What is Airbnb rental arbitrage?
Airbnb rental arbitrage is the practice of renting properties and subletting them on the Airbnb platform. It’s becoming more difficult to own property as home prices have far outpaced median incomes since 1960. That’s why this strategy allows you to build cash flow without the stress and challenges of home ownership.
Imagine you rent an apartment for $2,000 per month. If you sublet that same apartment on Airbnb for the month at $150 per day, you could pay off your rent in just under two weeks. Once you’ve paid off the rent, the rest of the month is pure profit. With the possibility of $2,000 in profit each month in our example, after subtracting potential maintenance and overhead charges, short-term rental arbitrage allows you to grow your income and save without owning property. Of course, that’s an oversimplification. There are expenses to running short-term rentals.
Seems too good to be true? Yes and no. Airbnb rental arbitrage is a tactic that can work well in some markets. It’s a great way many investors use with cheap rental properties to make them more money. However, there’s a lot of due diligence required on your part before jumping in with both feet.
Is Airbnb rental arbitrage legal?
Airbnb rental arbitrage is legal, depending on the short-term rental regulations where you live. So do your research first. Short-term rental laws are evolving in most large cities across the world. You’ll want to make sure that rental options like Airbnb are allowed in the city you’re interested in or that there isn’t a limited number of nights annually, you can rent out to guests. In case vacation rentals are allowed in your area, you’ll also have to check if your city, township, state, or province will require you to apply for a hospitality license.
After that, make sure that the landlord you are renting the property from allows short-term and vacation rental arbitrage. Some landlords explicitly say in their leases that this is not permitted or is only allowed on a case-by-case basis. Always check with your landlord before subletting your apartment, or you can put yourself at risk of being evicted.
Once you have an agreement with your landlord, be sure that you are protected and covered in the case of damages, injury on your property, or even natural disasters. Airbnb offers Host Protection Insurance to get you started, or you can browse some of the other options for guest screening and insurance.
How do I convince my landlord to accept Airbnb?
You’ve done your area research, understand the rules and regulations and found a spot you think would be popular with tourists. You have a good idea your Airbnb rental will be profitable. Now you need to convince the landlord to accept the vacation rental on his property. How can you do that?
Go in any vacation rental social media group and search for arbitrage. You’ll find out that convincing landlords is the biggest challenge of Airbnb rental arbitrage. After all, you’re always running the risk that after you tell your landlord your plan to rent through Airbnb, they may decide to use that strategy instead and no longer rent to you. So make it beneficial for the landlord.
Here are a few discussion topics to try out with a hesitant landlord.
First, there’s the upside that you’ll care about the unit as much as the landlord. Scuffed walls, a beat-up floor and generally not keeping the place clean will not produce 5-star reviews. And that isn’t good for your business. In other words, you have a vested interest in making sure the apartment is always in top condition. That’s a more significant promise than a long-term tenant can ever make.
Second, you’ll be running the rental as a lucrative business. The landlord will always get paid on time every month with you as the tenant. They won’t have to worry about always running after a tenant who may be late on rent.
Third, running a vacation rental business is by no means passive income like a traditional long-term rental is. So by all means, the landlord could try and run the apartment themselves. However, if they agree to the arbitrage, they won’t have to be burdened with the work of managing it, keeping the unit clean or marketing the listing on Airbnb.
In short, you’ll take excellent care of the place, make a profit, they receive their rental payments, and it’s a win-win for everyone.
Other tactics to convince difficult landlords
Landlords sometimes bring up the issue of noise complaints and Airbnb parties. It’s a valid concern. If your short-term rental bothers other long-term tenants, it could mean that the landlord has to deal with higher turnover. Then there’s the issue of insurance. Who will pay for damages? This is where technology comes in. Depending on the resistance faced, you can make it part of the agreement that you’ll use one (or more) of these tools:
- Autohost – Automatically screens problematic tenants.
- NoiseAware – Noise sensors with the option of 24/7 call centre coverage (they’ll make calls if things get out of hand).
- InsuraGuest or Safely – Their algorithms calculate risks and provide affordable coverage that goes above and beyond the Airbnb or Vrbo policies.
