Rental Arbitrage: Using Other People’s Property to Get Rich (Guide)

There is a new way to get rich in real estate, and it doesn’t involve starting your own business or becoming a millionaire investor. It’s called rental arbitrage, and it’s simple: you use other people’s property to make money.

No, really, that’s the whole strategy.

Rental arbitrage is simple, sexy, and allows a new real estate investor to get in on the game without blowing their life savings on a down payment on a traditional property.

This blog post will teach you how to use sites like Airbnb to rent out other people’s property. We will show you the best practices for doing this and explain why rental arbitrage is such a lucrative opportunity.

So if you’re looking for a new way to make money, keep reading!

What is Rental Arbitrage?

Rental arbitrage is the process of finding a rental property for cheaper than the market value and subletting it for a higher price.

For example, if you find an apartment that you can rent for $1,000 per month but know you could sublet it for $1,200 per month, you would be engaged in rental arbitrage.

This can be accomplished by finding a property in an area with high rental demand but low rental prices or by finding a property with low rental demand but high rental prices and then marketing the property to a wider audience. Either way, the goal is to generate a positive cash flow from the rental property after accounting for all expenses.

Is Rental Arbitrage Legal?

In most cities, yes.

But, a few major US cities like San Francisco and Atlanta have outlawed short-term rentals that lease homes and apartments for less than 30 days.

You can see a full list of cities where it is illegal to own & operate an Airbnb here.

There are, however, some city regulations, local laws, and HOA by-laws to look out for. These regulations will sometimes have strict compliance regulations for “short-term rentals,” which is what we’ll be doing.

Airbnb has a great help center with answers to most questions you’ll have regarding regulations in your city or target market.

Once you understand the regulations and confirm that your area is good to go, it’s time to start!

Note: I understand there may be viewers outside the US looking to employ rental arbitrage in their home country. However, I encourage those readers to get a crash course on how renting—long-term, short-term, or otherwise—is handled in the area they’re looking to invest in. Why?

Some countries, like Japan, are known to place tight restrictions on rental property, especially in vacation areas like Hokkaido, Tokyo, Kyoto, Osaka, and others. So, if you were interested in renting a property in one of those areas, you’d want to consult a local agent first.

How to Get Started with Rental Arbitrage

Rental Arbitrage, especially Airbnb rental arbitrage, is a simple business model. But, like with any other business, we need to have a clear plan in place before we begin.

A plan will temper our excitement and help us think clearly about this business as a whole during each phase of the process.

Luckily, I’ve created a framework for you to follow. Here are five steps for starting a rental arbitrage business:

• Researching the rental market
• Convincing landlords to work with us
• Estimating costs
• Preparing the unit
• Marketing the unit

Five steps seem simple — and they are — but we want to take our time and learn how to systemize each step for scaling in the future.

1. Research the rental market

When considering your new rental property, finding the best deal is important.

The first step is identifying your needs and wants in a rental property.

Are you looking for a certain number of bedrooms and bathrooms? More beds mean you can demand higher prices, but you’ll also pay more rent to the property owner.

Do you need a washer and dryer in the unit? A vacation rental might not need these utilities, but giving your tenants options will increase their happiness.

Are you looking for a pet-friendly rental? Yes, travelers do bring their pets along for the ride.

Once you have a good idea of your must-haves, you can begin your search.

There are several ways to search for rental properties. You can start by looking online at sites like Zillow or Craigslist. You can also drive around neighborhoods that interest you and look for “For Rent” signs. Another option is to work with a real estate agent specializing in rentals.

Once you’ve compiled a list of potential rentals, it’s time to start narrowing down your options.

One important factor to consider is the cost of the rent. Be sure to compare apples to apples when looking at rental prices. That means taking into account things like utilities, parking, and pet fees (if applicable).

It’s also important to visit the property in person before making a decision. This will help you get a feel for the neighborhood and the condition of the unit. By doing your research, you can be sure to find the perfect rental property for your needs.

Get a list of ten or more properties and then call the owners to schedule meetings.

Why ten or more properties? More is always better when it comes to potential properties. Even if you think each property is perfect for you to sublet, the owner/landlord may turn you down.

