Have you ever stayed at an Airbnb or other short-term vacation rental and thought, “I wonder how people do this?” You’ll be surprised to learn how easy it is to get into the vacation rental market. Nowadays, the demand for vacation rentals is growing quickly and there are many opportunities out there to take advantage of this opportunity. The best part? You don’t need to own the home you are renting out! Keep reading my rental arbitrage basics and everything you need to know to get started.
What is Rental Arbitrage?
Before we get into the nitty-gritty of how you can make money using rental arbitrage, let’s go over what rental arbitrage is. It’s easiest to think of arbitrage/arbitration as a fancier term for the practice of renting properties and subletting them on a vacation rental platform.
With home prices skyrocketing, it can be daunting to come up with enough money to purchase a vacation rental property. This is especially true if you’re just starting out in the Bnb world. By utilizing rental arbitrage, you can overcome the hurdles of homeownership while still reaping the benefits of passive income.
Rental Arbitrage Basics- How does it really work?
Once you sign your rental agreement, you are able to begin making money by renting out your property to short-term renters. Instead of charging these short-term renters a monthly rental fee (like you are paying to your landlord), you will be charging them a nightly or weekly rate. This rate is typically much higher than the long-term rental rate that you are paying to your landlord.
You will need to do some research and a little bit of math to figure out the rental rate sweet spot for your particular area. Once you have that information you can begin to make a profit off your vacation rental. (Be sure to check out my FREE training on this here!) For instance, if you have a property that you are paying $1,200 a month to rent and you are able to sublet that same property for $150 a night to travelers, it would take only 8 nights a month for you to pay your rent from your rental income.
If you rent that same property 15 nights in a given month, you will bring in $2,250 each month. This will not only pay your rent to your landlord, but it will also take care of any maintenance costs/fees you may have and leave you with profit in your pockets. Repeat this process for a year and you’ll be amazed at how much money you’ve made!
Pros and Cons of Rental Arbitrage
Nothing in life is 100% perfect. So there are a few pros and cons to be aware of when it comes to rental arbitrage. Let’s start with a few of the many pros.
Pros of Rental Arbitrage
- Low start-up costs
- You have access to the property for you and your family
- Quick turnaround time from renting to making a profit
- No need to hassle with mortgage lenders
Cons of Rental Arbitrage
- You need to be prepared to pay the rent if bookings are low in a given month
- Finding a landlord and property can be tricky in certain areas
- If your property is booked often, you’ll need to set aside money to replace items and furniture.
A Few Things to Remember
Before you rush out and sign a lease on the first vacation property you see, there are a few things to remember. The most important thing to research before deciding to jump into the rental arbitration game is if short-term rentals like Airbnb and VRBO are legal in your city or area. Most HOA’s have guidelines regarding short-term rentals. Be sure that what you are trying to do is legal in your preferred area. Don’t get shut down and stuck with a property that you can’t rent out!
Along with checking if short-term rentals are legal in your area, be sure to be upfront with your landlord about your plans for the property you are renting. Having a proper addendum to your contract is CRITICAL! You are not legally allowed to rent out the property if your landlord doesn’t agree to your terms in writing. Talk with your potential landlord and double-check the lease before signing it. Be sure that you are both on the same page as far as who will be living in the property.
What about Taxes and Repairs?
One last thing to be aware of that is really important. Just because you are renting the property and do not own it, does not mean that you are not responsible for damage, maintenance, and taxes.
I recommend that you set aside money each month to go towards the maintenance of the property and furnishings. You will need a fund for any damages incurred by your short-term renters. This way you won’t be surprised when you have to replace a broken bed or have a clogged sink fixed by a plumber. And don’t forget you will need proper insurance on your property to help you cover any major repairs that may come up.
Rental Arbitrage Basics
Now that I’ve shared all of my rental arbitrage basics, are you ready to join me in the rental arbitration market? For me and my family, having passive income from short-term rentals has changed our lives in countless ways. I know that it can do the same for you. For more information on how you can get started in the rental arbitrage market, get my book here. And be sure to follow me on Instagram here for more tips and tricks on making money with vacation rentals!
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