Guide to Airbnb Arbitrage
In the ever-changing world of real estate investing, savvy investors are always on the hunt for the latest strategy and deal. One strategy that is gaining a ton of momentum and rightfully so, is that of Airbnb arbitrage. It truly can be a game-changer when we look at the ever increasing capital investment required to get started on the road to your short term rental portfolio. Let’s dive deeper into this approach, and explore how it can add additional opportunities to your investment portfolio.
What is Arbitrage?
At its core, Airbnb arbitrage involves leasing a a property, and then subleasing it as a short-term rental. You want to look to partner with a Landlord in a location where there is STR demand, and thus opportunity as not just a long-term rental. Often, landlords who haven’t been able to lease the property for awhile will be very willing to explore this opportunity, because it gets them what they want, and with a credible investor source, whom will likely be more reliable as a renter. In this scenario it’s imperative that you have approval to rent as an STR and start with a 1 year lease at minimum. To be honest, we might even suggest trying to secure a longer lease, since you don’t want to just get started with your rentals and have a disruption due to lease renewal. That being said, it is important to weigh the risk benefit ratio here, because certainly a pro to this strategy is the fact that you can test a property or area if desired, and without a huge commitment from time and capital.
Pros & Cons
Pros:
Low capital investment
Transition of property can be very quick
Offers flexibility in trying out areas
No closing costs, lender approval
Way to minimize risk
Cons:
Dependent on landlord, little control
Potential lease restrictions
Hoa might change regulations
No opportunity to build equity
No tax depreciation benefit
Step by Step Guide to Getting Started with Arbitrage:
1. Market Research: As with any deal analysis, we begin with identifying potential markets that have a high demand for short-term rentals. We typically look at tourist destinations, business districts, areas close to hospitals, and universities. We’ll look at key metrics such as cash-on-cash return, occupancy rate, and average nightly rates to get a sense for how an area stacks up agains the others. AirDNA is a tool to get you started with the numbers and don’t forget to assess the competition. If you read our article on Airbnb success you saw that it is imperative to be in the coveted 99 percentile, or as close to it as possible.
2. Property Analysis: After we find a few areas we then begin to zero in on specific properties that offer the ability to invest the least amount of capital, but that still will stand out as a short-term rental. We look for things like uniqueness, amenities, and general appeal. Properties that come fully furnished, that have neighborhood pools, golf courses… get bonus points for us.
3. Partner with Landlord | Lease Negotiation: Once a property is identified then we set out to partner with a landlord. We negotiate all terms to the best of our ability and ensure that we can both sub-lease the property and that there aren’t any restrictions on short-term rentals either in the neighborhood development or city. Imperative to this step is both finding a landlord that has a desire to partner and who will both let you lease for a shorter period of time with the ability to renew, such as, first right of refusal for lease renewals. It is also important to ensure that you build in enough of a profit margin between what you are paying and on average what you expect to earn.
4. Interior Design: Designing the space to give it a welcoming atomosphere and make it stand out on Airbnb is super important. It’s a world of first impressions and you’ve gotta wow the potential guest. After all, we are in the world of hospitality first. Check out one of our designs here.
5. Permit | License: Ensuring you have all necessary permitting and licensure and are setup for any tax payments is essential. Also, understand if there are any safety codes that you must meet from both a regulatory and insurance standpoint.
6. Marketing: Now it’s time to get those professional photos and craft a compelling description. Make sure to highlight all of the unique features that set your property apart, in order to enhance your listing’s visibility in the local marketplace. We also love the use of reels for social media to give guests a tour of the property and a feel for the amenities.
7. Ready Your Team: Even though this is a leased property, you’ll still need the usual suspects: cleaning, management, 24 hour contact, save for possibly maintenance if that will be handled by your landlord.
8. Go Live!
In conclusion, Airbnb arbitrage presents an interesting opportunity in the world of short-term rentals. And though there are other ways to invest (check out this article), we believe this strategy allows investors to capitalize on growing their portfolio in a way that offers unique flexibility and lower capital investments.
If you’re ready to explore the potential of Airbnb arbitrage or seek guidance on properties that might optimize your real estate portfolio, connect with us. We are dedicated to providing the strategic insights and market knowledge that it takes to see your real estate endeavors through to their fullest potential.