One simple reason: Rental Arbitrage
Why does it seem like every other person you talk to knows of someone who is listing or will be listing on Airbnb? The answer is simply due to rental arbitrage.
What Is Rental Arbitrage?
When the revenue potential of something is significantly more than the cost to acquire it, you have the opportunity. Let’s say you have a nice studio apartment in downtown LA that costs you $1350 a month. It’s in a prime location with ideal amenities. You then find out that one of your neighbors is listing her own studio on Airbnb and is averaging $150 a night.
You do some simple math and realize that if you could rent out your unit for about 9 days of the month, you’d pay for your rent. What if you could rent out the unit for 27 days a month? That means the rental income potential of the unit on Airbnb is about 3X the cost of leasing the unit month to month! It is great if you are looking for avenues to earn a more passive income.
Rental arbitrage is simply the practice of earning a profit from the price difference between markets by matching imbalanced deals. It is a popular avenue to consider as Airbnb is becoming a much more versatile earning platform.
When your achievable daily rental rate is clearly greater than your actual daily rental cost, you have rental arbitrage.
Why Does It Exist?
Simple. There are always folks needing short term lodging and hotels are expensive. These folks want something more economical, and Airbnb properties are the answer. It allows anyone to capitalize on their available space by listing the unit at a daily rate that is substantially higher than their daily cost of the unit, but still less than what someone would pay for a comparable hotel room. Win-Win. Unless you’re in the hotel business.
How Much Arbitrage is Good Enough?
This will largely depend on your goals, but here is one way for you to gauge.
- Get an average Airbnb daily rate for weekdays and weekends of SIMILAR units in your area
- Get the weighted average Airbnb rate:
Weighted Avg Airbnb Rate = (Weekday Rate * 5 + Weekend Rate * 2) / 7
- Example: $50 weekday rate and $100 weekend rate will become ($50 * 5 + $100 * 2) / 7 = $64
- Take your monthly lease rate and divide it by 30 (e.g. $1500/30 = $50. This is your daily rental cost.
- Now divide the weighted avg Airbnb rate by your daily rental cost (e.g. $64/$50 = 1.3
So, what does this number mean? Well, if it’s a 1, it means you have to rent it out the entire month just to cover the cost of your monthly rent before any fees are taken out.
If you’re renting out your own space, then you don’t have a choice, but at least it’ll give you a sense of how worthwhile it would be.
If you’re looking at a dedicated unit, then you want to find a place where the ratio is 2.0 or more. In urban areas, this ratio will often be 2.5 or higher.
The higher the ratio, the fewer days you need to host to cover your monthly rent and the more days available to make profits.
What are the Risks of Airbnb Arbitrage?
If you are planning to invest in rental arbitrage with Airbnb listings, there are a few risks you definitely need to be aware of before doing so.
Changing market conditions is one of the biggest risks you may face since the real estate market is a constantly changing landscape. So, the booking demand for your Airbnb vacation rental property may vary month to month. The housing market plays a significant role in rental arbitrage. You may not be able to earn the same amount of money each month.
Local regulations are another serious risk to consider if you want to become an Airbnb host for a rental property. If your Airbnb rental property is an apartment or condo, for example, you need to remain in complete compliance with the local city regulations that are in place. If there is a homeowner’s association for the property owner, the same applies.
Different HOA rules can ultimately limit your ability to rent out your property for short-term rentals. Always familiarize yourself with all the regulations before you purchase or lease any new property.
Other unexpected events may also prove to be a risk as you explore arbitrage opportunities. If there is a natural disaster, for example, you might not be operational for a long length of time. Events like this need to be considered and calculated when you determine minimum profit numbers, so you don’t end up in the red when it is said and done.
Airbnb Rental Arbitrage FAQ
Now let’s take a closer look at some of the more commonly asked questions when discussing rental arbitrage opportunities.
Is Airbnb rental arbitrage legal?
This depends on the Airbnb regulations where you live. Often it is entirely legal and acceptable, but before you begin renting out your property on Airbnb, you want to first inform the landlord or property management about the plans you have and lay out everything in detail before you proceed. Make sure you are not breaking or going against your lease agreement.
What is a BNB Formula?
This is training on how to build a short-term rental empire without needing to own property.
What is rental arbitrage, and how can you benefit with Airbnb?
Airbnb arbitrage allows anyone to benefit from properties that they own or lease that are located in high demand areas. They simply list the properties at a daily rate that is higher than the overall property expenses. It is beneficial for those who are in need of short-term accommodations in major cities and tourist destinations and hosts looking for more cash flow to supplement their income.
Can you charge higher rates than those offered in nearby hotels?
No. The Airbnb properties you are listing for guests must cost less than the occupancy rates and what someone might end up paying at a comparable room or hotel in that area.
What is the formula for a successful Airbnb arbitrage?
This will depend significantly on what your goals are. This formula is for Airbnb rental platforms. To achieve a profit on a rental, you need to calculate the weighted average Airbnb rate available for your particular area. First, obtain the average daily rates for the area on weekdays and weekends. Calculate the weighted average Airbnb rate of all the properties. You then need to calculate the cost of the property expenses each day. Now divide the weighted average Airbnb by those property costs. The final ratio you achieve should be 2.0 or higher.
Makes a lot of sense…Everybody is trying to make a little extra!
I’ve come across this article several times and mean to comment each time but never do, until now.
The article is spot on but I’d caution anyone who is seriously considering this, to do your due diligence and weigh out all the risk potentially involved.
In my hometown market, urban living has exploded in recent years and happens to coincide with a tourism boom as well. I’ve been leasing units to then turn around and essentially sublet them to Airbnb guests for a couple of years and it has been anything but easy.
So far, I’ve had to relocate to different buildings several times, I’ve been illegally evicted, the local government first decided to permit short term rentals, then restricted it, then banned it then grandfathered people in, then restricted it to 3%, and most recently, they are talking about an all out ban again.
I’ve learned a lot in the process. How to properly frame what you want to do, whether to go to the property management companies or to the owners, whether to stick to apartment buildings or single family homes, whether doing a master lease of multiple units with the same company makes a difference. I’ve learned the importance of carefully screening your guests, taking the time to introduce yourself to neighbors, how to position a long term lease rather than a typical residential 6 or 12 month lease and still learning everyday.
I’ve wanted to throw in the towel many times, I’ve spent thousands in legal fees, I’ve been served with civil warrants twice now, I’ve had hundreds of five star reviews and have been cursed out more times than I can count.
Rental arbitrage can be a great opportunity when the stars align just right and/or you know what you’re doing. It’s no walk in the park and definitely becomes a full time job, at least until you figure everything out and have the chance to automate.
My point is to reiterate the importance of doing your homework, being completely transparent with owners and having a lawyer draft a lease specific to what it is you want to do. Finally, consider the risks involved as far as local regulation is concerned.