Suppose a tenant rents a property from a landlord for an entire year and then subleases it to twelve different people, each for a one-month period, to earn profit.
This model of renting and then subletting a property is called rental arbitrage.
Still not clear? Let us present you with the definition to simplify the concept.
Rental arbitrage is a real estate strategy. In this strategy, someone leases a property for a longer period and then rents/sublets the whole property (or its parts) to short-term renters with a higher per-day rental price.
The goal is to profit from the price difference between the long-term rent paid to the landlord and the short-term rental income earned from guests.
But again, what is this “Airbnb” arbitrage thing? Is it profitable to do? How can someone start doing this? Read on to learn all this!
What Is Rental Airbnb Arbitrage?
Are you clear about the definition of short-term rental arbitrage? Yes? Very good.
Rental Airbnb arbitrage is pretty much the same as rental arbitrage. The only difference is that the tenant uses Airbnb to rent out the property to short-term renters. That’s it!
You should remember that other vacation rental platforms like VRBO, Booking.com, Agoda, Expedia, Hotels.com, TripAdvisor, etc., can also be used.
Many hosts and guests sometimes call it “rental arbitrage Airbnb” even if other OTA platforms are used to make the ‘arbitrage’ happen.
The short-term rental leasing concept has been around for ages in every industry.
It is quite simple to do in terms of theory—simply buy a ‘Product A’, make it ‘Product B’ by putting in some smart efforts, and then sell it at a higher price tag.
With the rise in short-term rental platforms, this business has flourished.
An Example of Arbitrage Airbnb + Profits Overview
Let’s say you lease a 2-bedroom apartment in Miami for $2,500/month from a landlord under a long-term lease agreement. The landlord allows subletting the property.
You bring in some renovation work to the apartment and make it stylish. Then, you list both bedrooms separately on Airbnb for short-term rental. You set the nightly rate at $150/room.
With a 75% average occupancy rate, you rent each room for 22 nights per month.
- Monthly income per room: 22 nights × $150 = $3,300
- Since there are two rooms, the total revenue = $6,600
It is time to deduct some expenses.
- Rent: $2,500
- Utilities & Wi-Fi: $200
- Cleaning & maintenance: $500
- Airbnb service fees (3%): $198
- Total expenses: $3,398
After deducting the total expenses ($3,398) from total revenue ($6,600), you still end up earning a $3,202 profit in a single month.
This entire model is rental Airbnb arbitrage.
Is Rental Arbitrage Legal?
It depends on the local rental laws and the landlord’s permission.
Rental arbitrage is totally legal if the country and/or state allows short-term rental (STR) and the landlord you are renting the property from lets you do so.
If we talk about the United States, short-term rental is legal in all 50 states.
However, STR laws can vary from city to city in the U.S. Major cities may or may not allow renting a property on a short-term basis.
For example, New York City says hosts (whether owners or tenants) cannot rent out an entire home/apartment for less than 30 days. This goes for all permanent residential buildings, and even if the host owns or lives in the building.
Even if short-term rental is allowed for 30+ days, the host has to stay in the same unit/apartment as the guest. Plus, no more than 2 guests should stay with the host.
The best bet here is to research the city’s local laws for short-term arbitrage rental. You can search online, consult a legal professional, or ask other tenants.
That said, the following are U.S. cities that allow Airbnb arbitrage:
- Atlanta, GA
- Dallas, TX
- San Diego, CA
- Houston, TX
- Chicago, IL
- Saint Louis, MO
- Scottsdale, AZ
- Austin, TX
- Tampa, FL
- San Antonio, TX
- Charlotte, NC
If the local laws allow this renting model, the next step is securing landlord approval.
In order to legally sublet a property, make sure you acquire a landlord’s explicit consent to re-rent the property on a short-term basis.
That’s it for the legality aspect of arbitrate rental.
Pros and Cons of Airbnb Rental Arbitrage
These are some benefits and downsides of arbitrage rental you should know:
Pros
Low Startup Costs
You don’t need to buy property upfront. Just cover the first month’s rent, security deposit, and initial furnishings (appliances, linens, toiletries, etc.) to get into the real estate.
Flexibility
You just get the property on lease, don’t buy it. If demand shifts to another location, you can end your lease contract after its term and move to a better location.
Potential for High Returns
Short-term rentals yield higher nightly rates than long-term leases. If managed properly, the short-term rental profit you generate exceeds the monthly lease payment.
No Property Maintenance Responsibilities
Since you don’t own the property, the landlord typically handles major repairs and structural maintenance like roof repairs.
Control Over Guest Experience
You manage everything from listings to bookings to check-out to collecting the rent. You can decide how memorable a stay you want to make for guests.
Cons
Risk
You’re responsible for rent and utilities even if the property isn’t rented out. Damage or issues caused by guests can also be costly.
