When people think about Airbnb, they assume that you have to turn your home into a short-term rental. Well, get ready to have your mind blown, because you can make money on Airbnb without owning property. With rental arbitrage, you can become an Airbnb host even if the home isn’t yours. It’s ideal for individuals that don’t have the capital to purchase a property. They can still earn six-digit salaries and experience the life of a landlord.
What is Airbnb?
If you haven’t heard about Airbnb before, it’s a home-sharing site where anyone can list and rent short-term rentals. Aside from its affordable accommodations, it also has a selection of activities where travelers can see the city through the eyes of the locals.
Initially, Airbnb was designed for homeowners who wanted to earn some money on the side. However, due to the rise of short-term rentals as a source of passive income, Airbnb became a marketplace where people could conveniently market and manage their listings. Those that don’t have the time for property management hire a property manager.
Currently, Airbnb has around 5.6 million listings in more than 220 cities worldwide. This number is rapidly increasing due to the rising popularity of short-term rentals.
What is Rental Arbitrage?
In finance, arbitrage is the process of purchasing commodities in one place and selling them for profit in another. In short-term renting, the term has a similar meaning.
Rental arbitrage is the process of renting a property from a landlord and then renting out that property to another person. Essentially, it involves renting a short-term rental and then subletting it to someone else. For instance, if you were to rent an apartment for $1,200 per month and list it for $3,000 per month, you’d pocket $1,800 per month in profit, excluding expenses.
Is Rental Arbitrage Legal?
Rental arbitrage is common in commercial real estate property management. Only recently has it entered the realm of residential real estate.
Rental arbitrage on Airbnb is absolutely legal, as long as you inform the property owner. They should be fully aware of your plans to re-rent the property. If they’re open to it, you’re good to go. If they aren’t, at least you tried.
Whatever you do, do not go behind the property owner’s back. This could get you in serious trouble.
How Can You Make Money Through Rental Arbitrage?
Since rental arbitrage involves re-renting properties, you should learn how to speak the language of landlords. Understandably, they’re concerned that the short-term renter that you choose will destroy the place. Here are some tips to convince them to agree to a rental arbitrage agreement:
#1 Profit Sharing
Not all landlords will find the idea of you making more money than them desirable. Profit-sharing is the process of offering a portion of the profit you earn each month to the property owner. If you think that isn’t fair, remember that you’re already saving so much money from not having to purchase a property. Plus, sometimes, profit-sharing is the only thing that can convince property owners. Besides, you may be able to bargain once you’ve developed your track record. It doesn’t have to be 50-50 forever.
#2 Rent Multiple Properties
If the property owner has multiple properties that they’re renting out on Airbnb, you can offer to rent them all out at once, as long as they agree to re-renting them. This way, it’s a win-win situation. They can establish their portfolio over a shorter period of time, and you can earn more money with a landlord who aligns with your investment goals.
How Can You Get Started?
You’re re-renting someone else’s property, so you don’t need hundreds of thousands of dollars to start. If you’re interested in real estate arbitrage, here’s what you need to do:
#1 Start an LLC
If you’re planning on expanding your rental arbitrage portfolio to more than three properties, you should start an LLC. This increases the chances of conducting better business with landlords. Not only is it more professional, but it also comes with certain tax deductions.
In terms of capital, you’ll need around $1,000 to $2,000. It can be tempting to invest in several properties at once, but before you do that, be sure to get the hang of things.
#2 Research the Market
You shouldn’t rent a property simply because you believe it’ll attract tenants. You should always look into the market to see what people want. Where are people renting out properties? What decorating style do they prefer? Are they into two-bedroom or three-bedroom homes? Do they prioritize the proximity to touristy spots?
When looking for listings on Airbnb, be sure to search for properties that are priced at $100 per night. This is a sign that the property is in a popular area.
#3 Calculate at 50% Occupancy
With short-term rentals, it’s worth mentioning that you won’t always have tenants. That’s why you should calculate its profitability at 50% occupancy.
For example, if the rate in the area is $150 a night, you would make $2,250 a month (or for fifteen days) at 50% occupancy. If your rent (the amount you pay the property owner) and expenses are at $1,000, your net profit would be $1,250.
Of course, you can always conduct more comprehensive market research with the help of a property management company. This is simply a “short” version to quickstart the process.
How Else Can You Make Passive Rental Income?
If you aren’t interested in rental arbitrage, you should consider purchasing a property instead. There are several benefits to becoming a property investor, such as the six-figure income you can earn each year. If you’re concerned about your finances, there are several ways to fund your investment property without breaking the bank.
Consider speaking to a property management company such as Luxury Property Care. We will figure out how to fund your real estate investment so you can start making money with a property that you can call yours.