Short-Term Rental Arbitrage: Navigating Risk and Reward

What if we told you that you don’t actually have to own property to get in on the short-term rental market?

While many people assume that property ownership is a prerequisite, the truth is that even renters can tap into this lucrative opportunity.

This is simply a matter of short-term rental arbitrage, and we’re here to get you up-to-speed on everything you need to know about it.

What is short-term rental arbitrage?

First, let’s cover a short-term rental arbitrage definition.

Short-term rental arbitrage involves leasing a residential property on a long-term basis and then subleasing it for short-term stays. Think of it as subletting with a focus on vacation rentals or temporary stays.

This can work with any residential rental, whether your lease is for one year or longer. You, as the tenant, decide the terms of the short-term rental—whether you prefer weekend visitors or longer stays.

Is short-term rental arbitrage still profitable in 2024?

Yes, vacation rental arbitrage remains profitable in 2024! The barrier to entry is relatively low, as you only need enough capital to secure a long-term rental. Plus, short-term rental rates are typically significantly higher than long-term rent, enabling you to generate a profit.

However, profitability depends on factors like your rental cost, pricing strategy, and how efficiently you manage your business.

Is rental arbitrage legal?

Here comes the obstacle for most people: legality.

On a federal level, short-term rental arbitrage is legal in the U.S. No federal laws prohibit renting out your leased property for short-term stays.

However, regulations vary by state and even by county. So, it’s crucial to understand your local laws, as well as your specific contract, before engaging in vacation rental arbitrage to avoid any legal or financial repercussions.

How to do short-term rental arbitrage (legally)

To legally pursue short-term rental arbitrage, you first need to review your:

Start by checking the local regulations in your area. (Or, if you have flexibility, consider relocating to a city where vacation rental arbitrage is permitted.) Specifically, you’ll need to determine if nonowner-occupied short-term rentals are allowed and if there are limits on the number of nights per year the property can be rented out.

Even if the area allows short-term rental arbitrage, ensure it’s permissible for your specific property. Your lease should clearly state whether subleasing is allowed—many landlords prohibit it to maintain better control over their property. If your lease is silent on the issue, it’s best to get your landlord’s permission to avoid any conflicts.

Additionally, if your rental falls under an HOA, review the HOA’s rules and restrictions. Some HOAs forbid vacation rental arbitrage to protect property conditions and residents’ well-being.

Pros of short-term rental arbitrage

If you find that vacation rental arbitrage is legal and permitted, your next step is to weigh the pros and cons. Let’s start with its benefits.

Low initial investment

One of the first questions people ask is, “Do you need a lot of money to start short-term rental arbitrage?” The simple answer is: not nearly as much as you’d need to purchase a property outright.

If you’re already renting, your place is likely in good enough condition to list as a short-term rental. Plus, the landlord is responsible for major repairs and maintenance, so you won’t have to invest heavily in property improvements or renovations before listing.

You may want to make minor upgrades or add amenities to increase profitability, but this is up to you. You’ll also have some startup costs like forming an LLC or hiring cleaning services, but these are minimal compared to buying a property.

Scalability

Another pro is that rental arbitrage businesses can scale quickly without the heavy burden of growth costs. Your rental property is available year-round, and your overhead remains relatively stable, making it easier to expand without a proportional increase in expenses.

Avoiding ownership costs

As a renter, you’re not responsible for expenses like HOA fees, property taxes, or major repairs. While you’ll have your own business-related costs as a host, these are usually lower than the costs associated with property ownership.

Cons of short-term rental arbitrage

No business is completely free of challenges, so it’s no surprise that short-term rental arbitrage has some cons as well. Let’s take a look.

Paying your own rent

Regardless of your short-term rental success, you’ll still have to pay your rent every month. Your landlord won’t care if you had a slow month, so it’s crucial to ensure you can cover your rent even if bookings are low.

Failing to do so could lead to late fees or even eviction, which could ultimately cost you more than you earn.

Riskiness

Like any rental business, short-term rentals come with risks such as unauthorized parties, guest cancellations, and potential theft. If you don’t own the property, it might be harder to secure insurance, leaving you vulnerable if things go wrong.

Property damage

Some level of property damage is inevitable. Accidents happen, and guests might not always treat your property with care.

While you can minimize this risk by setting clear house rules and requiring a security deposit, you should still be prepared for potential damage. Any unresolved damage could come out of your own security deposit with your landlord at the end of your lease.

