People Are Making Tons of Money With Airbnb and They Don't Even Own Property. Here's How. The new book, "Start Your Own Airbnb Business," outlines the concept of rental home arbitrage.
By Jason R. Rich Edited by Dan Bova
Key Takeaways
- Instead of purchasing or financing real estate, some Airbnb hosts have discovered that it's less risky and more lucrative to lease ideal properties and sublet them to travelers.
- This business model is referred to as "rental arbitrage."
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In the new book, Start Your Own Airbnb Business, author Jason R. Rich breaks down all of the money-making possibilities with short-term rentals. In this excerpt, he explains "rental arbitrage."
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Instead of purchasing or financing real estate to be used for short-term rental, some Airbnb hosts have discovered that it's less risky and more lucrative to pinpoint ideal properties and then sign long-term leases for those properties with their existing owners. Once the property is leased, it's then managed as an Airbnb property by the lessee. Of course, the property owner must agree to this arrangement and short-term rentals must be legal in that geographic area.
Subletting a property that you then plan to manage as an Airbnb short-term rental can also be considered a corporate lease. And yes, it includes some risk, but not as much as purchasing (or financing) a property outright. This process is referred to as "rental arbitrage," which means you're renting out a property on a long-term basis for the sole purpose of listing it on Airbnb or a similar service and then managing it as a short-term rental.
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Choosing this business model will require you to pay the property owner (lessor) a security deposit (which is typically two months' rent). You'll also need to hire an attorney to help broker the deal, acquire appropriate insurance, and then furnish the property—all of which must be calculated into your startup costs. You'll then incur all the usual fees associated with being an Airbnb host, including cleaning fees, landscaping fees, and potentially property maintenance fees.
Airbnb hosts who have chosen to pursue this business model for one or more properties must do careful number crunching to ensure that, based on the anticipated occupancy rate when offered as an Airbnb property, it will generate enough revenue to cover the lease and all related expenses, plus generate at least a 20 percent profit each month.
A contingency plan must also be put in place to cover expenses when the Airbnb occupancy rate drops lower than expected, yet the property owner still expects their monthly lease payment and other expenses must also continue to be covered. Thus, you do not want to lease a property that will only generate Airbnb (or short-term rentals) seasonally, unless the profit you're able to generate during the peak season will cover your leasing and operating expenses for the entire year.
According to iGMS, "Once you have gotten the hang of how a corporate lease on Airbnb works, you can basically apply the same strategy to get a second property. This way you can grow your property portfolio and ultimately your business much faster. As you will be using others' properties, you can start a short-term rental business without owning any of your own rental properties."
If you choose to adopt a rental arbitrage business model, seriously consider forming and operating as an LLC (Limited Liability Corporation), which provides you with some added legal protections. Again, consult with an attorney before pursuing this type of short-term rental opportunity. Once you become fully acquainted with the corporate leasing strategy and have one unit successfully up and running (and profitable), you can grow your business by leasing additional properties that you'll also operate as short-term rentals via Airbnb.
Profit Potential
Let's say you sign a long-term lease on a home or apartment that costs you $2,000 per month. You can then potentially sublet that property via Airbnb for $200 per night. Once you add your expenses, if you're able to maintain an occupancy rate that includes at least 12 to 15 paid nights per month, you'll probably wind up breaking even. Then, any additional nights you book via Airbnb will generate a profit for you. So, during a month with 30 days, your profit potential is around $2,000 (assuming 100 percent occupancy, which is rarely achievable on a consistent basis, unless you offer a superior property within an in-demand location and charge a competitive nightly rate compared to the competition, or you're able to consistently book long-term guests who reserve the property for one or more months at a time).
While these numbers are used for demonstration purposes only, don't even consider leasing a property that you're not extremely confident will have at least a 50 percent occupancy rate via bookings through Airbnb and similar services. Otherwise, the financial risk increases rather dramatically. According to Airbtics, "There are certainly various ways to find rental arbitrage properties, but it may take some time to figure out the best ones for you if you don't conduct the necessary research carefully."
