When you think about investing in real estate, you may believe that you’re priced out of the market. It might seem as if you can’t get started unless you have lots of cash. There is a way to make money in real estate even when you don’t have property or money, however. It’s called rental arbitrage.
With rental arbitrage, ownership isn’t a necessity. All you need to do is to work with a landlord to rent their property, rent it out on a vacation rental site like Airbnb, FlipKey, Tripping, HomeToGo or any other, and make a generous income.
What exactly is rental arbitrage?
Arbitrage is a technical term used in the financial world to describe business deals involving picking up a commodity from one marketplace, and selling at a profit in a different one.
When it comes to doing business on a vacation rental site, arbitrage refers to going into business not with property you own, but with property you rent. You rent a property from a landlord, post it on a vacation rental site, collect more rent than you pay your landlord, and make a profit in the process.
For instance, you might rent a condo for $2,000 a month, spend about $1,000 a month on upkeep and other expenses, rent the property out on Airbnb at $5,000 a month, and make a $2,000 profit each month. On average, investors involved in rental arbitrage make around $1,000 a month with each property they deal in.
Is this kind of arbitrage legal?
People who are new to the concept of rental arbitrage often wonder if the business model is even legal. It is reasonable to wonder if a landlord would even permit having their property used by another in this manner. Rental arbitrage, however, has a long history in commercial real estate, and is completely above board.
All you need to do is to find a landlord willing to be part of such a business. Some may not be open to the idea, but others will. Being honest disclosing your intentions with the property is important to being successful. Once you find such a landlord, you can right away be in business.
How do you make an income without owning anything?
This business model depends primarily on your ability to find landlords willing to do business with you. Key to obtaining consent would be showing them how the business model comes with benefits for them, as well.
• Listing a property on a vacation rental site requires that you keep the property in top shape every day. The landlord knows that their property will be taken care of.
• You could offer to pay a premium on the quoted rent for the privilege of being allowed to let the property out on a vacation rental site.
• When you list a property on Airbnb, the company covers it for liability up to $1 million. Should a vacation renter cause damage to the property, this would make it easy for you to have their property restored to its original shape.
• You could offer to buy additional third-party insurance on top of the insurance provided by the vacation rental site. As long as the premiums don’t eat too greatly into your profit margins, such insurance could offer the landlord greater assurance that their property will remain well-protected.
• You could offer to give the landlord a percentage of your profits. Profit-sharing offers can help bring most landlords around. Once you establish a track record of doing well with rental arbitrage, you wouldn’t need to offer as much of your profits as an incentive.
• You could present the vacation rental site arbitrage model to landlords as a business opportunity they could get into. In a joint venture, they would contribute several properties they owned, and you would make sure that the properties were well taken care of, and put in the rest of the legwork.
Doing vacation rental site arbitrage the right way
If you plan to get into this type of business in earnest, it would make sense to take a number of steps.
Create a business: If you plan to involve yourself in vacation rental site arbitrage beyond a couple of properties, it would be a good idea to create an LLC. Doing this would give you legal and business standing, as well as favorable choices when it came to paying taxes. You would also find it easier to rent properties.
Many property management businesses only allow tenants to conduct rental arbitrage if they’re willing to sign a corporate lease. You don’t need more than a couple of thousand dollars to start such a business. In fact, it would be a good idea to invest no more in your business, initially, even if you do have money in the bank, ready to use.
Investigate creating a team: Once you begin to scale, you would need an attorney at corporate law or real estate law on your team to help you avoid mistakes of inexperience.
You would also need a bookkeeper, and an accountant specializing in taxes and real estate accounting. It could also help to rope in a co-host — someone who would answer the day-to-day demands of the business in return for a share of the profits, or a salary. You could get in touch with a general contractor and a professional photographer on a freelance basis, as well.
Put in the research:Many hopeful vacation rental hosts attempt to get into the market simply because they know of a property that looks good, and they believe that it’s in a popular location.
If you’re serious about being successful, however, you need to research the vacation rental websites to find out what specific streets and zip codes are the most expensive to rent. These are the markets that you’d want to get into.
When you reckon how much profit you’ll be able to make with a given property, it’s important to run your numbers for an anticipated occupancy rate of 50 percent. If you can’t be profitable at 50 percent occupancy, you should move on and find a different property.
Optimize to get the most out of a vacation rental site: Professional, high-quality images can command great user attention. It’s important to understand that many vacation rental hosts get mediocre results simply because they put in very little effort.
Studying successful listings to find out what they do right, and modeling your own effort after them, is the way to find success.
Over time, you can scale, as well as automate your vacation rental site business. You will need to create a system that runs on its own. A co-host who takes care of the entire operation, communicates with guests who come and go, and looks into problems as they arise, can be essential to a profitable operation with minimal investment of your personal time.
Launching an Airbnb business can be an excellent way to make a generous income in as little as 12 months. It’s success unheard of in most other industries. Putting in the research necessary, and making a genuine effort to offer value to your guests can help you exploit the business model well.
Here’s an article that will show you how to market an Airbnb.