Rental Arbitrage: $200k in Profit Without Owning Any Property


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Rental arbitrage gives you a way to make money with Airbnb — without owning any property.

Traditionally, building a real estate side hustle takes big bucks for down payments, closing costs, and renovation projects.

But enterprising short-term rental “moguls” are questioning if owning the property is even necessary. These rental arbitrage entrepreneurs sign long-term leases, and then turn around and sub-let the property on a short-term basis — profiting on the spread.

This side hustle comes with a lot of profit potential, but also comes with some controversy and ethical concerns.

In this post, I’ll break down:

  • how rental arbitrage works
  • the types of properties and areas that work best
  • how to approach landlords
  • why some cities are cracking down on Airbnb and rental arbitrage

rental arbitrage

What is Rental Arbitrage?

Rental arbitrage is when you sign a long-term lease with a landlord, then sublet the property as a short-term rental. It’s also commonly called ‘Airbnb arbitrage.’

The goal is to make a profit on the difference between the monthly rent you pay to the landlord and the income you bring in from using it as an Airbnb sublease or other short-term rental.

As an example, let’s say a 12-month lease on an apartment costs $2000.

If you can rent it out for 15 nights a month — a 50% occupancy rate — at $200 a night, you’ll have brought in $3000. (15 x $200).

That leaves you with $1000 in profit. And with startup costs much lower than traditional rental properties, you can start to see why this can be an attractive business model.

Interview with the $200k a Year Rental Arbitrage Mogul

To learn more about rental arbitrage, I sat down with Sam Zuo of PassiveAirbnb.com.

Sam manages a portfolio of “about 9” short-term rentals, mostly in the San Francisco Bay Area. With cleaning crews in place, an automated check-in and check-out process, and local “co-hosts” to handle guest communication, Sam runs the whole enterprise from overseas.

(He was in Northern Italy, and then Lima, Peru when we caught up.)

If you want to learn more about rental arbitrage from Sam, he teaches his full system in an online course.

How Much Does it Cost to Start a Rental Arbitrage Business?

At a minimum, you’re looking at $5,000-$10,000. That will include your lease costs, furniture and decor, linens and cookware, listing photography, and entity incorporation.

Still, one of the most attractive things about rental arbitrage is that you don’t have to buy any property.

That means you don’t have to save up a massive amount of cash for a down payment and closing costs.

You also won’t be on the hook for major property maintenance expenses.

That’s not to say Airbnb arbitrage can be done on a shoestring budget, though. While it’s not nearly as expensive as purchasing property, there still are some startup costs involved.

For his first property, Sam estimated his initial costs were between $6000-7000. (By month 3, he’d recouped those in booking fees.)

Rental Security Deposits

The first thing you’ll have to save up for is the costs of signing a long-term lease. This can include any or all of the following upfront costs:

  • First month’s rent.
  • Last month’s rent.
  • Security deposit.

In many markets, the security deposit will be the equivalent of one month’s rent.

Furnishing

If your Airbnb sublet is an unfurnished apartment, you’re going to need to get things like furniture, dishes, and linens for your rental unit. Depending on the size of the property, this could run $5,000-$10,000 or more.

furnishing a vacation rental

You can do this on the cheap by shopping at places like IKEA. Bear in mind that the less of an investment you make up front, the more often you’re going to have to purchase replacements.

You may think that renting a furnished apartment would save you some headaches. But there are a couple unique problems to consider with furnished apartments:

  • These apartments typically have a higher monthly rent, reducing your profit margin.
  • If the landlord has a furnished apartment, they may already do short-term leases themselves. They would be less incentivized to take you on as a middleman.

Photography

To be successful in Airbnb arbitrage, your place needs to look great.

It has to go beyond looking great in-person. Your pictures have to be great, too. Your Airbnb guests’ only opportunity to view your property prior to arrival is your photography.

Make sure it’s flawless. As great as the camera on your iPhone may be, Sam recommended hiring a professional.

It’s a one-time cost that will drastically improve your profits for as long as you have the property listed.

An average ballpark figure for photography services would be $100-$250/hour, but cost can vary depending on where you live or the photographer’s professional reputation.

