If you’ve ever wanted to become an Airbnb host, you might have had one major roadblock: you don’t own any property!
Did know you that you can still become a profitable Airbnb host without owning property? (Of course, you can still make money renting out a room or your entire place as an owner or lessee of a place.)
However, there’s a brand new way to be an Airbnb host: Airbnb rental arbitrage. With Airbnb rental arbitrage, you could be closer to making money as an Airbnb host than you think.
Airbnb rental arbitrage is a new, growing way to create a passive income stream to help you reach your financial goals sooner than later. The great part about this strategy is that it doesn’t take too much money upfront.
If you think being an Airbnb host might be for you, then keep reading to find out everything you’ll need to know about Airbnb arbitrage.
Related: Create your Airbnb listing now (it’s free)
What is Airbnb rental arbitrage?
Arbitrage is the act of buying and selling something at the same time to make a profit. The idea is to buy something at a low price and sell it at a higher price. The difference is the profit.
You may have seen this type of business in other online business models like Amazon retail arbitrage (FBA.) Arbitrage, as relates to Airbnb, also involves buying and selling for profit (if done correctly.)
Airbnb arbitrage is when you rent an apartment and then sublet it to Airbnb guests. The goal is to have the revenue from short-term rentals exceed the cost of renting, furnishing and managing the property. Here’s an example of how much you could earn in your area as an Airbnb host.
Many Airbnb hosts already rent an apartment or space and simply sublet an extra room to help them meet their rent obligations. Others use Airbnb hosting to offset the cost of an apartment they don’t use much due to travel or other life circumstances.
However, if you decide to rent an apartment or space for the sole purposes of being an Airbnb host, then there’s plenty of opportunity to make money.
For example, let’s say you can rent an apartment for around $1,500 a month. You may also rent furniture or buy furnishings to hosts guests. For the sake of simplicity, let’s say you are renting furniture for an extra $300 per month.
To make a profit with your rental arbitrage, you would need to earn more than $1,800 in Airbnb income each month. If you can rent out your unit at $100 a night (after the 3% service fee Airbnb charges hosts,) then you would need to have guests in the unit for 18 nights out of the month to break even. If you were able to have guests lease the apartment for 30 nights, then you would make $1,200 in profit.
If you will be paying someone to manage or clean the place, then you will need to deduct that from your costs as well. You’ll have to determine what amount of profit would make this effort worth your time.
The good news is that there are many markets and property types to explore so you can find out what works in the Airbnb rental arbitrage business. You could even invest in markets from out of town, so don’t think you are limited to one area.
Airbnb vs. traditional real estate investing
Traditional real estate investments can be capital intensive — meaning, you usually need a substantial amount of money to begin. Most real estate investment needs a down payment, monthly mortgage payments and the ability to pay for maintenance and repairs. The sheer amount of money needed to buy and own property can make it difficult to jump in for many people.
When you buy a piece of property, like a home, you must make a down payment to finance the loan for the property, also known as a mortgage loan. The amount of the down payment will vary based on your credit profile and loan type, but it’s usually between 3.5 and 20 percent. For example, if you wanted to buy a condo for $100,000, then you would need to put down a $3,500 to $20,000 payment.
Not everyone has that kind of money laying around. Even if you did, you may not be willing to deplete your savings on a real estate investment that may or may not pan out for you. In addition to the down payment amount, there are closing fees that can add an extra $3,000-$8,000 or more to what you need to bring to the closing table. Other costs include homeowner’s insurance and property taxes.
With Airbnb arbitrage, you can avoid the hassles that can come with traditional real estate ownership. When you are leasing the apartment from a landlord, you don’t have to worry about things like maintenance or property taxes. If you make careful decisions about location and your marketing strategy, it’s more than possible to earn a reasonable profit via rental arbitrage.
Is Airbnb rental arbitrage legal?
One thing you might be wondering is if this approach is legal and why landlords would accept this arrangement. I mean, couldn’t they lease the unit directly to Airbnb guests and pocket the cash for themselves?
Many landlords are more comfortable with traditional lease arrangements. A lease term for several months can be more passive income than Airbnb rental income. Airbnb is a short-term model that needs a different skill set and resources to manage the higher “tenant” turnover. For this reason, many landlords simply don’t want to change their business model to accommodate Airbnb bookings.
On the Airbnb side, this activity is totally legal and allowed according to their terms of service. A best practice would be to firm up a rental agreement with the landlord to ensure compliance, both legally and through Airbnb’s host insurance benefits should something go wrong.
Also, be sure to talk to potential landlords about your plan to rent the unit on Airbnb before signing a lease and hosting guests. Some landlords allow this arrangement and others don’t. Discuss your plans, in detail, with them and capture your agreements in writing. You may even ask a lawyer to draw up a specific leasing agreement for this situation.
What are the risks of Airbnb rental arbitrage?
The downside of Airbnb arbitrage is that you can lose money just as easily as you can make money. As with all other forms of arbitrage, sometimes buying low and selling high does not go according to plan.
