There’s more interest in short term rentals than ever, not just from guests wanting a different feel for their vacations, but from those looking to add a different type of income stream to their portfolios. For those who find real estate investing intimidating and perhaps financially a bit out of reach, vacation rental arbitrage is not just a great way to get a taste for some aspects of real estate investment, but it also offers less short-term cost and long-term risk.
What is Airbnb Arbitrage?
Vacation rental arbitrage is the difference between what you pay a landlord to lease a property and what you rent the property out for on a short term rental platform.
The biggest advantages Airbnb arbitrage can offer include:
- No-long term debt repayment: you don’t need a mortgage to get into arbitrage.
- Lower startup costs: you need to cover the first month’s rent and a security deposit, as well as basic furnishings for the home if it’s not already furnished. You’ll also want to invest in professional photography to make your listing shine. This is still a good amount of investment, but nowhere near what is needed in a home purchase.
- Flexibility: you can always block out time in the calendar to use the property for personal reasons, or if you’re in a seasonal area, you can offer it as a medium-term rental until the regular season picks up again.
- Scaling: once you get the hang of the process, you’ve got an excellent template to wash, rinse, repeat elsewhere.
No investment strategy is without drawbacks. The two to keep in mind with Airbnb arbitrage are:
- No appreciation: since you are not the owner of the property, you cannot benefit from any increase in the value of the property.
- Limited upgrade options: again, since you don’t own the property, you are often limited in what you can do to physically upgrade aspects of the listing.
What to Consider
If you’re interested in exploring short term rental arbitrage further, here are the most important questions to have answers to:
- Do I have permission from my landlord to sublet? This is the single most important question upon which everything else depends. If you don’t have permission, not only will you be doing something illegal, but you’re making it easy for your landlord to evict you. Be clear and upfront about your intentions with the landlord so he/she is prepared for what you would like to do.
- Am I compliant with local laws? Together with the landlord question, this is make-or-break. Take a look at your municipality and, if it applies, your HOA. Make sure that non-owner-occupied rentals are permitted and that there is not a severe cap on such rentals even when permitted.
- Is this a good market? Whether you choose a seasonal or evergreen market, take a serious look at the competition, and if you can, talk to some of those already in the market. You’d be surprised what people are willing to share over a simple cup of coffee.
- Is the listing in generally good condition? You don’t want a fixer-upper situation in Airbnb arbitrage. Whatever you rent needs to be fairly ready-to-go.
This content originally appeared in our twice-monthly Guest Book Newsletter.