Cleaning Services

While not necessarily a startup cost, you’ll need to clean your short-term rental after every guest stay.

It’s best to hire professional cleaners for the job, which can range from $30-200 depending on location and size of the property.

Legal Consultation

Unless you’re a real estate lawyer, you’re going to want to seek outside help from a local attorney to ensure Airbnb arbitrage is legal in your locality.

You will likely want to maintain this professional relationship. If you hit any problems with guests or the landlord, their services could end up being important.

You’ll also want them in your corner if local laws or HOA rules change mid-lease.

Rental Arbitrage Market Research: What Cities, Markets, and Properties Work Best?

Just because you list your Airbnb sublease doesn’t mean you’ll never have vacancy. Sam explained that a successful occupancy rate would be 70%-80%.

There’s no guarantee you’ll hit that rate, even if you do everything right. To maximize your odds of success, you need to do some homework up front.

The ideal market is one where there’s some sort of travel-based economy. A good indication is if there’s an airport nearby, though certain remote destinations may break this rule.

Some examples:

  • Certain counties in Hawaii, for example, are attractive for Airbnb arbitrage because of the state’s strong tourist economy.
  • Cities with bustling business districts can attract a lot of business travelers.
  • Universities can attract grad students and visiting parents.
  • Hospital systems can attract medical professionals serving short stints in the region.

It’s not just about making sure there will be a steady stream of potential Airbnb guests, though.

You also need to make sure that it’s currently possible to make money with Airbnb given rent prices in the local market.

Study the Local Airbnb Supply

To figure out if a market is ripe for rental arbitrage, first look at the existing Airbnb supply in your area.

Ask yourself:

  • What does a similar-sized apartment in a similar neighborhood go for?
  • How often are these properties booked? (punch in some future dates and see what kind of availability they have)
  • What is the average nightly rate for other local Airbnbs?

Cross Reference with Craigslist

Now that you know how much an Airbnb would go for in your area, head on over to Craigslist or Apartments.com to see how much an unfurnished apartment would run you on a monthly basis.

(For single family houses, I tend to look at Zillow rentals.)

Remember to calculate not just rent, but also the costs of utilities and/or landscaping costs passed on by the landlord.

Subtract these from your potential Airbnb revenue. If you get a positive number, that’s potential profit. The higher that profit, the better. 

If you get a negative number, you’re not looking at a profitable market.

Rental Arbitrage Profit Potential

The profit potential of rental arbitrage is going to vary greatly depending on the local market. Here are some anecdotes from Side Hustle Nation guests.

Profit Margin of $10,000-$15,000/Year

Craig Curelop, author of The House Hacking Strategy, used rental arbitrage as a part of his strategy in the past. He did it for a year in Denver, crediting the side hustle with helping him pay off his student loans.

That year, Craig estimates he made somewhere between $10,000-$15,000 in profit off a single unit.

Profit Margin of Close to $200,000/Year

Sam had recently been fired when he started his rental arbitrage business in February of 2017.

He went all in on rental arbitrage with a business mindset, subletting Airbnbs in multiple apartments in multiple cities.

He reported earning close to $200,000″ from Airbnb arbitrage in 2019, all while traveling the world. His current portfolio contains 9 Airbnb subleases, and he teaches an online course for others who want to learn this business.

How to Convince a Landlord?

Before you can start pulling in a profit with your rental arbitrage business, you must get the landlord on board.

Let me repeat:

Your landlord must know and consent to you subleasing their property as a short-term rental.

Without this permission, you can’t use the property.

So the big question is: How do you convince the landlord?

If you approach as a random side hustler pitching to put their property on Airbnb, you’ll probably get nowhere fast.

Become a Professional Property Management Company

When Sam approaches landlords, he does so as a professional property management company, LLC and all.

This establishes credibility as you open your conversations about rental arbitrage.

Sam also emphasizes to the landlord that:

  • every guest staying at his Airbnb sublets gets screened.
  • he uses collect guests’ driver’s license or government ID.
  • he targets business travelers who aren’t there to party.