As such, you need to manage the risks that could come with this form of income. It’s completely possible that you could sign a lease for a unit but have little to no guest bookings in the beginning — or ever. Also, if your place sustains damage from a guest that isn’t covered under the Airbnb hosting insurance, then you may be on the hook for repair costs with your landlord.
What if I lose money with Airbnb rental arbitrage?
As mentioned, this is totally possible. Here are a few ways that people mitigate (reduce) this risk.
One extremely popular method of making your arbitraged unit more profitable is by booking longer stays. At some point, you could begin to advertise the unit, apart from the Airbnb platform, for stays that are 3,6 or even 9 to 12 months long.
This type of arrangement appeals to business travelers who do not want to sign a lease or buy furniture to work in a location on a temporary basis. You can also connect directly with companies who are looking place employees in temporary housing units for a steady supply of guests.
Shared profit agreements
Another possibility is to negotiate a lower rental rate with the landlord in exchange for profit sharing. Say, for example, the rental unit you are looking at costs $1,200 per month. You could ask for a $900 rate in exchange for offering the landlord 20% or 30% of the profit from your guest bookings.
This way, if you have a slower month, you are not on the hook for more money than you can afford. It could also give you some breathing room to save up money to buy or rent furnishings. If you decide to go this route, be sure to pin down the specifics in a written agreement.
Another route you could take is simply saving enough money to cover your business if it takes a few months to become profitable. It’s always a good idea to have a business emergency fund anyway, and it will give you peace of mind during the slower seasons of your Airbnb business.
How can I become an Airbnb rental arbitrage host?
If you have decided that you want to become an Airbnb host, then here are some things that you will need to think about.
Try Airbnb for yourself
If you haven’t used Airbnb for yourself, then you might not understand the concept or how you could make money. You can rent an Airbnb unit (room, apartment, house, tent, etc.) for just a few dollars a night to experience the platform’s accommodations as a guest.
Click here to get $55 off your first Airbnb booking if you haven’t yet tried it out.
Determine your start-up costs
Before you begin, figure out how much it would cost to start your rental arbitrage business. Though this business needs less capital than traditional real estate investment, it still costs money to start.
Common start-up costs could include:
- Application fee (background and credit check)
- Deposit or first & last month’s rent
- Move-in fee
- Furnishing (can rent or purchase)
- Knick-knacks, furniture and guest items
- Filling an LLC (may not be necessary to start. Ask your accountant to be sure.)
- Legal fees (for example, to draw up a customized lease)
Your startup fees will eat into your profit until you are able to make enough money to break even. Once you break even, then you’ll be able to calculate your true profitability on a daily or monthly basis.
Find a profitable unit for your Airbnb hosting business
To find a profitable unit, you will need to need a few pieces of information to make a good assessment. First, research what the average daily rates are for similar Airbnb units in the area. These units will be your competition for guests, so it is important to price your unit accordingly. (Note: you can also look at rates for furnished, short-term rental units if you will go this route later. But for simplicity’s sake, let’s start with researching comparable Airbnb units.)
Keep the weekend and weeknight price differential in mind. Your weekday rental rate may be lower than your weekend rental rate, so use the differential to get an average daily rental rate. Use this average daily rate to figure out your monthly income potential. Remember to keep the seasonality of booking trends in mind, too.
Once you have your potential and monthly figures. You need to determine your costs on a daily and monthly basis. Add up your lease price and management and divide them by 30 days. This will be your daily (or monthly) rental costs.
Next, divide the average daily Airbnb revenue by the daily rental cost. If the number is less than one, then you would not be able to offset the costs of renting with the Airbnb rental income. If the number is greater than one, then it is possible to make a profit.
The higher the number, the better. As the number increases, the number of days you need to rent out your unit to break even will decrease. That will give you more days of the month to create passive rental income with Airbnb rental arbitrage.
You may need to look at several location and units to find an ideal arbitration scenario. It’s worth it to do the analysis up front so that you do not end up losing money.
Talk to the landlord
Once you’ve found a unit that would be worthwhile to lease, you need to talk with the landlord. Be upfront about your intentions and capture an agreement in writing to firm up the deal. If they are unwilling to work with you, then you should move on and find someone who will. Time is of the essence and you want to spend it on getting the best business partners possible.
Become an Airbnb host today
Even if you don’t have a subleased space where you can host guests, you can still start as an Airbnb host.
Create your Airbnb listing now (it’s free.)
Just remember, a host can use many spaces for rental. People rent out extra space in many forms: a spare room, a garage or coach house, a tent in the backyard (yes this is a thing and it’s more common than you think!) or even a stationary RV.
Renting your extra space can be a fantastic way to make the money you need to start your Airbnb rental arbitrage business right now.
More resources on Airbnb hosting:
- Create your Airbnb listing now
- Airbnb Checklist: Must-have items for your Airbnb rental
- 10 tips for AirBnb host
- Legal forms and documents
Want more ideas to fix your finances and earn more money? Check out my free eBook, Money Hacks 101 (a $29.99 value.)
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