Rental Arbitrage: The Secret to Making a Fortune on Airbnb Without Owning Property
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When most people think of real estate investing, they usually assume a few things. One, they think they need a lot of capital to get started, and two, they think they need to own a lot of property to make money. That's not true, thanks to rental arbitrage.
Owning property isn't a bad thing, but it isn't necessary under the arbitrage model. Through this method, you can work with a landlord to rent out their property on Airbnb—and make a lot of money doing so.
What Is Rental Arbitrage?
The word arbitrage is a financial term that basically means taking commodities from one marketplace and selling them for a profit in another.
In reference to Airbnb, it means an investor rents a property from a landlord, then lists it on Airbnb and collects the difference. For example, let’s say you rent a condo for $1,500 per month and list it on Airbnb for $4,500 per month. Before expenses, you collect $3,000 per month in profit. (Keep in mind that expenses can range from $250 to $1,000-plus per month, depending on your strategy.)
Most rental arbitrage investors aim to make around $1,000 net profit per property—although you can make much more.
Is Rental Arbitrage Legal?
When I first came across this model, I had several questions. Namely: Is this legal? And how will the landlord respond when they find out?
Fortunately, yes! It's completely legal. In fact, the rental arbitrage strategy has been used for a long time—it's just not talked about often. Like many creative investment strategies, it stems from the realm of commercial real estate.
First, you must tell the landlord about your intentions for the property. Some will be open to it; others won’t. If you encounter one who isn’t, you move on. Honesty is key.
How to Make Money on Airbnb Without Owning Property
Learning how to work with landlords is essential to successful rental arbitrage. After all, we’re not trying to be sneaky! So how can you convince landlords to work with you? First: Remind them of the benefits for them.
When a landlord rents their property to someone doing rental arbitrage, they can rest assured knowing that they are getting a long-term, business-to-business tenant with a financial incentive to keep their property in tip-top shape year-round. During arbitrage, you rent the property at full market rate—or maybe even a little higher to sweeten the deal, as long as it works with your business plan. The property owner's equity is increasing and they’re getting a little bit of cash flow every single month.
Some investors worry that Airbnb guests will destroy the house. Every now and then, someone may do something destructive—that’s just part of the rental business, and it’s usually a very small percentage of the guests. It’s a risk with traditional renters, too. Plus, with Airbnb, there are courses of action you can take to get reimbursed—not to mention a free $1 million liability policy for listed properties.
When someone using the arbitrage model rents a property from a landlord, it is in their best interest to keep the property pristine. For the landlord, this means the property will be in top selling condition all year.
How Airbnb Hosts Can Sweeten the Deal for Rental Owners
If that’s not enough to convince the landlord, try these tactics to make the deal more desirable.
1. Offer an additional layer of third-party insurance.
For security-conscious landlords who are security-conscious, this appeals to their need for more certainty. You can shop various companies for a third-party insurance policy that you can layer on top of the $1 million policy that you already have. This offers plenty of protection against just about any possible scenario. And remember: As long as the numbers make sense financially, this is a good strategy if it helps to get the deal done.
2. Offer profit-sharing
This is where you offer a percentage of the net profit of each deal that you’re doing with the landlord. This comes from a concept in private equity known as economic alignment. The basic premise is that when a party has a financial incentive in a business’s success, they’re more willing to help that business succeed.
You may need to give away a large portion of the profit of your first few deals in order to build up your portfolio and develop a track record. You might think that this isn't fair, but this may be exactly what you need to do in order to convince the landlord. Once you have several deals under your belt, you have more bargaining leverage, and you can take a larger share of the profits.
3. Offer to rent multiple properties from them at once
Expand with them as they build out their portfolio. A lot of single-family-home investors are looking for equity build-up in each of their properties over long periods of time. If you can prove to them that your model works, then you can offer to expand alongside them to accomplish their goals. With this strategy, you and the landlord become joint venture partners, each helping the other accomplish their investment goals.
How to Get Started in Airbnb Arbitrage
You don’t need to be a homeowner or have a lot of capital to get started with Airbnb. In fact, the costs associated with listing your first property are pretty low—even more so because we’re using other people’s properties.
1. Set up your business
If you plan on scaling your portfolio beyond three properties, begin by starting your business properly. Set up a solid foundation and infrastructure to conduct business in good standing and grow effectively.
