This post outlines exactly how to run a profitable Airbnb rental arbitrage business along with the many factors to consider before diving into this specific side hustle. Before we get too far, let’s look at what Airbnb really is.
What Is Airbnb
Think of an Airbnb as a hotel, but instead of being in a hotel you are renting out someones home.
Airbnb has become a dominant force in the world of travel.Offering the benefit of living like a local, guests have amenities like a washer/dyer and kitchen that they most likely would not have in a hotel. Most travelers these days often prefer to stay in some sort of home sharing such as Airbnb instead of a hotel.
Here’s a quote directly from Airbnb about their business:
“Airbnb began in 2008 when two designers who had space to share hosted three travelers looking for a place to stay. Now, millions of hosts and travelers choose to create a free Airbnb account so they can list their space and book unique accommodations anywhere in the world. And Airbnb experience hosts share their passions and interests with both travelers and locals.”
This type of business is part of the sharing economy, similar to services like Uber, Door Dash and Turo where a business is created however the services/goods offered can be offered by anyone who signs up to do so. As generations continue to progress, the sharing economy is becoming more and more of a dominant way of starting a business.
Think about it, you don’t have the normal start up cost. You have a business model and idea pre-decided for you. All you have to do is sign up and start. Oh and… signing up is free đŸ™‚
The sharing economy is creating thousands of jobs and side hustles for those looking for the chance. Will you strike upon this golden opportunity?
What is Airbnb Rental Arbitrage
Now that we know what Airbnb is, what do I mean when i say rental arbitrage? Well, normally for you to rent a space on Airbnb, you would either have to own another home or have extra space available in your home to rent out.
With this business model, you would actually be renting out a home/apartment and then turn around and sublease it except instead of on a long term lease, you would list it on Airbnb as a short-term rental (STR).
As we have seen Airbnb and other home sharing sites become more popular, they have also become more lucrative. Some experts have dozens of subleases under their belt and can make 2-3x or more the amount of revenue a month in comparison to a normal long term tenant. This is due to the fact that people have begun to solely look at Airbnb and similar sites for stays rather than a hotel.
Lets look at an example:
You want a two bedroom apartment in the downtown area of a city. Rent costs $1500 a month. You can charge at least $100 a night for people to stay in your apartment on Airbnb. Without factoring vacancy or prices increasing for weekends you would make double the profit on that apartment ($100*30 = $3,000) just by listing it on Airbnb.
Of course there are tons of other factors going into it and a lot of risks as well. We will go over all the major points you need to consider before jumping into this form of investing.
Why You Should Rent Over Buying
Some people prefer to buy a property and then rent it out on Airbnb. While this could potentially still be a great investment, it has a much higher barrier of entry (closing costs, down payment, etc.) and the cost of homes in well-performing Airbnb cities is astronomically high, so much so that if you calculate the return on investment it would take years to actually make your money back!
Sure, you are building equity and I am all for buying rental properties, but for this particular business model, starting off with rental arbitrage and then maybe working your way up to buying is the superior way of doing it. Plus, with renting you wouldn’t have to deal with the big ticket expenses like replacing a roof or water heater and you get to learn how to completely automate your business.
Costs
This way of real estate investing has one of the lowest barriers of entry while also being incredibly lucrative. It is such a simple way to build up cash. However, it does take a bit of cash to get started. Below are some of the major costs to consider before pursuing a rental arbitrage unit.
- Security Deposit (one-time expense)
- Monthly Rent (reoccurring)
- Furniture (one-time expense)
- Cleaners (reoccurring)
- Utilities (reoccurring dependent on lease agreement)
Market Research
Market research is the most important part of deciding where to start your rental arbitrage business. You want to ensure that you are renting a unit in a city where you can make more than enough money to cover rent. So what exactly do you need to look at?
With tools like AirDNA, you can easily recognize whether or not a specific zip code could be profitable. There are free and paid versions of this site, both offer great information.
Vacancy
Vacancies are nights that no one booked your listing.You want to keep your vacancy rate as low as possible. Of course, some months are better than others depending on where you are in the world. Maybe the fall attracts leaf-peepers. Maybe the summer attracts beach bums. Regardless, it is important to keep this variable low.
Some tips on keeping vacancy include:
- Offering discounts for longer stays (ex. 10% discount for week long bookings)
- Lowering your prices the day of or a couple days before if you are not booked
- Not allowing guests to book single night stays during the weekends
While there are many ways to get creative about keeping your vacancy rate low, the most important thing is to make sure your prices are not unreasonable.
Pricing
Pricing is the other major factor that goes into a successful arbitrage formula. You want to charge as much as you can while still attracting customers.
A lot of factors go into pricing your listing. Weekends usually cost more than a weeknight. If there is a concert or festival in the area that week, then you can definitely charge more. During your slower months, your prices will probably be lower. These are just some of the things to keep in mind when appraising the value of a night in your unit.
Airbnb has a built in price estimator tool however it is known to undervalue the price so do your own research on what people are charging for similar units in your area. Keep an eye out on the competition to understand your STR’s fair market value per night.
