As real estate investors, we are always looking for new ways to increase our passive income. Many new real estate investors believe the only way to invest in real estate is by owning properties. That investing strategy requires you to be a landlord and invest significant capital. The alternative investing strategy is Rental Airbnb Arbitrage. It is a business model that allows you to generate passive income while not owning real estate.
If you want to be a real estate investor, you’ll want to learn about the Rental Airbnb Arbitrage business model. It is an investing strategy that offers minimal risk with huge upside potential. It could be a lucrative business model for you.
In this article, I’m going to walk you through the Rental Airbnb Arbitrage Model, the pros and cons of this investment strategy, and how you can pitch it to landlords.
Rental Airbnb Arbitrage is a business model that leverages other people’s properties through sub-lease agreements and renting those properties on platforms like Airbnb, VRBO, or HomeAway. This business model requires little investment, generates positive cash flow, and poses far less risk. Considering these factors, this business model is attractive to many investors, new and experienced, because it offers less risk with huge upside potential.
As home prices continue to soar, it’s becoming increasingly difficult for people to buy real estate. Rising real house prices have made homeownership a distant reality for many people. Rental Airbnb Arbitrage solves this problem because it allows you to generate cash flow without owning real estate.
Rental Airbnb Arbitrage is legal in certain areas. Each city and town has different short-term rental laws and regulations. It is important to perform your due diligence before starting an Airbnb Rental Arbitrage business. You will need to familiarize yourself with the local laws and HOA bylaws.
It is recommended to seek legal counsel before starting your business to ensure you are following all laws and regulations. For example, the city of Chicago has strict rules and regulations for short-term rentals. In Chicago, operating as an illegal Airbnb host can be very costly. According to City of Chicago law, "MCC § 4-6-300(i)(1) threatens that “[a]ny person who operates the business of vacation rental without first having obtained the required license for such business shall be subject to a fine of not less than $2,500.00 nor more than $3,000.00 for each offense."
While each city is different, that should give you an idea of what to expect if you operate an illegal short-term rental.
Before you start your Rental Airbnb Arbitrage business you must manage your expectations. A lot goes into starting a successful business and it starts with you. If you want to succeed in this business understand that you will be an entrepreneur. The most successful entrepreneurs embody fundamental characteristics that contribute to their success. Entrepreneurship can be a challenging yet rewarding career path. Having a strong foundation will position you for success.
Before you become a short-term rental host you need to choose a market. The success of a short-term rental depends on how profitable your market is. Start by identifying cities and areas that you’re interested in. A good starting point is where you currently live. If you live in or near a big city that is tourist-friendly and has many attractions you should explore that market. These markets prove to be more profitable for short-term rentals. If you’re still unsure about which market is right for you, check out this resource. It lists the states with the highest potential for rental arbitrage. The data shows that cities that people frequent for vacation are the most profitable. "Many states throughout the Midwest don't have a single county in the Top 100, whereas Florida boasts 13." The more profitable your area is the greater chance you have of generating stable income.
Another important factor to consider is the ROI that a short-term rental can generate. Tourist-friendly areas increase your chances of generating consistent rental income. The more specific you can narrow down neighborhoods, the better. If you find a neighborhood on Airbnb charging $100+ per night then you’ve found a popular area. You will also want to know what types of properties are most common in those neighborhoods.
By becoming familiar with every aspect of that market you will become an expert in that locality. After conducting all of this research you will have a clear understanding of the market, and what ROI you can expect to achieve.
Understanding the laws and regulations of short-term rentals in your market is imperative. It is in your best interest to seek legal counsel that specializes in short-term rentals. Doing so will protect yourself and your investment from any legal issues that may arise.
Even though you don’t own the property, you will still have expenses that you are responsible for. The success of your Airbnb will depend on your market as we’ve already discussed but also on ratings. This includes cleanliness, service, and your unit’s furnishings. You don’t want to make the mistake of spending a fortune on expensive furniture, but you also don’t want to buy cheap furnishings. It’s a delicate balance to maintain a high-quality short-term rental while not breaking the bank. Let’s take a look at what expenses you can expect to incur.
