When done right, short-term rentals will typically generate more returns than long-term rentals. And with the increasing popularity of Airbnb and other similar short-term rental companies, the short-term rental business is experiencing rapid growth. The Airbnb business is definitely a lucrative one. But how do you get into the short-term rental game if you don’t have enough capital to buy a short-term rental property? Is it even possible?
Yes, you can make money on Airbnb without buying property. You can get started with minimal start-up capital and very low risk through a business model called rental arbitrage. With demand for housing rising much faster than wages, it’s more difficult for the average person to become a homeowner now than it has ever been. However, when it comes to short-term rentals, having no money to buy property is by no means a barrier to entry. Rental arbitrage makes it possible. If you want to learn how to make money on Airbnb without owning property, keep reading.
Defining Rental Arbitrage
Rental arbitrage is the practice of renting a property long-term and listing it on short-term rental platforms like Airbnb at a profit. By committing to the length of the lease, you assume the landlord’s risk of vacancy. However, in return, you will be able to charge a higher daily rate and make a profit.
When you first thought of investing in Airbnb real estate, you probably never thought of using properties owned by other people. Many think that generating passive income through short-term rentals is reserved for those who can afford ten’s of thousands of dollars to acquire Airbnb real estate. However, with rental arbitrage, almost anyone can invest in short-term rentals.
Benefits of Rental Arbitrage (Relative to Buying an Investment Property)
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Lower Start-Up Capital
Airbnb rental arbitrage allows one to become an Airbnb host without owning property. You simply sign a long-term lease, re-rent the property on Airbnb, and collect the difference. No down payments, closing costs, property taxes, or other costs related to owning an investment property. This makes rental arbitrage far less risky.
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Flexibility
If the difference between your Airbnb income and your monthly rent is significant enough, you can generate positive cash flow. However, in case the property is not profitable, you can leave it and look for another one in a different area.
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You Can Scale Faster
When you start an Airbnb business by buying an Airbnb property, you’ll need to place a down payment and pay off your mortgage for several years including other monthly expenses like maintenance, property taxes, and insurance. This means that you may need to wait for very long before you can access funds to purchase your next investment property.
With this business model, you can rent out a handful of properties for what you would have used to purchase only one rental property. This allows you to scale your Airbnb business much faster. As a result, you’ll make a lot more money. The sky is the limit on how many properties you can sublet out on a short-term basis. You have unlimited income potential.
How to Start a Rental Arbitrage Business
Starting a rental arbitrage business is not hard. However, not everyone who gets into it achieves success. If you want to maximize profits, you have to make the right decisions from the beginning. Here is how you can successfully start a rental arbitrage business:
1. Conduct Airbnb Market Research
Your degree of success in your Airbnb business is heavily dependent on location. To make sure that you are investing in areas with high-income potential, you need to do a thorough Airbnb market research. Here are the key things to keep an eye on when looking for the right market for rental arbitrage.
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Arbitrage Potential
To make a profit with rental arbitrage, the first step is to look for real estate markets with the highest average arbitrage potential. These are markets where short-term rent prices are considerably higher than long-term rental prices.
For rental arbitrage to be viable, the market should have a high short-term rental demand from vacation and business travelers. However, the average long-term rents in the area shouldn’t be unreasonably high.
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Airbnb Regulations
Before you think of starting a rental arbitrage business in a particular real estate market, know the local Airbnb regulations. Take time to study the laws of the city or state to make sure that they won’t hinder your business. For instance, some HOA rules can limit your ability to rent out the property on a short-term basis.
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Seasonality
High seasonality can be a big risk to your rental arbitrage business. You should avoid markets with huge dips in demand during certain seasons. The best markets for rental arbitrage have a consistently high demand for short-term rentals throughout the year.
2. Find Profitable Properties for Rental Arbitrage
Once you know your target market, you should identify rental properties that will bring you the most success. Here are some of the things you should keep in mind when looking for the perfect property for rental arbitrage:
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Airbnb Income Potential
You should find a short-term rental property that will allow you to make the most money. Basically, your Airbnb profit margin is the difference between your Airbnb rental income and your monthly expenses (your monthly rent plus operating expenses). Your Airbnb rental income should be able to cover your business expenses and still achieve a reasonable profit.
To find the most profitable properties in any market in the US, you can use Mashvisor’s Airbnb profitability calculator to do a quick Airbnb analysis. The tool allows you to estimate Airbnb income and Airbnb occupancy rate in a matter of minutes. These estimates are based on accurate and up-to-date Airbnb data from rental comps and Airbnb analytics.
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Start-Up Costs
Apart from the revenue potential, you should also take into account the start-up costs. They will determine what you can afford depending on your current financial situation. They may also help you estimate how long it will take you to recoup your initial investment.
For most properties, expect the following start-up costs:
- One month security deposit
- First month’s rent
- Furnishings (purchased or leased)
- Appliances (television, fridge, etc)
- Application fee
- Legal fees
3. Talk to Your Potential Landlord About Hosting on Airbnb
While rental arbitrage is completely legal, make sure you inform your potential landlord about your plans before you proceed to sign the lease agreement. Help them understand more about the Airbnb business and address any of their concerns. This will make sure that you are both on the same page and that you don’t risk breaking the lease agreement.
If they agree, set hosting guidelines that work for both of you and put them in writing. This will show your landlord that you are a responsible host. A rental arbitrage contract will also protect you in case of any misunderstanding in the future.
4. List Your Property on Airbnb
The next step is to list your property on Airbnb and optimize it for better visibility. Be sure to take professional photographs that will show your rental property in the best light possible. Your listing description should be detailed and highlight the best features of your property. You should also make sure that your nightly rates are in line with the market rates. The more appealing your listing is, the faster you are likely to get a booking.
5. Automate Your Business
Managing a short-term rental property is a lot of work and can be time-consuming. You should use property management software to automate your Airbnb business. Automation will help your business run more smoothly, enhance the guest experience, and maximize your revenue.
6. Grow Your Rental Arbitrage Business
When your property begins to bring in income, be sure to save. By following the same business model, you can leverage the profits to add another property to your portfolio in just a few months.
If you do it right, you can continue subletting properties and grow your business exponentially. With rental arbitrage, your profit potential is limitless. You can create an Airbnb empire without buying a single property and become financially independent.
The Bottom Line
Rental arbitrage can be a great way to make money on Airbnb without buying property. However, to create a good foundation for success, you must conduct thorough market research and find properties with high Airbnb income potential. Even with little or no experience in the industry, you can take advantage of this business model to create massive wealth.
To learn how Mashvisor can help you in your real estate investing journey, sign up for a 7-day free trial now, followed by 15% off for life.