What is Airbnb arbitrage?

What is Airbnb rental arbitrage?

Have you been dreaming of starting an Airbnb business? But maybe you’re worried about the costs, confused by the red tape, or unsure how much time you can dedicate to your business. While it may seem daunting to become an Airbnb host, it can be an amazing journey. A common misconception is that you need to own a property to become an Airbnb host. You can also sublease someone else’s property (Airbnb arbitrage model) or manage another person’s property (commission model) instead of purchasing a property through traditional methods.

What is Airbnb rental arbitrage?

Airbnb arbitrage is where an individual rents a property on a long-term contract and then sublets the property on Airbnb. With property prices reaching sky-high, it’s becoming harder and harder for people to purchase a property. Property taxes and interest rates are also rising, making Airbnb arbitrage an attractive option in the current market. 

Airbnb arbitrage allows you to create a positive cash flow without the complications and challenges of property ownership. 

Let’s look at an example: Say your rent is $2000 per month for a property with an average nightly rate on Airbnb of $150. 

With 14 booked days a month, you can pay off your monthly rent. Once the rent is taken care of, it will be profitable for you after maintenance and overheads. 

The Airbnb arbitrage model will work well in locations where the demand for short-term rentals has a higher value than that for long-term rentals, and occupancy is relatively steady throughout the year. Holiday or exotic locations compared to a residential area would be better. 

Another common option is to work on commissions. With this model, someone else owns the property, they rent it on Airbnb, but you manage the property and the listing. You would be working on commissions per listing that you care for as a consultant. You can either be salaried or take a percentage of revenue earned from bookings. 

In the Airbnb arbitrage model, you have autonomy over the money you make and the listing you manage. With the commission model, you would work with the property owner to manage the listing, as rates and stay requirements would be based on their preferences. You would be co-hosting the property along with the property owner. 

Couple of threads from Reddit about Airbnb arbitrage

Reddit airbnb arbitrage thread screenshot 1
Reddit airbnb arbitrage thread screenshot 2
Reddit airbnb arbitrage thread screenshot 3

Pros and cons of Airbnb rental arbitrage

Before making a choice, you might want to consider the pros and cons of the Airbnb rental arbitrage model. 

Pros and cons of airbnb rental arbitrage

How to get started on Airbnb arbitrage? 

Tiktok, Reddit, Youtube (like the Fearless Investor’s video on Airbnb arbitrage), and other social media networking sites are filled with influencers trying to give you the best way to get started with your first Airbnb arbitrage property. Go ahead and type in ‘Airbnb arbitrage’ anywhere, and you will find people giving their own two cents on this model. 

1. Look into regulations

The short-term rental market is constantly changing. Local authorities are finding ways to regulate short-term rentals to ensure that the residential housing market is still viable for buyers and long-term renters. You need to talk to local authorities and understand the various regulations in your area. 

Is it legal? In most cases, yes: 

✔ If the property owner allows it

✔ The area where the property is located permits it

When it comes to regulations, you’ll have to check with your local government. Some cities have forbidden this type of rental or placed strict limitations on them due to sky-rocketing housing prices and reduced real-estate inventory for full-time residents. You may have to check if you need a hospitality license or are subject to other regulations. In some cities or states, only certain areas can list properties as short-term rentals, or properties have to be within specific bedroom category ranges. In other cases, they’re all fully forbidden. 

While researching the regulations, you must also look at the market and understand the Airbnb arbitrage potential. PriceLabs Market Dashboards are fully automated personalized dashboards that help you track vacation rental data anywhere in the world. You can analyze various KPIs of your property to make pricing decisions to maximize profit or make informed investment decisions. It also helps you look better at other markets whenever you expand or create your portfolio. 

