Can you really make money with rental arbitrage?

You don’t need a lot of start up capital or to be a real estate mogul to make money on Airbnb. Hell, you don’t even need to own any property. You just need to know the shit outta how to find and run a great rental arbitrage opportunity. So let’s dive in and get started! Rental arbitrage has become an increasingly popular strategy for making extra money in real estate, and many people are interested in learning how to do it themselves. In this blog post we will cover:

  • what rental arbitrage is,
  • how rental arbitrage works on Airbnb,
  • what to look for in a rental arbitrage property,
  • 6 traps to avoid when rental arbitraging, and
  • our own personal rental arbitrage case study!

What is ‘arbitrage’?

In its simplest form, arbitrage is the process of buying a product in one market and then immediately selling it in another market for a higher price. This can be done by taking advantage of price differences between two different markets, or by taking advantage of discrepancies in the price of similar products offered by different sellers.

There are tonne of arbitrage opportunities available nowadays with the internet giving everyone access to different marketplaces instantaneously.

One well known arbitrage strategy is ‘rental arbitrage’.

What is rental arbitrage?

rental arbitrage

Rental arbitrage is about taking advantage of price differences in different property rental markets. There are different ways to do this. For example, you might buy a rental property in disrepair for a price based on the current rental return. You can arbitrage the rent by fixing the property up cheaply and increasing the rent. In this case you are arbitraging rental sub-markets between run down and well-presented rentals. The difference could literally be a lick of paint, some gardening and new curtains!

Another rental arbitrage technique – and the one we’re going to focus on here – is the practice renting a property long-term and then re-renting it on short term accommodation sites like Airbnb or Vrbo.

This kind of rental arbitrage is also known as ‘house hacking’ and there are two main ways to go about it.

  1. You can rent a property, live in it and rent out a room in that property short term.
  2. you can rent a property long term solely to rent it out to others on a short term basis. You don’t live in it at all.

We’ve made money with the second strategy, but this post applies to both methods.

The rental arbitrage model

The model for rental arbitrage using Airbnb is simple – your Airbnb earnings need to more than cover your cost to rent the property from the owner, plus your operating expenses as a short term rental. If you’re able to find a property where the Airbnb income will be more than your costs, you have created an opportunity for rental arbitrage!

Making money from rental arbitrage is highly location and market dependent as you can see from the AirDNA graph below. AirDNA is a great source of real data from Airbnb rentals.

This image shows the short term rental premium for different US markets based on real Airbnb and long term rental data.

The graph shows that long term rental rates have increased in some US markets and decreased in others due to changes in demand. Short term rental nightly rates and occupancy rates have also changed with demand. But what does all this mean? Well, markets where growth in short term rental demand and nightly pricing exceeds long term rental rates are golden!

In this post we are going to demonstrate that rental arbitrage can be satisfyingly profitable if done correctly, but there are also risks involved. You need to know your numbers and market trends (like those illustrated above) to make money. But don’t worry, this data is available on the internet! We use AirDNA for all of our Airbnb analysis.

Make sure you keep on reading right to the end where we share our own personal case study showing how we made money with rental arbitrage.

6 rental arbitrage traps to avoid

Once you understand the basics of rental arbitrage, it’s important to be aware of some traps that can derail your profits. Here are five to watch out for:Your own time commitment – managing a short term rental takes time, so make sure you factor this into your calculations

  1. Not properly researching an area – if the short term rental market is weak or there are too many short term rentals in the area, your earnings will be lower than expected. You need to be clear what your Airbnb occupancy rate will be and the nightly rate you can charge.
  2. Underestimating operating costs – from cleaning supplies to wifi service, make sure you have a realistic estimate of all your expenses. You can take a look at our case study below to get a better idea of what these might be.
  3. Ignoring the rules – governments and municipalities can make and change rules related to short term rentals, so always stay up-to-date on any new rules that could impact your bottom line. It’s best to find a location where there are already clear rules about running Airbnbs.
  4. Finding properties with hostile building management – some building managers or body corporates will do everything in their power to keep Airbnb businesses out of the building. Airbnbs can undercut their profits. Find Airbnb friendly buildings in rent in!
  5. Not managing risk – from damages to rental theft, there are a number of things that can go wrong with Airbnb properties or guests. Make sure you have enough in your budget to cover any unexpected costs and get short term rental insurance!
  6. Make sure you have a clear written agreement with the property owner stating your intention to rent the place short term. Be crystal clear about who will pay what costs – utilities, maintenance, and repairs.

What to look for in a rental arbitrage property

There are several things we recommend that you look for when identifying rental arbitrage opportunities:

  • The numbers of course! There must be a good short term rental premium in that location. We talk about ‘short term rental premium’ above.
  • The property should be in a desirable location with high demand from Airbnb guests. You can check short term rental demand for an area using AirDNA.
  • The rental rate that you pay should be below or at market value.
  • The property should be well-maintained and (ideally) furnished. This will reduce your Airbnb set up costs to things like small appliances, kitchenware, and consumable items (bath products). Lower costs mean quicker profits!
  • Properties that offer extra value that isn’t reflected in the rent. Like plenty of room to sleep more people using sofa beds or ways to turn dead spaces into a profit. Examples might be transforming a study into an extra bedroom, or an ‘insta-worthy’ view that’s not reflected in the rent.
  • A property that can out compete other Airbnb listings in the area. This means that the amenities, the interior design, the space, the light and the comfort level are better than the average local listing.

