Airbnb arbitrage is one of the most popular ways to make money from real estate without owning a property. Many abstain from the profitable opportunities offered by real estate investing as they don’t have the necessary capital for a down payment and all the other start-up costs associated with purchasing an investment property.
Airbnb rental arbitrage solves this problem by allowing savvy investors to rent out properties owned by someone else on a short term basis and generate potentially high profits from the difference between the short term rental revenue and the long term rental rate.
What Airbnb Arbitrage Is
Airbnb rental arbitrage is a real estate strategy used by investors who cannot afford to buy a property or who do not want to be involved in the burdens of investment property ownership. Under this strategy, you rent a property from a landlord and sublet it to third-party guests on a short term basis. In this way, you can start your own Airbnb business without going through the process of purchasing a house.
The money you make is the difference between the monthly Airbnb income that you generate from renting out the property and the rental rate that you pay to the landlord minus operating expenses. That’s why the key to success with this strategy is to find a property that has a relatively low monthly rent but has the potential to earn strong short term rental income due to high daily rates and good Airbnb occupancy rate.
With short term rental arbitrage, you act as both a tenant and an Airbnb host. This requires ensuring that all legal requirements are satisfied and that all involved parties are happy.
A main advantage of the rental arbitrage strategy is that it doesn’t demand much knowledge on behalf of the host, and neither does it require significant initial investment. Moreover, exit is easy in case it doesn’t work out or you don’t like Airbnb hosting.
This makes it a good option for those who are just getting started with real estate investments so that they can decide if this is the right field for them without committing to a second home in the long run. Moreover, it allows one to run an Airbnb in profitable markets with high property prices.
How Airbnb Rental Arbitrage Works
To operate an Airbnb arbitrage business, you need to find a good market and a good property for this strategy. You need to look for a location and a house that have low monthly rental rates, but are a popular Airbnb destination. Unless you have extensive experience in the real estate industry, this requires access to solid rental data and analytical tools.
Before you rent the property from the landlord, you need to make sure that subletting and renting out on a short term basis are not prohibited by local regulations, homeowners association (HOA) rules, and the lease agreement. Moreover, it’s a smart idea to discuss your intentions explicitly with the landlord even if the rental contract does not prevent arbitrage.
You want to do everything possible to avoid issues with the owner down the road. You might need to modify the lease to specify how excessive property damage and liabilities will be handled to convince the landlord that their property will be properly taken care of and that they will not get in legal or financial trouble.
Next, you have to prepare the property for guests which might include furnishing it as a short term rental as well as adding amenities, stocking supplies, and professionally cleaning it. As soon as the rental is ready to welcome its first guests, you need to list it on Airbnb and other best short term rental websites and to market it elsewhere to start generating bookings.
Once you begin to bring reservations, you will have responsibilities similar to the obligations of regular Airbnb hosts. These include continuously advertising your property, dynamically adjusting the nightly rates, housekeeping between guest stays, and maintaining the property in a good shape. The only difference is that you also need to pay the rent to the landlord on a regular basis.
Legal Regulations in Airbnb Arbitrage
Airbnb rental arbitrage activities are not explicitly illegal according to US legislation. This means that US state and local authorities do not expressly prohibit the idea of renting a property from someone to sublet it to someone else on a nightly basis.
Nevertheless, there are important legal restrictions and regulations that Airbnb arbitrage faces in many US locations, similar to other short term rental activities. After all, running a rental arbitrage business is not very different - from a legal point - from operating an Airbnb business.
Some cities, such as New York City, prohibit the renting out of entire properties and parts of properties when the owner is not on site. This means that you cannot exercise this strategy in NYC, which has some of the strictest Airbnb laws in the entire US market.
Other locations restrict short term rentals to primary residences only and also limit the number of days per calendar year for which the property can be listed for renting. In many major tourist destinations, strict zoning laws are applied to Airbnb rentals to prohibit them in residential neighborhoods and allow them only in commercial areas. In some cases, there might be limits on the number of Airbnbs within a certain area.