2. Talk to building management 

You are going to be listing someone else’s property on Airbnb, and being on the same page as them is important. Talk to the landlord and ensure everything is discussed and on paper. Get a clear-cut contract with them stating and differentiating the responsibilities properly.  As friction between you, the landlord, and the building management reduces, you can open up more dates in your calendar for guests. Talking to your landlord would probably be the most difficult of the steps. Various videos and blogs online can help you get started on that. To get you started, this video by Greg Pimentel on How To Pitch Landlords for Airbnb Rental Arbitrage also has a FREE Landlord Script.

3. Create projections

While looking at a property for potential investment, you need to evaluate if it would be profitable. Creating comp sets of similar properties in the locality allows you to use PriceLabs Market Dashboard for average daily rate and occupancy projections. This will give you a fair idea of the kind of return on investment you can expect. You also need to consider other utilities, insurance for the property, lease rent, and other services that account for your property expenses. 

With short-term rentals, you might not always have 100% occupancy, it’s a good idea to project a conservative 50% occupancy as you get started and use that to calculate potential profitability. For example, if the ADR in the locality is $200 a night, you would make $3,000 for 15 days of occupancy in one month. If your rent is $1,000, your net profit would be $2,000. This is a short or quick way to understand your projections, even during slow months. 

4. Try to save on furnishings

You can try finding a property that is furnished or has basic items in place. Or you can scout the internet – Facebook marketplace, TikTok, eBay, or wish.com to find cheap but good furniture. Another way to save some bucks is by thrifting furniture and other fixtures in your property. You are eco-friendly and frugal, which can be used to promote your property on social media!  

5. Look into forming an LLC 

You are not legally required to form an LLC to list properties on short-term rental marketplaces, and it is not required to rent a property. However, it might be extremely beneficial. By forming an LLC before you list your properties, you ensure that you protect your personal assets from any problems in your business. LLCs are limited liability entities that absorb liability away from you as an individual. There are also significant tax benefits and protections by forming an LLC. However, if you do not want to form one, it is fine if you’re the only one in business. 

How to make your rental arbitrage property profitable? 

With rental arbitrage, you’re subleasing someone else’s property, so you don’t need hundreds of thousands of dollars to start, but you need clear strategies. 

Cash-on-Cash Model

You’ve decided to get into the arbitrage model. You’ve found your apartment and are now conversing with the landlord. First, negotiate the rent. If you get into a two-year lease, you should negotiate two to three months of free rent. Let’s say you’ve negotiated the rent. Now, it’s time for the down payment. You might go to a bank for a loan for 10% of the down payment. You’ve got the loan and have started running your first Airbnb arbitrage model property. Let’s say you’ve seen profit for three months. Put the property as collateral, then revisit the bank. Keep repeating this until you reach your financial goals. This is how you could upscale your Airbnb arbitrage model using the Cash-on-Cash model. 

Pricing your Airbnb property does not differ from pricing a property you own as a short-term rental. The only extra thing you have to account for is the rent you are accountable for. 

Being intelligent with your property’s pricing will have the most crucial impact on your business’ success. Figuring out a single Airbnb pricing strategy (if you like videos more than blogs – take a look at our webinar on pricing strategies) might not work for you or even be simple; you may find yourself trying several strategies before sticking to one that works for your model. From time to time, you need to switch between various strategies according to the market trends to ensure you are making the most out of the situation. 

It takes a lot of time and energy to ensure that what you have in your head works for your property. Various tools in the market can make the pricing process easier for you. Using a tool like PriceLabs is going to facilitate you to analyze the market. In addition to it, you will also be able to learn about significant events and high and low seasons. PriceLabs is a dynamic pricing tool for Airbnb used by thousands of hosts. PriceLabs analyzes several data points to identify price points for your listings. Further, your prices are automatically adjusted every 24 hours.

You’re probably willing to take the plunge if you’ve come this far. All real estate investment comes with its limitations and risks; be sure to consider them against your limitations before making a decision. Having a spreadsheet full of data is always good to get going. Airbnb hosting tips and tricks, events, forums, and internet research will help you find answers to all your questions. 

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