That leads us to the next step in this framework…getting the “yes.”

2. Convincing landlords to work with us

Negotiating with landlords is arguably the most difficult part of the rental arbitrage process, but with a little guidance, you can become a pro.

Two “risks” of negotiating a short-term rental deal:

1. They might say no
2. They might steal our idea and test Airbnb arbitrage out for themself.

When this happens, don’t be discouraged. We aren’t losing anything here, we’re just not gaining a property to rent.

To increase your chance of securing a long-term lease for your short-term rental goals, make sure to address the property owner’s concerns upfront.

The everyday landlord is concerned about two main things:

1. They don’t want to chase rent
2. They don’t want to spend money on repairs or maintenance

We can put a landlord’s mind at ease by addressing these concerns in one swoop. Use this next sentence (or one very similar) to let the landlord know you understand their concerns before they have a chance to bring them up.

“You don’t have to worry about the unit — I’ll keep it pristine and will hire a professional cleaning company for upkeep. Also, I’ll automate payments so you’ll get the month’s rent early.”

These aren’t the only concerns landlords have, but they are issues that often crop up during an arbitrage negotiation.

Approach these meetings with both parties in mind, lay out the benefits, and address concerns, and you’ll find a property owner willing to work with you.

Once you get the “yes,” it’s time to break out the calculator.

3. Estimating costs

When estimating the costs of running your rental arbitrage empire, it pays to think of each property as its own business.

Each rental should have data (e.g., expenses, profits, etc.) siloed from the entire portfolio. This will allow you, the business owner, to put more time and resources into a profitable property and cut properties that don’t profit or involve more risk.

Costs of running a rental arbitrage business:

1. Application fees and business permits
2. Deposits (Security deposit, first month and last month rent deposit, pet deposits, etc.)
3. Renter’s Insurance
4. Legal fees (contracts, background checks, etc.)
5. Repairs & updates on the property
6. Furnishings
7. Utilities and Wifi
8. Entertainment subscriptions (Netflix, Hulu, etc.)
9. Tools, toiletries, and kitchenware
10. Cleaning service
11. Management
12. Software (software for rent collection, maintenance scheduling, etc.)

While most of these are self-explanatory, there are a couple I think need to be covered a bit more in-depth.

Repairs & Updates

Usually, a property made available for lease is in livable condition and has been kept up properly to attract potential renters. In this case, someone seeking to engage in rental arbitrage won’t have to do too many major repairs/updates to sublet the property.

Sometimes you’ll find a property that the owner either can’t or doesn’t want to repair and update for a new tenant. In these cases, you can negotiate better lease terms if you’re willing to repair the property before listing it on platforms like Airbnb.

Do your due diligence with every property because major, costly repairs may keep the property from being profitable, no matter how cheap you can get a long-term lease.

Cleaning service

This is a must-have for any serious short-term rental business, and the reason why is right there in the name. “Short-term.”

You do not want to get stuck cleaning each unit after a tenant leaves – this is a cost-ineffective use of your time, and you’ll quickly get overwhelmed.

During peak seasons for vacation rentals, you could have large parties of people renting your units back-to-back. Hire a professional cleaning company for this – trust me, this is not the place to skimp.

Some Airbnb hosts are operating 1-2 units that do the cleaning themselves, which isn’t advisable for those reading this guide. This guide is for those who want to create a successful arbitrage empire — we want to build a business, not a hobby.

Management

The final cost you’ll want to consider is whether or not you’d like someone else to manage your investment.

Maybe not with your first property, but what about your tenth? Twentieth? Hundredth?

Property management companies aren’t cheap, but if you want to continue growing your business while avoiding burnout, you will need help.

Tip: Use an Airbnb profitability calculator

There are several well-done “Airbnb” calculators available. These calculators help you determine if your rental will be profitable.

I recommend AirDNA’s Rentalizer.

You can use it for free with limited functionality, and it’s a great tool for wrapping your head around a short-term rental investment.

The tool will also give you insights into the area around you so that you can stay competitive with other hosts.

You’ve crunched the numbers, dotted your t’s, and crossed your i’s. Now, we need to get the unit “Airbnb ready”…

4. Preparing the unit

When preparing a unit, it is important to consider the city your guests are visiting and what local amenities attract people.