You can also use pricing tools like Everbooked or Beyond Pricing to get a better grasp on what you could be charging. These might be helpful if you feel as though you don’t have the time to do a full analysis on the market price of your STR.
Pricing can be adjusted the day of. As mentioned in the above Vacancy section, if you are not booked for the night, you can reduce the price of your unit to try to get a last minute booking. Some reduce the price per night by a set percent each week if a block of nights is still open.
For example, reducing by 10% when your have a vacancy two weeks out, reducing by 20% when it is one week out and reducing by 30% or more when it is a couple days out.
This method would make your Airbnb more likely to be booked because of the low cost but of course, you never want to lower it to a point where you cannot make a money after the cost of cleaning and room fees.
Rules and Regulations
Before anyone gets too excited, check with your local city/town hall and see what their regulations are regarding STR’s, specifically Airbnb. Many cities are beginning to release stricter rules around it which can hinder your ability to do rental arbitrage.
For example, Boston recently released new regulations that allow you to rent a unit on Airbnb however you must own the unit and must live adjacent to it among many other new laws.
You wouldn’t want to get yourself wrapped up in a legality issue just as your business is starting out, so make sure to target cities that are more Airbnb friendly. There are a couple ways to check if it is legal in any given city.
- Check town halls website
- Call town hall
- Check Airbnbs list of regulations by city (scroll to the bottom of the linked page). Note that this does not list every single city but it does have a vast majority of them.
Even if you call the town hall and they don’t have regulations or bans on it yet, it would be wise to ask what the conversations around STR’s or specifically Airbnb are and if they are generally positive or negative.
Many people have ways around these regulations, however you should at least know them before entering into any lease agreement.
*Please note that I am not a lawyer or legal professional and this is merely for entertainment purposes of my blog. This is purely my opinion and you should consult your lawyer prior to entering any sort of legal matter.
Landlord Approval
This is where I got hung up when I first heard about rental arbitrage. Who the heck would pass up making all that extra money and let someone else do it on their own property?
The reality is that a lot of people don’t want to deal with the hassle of it. They don’t want to have to invest their time and energy into learning this business model and would rather just rent out their apartment on a long-term basis.
To get a landlord to agree and allow you to sublease their unit, you have to approach it from their mindset. What would you do if you owned this place? What would make you agree to allowing your tenant to sublease?
By putting yourself in the landlords shoes you have a much greater probability of success.
Some other options to offer to your landlord to help persuade them on the topic is to tell them that:
- You will take care of certain maintenance procedures
- You will get extra insurance
- You will pay a set amount of monthly rent over what they would normally charge
- You will give them a percent of sales
I would avoid the last two and only offer the first two options while negotiating, you don’t want to just hand away money to get a gig.
You can find landlords on Facebook Marketplace, Craigslist, through a realtor, etc. You may even have a friend or family member who is looking to fill their apartment. Whether you propose the idea to them over email, phone call or in person, the one thing you need to make sure of is that you have your business model together and answers to questions ready for them.
Some common questions landlords may ask include
- How do you screen the guests?
- What happens if they break something?
- Why should I let you do this?
You can start by either putting together a business model slide deck or some sort of overview that runs them through the key points of your process. This should answer most of their questions. For the ones listed above, you can use answers like:
- The guests are screened through Airbnb by looking at their past stay ratings and reviews. We set a standard and do not allow guests that do not meet those requirements.
- Airbnb has a $1,000,000 liability insurance policy that covers all hosts. Depending on what they break, we can always call upon that policy. If it is something that is more minor, we can also report it to Airbnb and have the guest pay for it. *Note: You can also offer to get another insurance policy for more coverage – more on this in the Insurance section below.
- The monthly rent will always be paid in full and on time. The normal wear-and-tear of a property that faces long-term tenants would be completely minimized when you only rent to short-term tenants (ex. appliances are being used much less). Also, if there is an issue with the property you will likely find out much sooner than if it was a long-term tenant who figures that you will charge them for it. A short term guest is treating it like a hotel and wants you to know of anything that is wrong.
Start A Business
If you really want to be serious about this form of investing, you could even start a business out of it. By forming an LLC or partnership, you could approach the landlord with a corporate lease and from the standpoint of a business owner. This may instantly give you more credibility and make you seem like you are much more serious about their property.
The plus of starting a business means that you have the opportunity to use things like business expenses, business travel and other possible deductions to your benefit.
The Lease
The biggest thing to look out for on the lease is to ensure that the No Subletting Clause is taken out. By removing this from the lease, you will be able to list the property on Airbnb legally, with the landlords permission.
If you enter into a lease agreement and do not tell the landlord that you plan to sublease, you may get in a lot of trouble or evicted if they find out you are subleasing. If you want to try it out but aren’t allowed to sublease according to your lease contract, try talking to your landlord to see if they would be OK with it. If you have been a great tenant then they may not mind amending the lease to allow it.
If you do decide to start an LLC or other type of business, you can then use a corporate lease as your template. A corporate lease inherently allows subleasing depending on the nature of the business. You will still want to clarify with the landlord to make sure everyone is on the same page from the start.
