.
8. Invest in professional services and automation tools. As your business grows, consider tapping professional services to help you save time. Hire professional cleaners to keep the property tidy. You can also work with virtual assistants for tasks such as social media marketing.
Other than that, you can also put your business into autopilot by using vacation rental automation software. For example, you can use AirDNA for market research and dynamic pricing. Meanwhile, iGMS can be a useful tool for “powerful smart messaging.”
What are rental arbitrage apartments?
Rental arbitrage apartments are apartment units rented by entrepreneurs for the purpose of operating them as short-term rentals. In addition to houses, condo units, private rooms, and shared rooms, apartments are a popular choice among users of Airbnb, VRBO, and other platforms.
According to Greg Pimentel of Rental Arbitrage Academy, it’s best to look for smaller apartments - not those that are in large complexes. In a YouTube video, he explains small units are simpler to manage, plus it’s easier to negotiate with property owners than big corporations.
How to find rental arbitrage properties?
You can find rental arbitrage properties by checking out rental listing sites (such as Apartments.com, Zillow, and Zumper). You can also consider attending real estate investor networking opportunities and contacting property owners on Airbnb.
What is a rental arbitrage contract?
Contact details, detailed property description, along with the terms and conditions go into an effective rental arbitrage agreement. This document is a written agreement between a property owner and a tenant who intends to list the property as a short term rental.
The contact details include the full name, phone number, mailing address, and email address of the landlord and tenant. The property description specifies the full address and location of the unit, Meanwhile, the terms and conditions section includes details such as the contract duration, rental amount, and payment due date. It may also outline the responsibilities and rights of both the landlord and tenant.
Tim Hubbard of the Short Term Rental Riches podcast says it's important for a contract to include a way out for arbitrage entrepreneurs. Unexpected things can happen, such as policy changes in your area or low occupancy rates that last for months. It’s best to find a landlord who will be open about this idea and will not charge you any penalty when you have a valid reason to opt out.
Related Articles on Airbnb Arbitrage
Is Rental Arbitrage Worth It For You?
Rental arbitrage can be a worthwhile business idea for non-property owners wanting to enter the real estate business. When done right, some even succeed and get rich through this business model.
It is, however, not without its flaws. There is always a risk of not earning enough to cover for rent, operational expenses, and taxes, among others. As mentioned, local regulations may change and this could leave you without a business to run.
In many ways, lead generation is an easier business to operate. You won’t have to worry about property management issues or deal with customers during weekends. Instead, your work mainly involves helping small businesses gain prominent search engine results for their websites. As you deliver organic traffic, your clients can attract valuable traffic and boost their earnings.
Personally, I make up to $52,000 of passive income each month providing this service to several businesses. Plus, I offer lead gen coaching for anyone who wants to learn how to do it, too.