Some cities and towns allow vacation rental activities more freely, but require specific short term rental permits or licenses that need to be renewed annually or biannually. They also impose strict regulations in terms of the presence of working smoke detectors, carbon monoxide detectors, and fire extinguishers and demand regular inspections.
In other words, Airbnb regulations are as diverse as they get, so you need to carefully study your market before moving forward with this strategy.
Get Started with Airbnb Rental Arbitrage: 12 Steps
The 12 steps to build an Airbnb rental arbitrage business are:
1. Set Up a Budget for Your Airbnb Arbitrage Business
First, you need to work out your budget to set up the financial framework for your investment endeavor. You have to analyze your current sources of income, available savings, other assets, and how you expect them to change over the course of the next couple of years to decide how much you can allocate to this strategy.
In your budget, be realistic and don’t try to invest more than you can afford to retain your financial stability. Moreover, you need to factor in a small cash reserve in case the Airbnb business doesn’t take off right away as there are ongoing running costs that you need to cover no matter whether you’re renting out or not, such as rent, utilities, insurance, HOA fees, and maintenance.
Even though you are not buying an investment property, you might be eligible for some financing to start your business. There are Airbnb loans that cover things such as furniture and other initial costs. Check out these options if your budget is limited.
2. Find the Best Location
The second step in the process of starting an Airbnb arbitrage business is to discover the top market for this strategy. In any type of real estate investing, location is key as it impacts most factors that determine your ultimate success or failure.
Where you operate will impact the monthly rent, the short term rental income, the initial investment, the operating expenses, the cash flow, and the return on investment.
The ideal location for short term rental arbitrage is a market that exhibits reasonable rental rates accompanied by strong Airbnb average daily rates (ADR) and high Airbnb occupancy rates. This means that you should focus on popular tourist destinations where there aren’t many tenants pushing rent up.
It’s better to find an area that welcomes visitors throughout the year as seasonality can turn into a major problem for Airbnb hosts, leading to low occupancy, weak revenue, and meager profit.
If you plan to manage your arbitrage business on your own, it makes sense to analyze markets close to home, which means your own city or neighboring cities. Remember that you have to be available on a daily basis to perform a range of housekeeping tasks, or on a regular basis to check up on the property if you decide to work with a cleaning team. If you plan to hire a professional Airbnb manager, then you can search for the best markets for Airbnb arbitrage nationwide.
3. Study the Local Short Term Rental Laws and Regulations
Once you’ve identified a market where the numbers make sense, you need to check out the Airbnb laws and regulations. Consider the applicable state, county, and city level ordinances as all these local authorities might apply different rules, and you need to be in compliance with all of them for a safe and legal Airbnb rental arbitrage business.
The best resources for short term rentals laws are usually the websites of local authorities. In most cases, a simple Google search with the name of your area followed by “short term rental laws” will take you to the right place.
Read all relevant documentation carefully and take note of the safety requirements, the duties of the operator, the number of days per year for which you can rent out, and all other important details. Write down what permits and licenses you need and what documents you need to apply for them. Keep track of the taxes that you will have to pay.
4. Search for Long Term Rentals That Can Work as Airbnbs
After you have ensured that Airbnb is legal in your selected market, it’s time to start looking for properties that will be profitable rental arbitrage opportunities. Similar to the market, you want to focus on houses or apartments that are rented out for relatively cheap because they are not attractive to tenants (far away from business centers, located in busy neighborhoods, etc.) but that would attract a lot of short term visitors (close to local attractions, busy parts of town, etc.).
The most popular rental websites include Realtor.com, Zillow, Trulia, Apartment.com, Zumper, and many others. There you can see the monthly rent of properties, but you’ll need to use an additional Airbnb data tool to check out what short term rental income you can expect. This is the result of the nightly price and the occupancy rate.