Start with a legal entity. For most people, an LLC works best. It's easy to set up and simple to manage and offers favorable tax options.
Doing this now will help you find more deals later on when you start searching for properties. Plus, some property management companies won't allow you to perform rental arbitrage without a corporate lease.
Take inventory of your assets, resources, and network. What can you leverage for immediate success? No, you don’t need tens of thousands of dollars. But if you do have investment capital, I’d still encourage you to start small. It’s tempting to jump into the business head-first, but you must learn the systems first before you scale. Capital-wise, you only need between $1,000 to $2,000.
2. Build your team
Like any good business owner or real estate investor, you need a good team. It’s easy to handle everything yourself at first—but you’ll want additional support once you start to scale.
Your core business team should consist of your accountant and your attorney. These two team members will guide you around common newbie pitfalls. Here’s what to look for:
- Attorney: You want someone who specializes in corporate law and/or real estate. Even better if they have personal experience with real estate investors and other rental property owners.
- Accountant: They should understand tax strategy and have experience with real estate investors.
Once you scale out to three or more properties, it’s time to start expanding your team, too. Here are some of the key members that you’re going to need:
- Co-host: This person is a member of the Airbnb community who doesn't control any property themselves but helps full-time hosts manage existing properties. Think of them like your personal property manager who oversees day-to-day operations. Airbnb allows you to give the co-host a percentage of the profit of each deal that they help you with.
- Cleaning crew: In the beginning, you can clean your own properties. However, this is very time consuming. Your options are a professional company or an individual or small business. Generally, mom-and-pop cleaning crews are more adaptable and cheaper, while professional companies cost more but are more effective and have more accountability.
3. Do market research
Most people who get into Airbnb don’t conduct any market research beyond a Google search—if that. Just because you have a nice property and you think it’s in a popular part of town doesn’t mean it’s going to be successful.
You want to use hard facts to find properties in the most profitable parts of town. Which submarkets, zip codes, and streets will give you the biggest bang for your buck? The Airbnb website can tell you a lot about your market—if you know what to look for.
- Entire home properties. We’re not starting a room-sharing business. Whole-home properties make you more money.
- Minimum nightly rate of at least $100. This rate tells you where the most in-demand properties are located.
Next, examine the map for clusters of listings. Go through them one by one to identify patterns. What is in demand in this unique market? Look for:
- Number of bedrooms
- Amenities, like washer/dryer or air conditioning
- Proximity to downtown or other touristy spots
- Decorating style.
Your job is to discover these market-specific details and then repeat them in your own business strategy.
What attractions are visitors talking about in your city? It could be beaches, parks, shopping, or bars. Look for this information in the descriptions of the top Airbnb listings, the reviews, and with Google searches on various travel sites. This will give you a better idea of where to look for properties.
Next, calculate the potential profitability of your listing and test for demand. Ideally, you want to be profitable at 50 percent monthly occupancy—that’s a good barometer of success.
For example, let’s say the going nightly rate in your target location is $200. Fifteen days booked—or approximately 50 percent occupancy—will make you $3,000 for the month. If your rent and expenses are $2,000, then you’ll net $1,000. That’s pretty good for 50 percent occupancy and doesn’t even account for additional costs that you will charge the guest, like a cleaning fee.
As you expand your Airbnb offerings, you might be interested in paid tools to test for occupancy and demand. Now, though, you can run these analyses for free on the Airbnb website. Look at several listings in your market and then look at their bookings one to two months into the future. This gives you a decent idea of how they are actually doing.
To do this, just click the “Check-in” button on the right side near the calendar. Then cycle through the months with the navigation arrow. The days that are booked will be filled in, and the open days will be bold text.
There’s obviously a lot more that goes into market research, but this is enough to get started.
4. Finding properties
Now that your real market data shows you exactly what areas are most profitable, what home types people like, and what attractions guests want to visit, it’s time to find your first property.
There are many rental property search tools online, and you can use whichever one you feel comfortable with. I recommend Zillow. Search for your market, selecting the filters that apply to your metrics.
Once you narrow your search down to the exact submarket or zip code you are considering, it’s just a matter of analysis. You may have to sort through 50 to 100 rental properties before you find your needle in the haystack—but this effort will be rewarded in the end.
