Rental Arbitrage: The Ultimate Beginner’s Guide

Thanks to 21st century technology, rental arbitrage is a new real estate investing business model that requires very little upfront capital (relative to most REI business models), allows for maximum flexibility, and has relatively low risk.

It’s no wonder, then, that it’s become such a popular model for new investors.

Whether you’re considering building a rental arbitrage business, just want to learn more about the business model, or are a property owner who’s wondering about the risks of letting another investor arbitrage your properties, you’ll get the knowledge you need in this guide to make an informed decision.

First thing’s first.

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What is Rental Arbitrage?

Rental arbitrage is similar to subletting in that you rent out an already rented property — but rental arbitrage typically refers to short-term vacation rentals like what you’ll find on AirBnB and VRBO.

Let’s walk through an example.

Imagine that you find a vacant property with a landlord who’s trying to fill it with tenants. You go to this landlord and tell them that you’d be willing to sign a 12-month lease if they allow you to rent the property out as a short-term vacation rental and pocket the profit.

You explain to them that all tenants will be screened before they’re accepted, the property will be cleaned after every visit, and you’ll absorb the risk of not finding tenants by signing the lease.

And so they agree.

Let’s assume that the rental price is $1,500 per month but — since the property is in a touristy location — you’re able to generate $3,000 per month. $1,500 of that goes to the landlord, then you make $1,500 minus operation costs.

That’s a very optimistic example… but you get the idea.

You sign a lease and peddle that property as a short-term rental, making whatever profit you can pull.

Pros & Cons of Rental Arbitrage

Okay — that makes sense.

But what are the pros and cons of rental arbitrage… for both the arbitrager and the property owner?

Pros & Cons For The Arbitrager

Here are some pros and cons to consider for the person who’s starting a rental arbitrage business…

Pros

  • Low Startup Costs
  • Don’t Need to Purchase Property
  • Easy & Fast to Start
  • Scalable
  • Allows You To Take Advantage of Touristy Markets

Cons

  • Responsible For Damage
  • Bookings Are Often Seasonal
  • Can Be Hard To Get Landlords To Agree
  • Manage Regular Maintenance
  • Landlord Can Call it Off

Pros & Cons For The Property Owner

Here are some pros and cons to consider for the property owner who lets someone arbitrage their property…

Pros

  • Property Doesn’t Remain Vacant
  • Property Gets Cleaned Regularly
  • Might Be Able to Profit-Share With Arbitrager
  • Can Call it Off if Things Don’t Go Well

Cons

  • You Take on The Most Risk Since it’s Your Property
  • Property Might Get Damaged By Renters
  • Need to Make Sure the Arbitrager is Trustworthy

How To Start a Rental Arbitrage Business

By now you should have a pretty clear idea of how the rental arbitrage business works.

Next we’re going to walk through the steps to building a rental arbitrage business — these are for people who are considering rental arbitrage but they’ll be informative as well for property owners and investors.

Let’s dive in.

1. Choose a Location

In the same way that you can wholesale real estate virtually, you can also do rental arbitrage virtually — so living in a city doesn’t mean that that’s the city where you have to build your business.

In fact, there’s a good chance that you should build it elsewhere — somewhere with a better short-term rental market.

And to kick off your exploration, here are the states with the highest average rental arbitrage potential, according to AIRDNA

And here are some of the counties in the U.S. with the most potential…

Generally speaking, the best cities to build a rental arbitrage business will be in touristy areas or in real estate markets with rising interest and potential. Those markets will be the easiest places to find renters and make healthy profit.

But aside from the charts above, how do you know what the short-term rental market is like in a given city?

Well, a quick Google search for “short-term rental market [city]” will give you most of the information you need, including average rent and vacancy rates.

Also keep in mind the seasonality of the business and, more specifically, of the market where you choose to do rental arbitrage.

How long does the touristy season last? How low are the lows and how high are the highs? Will the good seasons allow you to cover your costs and remain profitable during the low seasons?

Those are all important questions to ask before you make a decision.

Once you’ve found an area with good potential, look at the cost of long-term rentals in the area, compare that to the cost of short-term rentals — as well as the demand — and make an estimate for how much you think you’d be able to make per property per year.

2. Determine Your Costs

As with all businesses, you’ll need a little money to start your rental arbitrage business — somewhere in the neighborhood of $5,000 to $10,000.

