Rental arbitrage is a strategy where you lease a property long-term and then re-rent/sublet it short-term to earn from the difference in rental rates.
But is this real estate business model legal? It depends on local laws and the landlord.
Rental arbitrage is totally legal to do if your country/state allows short-term rental (STR) and you have the landlord/owner’s permission to sublet their property.
So, how do you check whether STR is allowed in your state/city? How can you legally pursue this venture in your area? Read on to learn this!
What Makes Rental Arbitrage Legal?
These are factors that determine whether you can legally do rental arbitrage or not:
1. Location of Property
The most important factor is where the property is located.
Rental arbitrage rules are different in every city, county, and state.
Some places welcome short-term rentals because they help tourism. Others restrict or even ban them to avoid problems like noise, parties, damages, and/or housing shortages.
For example, cities like Austin, TX, and Tampa, FL, allow rental arbitrage with some regulations. But New York City has strict rules against short-term rentals in residential buildings.
Therefore, check local laws before starting rental arbitrage. If they allow this model, it means the state or local laws have no issue with it.
2. Short-Term Rental Laws
Short-term rental (STR) laws are different everywhere.
Some places require the hosts to get a permit for STR. Others have rules about how long you can rent out a property or how many guests can stay.
Therefore, it is a MUST to follow these rules to avoid any legal issues.
For example, in New York City, you can’t rent out a whole apartment for less than 30 days unless you live there with guests and meet other conditions.
Some cities also require you to register your property or follow zoning rules.
All you have to do is to understand these laws before you start. Know different local rules for rentals to save you from fines or other issues.
3. Landlord’s Permission
Another necessary aspect is permission from the property owner. The property belongs to them, so they have the right to decide how you use it.
Some landlords aren’t open to subletting, while many have no issue with it.
The only way to get around here is to have clear and honest communication. Be honest with them, tell them what you will do with the property, and get their permission.
You can even offer them more rent, a portion of your profit, or provide extra security deposits.
They need to allow you to sublet their property for legality. This could be added to your lease agreement to make everything official.
You could face eviction or even legal action without the landlord’s consent.
4. Lease Agreement
Even if your landlord verbally agrees, you must check the lease agreement.
Some leases clearly state that subletting is not allowed, while a few may have vague language. If you violate the lease terms, the landlord can evict you, and you may face legal consequences.
To avoid this, ensure your lease includes approval for subletting from the landlord before you start rental arbitrage.
An Example Explaining Rental Arbitrage Legality Status
This example is already discussed in this guide, but let’s shed more light on it!
Short-term rental is allowed in all 50 states of the United States. However, the STR laws can be different depending on which city you’re in.
For example, New York City doesn’t allow renting out a whole property for less than 30 days.
Even if you rent a property for more than 30 days (which is allowed), only 2 guests can stay, and the host has to be in the same property as the guests.
On the other hand, many US cities allow rental arbitrage, such as Chicago, Austin, Atlanta, San Antonio, Dallas, and the list goes on.
The point here is that STR laws can differ from city to city. You must check these laws in your local hood and do arbitrage accordingly.
Is There Any Legal Risk With Rental Arbitrage?
If you have permission from the property owner to pursue rental arbitrage and your city (local laws) allows it, there is no legal risk with doing so.
However, make sure you follow all the STR rental laws set by the government in your area. If you need to pay the tax or acquire any permit, get it before you start your venture.
Conclusion
Rental arbitrage can be a good way to make money, but you must do it legally.
First, check if short-term rentals are allowed in your city. Some places allow them, while others have strict laws. Next, get permission from the landlord. Without it, you could face eviction.
Also, make sure your lease agreement allows subletting. If needed, get permits or pay taxes.
FAQs
Should Landlords Allow Tenants to Do Rental Arbitrage?
It depends on the landlord. Some are fine with it, while others don’t allow it. The main concerns are property damage, late rent payments, and frequent guest turnover.
However, responsible tenants can keep the place well-maintained and even offer landlords extra rent or a share of the profits. If the risks are managed, it can be a win-win for both sides.
Can You Always Make Money With Rental Arbitrage?
No, rental arbitrage isn’t always profitable. It depends on demand in the area, how much rent you pay, and your costs for furniture, utilities, and maintenance.
If short-term rentals are in high demand and you manage the property well, it can be a great way to make money. But you can struggle to profit if bookings are low or expenses are high.
Do You Need An LLC to Start Rental Arbitrage?
No, you don’t need an LLC to do rental arbitrage, but it can help.
An LLC protects your assets if anything goes wrong and offers tax benefits. Many investors prefer to set one up, but you can start as an individual if you’re just testing the waters.