Automation
Many people set up Airbnb listings that are states away from where they live. It all depends on how you automate it. Regardless of your proximity to the unit, you should try your best to automate your business as much as possible so that you aren’t needed for the business to be successful. Below are some top tips on automation.
Cleaners
You can share your booking calendar with your cleaners on Airbnb by adding them as a user with visibility access. By doing this, your cleaners can check the schedule and see when they need to be there, rather than you having to reach out every single time your place is booked.
Check-In
Another great tip to completely automate the check-in process is to install a keypad. Some prefer to do a lock box, however the trouble with that is the key could still be lost. With modern technology, you are able to update the code to keypads from your cell phone so you can change it in between guests. It also takes the keys out of the equation as well as the guests having to meet up with you.
Manager
Airbnb managers can cost between 20-25% of your revenue however if you want to completely automate your business then this could be a great option for you. After all, you would only have to get a deal under contract and furnish the unit, after that it’s all under the managers responsibilities. No more responding to guests for you!
Insurance
As mentioned, Airbnb provides a $1,000,000 liability policy to all hosts. A lot of hosts believe that this is all they could ever need and don’t pursue any further coverage.
However, if you are trying to sell a landlord on the idea of letting you turn their property into a STR, then another policy may not hurt. A popular option for extra coverage specifically for Airbnb is Proper Insurance. They can help you understand what your landlords policy covers and also what it doesn’t. This is important because homeowners insurance and renters insurance in most cases does not protect against short-term rentals.
Risks
There are of course many risks that could potentially arise in this business model, just like with most investments. Some of the largest foreseeable risks (and how to mitigate them) include:
- Changes in regulations making short-term rentals no longer allowed or put under strict laws (by reaching out to your city hall to see how the conversations around the topic are going, you will be able to forecast any future regulation and even speak out against it)
- Not generating enough money to cover monthly rent and expenses (by completing detailed market analysis and doing your research using the tools below, this shouldn’t be an issue)
- A major disaster causing a decrease in the amount of people traveling to your city (awful – you can just hope that this doesn’t happen not only for your rental but also for the people who live in that area)
Other tips
These are some helpful tips that may not be so obvious just starting out. Soon enough you will find that you have a plethora of tips you wish you knew from the start. However, you will learn as you go and be able to adjust your business accordingly. When you know better, you do better – right?
Reviews
Reviews can make or break your business. Read that again. When was the last time you booked a stay someplace without factoring in the reviews? Keep this in mind and try your best to be as polite and courteous to the guest as possible. If they are being unreasonable, you can always report them to Airbnb if you have proof of what they did.
Go out of your way to make your guests feel special. Whether it is leaving them a wonderful note or email listing out great tours/restaurants in the area or by letting them know if your cleaner is done early so they can check in earlier, these little things can go a long way. Be gracious and kind, it will never hurt you.
Furnishing
When furnishing the unit, you want to think about what looks the most visually appealing. A lot of hosts will go with a specific theme to attract people (ex. game of thrones, harry potter, etc.) but any sort of design will work if you have all the right pieces.
If you are at a loss when it comes to this, it might be worth your while to consider hiring a design consultant. We have an interior designer that does a spectacular job, send us a message through our Contact Us page and we will give you her number directly.
Something to keep in mind when you are furnishing you rental. Keep a list of everything you are buying and putting into the space. This list will serve multiple purposes. It will help the cleaners check to make sure no items were stolen and it will also help you in the future if you are looking to furnish another unit.
Keeping an inventory list is one of the more beneficial tips for beginners.
BONUS: One thing every single host will say is that it pays to have an extra comfy bed. Even if it means not being able to decorate as much as you wanted, go for the comfiest bed in your budget.
Pictures
You just spent all this money on furnishing the apartment and getting it under lease, why skimp on the pictures?
If you have a good camera and feel confident in your abilities to take excellent photos that sell your place, then definitely go for it. However, if you don’t then it would be wise to look into hiring an expert.
A lot of people take pictures just with their cell phones and then use those pictures on the site. It is quite obvious when you see one of those pictures vs. a professionals. These pictures are what sell your listing. People will look through all of the pictures in your listing before even reading anything about it. Make sure the pictures are phenomenal.
Repeat Guests
When thanking your guest for their stay and asking them to leave a review, make sure to let them know that if they want to stay again they can reach out to your directly which will end up making their stay cheaper because they won’t have to pay Airbnb’s fees.
Extra Resources
Below is a list of resources that are incredibly beneficial for learning more about Airbnb Rental Arbitrage.
Final Thoughts
Although it may seem like a lot of work, this is actually one of the more simple business models I have come across. Airbnb does a lot of the work for you and after that you can practically automate every other step. This is the perfect side hustle for someone who is serious about making money and growing a business.
Overall, Airbnb rental arbitrage is a great opportunity to gain a solid monthly cash flow and build up your knowledge so you can scale up the business and acquire more rental units. If you have ever hosted or are considering starting this side hustle, let me know in the comment section!
Go check out what you could make in your area by starting this lucrative side hustle.
Want a $55 discount off of your next Airbnb stay? Go check out this link.
For more side hustle ideas, check out these articles!