Offer the Landlord a Profit Share

If you’re brand new, even an LLC might not be enough to convince reluctant landlords. While you build your business’s reputation, you may consider offering the landlord a profit-sharing deal.

Craig explained that you can set this up by paying the rent as agreed upon with your landlord, and then paying them a percentage of your rental arbitrage profits on top of it.

When you’re both making money from Airbnb, they may be more likely to sign on.

Creating Your Rental Arbitrage Airbnb Listing: Best Practices

As you get your rental arbitrage business started, you’ll need to establish a positive reputation. Here’s how to optimize your initial Airbnb listings to do just that.

Take Advantage of the New Listing “Boost”

During the first two to three weeks, Sam says your listing will be boosted by the Airbnb algorithm.

This is a huge advantage.

Once this window closes, you’ll have to earn your listing’s visibility.

Rack Up 5-Star Reviews

It’s a lot easier to maintain visibility on Airbnb by racking up as many 5-star reviews as you can during those first two to three weeks.

You always want to take good care of your guests, but if there’s ever a time to go the extra mile, it’s that initial 14- to 21-day window.

Here are some ways you can exceed expectations:

  • Make sure your listing is accurate. In your efforts to market your listing, make sure you’re not embellishing. Under-promise and over-deliver to earn higher ratings.
  • Research your guests. Before you approve your guest, check to see if they even make a habit of leaving reviews. If they do, are they fair or nit-picky? If they’re fair, what can you do to meet their expectations where past hosts have failed?
  • Block off time to be extra attentive. Hopefully your guests won’t run into any troubles during their stay. But if they do, you want to make sure you or someone you trust can respond to texts and handle any issues immediately.
  • Don’t take it too far. If your guest is booking a private apartment, they probably aren’t trying to socialize with you. While it’s good to be attentive, don’t overdo it. If you’re texting multiple times a day and there haven’t been any issues, you’re probably taking it too far.
  • Offer local recommendations. You know your locality inside and out. Little things like restaurant recommendations, a written guide for a neighborhood walking tour or information on public transit can make a big difference. You’ll be able to reuse these materials for future guests, as well.

How Should I Price My New Airbnb Listing?

You want to make as much profit as possible on your listing. But during those first couple weeks, you’re just trying to establish credibility and reviews.

With this in mind, Sam recommended pricing your unit 15%-20% lower than similar units in your area. The savings will encourage people to take a chance on an untested property.

Tools of the Trade

While you will need to be actively involved in your rental arbitrage business, there are things you can do to lighten your workload.

Some of your responsibilities can be automated.

Sam has incorporated the following three tools to help him run his Airbnb arbitrage business remotely.

1. Remote Keypad

You don’t need to be there when your guests check in. Incorporate a remote keypad, eliminating the physical check-in process.

2. Airbnb Management Software for Guest Communication

You can communicate with your guests via the Airbnb platform. But if you want to take things to the next level, you can invest in some management software to automate much of your guest communication.

Guesty and Lodgify are popular options.

This software can be used for:

  • Automating welcome messages to your guests a few days before check-in.
  • Automating post-visit messages.
  • Guest reviews can be automated when desired.
  • Auto responding to common guest messages during their stay.

3. Reliable Cleaning Crew

Your Airbnb sublease will need to be cleaned between every guest stay.

Find a local, professional cleaning crew who can reliably provide services — even if your bookings aren’t regular.

You can find reliable cleaners using a service like Angie’s List.

Though with the growth of rental arbitrage in recent years, there are now apps built for the sole purpose of connecting Airbnb hosts and reliable cleaning crews.

Is Rental Arbitrage Legal?

It depends on the property. In most cases, yes, rental arbitrage is legal as long as you have landlord consent.

However, the negative effects of rental arbitrage have led some states and municipalities to enact laws banning or restricting the practice.

You must check local laws before launching this side hustle.

Rental Arbitrage Risks

So far rental arbitrage sounds like a pretty lucrative side hustle, right?

Let’s take a look at some of the potential downsides to Airbnb arbitrage, including risks you’ll be taking on as an individual.

Vacancy

If your Airbnb is booked all the time, it’s going to be hard not to profit.