Many cities require hosts to register their short-term rental units directly with the city to list their units on platforms like Airbnb, VRBO, and other short-term rental websites. This application may include a permit or license that is required to operate a short-term rental. Failure to comply with this process may result in significant fines and lawsuits.
The monthly rent is stated in your lease. You are responsible for paying this rent to your landlord based on the terms and conditions outlined in your lease. It is a fixed cost that stays constant regardless of how much revenue your short-term rental generates unless stated otherwise in your lease.
A security deposit is a certain amount of money that is given to the landlord as proof of intent to occupy a property and ensure it will be taken care of.
You will need a renters insurance policy and will need to provide a copy to your landlord. You must have renters insurance because it will provide you with protection in the event of a covered accident. Renter's insurance typically covers personal property, liability, and additional living expenses. Be prepared to provide a copy of your insurance to your landlord.
If you hire an attorney you will have to pay them for their services. It is worth the investment because the fees you will pay them will be minimal compared to the fees, fines, and penalties you could be required to pay if you break the law.
The lease agreement you have with your landlord will state which utilities you are responsible for. These may include but are not limited to water, electricity, natural gas, sewage, and garbage. It is best to assume that you will be responsible for paying all of these so you can factor them into your monthly expenses. In the best-case scenario, you won’t be responsible for all of them.
Considering the remote environment we live in today, many people rely on Wifi to stay connected with family, friends, and work. You want to provide a comfortable stay and wifi is an amenity that many people expect. It is well worth the investment.
If you want to book your short-term rental you need furniture for guests. Without furniture, there are no guests. You will need to have a bed for each bedroom along with a table and/or nightstand. Each bedroom should have a lamp, too. The living room should have a coffee table, sofa, and TV. In the kitchen, you’ll need a table with chairs and/or stools. Each bathroom should already have cabinets, mirrors, and a vanity. Also, have a trash can in every room.
You want your guests to feel at home while renting your unit. Put yourself in your guest’s shoes, and think about how you can make their stay as comfortable as possible.
It’s the little things that matter most. You’ll need to have hand soap in the kitchen and each bathroom. In each bathroom, make sure you have body wash, shampoo, and conditioner. Reusable soap dispensers are an efficient way to maintain organization and cleanliness in each bathroom. In the kitchen, have paper towels, napkins, dish soap, and garbage bags.
Standard kitchenware is essential. This includes cups, plates, mugs, silverware, pots, pans, and a coffee maker. Guests may want to make breakfast each morning or order food, so having essential kitchenware improves the guest experience.
Providing cable and streaming services is another way to improve your guests' stay. Having Netflix, Hulu, or Disney+ at the ready is a subtle yet significant amenity. They are services that nearly everyone uses and they can help you receive higher ratings and reviews.
You will need to have an emergency fund for necessary and unexpected repairs to the property. In the event your landlord and/or renter’s insurance policy do not cover unexpected damages you must have an emergency fund while operating your short-term rental.
There will be upfront costs but provided you choose the right property you should be generating enough cash flow to make a profit.
Now it is time to list your rental on trusted vacation rental sites, such as Airbnb and VRBO. Before you create your listing you will want to hire a professional photographer. Doing so will make a significant impact on your listing’s first impression. They know the right angles and how to use lighting to make a property look its absolute best. Leave your iPhone Pro Max at home and invest in a professional photographer. You won’t regret it.
Once you have your listing photos you are ready to create your listing. Many people who use vacation rentals trust sites like Airbnb, VRBO, and HomeAway. Listing on these platforms gives your rental the best chance of securing bookings.
Many people create their listing and hope it does well. But, that is not a formula for success. Now, there is a secret that only the most successful short-term rental hosts leverage. They optimize their listing’s description with SEO strategies that include specific keywords and phrases. This drives more traffic to their listings and results in more bookings. If you have direct experience using SEO strategies you could do this yourself. If you don’t, consider hiring a copywriter. It’s a one-time fee that could increase your revenue.
One main difference between short-term rentals and long-term rentals is how they charge. Short-term rentals charge on a nightly basis and long-term rentals charge every month. This makes short-term rentals a more profitable business model. For example, say you have an income property that you could rent for $2000 per month. As a short-term rental, if you charge $200 per night it would take you 10 days to generate $2000 instead of one month. That leaves you with around 20 extra days each month to make a profit.
