What is Rental Arbitrage?
The world of vacation rentals is extremely diverse, with properties ranging from a studio room to an entire house. As such, there are many ways for users to participate on platforms such as Airbnb, VRBO, and other similar sites.
Some users prefer to only rent out their own residence when they're on vacation, while others take things a step further and rent properties just so they can sublet them out on Airbnb. This is what's known as rental arbitrage.
Whether you are a vacation rental host, or a landlord, either way, it's important to be aware of what rental arbitrage is, how it works, the pros and cons of this strategy, and the legalities surrounding it.
Keep reading to learn everything you need to know about rental arbitrage, including what it is, and the risks involved with it.
What is Rental Arbitrage?
Rental arbitrage can be described as a strategy used by vacation rental hosts and landlords in which they rent out a property just so they can sublet it out on a short-term rental platform like Airbnb. This is different than a traditional vacation rental, which is when someone rents out their property on a long-term basis.
The main goal of rental arbitrage is to make a profit from short-term rental bookings after paying the landlord for the rent on the unit. The word “arbitrage” comes from the idea that you’re essentially trading one asset for another. In this case, it’s trading a long-term rental for a short-term rental and then again for cash.
How Does Rental Arbitrage Work?
Rental arbitrage can be a risky strategy, but it can also be very lucrative if done correctly. As mentioned above, it requires you to rent out a property and then sublet it out on a short-term rental platform like Airbnb.
So, let’s say you’re looking at a property and the rent is $1,000 each month. So, you sign the lease, and after taking possession of the unit, you list the property on Airbnb for $100 per night. In this example, you only need to rent the unit for ten nights each month and you’ve made back the rent money. The other 20 nights are all profit.
That said, you still need to pay some money for this sort of business. Hosts typically need to pay for things like cleaning and maintenance, supplies, and so on, but the idea is that you can make a good amount of money even after paying for the rent and these incidental business costs.
Most people who employ this strategy have many units for rent on Airbnb and other platforms, so it can be an extremely lucrative business as long as you set it up correctly and take care to avoid doing anything illegal in the process.
Related Reading: How to Start an Airbnb Business in 8 Easy Steps
Pros of Rental Arbitrage
The first and most obvious advantage of rental arbitrage is that it allows you to make money from your properties. But that’s not all. The following are some other ways rental arbitrage can benefit you as a landlord or vacation rental host.
You Can Maximize Your Profits
If a short-term rental generates more revenue than a long-term rental, you’re maximizing your profits. That’s why many landlords and vacation rental hosts use rental arbitrage. In some cases, the profit can be substantial, especially around tourist destinations or in major city centers.
Vacation Rentals Can Pay for Long-Term Rentals
Another way rental arbitrage can benefit you is by paying for your long-term rental. For example, you may be able to rent your unit out for 3 months and make enough money to cover your own rent for the rest of the year.
Increased Cash Flow
Another advantage of rental arbitrage is that it can help increase your cash flow. This is especially important if you're a landlord who needs to pay a mortgage. By making money from your properties through rental arbitrage, you can increase the amount of cash flow in your business.
Cons of Rental Arbitrage
While rental arbitrage can have many advantages, there are also some disadvantages to keep in mind. Let's go over some of the main drawbacks associated with rental arbitrage so that you can decide if this is a good strategy for your unique situation.
More Cleaning and Maintenance
If you decide to use rental arbitrage, you’ll probably have to deal with more cleaning. This is because you’ll have more guests staying in your properties. You might decide to hire a cleaning service, but you’ll have to pay for that and it’s typically pretty expensive, especially if you have a lot of turnover.
More Bookings to Manage
If you decide to use rental arbitrage, you’ll have more guests staying at your properties. This means you’ll have to book more reservations. This can be both a positive and a negative. It can be a positive if you have more guests staying at your properties, but it can also be a negative if you don't have enough time to manage all of this rental traffic.
Is Rental Arbitrage Legal?
This really all depends on where you live, your job title, and the details of your lease or rental contract. In many states, rental arbitrage is completely legal. However, if you are renting the property from a third party, such as a landlord, or property management company, then you will need to review your lease very carefully.
Many landlords forbid their tenants from rental arbitrage. There are a few reasons for this. First and foremost, when a tenant is renting the unit out, there is a greater chance of the property being damaged. Also, many landlords simply don't like the idea of their tenants making more money than them from the rental. It might sound petty, but that’s the reality of the situation.
Other landlords welcome the idea of rental arbitrage. In fact, arbitrage can be a very good thing for landlords. First of all, your tenant has a vested interest in keeping the unit in perfect condition, otherwise, they run the risk of getting bad reviews. Also, because the tenant will be making a profit on the property, they should never be late with the rent.
That said, some states and countries expressly forbid rental arbitrage entirely. Other countries have rules whereby it’s illegal to offer a short-term rental for less than a month or another set number of days. Also, some municipalities require you to get a hospitality license and register your short-term rental business, which can be a costly, bureaucratic process.
Related Reading: The Ultimate Insurance Guide for Airbnb Hosts
Landlord Insurance Can Protect You from Rental Arbitrage
Renting out a property on a short-term basis is a risky business. If a guest complains about something or damages your property, you could face a lot of financial losses. That's why you should consider taking out landlord insurance. Landlord insurance can help protect you from rental arbitrage and other risks when renting out a property.
Some types of coverage you may want to look for in a landlord insurance policy include the following:
- Liability Insurance - This coverage protects you from any lawsuits that may result from a guest at your property getting injured. Learn more about Liability insurance in our Ultimate Guide to Landlord Liability Insurance.
- Coverage for Water Damage - This coverage can help protect you against any water damage that may happen in your rental unit or your property.
- Coverage for Damage to the Property - This coverage can help protect you against any damage that may be caused to your property. Some policies also provide coverage for damage to the guest’s property.
By taking out a landlord insurance policy, you’ll be able to protect yourself and your rental business. If you have a tenant who is subletting your property out with rental arbitrage, then landlord insurance will give you peace of mind.
However, if you are a landlord renting out your own property via rental arbitrage, then landlord insurance is even more important as it protects you from personal liability in the event that a guest gets injured on your property.
Rental arbitrage is a strategy that uses a short-term rental to pay for a long-term rental. It can benefit both landlords and vacation rental hosts, though it also comes with a few challenges and disadvantages. It’s important that you know and understand the rules and regulations surrounding rental arbitrage in your area, especially if you’re a landlord. Landlord insurance can protect you from rental arbitrage and other risks when renting out a property.
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