The best part is that these tools integrate with most major property management systems (PMS). As we’ll see below, you’ll need a solid PMS if you’re to operate a successful Airbnb rental arbitrage business. By integrating the service into the PMS, you’re getting the benefits of coordinating and automating those services at scale (because let’s face it, you’ll have more than one arbitrage property in no time).
What are the best cities for Airbnb rental arbitrage?
The best cities to invest in any vacation rental or short-term rental arbitrage will always be in up-and-coming real estate markets. Such markets offer that sweet spot between short-term rental income potential and cheap rents. The challenge is that these markets change consistently, so do your research. To estimate rental expenses in those areas, you have a few resources available:
- Zillow (and other real estate analytics), and;
- Local real estate professionals.
Unfortunately, free short-term rental analytics are hard to come by (we’ll explain why we think you should pay for great data later on).
On a macro level, you can use this short-term rental forecast. Otherwise, there’s powerful tech that can help you. Data aggregators like KeyData Dashboard, Wheelhouse Pro, and AllTheRooms Analytics track short-term rental markets and trends to provide actionable insights. All are great to get precise and data-backed estimates of your market’s income potential. If you’re planning on applying for a loan to seed your arbitrage business, such reliable metrics are critical to give your business plan credibility. Another great suite of tools you can use in your due diligence is AirDNA. AirDNA is a leading provider of short-term rental data and has a bunch of free tools that will help you estimate the markets for Airbnb arbitrage in the US (the Rentalizer and MarketMinder are incredibly useful).
Given the importance of due diligence in an arbitrage project, we recommend paying for some of the tools mentioned above. On their own, the free tools are great and will help give you context into a specific market. However, if you’re considering pouring life savings into your Airbnb arbitrage project, those extra nuggets of information you get from the paid subscriptions are worth their weight in gold.
With short-term rental arbitrage, you’ll want to be profitable even if you don’t rent out your property every day of the month. No matter how wizardly your marketing skills are, most properties don’t have 100% occupancy for several reasons:
- Orphan days: In most markets, Tuesdays through Thursdays between two reservations can sometimes be hard to book.
- High and low seasons: Some markets are prone to seasonality fluctuations. In the low season, some of them don’t get mid-week reservations.
- Maintenance and cleaning: Depending on the availability of cleaning contractors, you may end up having to book a day between reservations for cleaning. If the market your serve has low lengths of stay, those cleaning gap days will dig into your profits.
Getting an accurate estimate of Adjusted Occupancy Rates (AOR) is critical to assess if your arbitrage will succeed. Here’s an example of a city where rent is $3,000 per month for a two-bedroom. If those types of vacation rentals only go for around $150 per day in that area and book on average 25 nights a month, you’re running too tight of margins. Once you factor in other expenses (i.e., tech tools, listing site fees, marketing expenses), there won’t be much left for you. One month with low occupancy and you risk running into the red.
How can I make my Airbnb rental arbitrage business successful?
Let’s say you’ve chosen the perfect city for your vacation rental arbitrage investment, and the landlord has agreed to it. The analytics check out. You see a booming hospitality industry on the horizon. What are the next steps to take to ensure that your short-term rental business is successful?
Grossly overestimate your starting costs
With any rental property investment comes initial, upfront costs. While they may not break the bank as much as purchasing a property, you’ll want to factor in the following to make sure you’re able to build a stable rental business:
- Application fee
- Deposit (ie. Does this include first month’s rent, last month’s rent, security, etc.)
- Insurance policies
- Legal fees
- Maintenance and updates to the property
- Furnishings for all rooms
- Wi-Fi connection and new account fees
- Entertainment subscriptions
- Cleaning service fees
- Monthly utility expenses
- Toiletries and kitchenware
Factor in these costs before committing to a long-term lease. If this is your first run at vacation rental management, run different scenarios. What happens if your occupancy rates are 10% lower than estimated for the first six months? Similarly, create scenarios where recurring cleaning costs, furnishing expenses, and utilities are 10-20% more expensive than anticipated.