All you need to do is lease the property and list it on Airbnb, VRBO, or HomeAway. You must have the owner’s permission.
If you’ve ever dealt with bad tenants you know how much of a nightmare they can be. For traditional landlords, the eviction process can be expensive and time-consuming. The average stay in a short-term rental is 4.3 nights so you don’t have to worry about dealing with bad guests for a long time.
With traditional rental properties, it’s common for a tenant to sign at least a one-year lease. An investor in long-term rental properties can enjoy consistent cash flow each month. With Airbnb rentals, you’ll have periods of vacancy where you won’t be generating income. It doesn’t provide consistent income as long-term rental properties do.
To secure more bookings and generate consistent income your property must be attractive. This means you have to invest in your short-term rental. Quality furnishings are worth the investment. You don’t want to break the bank, but you don’t want cheap furniture either. A professional photographer will add the finishing touches to your short-term rental listing. To seal the deal you need an SEO strategy that drives traffic to your listing. A strong first impression will put you in the best position to book guests consistently.
When your guests check out you will need to have a cleaning service to clean your short-term rental. The cleaning service should be ready immediately after your guests check out. This ensures the unit will be ready for the next guests.
After each stay, you must clean your property and prepare it for new guests. Also, you must provide your guests with logistical information before their arrival. This includes where they can park and how to operate household appliances. You can provide a booklet that answers all these questions via email and in the unit.
When pitching landlords on your business opportunity understand that you will get rejected. This goes back to managing your expectations when you start your business. Rejection is part of the process. You will hear more “No’s” than “Yes’s” so you will have to be persistent until you succeed.
The process is different for everyone. It may take you ten calls before you connect with a landlord who is open to your business proposition. Or, it may take you one hundred calls before you land an appointment. You must shift your mindset from "how long will this take?" to "I will do whatever it takes to succeed." This is a winning mindset that will position you for success. Once you connect with a landlord that is “open to your idea” you must know your value proposition to them. You must know how to negotiate like a pro to best position yourself for success.
Before you pitch landlords you must know your market’s short-term rental laws. Know the rules and regulations that you will have to abide by. The landlords you speak with may not know the short-term rental laws in their market. This is why you need to know about your market’s subletting and short-term rental laws. This will increase your credibility, too.
First impressions are lasting impressions. This starts with how you present yourself – communicate and dress like a professional. Doing so will increase your credibility further. Tell your landlord about yourself and why you want to host a short-term rental.
It’s recommended that you show them your home so they can see how well you maintain your property. Make sure it’s clean, neat, well organized, and taken care of. Again, first impressions are lasting impressions.
Provide them with Airbnb's $1M Host Damage Protection Policy. Doing so will show your landlord that you’re thinking of them throughout this process.
Here are several income options:
Here are several options that lower your landlord’s risk
This shows your landlord that you are keeping their best interests in mind.
Work with your landlord to set guidelines for hosting. Doing so will show your landlord that you care about their opinion, and it gives them a sense of control. Agree on when you can host, how many people you can host, and the rules that guests must obey.
Your landlord's buy-in to your business proposition is vital to your success. Without them, you do not have a business. So make sure you include them in each of your business decisions related to their property.
Keeping an open line of communication is important throughout this process. If at any time you have questions, ask your landlord. Tell your landlord to immediately contact you if they have any questions, too. This builds trust that will grow during your working partnership.
Inform your landlord of new bookings and how long their stay will be. Keeping your landlord in the loop is a great way to maintain a solid relationship with them. This will benefit you in the short term and long term. The bottom line is to get creative. These are a few options to get the process moving forward.
At the end of the day, you’re in business to make a profit. Knowing the numbers of your short-term rental is vital to the success of your business. Don’t make the mistake of investing in a property because you “think it will work out.” That is not a responsible strategy. Choosing the right property will ensure the numbers are in your favor so you can make a profit.
You need to know how to calculate your ROI so you will be able to determine if a property is a lucrative option for you. That’s why we’ve created the ultimate rental property calculator. It has all the vital metrics in one place. You can calculate your monthly income, vacancy rate, recurring annual operating expenses, and much more using our rental property calculator.
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