Airbnb Arbitrage: Renting vs Buying
When people think about starting an Airbnb business one of the first excuses that comes to mind is not having enough capital to buy one or multiple properties. I'm writing this post to dispel the belief that you need to own a property to run a successful Airbnb business and to also prove that renting is more profitable.
Buying A Property
Starting Capital: $25,000
Purchase Price: $200,000
Down Payment: $20,000 (10% = best case scenario)
Furniture & Admin Startup Costs: $3,000
P&I, PMI, Taxes, Etc: $1,250/month
Business Expenses: $750/month
Revenue: $3,000/month
Cashflow: $1,000
Rental Arbitrage
Staring Capital: $25,000
Purchase Price: $0.00
Down Payment: $500 security deposit
Admin Startup Costs: $1,500 (using a furnished apartment & not including rent)
Rent & Utilities: $1,450/month
Business Expenses: $750/month
Revenue: $3,000/month
Cashflow: $800
Total Capital Used: $4,200
Leftover Capital: $20,800
So as you can see you made a little less with the rental arbitrage model however you also have $20,800 leftover in your pocket. You can now take this capital and do the same thing with 4 more properties each making $800/month cashflow. $800 x 5 = $4,000/month cashflow for the same amount of capital you used to buy ONE property. But not only do you have more upside you have less "potential" downside. What happens if the property you bought isn't performing? what if the neighborhood goes south? what if your AC blows out or your roof needs to be repaired? With rental arbitrage you get all the upside without the downside of owning a huge liability. A smart thing to do would be to have an escape clause in your rental agreements that allows you to plan for unexpected problems with the performance of your property so you don't get trapped.
To be honest the numbers on the rental example are a little higher than normal. You could actually acquire a new rental property for much less than that by finding motivated owners and negotiating better terms. You might be able to get into a new property for $500 if you know how to cut and slice the deal the right way.
Thanks!