Moreover, it’s important to estimate the startup costs that you need for the project as well as the ongoing expenses. Your rental property analysis needs to show that your expected cash flow will be positive and your ROI will be good for the numbers to make sense.
5. Check Out the Rental Agreement and HOA Rules
When you find a couple of potential opportunities that seem like lucrative options from a financial point of view, you have to confirm that operating an Airbnb arbitrage business from them is a possibility.
The first thing to check is if they are run by an HOA and, if so, whether the HOA rules say anything about short term rentals in general and subletting in specific. Many homeowners associations prohibit vacation rental operations to protect common areas and amenities in addition to the peace and safety of other homeowners.
Second, you also need to get in touch with the landlord and ask for a copy of the lease agreement. You should make sure that subleasing to third-parties is not explicitly prohibited in the rental contract.
6. Discuss Your Plans with the Landlord
Even if the rental agreement does not prevent rental arbitrage, it’s best to be honest with the landlord and openly talk with them about your intentions to rent out their property to short term guests. After all, you don’t want them to surprisingly find their home listed on Airbnb and start causing trouble over you using their property to run a business out of.
To convince the landlord to allow this, prepare a list of all the precautions that you plan to take in order to guarantee the safety of their house and their personal indemnity should an accident happen on the property. You can cite the guest screening procedures that you will apply and the type of insurance that you will get. You can also offer to cover the higher than average cost of repairs.
7. Sign a Lease Agreement
After you have reached an agreement with the landlord, it’s time to sign a lease. Since you are not renting the apartment to use personally but to rent out to others, you and the landlord might need to change some clauses and add new ones to specify the necessary terms.
You might need to resort to the help of a real estate attorney to draft an edited version of the standard rental agreement to match your specific case.
Once all parties’ rights and responsibilities have been clearly outlined, both you and the landlord have to sign the contract so that you can move on to the next steps of starting Airbnb arbitrage.
8. Get the Rental Ready for Guests
Once you have secured the property for the next year or so, you have to work on preparing it for being listed on Airbnb and for welcoming guests. If you’ve been able to find a furnished rental, then your work is relatively minimal as you need to provide towels, bed linen, restockable supplies, and some other basics and get the property well cleaned.
However, if the house is not furnished, you’ll have more work to do. You’ll need to furnish the property with all the basic items that provide a comfortable stay for your future guests without going overboard and wasting too much money. The average cost to furnish a house is between $5,000 and $100,000, and you should aim for the lower limit of this range as it is not you who will live there and it is not even your own investment property that you're furnishing.
If you need some help with this, you can hire one of the best Airbnb design and furnishing companies, in order to get the property professionally designed in line with the standards of the hospitality industry. But if you’re on a really tight budget, you can consider buying second hand, refurbished furniture and decor items to get started.
Another important thing to consider when getting the property guest-ready is adding Airbnb amenities. A fully furnished kitchen, an espresso machine, a home office, or some experiences might be all that you need to distinguish your rental from the rest in the area and get more bookings than your competitors.
9. Obtain an Airbnb Insurance
Before you are fully ready to start welcoming guests, you need to take care of one more aspect of the vacation rental business: getting the right insurance. The homeowner insurance and the rental insurance of your landlord are not enough to cover damages and injuries that might occur on the property when it is operated as a short term rental. While Airbnb insurance is not legally required, it is highly recommended to avoid costly situations.
The most important components of the best insurances for Airbnb include property damage (including primary property, secondary property, and host’s personal property such as furnishings and decorations), liability protection (covering medical and legal fees), and loss of rental income (should the property become uninhabitable during a covered event).
You should check out a few different providers and ask about their coverage and cost as terms can vary widely. Some popular choices among Airbnb hosts include Steadily, Obie, Proper, Allstate, Farmers Insurance, American Family, and Safely.