How to make money with vacation rental arbitrage

Starting a vacation rental business can be challenging, but the potential earnings are often worth it. Once you’ve covered initial expenses like furnishings, insurance, and legal fees, you can start calculating your potential profits.

To estimate your net income, subtract your fixed costs—such as rent, utilities, and platform fees—from your expected earnings. If the profit margin looks good, you’re on the right track! But how do you actually make money with short-term rental arbitrage?

Short-term rental arbitrage works similarly to traditional short-term rentals. You list your property, set availability, and start hosting. If covering your rent is a priority, focus on maximizing your income from bookings.

Here are some tools to help you succeed.

Dynamic pricing

Your property won’t be booked every single day of the year. You’ll need time for cleaning, repairs, and turnover, and even the most popular rentals won’t achieve 100% occupancy. A dynamic pricing tool can help you optimize rates based on demand, ensuring you get as many bookings as possible.

Want to try out dynamic pricing? Lodgify Dynamic Pricing is incredibly easy to implement, lets you set minimum rates so you remain in control of your pricing strategy, and generates an average revenue increase of 20%.

Channel manager

It’s a good idea to list your rental on multiple third-party booking platforms to increase your visibility. And if you do so, a channel manager will be crucial to sync your calendars across all these sites.

A good channel manager includes a real-time calendar and two-way synchronization of availability, rates, listings, and more. These features save you time and money, making your business more efficient.

Website builder

Of course, those who are really serious about their vacation rental arbitrage business would be wise to go one step further and create their own direct booking website. While third-party channels (also known as OTAs) are still essential to boost visibility, your own website will help you be OTA-independent and avoid third-party fees.

Thankfully, there are vacation rental website builders that make creating your own site a breeze!

Additional short-term rental arbitrage FAQs

Is short-term rental arbitrage the same as subleasing?

Yes, short-term rental arbitrage is essentially a form of subleasing, where you lease a property and then sublet it on a short-term basis, often through platforms like Airbnb or Vrbo.

What are some examples of short-term rental arbitrage?

An example of short-term rental arbitrage includes the following: Suppose you rent an apartment for $2,000 per month. If you sublet it for $200 per night, you could cover your rent in 10 days and earn a profit for the rest of the month.

Of course, you’ll need to factor in other business expenses like utilities and cleaning services. You’ll also want to make sure to do market research to choose a competitive rate, but this gives you an idea of the potential profitability.

Do you need an LLC for short-term rental arbitrage?

It’s advisable to form an LLC whether you’re doing vacation rental arbitrage or renting out a property you own. An LLC protects your personal assets, adds professionalism to your business, and offers potential tax benefits.

Most importantly, an LLC separates your personal and business assets, safeguarding you in case of any legal issues. It can also enhance your business’s credibility and save you money on taxes.

How risky is short-term rental arbitrage?

As long as you make sure short-term rental arbitrage is legal in your area and is permitted by your landlord and homeowners association, it isn’t too risky. Riskiness only becomes an issue when you begin short-term rental arbitrage without first looking into these issues.

While there may also be some risk related to property damage, theft, and last-minute cancellations, this is the case for any short-term rental business.

How much money do you need to start short-term rental arbitrage?

The cost of starting a short-term rental arbitrage business varies depending on your location, rent, and how much you choose to invest upfront. Typically, it costs between $3,000 and $5,000 to get started.

These costs include:

  • Rental deposits
  • Legal fees
  • LLC formation
  • Furnishing and decor
  • Cleaning services

While you can certainly start rental arbitrage for less, these initial costs are still relatively low compared to purchasing a property.

Is short-term rental arbitrage worth it?

Whether vacation rental arbitrage is worth it depends on your goals and circumstances. If you’re looking to make money without owning property and with minimal investment, it’s a viable option. However, if navigating legal restrictions and landlord approvals seems daunting, you might consider other business opportunities.

The key is to research local regulations, understand the profit potential, and weigh your options carefully.

Vacation rental arbitrage: in conclusion

As you see, you don’t need to own property to start a short-term rental business—rental arbitrage allows renters to get in on the action, too.

However, it’s absolutely crucial to double (and even triple) check your local laws, rental contract, and HOA rules to make sure short-term rental arbitrage is allowed. If short-term rental arbitrage isn’t permitted at any of these levels, you can consider it a no-go.

On the other hand, if it is allowed, you can look forward to high potential earnings and an engaging new line of work!

If this ends up being the case for you, consider downloading our vacation rental agreement to start your business off on the right foot.

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