But most Airbnbs don’t operate at full occupancy. (Nor do hotels, to be fair.)

Ideal occupancy rates for rental arbitrage are 70%-80%, according to Sam. You can increase your odds of reaching that rate by knowing your target guest.

If you’re targeting business guests but your Airbnb sublet is not in the business district, you’re not likely to be the most popular listing.

Municipal Actions

While it’s imperative to research current local laws wherever you intend to operate, municipalities can change the rules at any time.

It’s important to have a plan on how you’ll cover the rent should rental arbitrage suddenly become illegal.

Before signing a lease, check local sentiment. If that sentiment has resulted in any local political action, new laws and codes could be written before your lease expires.

HOA Actions

If you’re wondering why Craig stopped rental arbitrage after one year, even after earning $10-15k, it’s because the homeowner’s association of the condo building found out.

(His friend — who owns the apartment — now runs it as a long-term rental.)

HOAs can set their own rules, which can be even more restrictive than local laws.

If at any point the HOA decides they don’t want an Airbnb sublease in their building or neighborhood, it could stop your operation cold.

This is a particular problem if you’re not all the way through your lease. You’re still on the hook for monthly rent, but no longer have an income source.

Property Damage

While it is true that Airbnb and like platforms offer some protection via insurance, filing an insurance claim could be a process.

Sam recommended having cash on hand to pay the landlord immediately for any damage while you wait for the insurance payout. This allows you to maintain a positive relationship with the landlord.

It also allows you to continue booking your Airbnb sublet so you don’t lose income in the meantime.

Read the insurance policy carefully before launching any rental arbitrage business. There’s a chance you may need an additional liability policy to fill in gaps.

Airbnb Alternatives

If you don’t want to use Airbnb, you can still do rental arbitrage. You can look to competitors like:

This list is by no means all-inclusive. Depending on where you live and your target guest, the best platform will vary.

Sublease Room by Room

Another way to pursue rental arbitrage is to lease a larger home with multiple bedrooms, leasing out each room as a separate short-term rental.

In this scenario, you may live in your rental with a lot more interactions with guests. This was another strategy Craig used to reduce his living expenses, though he actually bought the house.

Living in the property you’re subleasing can also help you get around legal restrictions in some cities.

The Controversy and Backlash over Rental Arbitrage

Wherever there’s relatively low-risk profit to be made, which is the definition of arbitrage, people will naturally take advantage of that.

If enough people do, it will have some unintended consequences.

In the case of rental arbitrage, the consequence has been contributing to rising rents and a shortage of affordable housing.

After the 2008 housing bubble burst, more people were forced into the rental market, exacerbating the situation. Competition and prices for rentals increased as fewer families owned their own homes.

Rental arbitrage adds to this problem by taking more units off the long-term rental market and moving them to the short-term rental market.

Housing Shortages in San Francisco

Airbnb is a San Francisco-based company, yet has encountered a lot of pushback in its hometown. The Bay Area is facing an incredible housing crisis.

The region’s battle against Airbnb arbitrage has been going on for nearly ten years. In the city of San Francisco specifically, you can no longer run a short-term rental arbitrage business.

You can only use the unit you live in as an Airbnb listing. When you’re not home, you can only use your home as a short-term rental for 90 days per year.

In the past year, the city has aggressively pursued violators.

Without enough long-term rentals on the market for the current population, the city doesn’t want to see any more properties converted into what the law refers to as “illegal hotels.”

Obviously, Airbnb is just one of many contributing factors to a housing shortage, but it makes an easy target.

Rental Arbitrage: Conclusion

Rental arbitrage can be an extremely profitable side hustle. There will be upfront costs, but it’s nowhere near as expensive as purchasing property.

Before starting Airbnb arbitrage, take ethics under consideration.

While your actions may be profitable, you could end up displacing or driving up costs for your neighbors, depending on the housing market in your community.

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About the Author

Brynne Conroy is the owner and creator of Femme Frugality — a popular women’s finance blog. She is also the author of “The Feminist Financial Handbook,” which has been called “revolutionary” and “a unicorn among finance books.”

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How rental arbitrage works

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Apartment photos courtesy of Depositphotos.

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