10. Create an Airbnb Listing
It’s finally time to list your property on Airbnb, Vrbo, Booking.com, and potentially other booking channels. As a beginner, it’s best to start with a few short term rental websites and optimize your listings there in order to start getting some traction.
An Airbnb listing needs to have a catchy title, feature a detailed, scannable description, incorporate the right keywords, list all amenities, provide information about the property and the area, include high-quality photos of the inside and the outside, and provide house rules.
Moreover, it’s important to apply a dynamic Airbnb pricing strategy that takes into consideration seasonality, holidays, weekends, changes in supply and demand, and competitors’ performance.
You need to keep a close eye on the performance of your property and your competitors, continuously adjusting the daily rate to strike the right balance between pricing and occupancy to maximize revenue and profit.
All these elements are important for the Airbnb SEO algorithm to have your listing start ranking and showing up in guest searches. They are also important to make guests choose your rental over similar options once they land on the listing.
11. Decide How to Manage the Airbnb Rental Property
Running an Airbnb arbitrage business is a lot of active work due to the continuous check-ins and check-outs and the tasks to be completed between and during them. That’s why it’s crucial to choose the right short term rental property management method for the property, with the main options being becoming a DIY Airbnb host or hiring a property manager.
If you end up renting a property in your own market, and you don’t have a demanding 9-to-5 job, you can consider being a host. While it requires certain skills, it is definitely something that can be learnt by doing.
To facilitate your work, you can consider hiring a housekeeping team to take care of cleaning, laundry, and restocking supplies between stays and also buying the best Airbnb management software tools for dynamic pricing, guest communication, channel management, and task coordination.
Alternatively, if you lease a property away from home or have a full-time job, you can work with one of the best Airbnb management companies.
12. Start Marketing Your Listing
The last step in launching your Airbnb rental arbitrage business is to promote your listing. Just having your listing on Airbnb and other platforms might not be enough to get your first couple of guests.
As part of your vacation rental marketing strategy, you can share your listing on social media, email it to your contacts, and launch your own direct booking website. You could consider paid ads on Google or social media too, but keep in mind that those can end up being quite costly.
Airbnb Arbitrage Pros and Cons
The short term rental arbitrage strategy comes with major advantages and disadvantages, similar to other real estate investment strategies. It’s important for aspiring hosts to consider them before deciding if this is the right way for them to make money from real estate.
The most considerable benefits of renting a property to sublet on a short term basis are:
- No real estate property ownership
- Low initial capital requirement
- Easy exit strategy
- No long term commitment to a property
- No need for financing
- Potentially passive investment strategy (if you hire a property manager)
- Strong revenue potential (if you select the right market and the best property)
- Little knowledge required
- Ability to learn about real estate investing
The most worrisome drawbacks of this approach include:
- No long term appreciation
- Certain arbitrage legal restrictions
- Local Airbnb regulations and restrictions
- Problems with the landlord
- Interior design and furnishing costs (unless you rent a furnished apartment)
- Multiple fees associated with running an Airbnb business
- Active property management (unless you hire a professional Airbnb manager)
Airbnb Arbitrage Contract
Due to the nature of short term rental arbitrage, you need two types of agreements to be on the safe side. First is the lease agreement with your landlord for renting their property, and second is the rental agreement that guests sign before staying in the property.
Long Term Rental Lease Agreement
That’s the standard in the US rental market. The landlord and the tenant (in this case you) need to sign a written rental agreement that specifies the rights and responsibilities of both parties and how any disputes would be settled.
As mentioned above, since you plan to sublease the home to third parties, it’s good to reflect this in the draft to have the written permission of the landlord to run Airbnb arbitrage.
Short Term Rental Agreement
The second contract is also something pretty standard in the vacation rental industry. You should draft a short term rental agreement that your guests sign electronically before check-in.
This agreement should clearly state the house rules and make it absolutely clear what they are allowed and not allowed to do on site. This includes things such as maximum number of guests, overnight visitors, house parties, noise regulations, pet policy, and others.