Between the research and implementation phases
Assuming your research checks out, you’ll have to furnish and decorate the unit. Some hosts or managers DIY this step. Others hire interior designers. This phase of the arbitrage process has more to do with decor than automation at scale, so we’ll fastforward a bit. Just remember to pay for (or upgrade) amenities guests are willing to pay for.
List your first short-term rental arbitrage property
Your goal is to advertise your properties on all the major listing sites and online travel agencies (OTAs). We’ve been using the term “Airbnb arbitrage”. But really, we shouldn’t forget about Vrbo, Booking.com, HomeToGo and TripAdvisor. And those are just the starter sites. There are niche travel sites you should also list on.
This strategy is called multi-channel distribution, and the goal is to boost marketing on these sites with automation. Why is that important? Broad distribution will contribute to low vacancy rates. And once you consistently book 90% of available nights, you can start raising your nightly rates.
If you want to learn more about multi-channel distribution, why it’s a winning strategy and how to implement it, check out this in-depth paper on the topic:
A few tips on optimizing your listings
Simply listing your property isn’t going to make you successful. No matter what platform you list your short-term rental property on, you’ll need to optimize the listing so that it shows up in searches.
Consider the following:
- Do you have beautiful photos of the property?
- Do you have the amenities guests expect?
Check out the complete guide to optimizing your listing, and make sure vacationers don’t scroll past your offering.
Consider building a direct booking site
Once you get reservations through listing sites and OTAs, it’ll be time to build a direct booking site (DBS). A DBS is a great workaround to paying commissions to listing sites. It’s also a great way to get repeat visitors and solidify your income stream. With a DBS, you take control over your building and scrap the Airbnb out of “Airbnb arbitrage”. To get a leg up on this later stage of your arbitrage business, consider reading this paper on the subject:
Tools you’ll need to automate and scale your arbitrage business
Arbitrage businesses have substantial overhead expenses: rental costs. You’ll likely need several units running at once to make a living. The problem you’ll face is that managing multiple vacation rentals by yourself is a logistical nightmare. And hiring staff isn’t an option until you become profitable. To get around these two challenges, you’ll need automation tools. Here are the basic ones you should look into:
- Property Management System: for multi-channel distribution, automating guest communications, assigning tasks and analytics (and much more). A good PMS like Hostfully will also allow you to integrate other software into it (see below). The PMS will be the central hub of your business.
- Dynamic pricing app: optimizes rates for your rentals according to market dynamics. This software integrates into your PMS. It’s a “set it and forget it” app that pays for itself multiple times over.
- Cleaning coordination software: if you plan on hiring cleaners or contracting out this process, these types of apps will save you hours of work. Cleaning apps also integrate into your PMS. Alternatively, you can use the automation features of the PMS to get a similar result (this case study shows you how).
- Payment processor: you’ll need one to accept payments from some listing sites. A payment processor like Stripe or PayPal is also necessary to accept direct bookings.
- Digital guidebook: cheap and easy to put together. This is how you will communicate check-in instructions, house rules, and recommendations. If you’re not sure what digital guidebooks are, here are some examples of real guidebooks created by Hostfully customers.
Of course, many other software add-ons will make your job easier. The list above is just a start. If you want to see what else software can do in a short-term rental management business, check out these case studies. There’s much more you can with automation once your business is live and you get more experience.
You did it! You built a short-term rental arbitrage business, and it’s successful. Over time, you’ll likely want to acquire more and more properties to continue to develop your business. That doesn’t mean you have to work 70 hours per week to do so. You can use multiple tools to help automate your company and have it do the work for you. We’re here to help!
This article was first posted at https://www.hostfully.com/blog/airbnb-rental-arbitrage/
Alan has been working in the vacation rental sector since 2004, when he first created a listing site for his property management company. He has been helping short-term rental owners and managers to stand out in an over-saturated marketplace for over 12 years and has written thousands of articles in that time.
He has written books on vacation rental photography and was the first in the industry to create online marketing courses for hosts.
He has given keynote presentations across various subjects at The Vacation Rental World Summit, VRMA, VRMintel, Host, and The Book Direct Summit.