When considering a rental arbitrage opportunity, always do your research to make sure these factors are present!

Now you understand what rental arbitrage is, how it works, some of the traps to avoid, and what to look for. Huzzah! Now let’s take a look at an example of how we successfully made money with this strategy.

Our rental arbitrage case study

We’re going to share with you a personal case study using rental arbitrage. Hopefully it helps you understand how to go about finding these opportunities and how much you can actually make, if you do it well!

Due diligence

When looking for an investment opportunity, we always start with a due diligence phase. For Airbnb, we use AirDNA to do our research, as well as the Airbnb platform itself. Our aim was to find a rental arbitrage opportunity and set up a new Airbnb income stream for our financial freedom goals!

Our due diligence on AirDNA discovered:

  • strong demand for Airbnbs in a particular Brisbane CBD area; an entertainment district featuring restaurants, bars, clubs, and cultural venues
  • a limited supply of quality 1 bedroom apartments in the direct vicinity
  • a pricing gap in the nightly rate for singles or couples wanting to stay in the area
  • the most successful Airbnb listings in the area had a ‘wow factor’ to them.

Once we identified this gap in the market we went about finding an apartment to rent to specifically fill that gap in market demand and pricing…

The property

We found a one bedroom apartment for rent in the area through a real estate agent in our network. These are the features that we felt made the property a potentially good Airbnb option:

  • spectacular city views
  • walking distance to entertainment venues, restaurants, pubs and clubs
  • spacious apartment for a 1 bedroom
  • all new interior
  • Airbnb friendly apartment building.

The rental arbitrage deal

After further discussion with the agent, the apartment was offered to rent for $460 per week.

Next it was time to do the numbers….

After crunching some high and low scenarios we realised from the combination of Airbnb demand (occupancy) and achievable nightly price, compared with the weekly long term rent and likely expenses that this particular would be a good rental arbitrage opportunity.

We signed the lease, snapped into action and began to set up the Airbnb listing.

Set up costs

The apartment did not come furnished, which meant that we had higher start up costs. We would also face a pay back period before we started making actual profit. We needed to limit the set up costs to achieve a payback period of under 6 months if possible, given we had a 12 month rental lease.

It cost us $7000 AUD to furnish, decorate and equip the apartment for Airbnb guests. This included all new items and buying our own linen. It did not include the 7 days it took to set everything up, which you’re paying rent for. Make sure you factor this in to your analysis.

Income and expenses

Here is our actual income and expenses ledger for the month of January.

January ExpensesCost per month**
Rent$1993
Maintenance$0
Power$89
Water$15.40
Hot Water$165.50
Internet$70
Insurance$30.50
Cleaning and laundry$370
Consumables$163
Total cost$2896
Total income (net of fees)$4519
Monthly profit$1622
** numbers are rounded

Annual profit

Extrapolating from these monthly figures we can get an indication of annual profits.

Year 1 profit is equal to the net income after start up costs….

= $1600 x 12 months – $7000

= $12,200

Year 2 profit is more like $19,200.

Thats just from one x 1 bed apartment! You get three of these things that work well and you could consider quitting your job and building an empire!

Final word

It’s worth knowing that not all months are equal in Airbnb income – some have higher demand and some have lower demand. CBD locations like this one are not particularly seasonal however, and can experience strong demand all year round due to the variety of entertainment options in the area. What you really need to watch out for is oversupply of properties locally – this can really impact your occupancy rates and your bottom line. We have ways to manage this risk which you can read about in our upcoming ebook!

Our eBook will also share the due diligence strategies we use to help our Airbnb business ride through business risks like unexpected dips in demand (from a pandemic maybe!).

If you’re doing due diligence on a potential property of your own, AirDNA will show you average occupancy for a particular area as well as average nightly price for different types of properties. Base your due diligence off of this data but allow a buffer for expenses. We also recommend running some sensitivities on your analysis based on higher and lower demand scenarios!

Next steps

In this post we’ve shared some beginners knowledge about rental arbitrage and how we make real honest to god money from it.

If you want to learn more and set up an Airbnb income for yourself, here are two things you can do:

  1. Sign up for the BNBformula training and get cracking on building your own Airbnb business empire, OR
  2. Bookmark our Host Hub page and stay tuned for our upcoming eBook. It’ll cover all of our hacks and tips with this rental arbitrage strategy.

Or you can read our other cool posts on making money with Airbnb!

How to manage Airbnb properties for other people
Make money on Airbnb without owning property – $6400 in one month with this apartment
How to start an Airbnb in a pandemic

Financial freedom with Airbnb using rental arbitrage is real peeps. Let’s get stacking those Benjamins (or Pineapples if you’re from Oz!).

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