Airbnb Arbitrage Tools
Technology has come at the core of the Airbnb management industry. Hosts need software tools to help them improve and streamline various aspects of the management process, and this holds true for those who operate Airbnb rental arbitrage models too.
Following are the main tools that can help with your business:
Long Term Rental Data Provider
First, you need a tool that will help you collect and analyze long term rental market and property data in order to find the best location and the right house for your endeavor. Without the right tools, it’s very time-consuming and nerve-wrecking to spot good opportunities. Popular long term rental data sources include Rentometer, Zillow, and Mashvisor.
Airbnb Calculator
Another tool that’s a must in the initial analysis stage is what is known as an Airbnb calculator. This is an Airbnb data analysis tool that provides an estimated monthly revenue including the ADR and the occupancy rate after you plug in a property address and number of bedrooms and bathrooms. The calculations are based on data on the performance of comps in the area. Some companies that provide this tool include AirDNA, Rabbu, Mashvisor, and Airbtics.
Airbnb Interior Designer and Furnisher
While this is not strictly a tool, you might need the help of a professional vacation rental design and furnishing company to get your property ready in the most optimal way. While you will need to pay a fee for this service, companies benefit from industry discounts on furniture and decor, which might keep the total price of your furnishing project constant while bringing better results.
Summer provides short term rental interior design and furnishing services that start at $10,000 and provide full flexibility.
Airbnb Dynamic Pricing Software
Having a dynamic Airbnb pricing strategy is a must to capture bookings during low season and boost revenue during high season. However, doing all the data collection and calculations manually is virtually impossible, especially for someone who is just getting started in the short term rental industry. Thus, you would need one of the best Airbnb pricing tools, such as Wheelhouse, PriceLabs, AirDNA, or Beyond, to automate the process.
Airbnb Property Management Automation Software
Getting access to a comprehensive property management system (PMS) would prove indispensable help in the management of your Airbnb business. This can help you manage listings on multiple platforms, sync reservations, avoid double bookings, automate guest communication, streamline team and task management, and collect reviews.
Some of the key features to look for include a channel manager, dynamic pricing, a multi-calendar, a reservation system, a unified inbox, and task management. Popular short term rental management software tools used by hosts include Guesty, Hostaway, Hospitable, and Lodgify.
Airbnb Property Management Company
Finally, if you cannot manage the property on your own, you have to hire an Airbnb manager. You can choose between a small, local property manager and a larger, nationwide company. Both options come with their own pros and cons, so you should choose the one that fits your personal preferences.
Summer offers full-service short term rental management that includes everything from listing and pricing, through guest communication and cleaning, all the way to maintenance and repairs. The cost starts at only 20% of booking revenue excluding cleaning fees and depends on the market and the property.
Airbnb Rental Arbitrage Tips
Below are proven tips and tricks to help you start a short term rental arbitrage business:
- Work out a budget and diligently comply with it
- Check, double check, and triple check local short term rental laws and HOA rules
- Inform the landlord about your intentions to sublet their property and get their approval
- Try to negotiate the monthly rent with the landlord (it doesn’t hurt)
- Sign an adjusted written lease agreement that allows you to sublet the property
- Stay on good terms with the landlord
- Make informed, data-based decisions
- Choose timeless designs and items when furnishing the property
- Provide more amenities than competitors in the local market
- Get an Airbnb insurance to avoid unnecessary costs
- Use automation software tools
- Continuously optimize your listing for Airbnb SEO
- Provide exceptional guest services
- Offer Airbnb experiences for more bookings and more 5-star reviews
- Ask guests for reviews
- Apply dynamic pricing
- Hire a short term rental management company if needed
10 Best Markets for Airbnb Arbitrage
The top locations for short term rental arbitrage are the markets with the largest differences between Airbnb income and rental rates. We looked at data provided by AirDNA, and these emerge as the best Airbnb arbitrage markets in 2024 where investors can expect the largest profits.