If you want to narrow the process even further and cut down on your upfront costs, you can search specifically for furnished properties.
Of course, you have to be upfront with the landlord. If they’re not on board with you listing their property on Airbnb, look for another option.
5. Listing your property
Listing your property is straightforward. Just follow the instructions on the Airbnb page by selecting “Become a Host.” You can create a dummy profile to get started, and then create your real listing later on.
After you are set up, you can create your schedule, set requirements for guests, and establish your daily rates. From there, everything is taken care of on the Airbnb website and app—which is what makes this model so easy to get into.
6. Optimizing your listing
Now that you have your property set up on the Airbnb platform, you can begin optimizing your profile to attract more guests. Every profile has a rank, which is determined by an internal algorithm only known to Airbnb—just like Google search results. There are many known white-hat methods of increasing your rank and attracting more guests.
Great pictures are essential. We recommend hiring a professional photographer—it will cost a couple hundred bucks. If not, then at least learn a little about lighting and photo editing. Your pictures are one of the first things people notice. Often, tourists make immediate yes-no decisions based on the quality and appeal of the photos. If you want good examples of great photos and top-of-the-line listings, then click the “Airbnb Plus” homes to view your market’s top-rated properties.
You can glean more tips from those Airbnb Plus listings, too. Do they use certain keywords in their titles? What rooms do they showcase? Is there an interior design pattern that stands out?
Do your best to model your profile after the top performers. A lot of people who get into Airbnb just wing it and try to come up with everything by themselves. This is why most people get mediocre results.
7. Automating your business
Successfully building an Airbnb portfolio that generates thousands of dollars per month is pretty awesome, but being stuck working 100 hours per week to maintain it certainly isn’t. We didn’t get into business and investing so we could work two or three times as much as everyone else. We invest because we want freedom, control, and options.
Establishing appropriate systems to run your Airbnb business with minimal effort and maximum income.
Once you have your property set up, you’re responsible for basic property management tasks and cleaning. If your landlord has a property manager or you are using a condo in a complex, then your basic property management needs are taken care of. If not, then you will need to find a good property manager who can handle these things.
Your cleaning crew needs to understand exactly what to do each time they clean. They also need to know when to come. The best way to do this is to sync your Google calendar with your Airbnb schedule, and then share a “read-only” version with your cleaning crew so they can access the calendar, but they can’t change it.
A co-host is your next most powerful automation technique. Find someone you can trust with experience in the hospitality and real estate industries. This person will be the face of your business on the properties that they represent and manage. They will be responsible for handling guest questions and providing additional services. Think of a co-host as an internal Airbnb property manager for you and your listings.
If you have numerous listings in multiple markets, then you will have more than one co-host who manages their own section of your portfolio. After a certain point, you can hire a CEO or asset manager, who will take on your job of overseeing and growing the company.
Next, automate the check-in process. Do you really want to personally drive to each listing and greet every single guest? No. Get around this burden by developing a self-check-in process for your guests.
You can put keys inside an old-school lock box, like the kind that real estate agents use, or you can use smart locks. The downside of the lock box is that people can lose the key or come back months later and rob you, assuming you don’t change the code. The upside: they’re cheaper.
Smart locks offer a lot of options and many more security features, like the ability to remotely access the property from your phone. A popular model is the August Smart Lock, which will run you a couple hundred dollars.
You can also give temporary codes that expire after your guest leaves and allow you to see who is accessing the property and when. This gives you a lot more control and accountability.
You’ll also want to develop a comprehensive house manual and give guests access immediately upon booking. It should cover every possible question a guest could ask—everything from WiFi passwords, gate codes, and available amenities to local attractions, transportation options, emergency contacts, and co-host contact information.
This manual gives guests everything they need to be self-sufficient. Most people don’t want to be bothered when they are staying at your property, just as they wouldn’t in a hotel. Make it easy for them to get what they need without too much effort.
Starting a business with Airbnb is one of the best models for people without a lot of real estate experience or startup capital, because a lot of the mechanics are handled for you. However, it’s even better if you do have these things, because you will be able to launch and scale your business that much faster.
If you put your head down and diligently work on this, you will be making a six-figure income in 12 to 18 months—a level of success almost unheard of in most industries.
Any questions? Need further instructions?
Ask me in a comment below!