Why does it seem like every other person you talk to knows of someone who listing or will be listing on Airbnb? The answer is simply due rental arbitrage.
When the revenue potential of something is significantly more than the cost to acquire it, you have opportunity. Lets say have a nice studio apartment in downtown LA that costs you $1350 a month. Its in a prime location with ideal amenities. You then find out that one of your neighbors is listing her own studio on Airbnb and is averaging $150 a night.
You do some simple math and realize that if you could rent out your unit for about 9 days of the month, youd pay for your rent. What if you could rent out the unit for 27 days a month? That means the rental potential of the unit on Airbnb is about 3X the cost of leasing the unit month to month!
When your achievable daily rental rate is clearly greater than your actual daily rental cost, you have rental arbitrage.
Simple. There are always folks needing short term lodging and hotels are expensive. These folks want something more economical and Airbnb is the answer. It allows anyone to capitalize on their available space by listing the unit at adaily ratethat is substantially higher than theirdaily costof the unit, but still less than what someone would pay for a comparable hotel room. Win-Win. Unless youre in the hotel business.
This will largely depend on your goals but here is one way for you to gauge.
Weighted Avg Airbnb Rate = (Weekday Rate * 5 + Weekend Rate * 2) / 7
Example: $50 weekday rate and $100 weekend rate will become ($50 * 5 + $100 * 2) / 7 = $64
Take your monthly lease rate and divide it by 30 (e.g. $1500/30 = $50. This is your daily rental cost.
Now divide the weighted avg Airbnb rate by your daily rental cost (e.g. $64/$50 = 1.3
So what does this number mean? Well, if its a 1, it means you have to rent it out the entire month just to cover the cost of your rent, before any fees are taken out.
If youre renting out your own space, then you dont have a choice but at least itll give you a sense of how worthwhile it would be.
If youre looking at a dedicated unit, then you want to find a place where the ratio is 2.0 or more. In urban areas, this ratio will often be 2.5 or higher.
Makes a lot of senseEverybody is trying to make a little extra!
Ive come across this article several times and mean to comment each time but never do, until now.
The article is spot on but Id caution anyone who is seriously considering this, to do your due diligence and weigh out all the risk potentially involved.
In my hometown market, urban living has exploded in recent years and happens to coincide with a tourism boom as well. Ive been leasing units to then turn around and essentially sublet them to Airbnb guests for a couple of years and it has been anything but easy.
So far, Ive had to relocate to different buildings several times, Ive been illegally evicted, the local government first decided to permit short term rentals, then restricted it, then banned it then grandfathered people in, then restricted it to 3%, and most recently, they are talking about an all out ban again.
Ive learned a lot in the process. How to properly frame what you want to do, whether to go to the property management companies or to the owners, whether to stick to apartment buildings or single family homes, whether doing a master lease of multiple units with the same company makes a difference. Ive learned the importance of carefully screening your guests, taking the time to introduce yourself to neighbors, how to position a long term lease rather than a typical residential 6 or 12 month lease and still learning everyday.
Ive wanted to throw in the towel many times, Ive spent thousands in legal fees, Ive been served with civil warrants twice now, Ive had hundreds of five star reviews and have been cursed out more times than I can count.
Rental arbitrage can be a great opportunity when the stars align just right and/or you know what youre doing. Its no walk in the park and definitely becomes a full time job, at least until you figure everything out and have the chance to automate.
My point is to reiterate the importance of doing your homework, being completely transparent with owners and having a lawyer draft a lease specific to what it is you want to do. Finally, consider the risks involved as far as local regulation is concerned.
Are you in Austin by any chance? I am as well and would love to speak with you please email me at sandeep(dot)[emailprotected]Thanks.
Thank you for the thoughtful and helpful advice in regards to rental arbitrage. I am looking to begin in the business and any advice, like the tips you given above would be very helpful. If you may have anytime to talk more about your experience would be the best thing for me going into 2018. Let me know at[emailprotected]
I am looking into entering the rental arbitrage space and found your comments very eye-opening. Everything you said makes a lot of sense and I relate to all of it. I would be beyond happy if we could talk on the phone or via email Justin
Steven appreciated your genuine comments. ive had similar experiences in Canada, what a ride its been. Interested in sharing experiences, lessons, etc? send me an email joy(dot)[emailprotected] would love to connect. good luck & cheers
Hi Steven, can you hop on a phone call and pay you for your time? 30 mins? my email is[emailprotected].
Im just starting, about to acquire a lot of properties and get an investor. Thanks.
Its not always whether you rent or not but how you rent. Little things can can make a huge difference in your booking frequency and rate. Stupid stuffcheap toilet paper, proper linens, good wi-fI/Internet speed. You should really consult a great vacation rental specialist before listing you property.
Totally agree as long as market demand is there. No amount of great hosting and attention to details can overcome a lack of demand.
Great info! 1 question I have is, what is the ideal occupancy rate for similar properties when deciding whether its worth renting nearby?
1. Is there any type of STR insurance that has like an umbrella cover for multiple properties that you have under your portfolio? Or do i have to got one STR insurance for each property respectively.
2. What are some strategies to avoid profit share with LANDLORDS? What to do if the Landlord asks how much you list the property for?
3. What are strategies to work with Real Estate Agents if i cant get direct access to the Landlord?
I have tried to do this in Plano/Frisco TX. My realtor who is very savvy about rentals and the lingo in them worked for a full week going with me to different properties. He introduced me as one of his biggest investors (I own 3 homes in Plano for Airbnb) and he can talk the talk. We didnt find one place that we could do corporate leases. Most all of them had never heard of Airbnb for one, and once explained, the benefits to them would have been much better with cleanings, maintenance issues, so forth taken care of by me and I was willing to pay 3 months at a time etc This was their complaint: they require background checks for each person who lives there, including fingerprints in most places. Their leases strictly prohibit sub-leases (which in their mind is something who vacates and just leases to whoever and doesnt monitor anything). They offered me a corporate lease, but then raised the rent to double. As a corporate lessee, I would have rights to put my people into the units for any length of time I wanted. However, they would require prints and background checks and no way an Airbnb guest of a couple of weeks or less is going to do this, plus the cost involved. If I didnt sign that I would maintain background files on each person, then I would be personally liable for anyone who hurt anyone on property, caused any kind of a ruckus with other traditional tenants, etc. Basically, if they came in and had a party or bumped someone in the parking lot, and then left, a lawsuit would be filed against me.
We tried in so many complexes and there are tons of them everywhere trying like crazy to get the tenants. Any advice on where I went wrong in attempting this is greatly appreciated! I know Airbnb hosts rent out apartments that are not owned by them, as I can find them all over Airbnb. Do people just try to completely fly under the radar and hope and pray they are not going to get caught?
I am Canadian. Does anyone know if rental arbitrage is possible in Canada, and specifically in cities like Ottawa or Toronto, or even in the West Coast, like Vancouver?
What if i wanted to come to the States as a Canadian and establishing an activity in the US? Is that possible?
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