The ten best markets for Airbnb Arbitrage are:
1. Charleston, SC
Charleston, SC is one of the most profitable cities for renting and subletting a property in the US market. The city is famous for its rich history, the cobblestone streets, the stylish French Quarter, the Battery promenade, the beaches, and the delicious food, which make it a popular tourist destination. The mild climate turns Charleston into a preferred destination year-round, securing good occupancy rates for hosts.
2. Providence, RI
Providence, RI brings together the warmth of a small town with the rich culture of a big city and adds extra sophistication to the mixture to make it an ideal location for running an Airbnb business. The city hosts multiple museums, art galleries, and performing arts sites that attract visitors from near and far. Brown University brings parents and prospective students during all seasons.
3. Jacksonville, FL
Any place in Florida barely needs an explanation why it’s one of the best short term rental markets, and Jacksonville is no exception. The endless beaches, the multiple parks, the fishing opportunities, the historic areas, the family activities, and the diverse street arts are just some of the reasons why different types of visitors come to Jacksonville from in and out of state, all year-round.
4. Nashville, TN
Nashville, TN is defined by country music, and music-related attractions are the main drivers of tourism in the capital of the State of Tennessee. The Country Music Hall of Fame and Museum, Grand Ole Opry, the Roman Auditorium, the Parthenon, and the Nashville Farmers’ Market are some of the most popular attractions that contribute to the success of Airbnb arbitrage in the city.
5. Sacramento, CA
Sacramento, CA is yet another location that combines the needed features to turn into one of the most lucrative markets for short term rental arbitrage. With the self-proclaimed tourism slogan “California starts here”, the capital city of the State of California attracts multiple visitors from near and far with its rich history and diverse culture.
6. Virginia Beach, VA
Virginia Beach, VA, located on the Atlantic Ocean coast, is a popular tourist destination which offers high daily rates and strong occupancy. In the summer, visitors are attracted to the beaches, the oceanfront, and the boardwalk. In other seasons, they keep coming to Virginia Beach for the arts, the entertainment options, the dining scene, the maritime history, and the family attractions.
7. Cape Coral, FL
As no surprise, Cape Coral, FL is another Florida city that is ideal for rental arbitrage. The city is well-known for its many canals which contribute to a unique landscape. Sirenia Vista Park, Matlacha Pass Aquatic Reserve, and Four Mile Cove Ecological Preserve host interesting animal and plant species, such as manatees, herons, ibis, and mangroves.
8. New Orleans, LA
New Orleans, LA offers access to jazz music, brass brands, vibrant music scene, busy nightlife, and spicy cuisine as the meeting point of French, African, and American culture. The most famous event is Mardi Gras, which is characterized by endless street parades and parties and which brings even more visitors to the otherwise always popular New Orleans.
9. Austin, TX
Austin, TX is known as the Live Music Capital of the World for its eclectic live music scene bringing together country, blues, and rock. In addition to being the capital city of the State of Texas, Austin hosts major museums and many parks and lakes where visitors can hike, bike, swim, and boat. Shopping and dining options are also abundant.
10. Denver, CO
Denver, CO is yet another top market for Airbnb rental arbitrage because of offering the right ratio between short term rental income and monthly rental rates. The city offers many museums, including the Denver Art Museum, historical landmarks, and famous breweries. Moreover, Denver provides access to the ski resorts of the Rocky Mountains.
Bottom Line
Airbnb arbitrage is a lucrative real estate investing strategy that allows investors to make money from the ever-growing short term rental industry without owning a property. The key to success is to locate a market and a property where Airbnb income significantly exceeds rental rates and where vacation rentals are legal and do not face many restrictions. The rest is a matter of furnishing the property right, offering top amenities, creating a strong listing, and efficiently promoting the listing.
