Rental arbitrage allows you to rent out a space for more than you pay in rent each month. Although it can be tricky to achieve the right balance with rental arbitrage, it could be a viable strategy to help you earn an income.
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Ready to learn more about rental arbitrage? Let’s dive in.
What is rental arbitrage?
Rental arbitrage is when you lease a long-term property. But instead of simply living in the space, you rent it out to someone else. Typically, you’ll rent it out to someone else on a short-term basis through a vacation platform like Airbnb or VRBO.
The goal of rental arbitrage is to bring in more money each month than you pay for the unit. Sometimes, you’ll hear the term Airbnb arbitrage, which is the same thing as rental arbitrage.
What is arbitrage?
You don’t have to pursue rental properties to implement the idea of arbitrage into a business. Arbitrage is simply the act of buying something below the market rate and then selling it for the market rate or higher. As the person seeking out the deals to make an arbitrage strategy work, you get to pocket the difference.
You can look for arbitrage opportunities in any marketplace. In order to succeed, you’ll need to get familiar with the market rates and learn how to shop for a great deal.
For example, you might find a great deal on a widget at your local department store after the holidays. Although you can purchase the item for just $50, you look up the prices and determine that you could make a profit by selling it for the full value of $100 online. With that, you make the purchase for $50 and subsequently sell the item for $100. At that point, you have successfully facilitated an arbitrage transaction and can pocket $50 for your troubles.
How rental arbitrage works
Rental arbitrage may sound too good to be true. After all, you won’t have to make too big of a financial commitment to move forward. Unlike buying a property with financing that could stretch on for years, a rental lease is typically renewable based on the year. With that, you have more opportunities to earn income with less of your own capital being tied down.
If you want to pursue rental arbitrage, it is important to start by doing your research. Without careful research, you might not make a profit with your rental arbitrage strategy. So it is imperative to consider the numbers of any potential rental arbitrage plan carefully. A good place to start your search is with AirDNA.
Once you find a unit that could work, you have to ask the owner for permission to pursue rental arbitrage. If you aren’t upfront with the owner of the unit, you could run into issues throughout the lease.
If the landlord is on board, then you can sign a lease for the unit. The next step is to list the property as a short-term rental on various platforms. Finally, you can start to rent out the unit for a higher monthly rate than your lease agreement and pocket the difference.
Wondering why a landlord would be okay with your pursuing rental arbitrage in their unit? Some landlords don’t have the time or energy to manage the high turnover efforts involved in a short-term rental. With that, a landlord may be willing to work with you – assuming that you will be able to pay your rent on time.
How much should you make on a rental property?
The amount you can make through rental arbitrage varies dramatically based on the area. You could make thousands of dollars per month or end up in the red. That’s why it is critical to do your research ahead of time.
Seek out average long-term rental rates and compare them with short-term rental opportunities. You may find a potential profit. Keep in mind that if you are doing rental arbitrage, you may make less than if you rented out the space without the overhead of a rent cost. But there is also less risk involved than owning a property.
How do I start a rental arbitrage business?
Start the process of rental arbitrage by doing the research for your location. Is there a potential to create a profit through rental arbitrage. If so, then start looking for specific properties.
As you explore your options, take local rules and regulations into account. Unfortunately, some HOAs or local governments have restrictions on short-term rentals. In fact, that might be why the original landlord isn’t pursuing short-term rentals themselves. With that, make sure to do your research ahead of time. You don’t want to get locked into a lease agreement with a unit that is not rentable on the short-term market.
Another factor to keep in mind is the seasonality of short-term rentals in your area. Is there a big dip in market demand for certain seasons? It’s okay if there is. But make sure the high season is enough to generate a profit for the entire term of the lease. Also, don’t forget about vacancies when running your calculations.
Once you sign a lease, you can rent out the space on the short-term market with the landlord’s permission. At that point, you’ll need to find short-term tenants to fill the unit and create a profit.
Is rental arbitrage legal?
Yes. Rental arbitrage is completely legal if you consult with the owner of the unit ahead of time. Not only should you talk to the owner directly, but review the lease agreement closely. Make sure there is no language within the lease that you could potentially violate with your rental arbitrage business.
Unfortunately, short-term rentals are not always allowed by HOAs and local governments. Keep those regulations in mind when looking for a unit. Rental arbitrage will become illegal if you aren’t allowed to facilitate short-term rentals on the property.
Another legal way to earn money through real estate is house hacking! Take advantage of our FREE House Hacking Quick Start Guide to learn more about this life-changing strategy.
How do you pitch rental arbitrage?
If you are seeking to do rental arbitrage, then you aren’t a traditional apartment tenant. With that, it is important to be upfront with the owner.
The only thing you can do is ask the owner politely. Take the time to share the potential for the landlord to receive their rent from you as a reliable tenant. In some cases, the landlord will be perfectly fine with the arrangement. In other cases, they won’t want short-term tenants within their unit.
If the answer is no, simply accept that and move on to the next potential property. You cannot force a landlord to work with you.
At the end of the day, they own the property and have the final say on what is allowed or not. But you might be surprised at how willing some owners are. Many are happy to collect the rent. You’ll take on the risk of a short-term tenant arrangement, but they expect to collect rent from you on a regular basis.
The bottom line
Rental arbitrage is a great way to get started in real estate. You can learn the ropes of the short-term rental market without tying up too much of your own capital.
But if you want to take the plunge into investing your own money into real estate, then use our guide to get started. You’ll learn everything you need to know to build the real estate portfolio of your dreams.