Legal and Lease Restrictions
Not all cities allow short-term rentals, and some landlords prohibit subletting.
Market Fluctuations
Demand can be seasonal and can affect your income stability.
Management Intensive
Requires time and effort to manage bookings, guest relations, and maintenance.
How is ROI Calculated for Rental Arbitrage?
Calculating Return on Investment (ROI) for rental arbitrage is quite easy.
You simply need to find out how much you make compared to your initial expenses.
The formula of ROI is:
ROI (%) = (Net Profit / Initial Investment) x 100
That said, follow these steps to calculate arbitrage ROI easily:
- Calculate Total Revenue
Decide the monthly rental income from short-term rentals.
(We are going to use the same example we used earlier in this guide.)
If you rent out a room at $150 per night and achieve a 75% occupancy rate (22 nights per month), your total revenue is:
22 nights x 50 = $3,300
If you have two rooms, the total revenue would be:
3,300x 2= $6,600
- Calculate Total Expenses
Long-term rent: $2,500/month
Utilities & Wi-Fi: $200
Cleaning & maintenance: $500
Airbnb service fees (3% of revenue): $6,600 x 0.03 = $198
Total expenses: $2,500 + $200 + $500 + $198 = $3,398
- Calculate Net Profit
Net Profit = Total Revenue – Total Expenses = $6,600 − $3,398
Net Profit = $3,202
- What Was Your Initial Investment?
This includes:
First month’s rent: $2,500
Security deposit (typically 1 month’s rent): $2,500
Initial furnishing & setup (varies): $3,000 (estimated)
Total Initial Investment: $2,500 + $2,500 + $3,000 = $8,000
- Apply the ROI Formula
ROI (%) = (Net Profit / Initial Investment) x 100
(3,202/8,000) x 100 = 40.03%
Note: This example we discussed isn’t practical, but we assumed. The actual ROI can vary based on occupancy rate, rental price, market demand, operational costs, etc.
Is Airbnb Arbitrage Profitable?
Let us add AirDNA’s study on the STR arbitrage market for your answer.
According to the study, short-term rental (STR) demand was high in 2021, and hosts made about $4,425 per month, earning 170% more than their rent costs.
But as more people started doing Airbnb arbitrage and rent prices went up, profits dropped. By 2022, hosts earned 156% more than rent, and by 2023, it fell to 124%.
Even though profits have decreased, Airbnb arbitrage still provides an opportunity for profit, as STR hosts today earn 124% more in revenue than their rental costs.
Does it mean that arbitrage is gonna be profitable for everyone?
In ideal cases, yes, arbitrage can be profitable. And there are a few conditions to make the answer ‘yes’ in this case.
First, you’re required to have experience in hospitality, marketing, or property management to succeed in the world of arbitrage. Or have a team like DOSbnb on your side that manages everything for you—listing, booking, bookkeeping, and everything.
Secondly, you must execute the arbitrate model in the right markets and locations where you have solid rentals all year long.
However, arbitrage can be a big risk if you’re a beginner in the short-term rental market.
In the end, let us mention one thing: even if a study shows that arbitrage is profitable, the answer to this depends on how you do it.
Conclusion
Airbnb arbitrage is renting a place and subletting it on Airbnb for a profit. It is a great way to earn money without the need to own a property.
It can or cannot be profitable. And to make it profitable, it requires careful planning.
First, follow local laws and get landlord sub-renting approval. When that is done, manage everything carefully. Make sure you consider market demand and competition.
Success comes from choosing the right location and then obtaining guests continuously.
If everything goes well, Airbnb arbitrage can be a smart and sustainable income source.
Airbnb Arbitrage FAQs
Is LLC a Must for Airbnb Arbitrage?
No, it is not a necessity to have an LLC for Airbnb arbitrage. But having it is a good idea. An LLC protects personal assets, provides tax benefits, and makes your business professional.
Is Rental Arbitrage a Good Idea?
Arbitrage rental can definitely be a good idea if you’re able to earn more than your total monthly rent and expenses cost. This short-term rental model is an excellent way to enter into real estate (with existing experience).
Is Rental Arbitrage Passive Income?
If you manage the leasing and renting operations yourself, rental arbitrage is an active income (especially in the initial stage). However, it has the potential to be a passive income source if you hire a team to handle all the processes themselves.
How to Convince Landlords to Arbitrage Airbnb?
A landlord wants two things from the tenant: good profit in the form of rent and well-maintained property from the tenant’s side.
When trying to convince the landlord for arbitrage(via a proposal or meeting them in person), offer them shared profit or pay higher rent. Assure them you’ll handle guest screening, insurance, and maintenance.
What is Initial Cost to Start a Rental Arbitrage?
Typically, the initial cost of starting a rental arbitrage requires covering the first and last month’s rent, security deposit, and furnishing costs. You may need a budget for cleaning, setting up utilities, professional photos, and/or marketing.