Airbnb has rapidly become one of the most popular ways to travel. Not only is it a cost-effective option, but it also allows travelers to live like a local.

Bedding, towels, kitchenware, and cleaning supplies are things people expect to find in a short-term rental. But, they don’t expect to find a gift basket from the local farmer’s market.

Think beyond the upfront expenses and short-term profit margins. A successful Airbnb host anticipates their guests’ needs and creates a unique experience, not just another short-term rental.

We’re not operating a hotel and must step up the game to earn those 5-star reviews and a high occupancy rate.

You can find great interior design ideas on sites like Decorilla or Houzz that will help you design a unit that your tenants will want to share on their Instagram stories.

5. Marketing the unit

The first step is always going to be creating a great listing. This is your chance to sell potential guests on why they should stay in your unit, so make sure to include plenty of photos and amenities. You’ll also want to set a competitive price that reflects the value of your unit.

Most short-term rental platforms like Airbnb and Vrbo allow you to sign up for free and list your property for free. But they don’t do much to get the word out about your shiny new vacation rental.

Airbnb will sometimes showcase your unit if it’s especially unique or has a wealth of reviews, but in most cases, you’ll have to do your own marketing.

Create a website

The best place to start when marketing your rental arbitrage business is by creating your website. You can do this using tools like Wix or Squarespace or pay a web designer or marketing company to build one for you.

Your site can be an incredible asset for your Airbnb rental arbitrage business. Firstly, paid search ads allow you to drive traffic to your portfolio.

Secondly, when guests book a stay through your site, you won’t pay any fees to rental platforms!

Yes — you can increase your rental income (and thus profit) just by having your website.

Build a social media presence

Creating an Instagram account for your unique Airbnb property is a great way to market your space and attract potential guests. Here are a few tips to get you started:

First, choose a username that reflects the personality of your property. For example, if you have a cozy cabin in the woods, you might want to go with something like @cozycabininthewoods.

Next, post high-quality photos that show off your space in its best light. Include several angles, views, and unique features or amenities your property offers.

Finally, don’t forget to engage with your potential guests by responding to comments and questions. By connecting with your audience, you’ll be more likely to convert them into actual bookings.

Affiliate marketing

You’ve probably heard of affiliate marketing before – it’s very popular in the social media influencer space for selling retail products. But you might not know that affiliate marketing can also work well for rental arbitrage.

Reach out to bloggers, travel vloggers, and other influencers who might be interested in writing about or promoting your vacation rental.

You can offer these affiliates cash incentives to share your property with their audiences or a free night’s stay in exchange for a few posts.

Whatever marketing path you decide to take, focus on one at a time. It’s much better to be consistent on one channel than below average on ten channels.

There is a misconception in the online business space that you must be everywhere, doing everything, all the time. When in fact, this scattered approach will dilute your message and your efforts almost every time.

You’re doing Rental Arbitrage. What comes next?

Where your rental arbitrage business goes from this point is entirely up to you.

Want to scale? Simply rinse and repeat this process until your rental income looks like a phone number.

Often rental arbitrage is a great segue into building a traditional long-term rental business. With the income from your short-term rentals, you can begin buying single-family homes, duplexes, fourplexes, or even apartment buildings that you’ll profit from for decades.

Traditional arbitrage vs. Airbnb arbitrage

You’ll notice that I mention Airbnb a lot in this article. That’s because the rental platform has become synonymous with rental arbitrage.

Most people wouldn’t know about rental arbitrage if it weren’t for Airbnb. The app built itself on this sub-niche of the rental business.

This doesn’t mean you must use Airbnb for arbitrage, but going the traditional route will be much more difficult without the platform. Airbnb is used by millions of people in cities across the world every day, and even a small portion of that traffic could make you very, very rich.

Wrap Up

So there you have it – a crash course in rental arbitrage. Using other people’s property to generate a passive income and get rich is one of today’s most creative business models.

This strategy is perfect for beginner investors and can be easily executed with Airbnb.

Have you tried this out yourself? If so, what tips would you share with others starting in real estate investing via rental arbitrage?

Reach out and let me know!

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