What is Rental Arbitrage? – Benzinga

If you want to invest in the short-term rental market with less capital, consider getting started through rental arbitrage. It’s a real estate strategy that’s been growing in popularity because it provides entry into short-term or vacation rentals without the upfront cost of buying property.

With rental arbitrage, you don’t have to own a house or apartment in order to profit from renting it out. However, that doesn’t mean it’s simple or zero-risk. There’s a lot to learn about how it works, including legal considerations that could affect your venture. 

Here’s what you should know before you consider this strategy.

How Rental Arbitrage Works

Rental arbitrage starts with signing a long-term lease on a property, say a year to 15 months. You then furnish it and make it available to short-term guests, typically on a vacation rental platform such as Airbnb or Vrbo. 

Depending on your needs, you might rent out a single room or the entire property. The idea is to earn more from nightly bookings than you pay in rent and other expenses. “Arbitrage” is the difference between the lease amount and your income from the short-term rental.

You may also hear rental arbitrage called by other names: Airbnb rental arbitrage, apartment arbitrage, lease arbitrage, re-rent or short-term rental arbitrage.

Here’s how it works: Suppose you sign a year-long lease for $2,000 per month. You list the property for $200 a day on a vacation rental platform. Say it’s booked for 20 days each month, so you pull in $4,000 monthly, which is twice the rent. After covering your own rent and other expenses, you walk away with a nice profit. 

Your lease with your landlord should explicitly spell out permission for you to sublet the property and the conditions of subletting it. Since you’re responsible for all of the terms set out in the agreement, you also should consider including relevant terms in the sublease signed by your guests.

Rental Arbitrage vs. Traditional Real Estate Investing

Rental arbitrage and traditional real estate investing represent two distinct strategies for generating income from properties.

While leasing to sublet may require less upfront capital, it can also come with higher risks and demands on your time. By contrast, traditional real estate investing may require a much larger initial investment, but it can provide more stability and the potential for long-term appreciation.

With rental arbitrage:

• You don’t have to own any property.
• Your capital investment is significantly lower.
• You have the potential for high returns.
• You have no opportunity for equity in the property.
• Your involvement in day-to-day operations may be high.

For traditional real estate investing:

• Your capital investment is higher.
• You own your property.
• You can expect stable income from long-term leases.
• You gain equity and the potential for appreciation.
• Maintenance and other demands on your time may be lower.

While rental arbitrage might require more hands-on management, traditional real estate investing tends to require more complex skills, unless you hire a property manager, which can cut into your profits. 

The best strategy for you depends on your financial situation, risk tolerance and investment goals.

Pros and Cons of Rental Arbitrage

Running a rental arbitrage business can deliver rewards, but it comes with risks. Here are the pros and cons.  

Pros

• Low upfront costs: No large down payment or mortgage is required.
• Faster returns: Earn income quickly by listing the property online.
• Potential higher income: Charge more per day for a vacation rental.
• Scalability: Replicate the model with other rentals.

Cons

• Legal and lease limitations: Many landlords restrict subletting and short-term rentals.
• Management demands: Dealing with turnover, cleaning and guest inquiries takes time.
• Unpredictable income: Slow seasons hurt steady rents.
• Higher risk of property damage: Greater turnover often leads to more wear and tear.

Legal Considerations and Landlord Approval

To get your rental arbitrage business off the ground and keep it running smoothly, explain your plans openly to a potential landlord. If they agree, get permission in writing to sublet the property. 

Before signing a lease, you also must check local zoning laws. States, counties, cities and neighborhoods may have separate rules for short-term rentals. Some cities and counties impose heavy restrictions or ban them altogether.

Even where these rentals are allowed, you may have to secure a permit and adhere to specific rules involving parking and noise, depending on local ordinances.

Purchasing short-term rental insurance can guard you against damage from guests, liability claims and lost income should the property become unusable. You also might consider separating your rental arbitrage business from your personal finances by setting up a limited liability company or sole proprietorship.

How to Start a Rental Arbitrage Business

Getting your rental arbitrage business going takes a lot of preparation and strategic planning. Here’s a step-by-step guide.

Market Research and Location Selection

Thoroughly research multiple markets to identify the best locations. Look for a place with high demand for short-term rentals, favorable regulations and strong occupancy rates. 

Securing a Lease With Landlord Approval 

Negotiate a lease that clearly states that subletting and short-term rentals are allowed. You may need to make concessions, such as paying a higher security deposit.

Furnishing and Designing the Rental

Decorate the rental for the comfort and convenience of your guests with quality furnishings and clean linens, toiletries and kitchen supplies. Consider professional staging.

Listing on Short-Term Rental Platforms

To attract guests, write an engaging listing that highlights the property’s best features and nearby attractions. Use high-resolution photos and set locally competitive pricing.

Managing Bookings and Guest Communication

Provide clear instructions for check-in, respond to guests’ inquiries quickly and promptly address issues that arise during their stays. Positive reviews play a key role in getting more bookings.

Start Your Journey by Landing Your First Rental Arbitrage Deal 

If your money is tight and you want to start investing in real estate, rental arbitrage presents a lower barrier to entry than traditional rental properties. Now that you know the steps involved in executing this strategy, you can begin your real estate investing journey with confidence.

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