Here are some of the costs — starting and ongoing — to keep in mind…

  • Application Fee
  • Rental Deposit
  • Insurance
  • Legal Fees
  • Maintenance and Repairs
  • Furnishings
  • Decorations
  • Wi-Fi
  • Cleaning Service Fees
  • Utilities
  • Appliances

Your biggest upfront costs will likely be furnishing the property (if it’s not already furnished), appliances, decorating, and rental deposit. Your largest ongoing costs will likely be cleaning fees, maintenance and repairs, and utilities.

Keep those costs in mind when you’re determining the profitability of a property for arbitrage.

3. Assemble Toolkit

To accomplish rental arbitrage — to get started and to scale — you’ll want to leverage the right tools.

That will probably include a property management system, a dynamic pricing app, cleaning coordination software, a payment processor, a digital guidebook, remote keypads, and booking software.

Whatever you decide, it’s a good idea to assemble your toolkit before getting started so you’ve got systems in place to keep the business running smoothly.

Here are some to-dos for getting your business off the ground…

  • Determine Your Listing Platforms — Where are you going to list your properties? The more places you list, the easier it’ll be to keep the properties filled, but the more difficult it will be to ensure that the property doesn’t get double-booked. Make sure you’ve got plans in place to avoid double bookings and that you used the most popular platform(s) for that specific area.
  • Choose Property Management Software — Property management software (like Guesty) makes managing your short-term property rentals super easy. You can manage your listing across multiple platforms, community directly with your guests, and more.
  • Find Cleaners — You’ll also need to find someone to clean the property in between guest visits. This could be an individual or a property management company. Either way, make sure you trust this person and have a direct line of communication with them.
  • Remote Keypads — Remote keypads make it so that you don’t have to be present to check guests in and out of the rental. You just give them a code and they can access the property on their own.
  • Create Digital Guidebook — A digital guidebook will provide the renter with important house rules as well as check-in and check-out information. You can turn this into a PDF and send it to renters before their visit to streamline everything.

Those to-dos should get you off on the right foot. But take a moment to think through the entire process from A-Z — are there any tools or processes you need to add to make things move more easily?

4. Find & Pitch Property Owners

In order to build a rental arbitrage business, you have to find property owners and convince them to let you arbitrage their properties.

How do you do that?

Well, the first step easy — simply look through the market’s rental listings to find vacant properties that landlords are trying to fill.

Then call those owners, tell them about what you’re doing, and ask if they’re interested. Don’t forget to mention the primary benefits they get by working with you…

  • Property Doesn’t Remain Vacant
  • Property Gets Cleaned Regularly
  • Can Call it Off if Things Don’t Go Well

(If you get ahold of the property management company, ask if it’d be possible to speak with the owner directly)

Obviously, you’ll need to build some trust to get them to agree to the deal — so allow for some time to get to know each other and, if possible, show them your track record of real estate investing to prove that you mean business.

If you’re just getting started and you’ve got no track-record to prove your trustworthiness, then you might consider doing profit-share with the owner to sweeten the deal — giving them, say, 20% of your profits in addition to what you’re paying them for rent.

Once you’ve got a few properties under your belt, it’ll be easier to convince property owners to work with you.

5. List The Property

Once you’ve got an agreement with a property owner and you’ve signed the lease, it’s time to list the property and find renters.

Here are the main platforms you’ll want to list on…

  • AirBnB
  • VRBO
  • Fairbnb
  • FlipKey
  • Agoda

You want to get as much attention as possible for the property — the more often it’s filled, the more money you’ll make. So optimize your listing with professional photos and a compelling description.

Also do everything you can to get 5-star reviews — go above and beyond for renters (especially in the beginning) — those will make your rental a big success down the road.

6. Scale

Once you’ve arbitraged a single property, you’ve arbitraged a hundred properties — the process is the same, but the people you work with and the market you work in might change.

You’ll also run into additional challenges that happen when you’re scaling any type of business — more properties means more profit, but it also means more problems. That’ll just emphasize the need for you to have clean-cut processes and systems in order to scale.

Conclusion

The rental arbitrage business model is one that many new investors are excited about and many seasoned investors are wary of.

Regardless of which camp you belong to, you should now have a better idea of the pros and cons, the costs, the steps, and ultimately, whether or not the business model is one that you want to engage with.

Good luck!

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