The world of vacation rentals is extremely diverse, with properties ranging from a studio room to an entire single-family home. 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 does 'rental arbitrage' mean?
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.
You may have heard it referred to as 'Airbnb arbitrage' - that is simply because Airbnb is the most popular platform, but arbitrage can be done on any comparable short-term rental site.
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.
Is rental arbitrage legal?
Rental arbitrage exists in a legal gray area, and its legality depends heavily on local laws, lease agreements, zoning restrictions, and short-term rental regulations. The strategy itself—renting a property long-term and subletting it short-term—is not automatically illegal, but it becomes unlawful the moment it violates a lease, city ordinance, homeowner association rule, or state-level requirement.
The most important factor is permission from the property owner. In many jurisdictions, subletting without written consent is illegal and can result in eviction, fines, or the termination of your lease. Most standard lease agreements explicitly prohibit short-term rentals unless the landlord approves them in advance. Without that approval, the rental arbitrage arrangement is not legally valid.
City and county rules also play a major role. Some cities require a short-term rental permit, limit the number of nights a unit can be rented, or ban non-owner-occupied short-term rentals entirely. If you operate without proper licensing, you may face penalties or be barred from hosting on platforms like Airbnb or VRBO.
Zoning rules and HOA bylaws can further restrict short-term rental activity. Even if your landlord approves subletting, local regulations may still prohibit rentals under 30 days, or they may require additional safety inspections, insurance coverage, or tax registrations.
In short, rental arbitrage is legal only when you have explicit permission from the property owner and you comply fully with local short-term rental laws. Anyone pursuing arbitrage should review their lease carefully, confirm local regulations, and ensure every step of the operation follows the law to avoid serious financial or legal consequences.
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 it can have many advantages, there are also several disadvantages to rental arbitrage 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.
Legal risks
Rental arbitrage is not always allowed on lease agreements, and landlords must always clear their plan with their mortgage lender.
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.
Key takeaways
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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