What comes to mind when someone tells you, “You should consider investing in real estate?” You will most likely say, “But I don’t have $80,000 in cash lying around, and I don’t own any property.” Thanks to Airbnb Arbitrage, you don’t necessarily need this kind of capital, or a property, to invest in real estate.
Airbnb arbitrage allows you to rent a property and sublet it at a profit. Real estate investors using this investment model make about $924 per month in profit on average. Usually 4-5 units is enough to replace the average full-time income. The potential earnings could be higher depending on the location of the property and state/city regulations. However, they can also be much lower too. Airbnb
As a caveat, this isn’t financial advice – just sharing our knowledge and experience for entertainment purposes. Read on to learn more about Airbnb arbitrage, how much you can make with this business model, and the most critical formula for success in this space.
What Is Airbnb Arbitrage?
Even though the term “arbitrage” has been popularized primarily by the emergence of Airbnb investing, it’s not a new concept. Investors have been using it to make money in stock, currency, and commodity markets for quite a while.
So, what exactly is arbitrage, and how does it apply to real estate investing?
Arbitrage refers to buying an asset/commodity in one market and then selling it in another market to make a profit. Essentially, an investor makes money within the spread from these two markets.
Now, how is this business model used in Airbnb? What is Airbnb Arbitrage?
Airbnb rental arbitrage means renting a property and then subletting it on a short-term basis via platforms such as Airbnb and HomeAway at a higher price than the rent.
As a general rule, the difference between what you charge your customer and the rent needs to be significant enough to cover not just the rent and other business expenses incurred to land a client and still leave you with a decent profit.
To shed more light on the workings of Airbnb arbitrage, here’s an example:
Let’s assume you strike a deal with a condo owner, and they agree to rent it to you at $2,000 per month. With that agreement in place, you list the condo on Airbnb, charging potential customers about a monthly fee of $4,000.
After a bit of marketing through your blog, social media, and other platforms, you find a customer who is willing to pay that much but at the cost of $300 in marketing expenses and utilities.
In this case, you pay the landlord the agreed rent of $2,000, leaving you with a before-expenses profit of $2,000. You then deduct the $300 you spent on marketing/utilities and pocket $1,700 in profits.
This, in a nutshell, is how Airbnb arbitrage works. But while it might seem like a simple model on paper, it’s not necessarily so. Nevertheless, people are making money (and lots of it for that matter) with it, so let’s find out how they’re doing it.
Is Airbnb Arbitrage Legit?
Our very first property was acquired with the Airbnb rental arbitrage business model and we can tell you that it is entirely legitimate. However, going into a lease without knowing your numbers can be disastrous. Check out our story on how we used market analysis tools like AirDNA to save our rental.
Years ago this concept was relatively unknown, so finding willing landlords was a problem. Airbnb and other Airbnb-like companies have created a huge level of awareness about this business model, so the landlords are more aware and willing to rent out their properties to would-be hosts.
In fact, our long term real estate investing goals will now include finding and renting out properties to rental arbitrage hosts for the following reasons:
- We can charge higher rents with real market data
- Our properties will be cleaner
- The tenants are not actually residents
Because more and more landlords are willing to rent out properties to sub letters, rental arbitrage may be the easiest way for people to invest in real estate without owning property, using the profits to build up a sizeable down payment for your own house.
How Much Can You Make With Airbnb Arbitrage?
On average, you can get a monthly net profit of ~$924 from Airbnb Arbitrage, according to recent research by Earnest (a low-interest lender).
The data goes on to compare this number against the average earnings of other side-gig entrepreneurs, and the findings make Airbnb arbitrage even more appealing.
Airbnb hosts make more than eight other types of workers in the sharing economy (including Uber drivers and Fiverr workers), and almost thrice as much as all other workers. It’s also worth mentioning that nearly half of Airbnb hosts earn more than $500 per month.
Indeed, becoming an Airbnb host is an attractive prospect for both short-term and long-term real estate investors, and arbitrage facilitates that.
It’s worth noting that while these numbers look impressive, Airbnb arbitrage investors’ profit margins depend on several factors. But state/city regulations and the location of the property are arguably the most significant.
Let’s discuss each of these factors separately in the next section.
Location With a High Demand for Short-Term Rentals
Ideally, you want the property you invest in to be in a city with a high demand for short-term rentals. Several methods may be used to determine the attractiveness of a short-term rental market, but few are more straightforward than comparing the household income to home prices.
Generally, the demand for short-term rentals increases as home prices increase relative to the household income. In simpler terms, the more people cannot afford to purchase a home in a given city, the more likely they are to rent short-term.
According to a 2019 real estate affordability report, it’s burdensome for a median-income earner to rent a studio, one, or two-bedroom apartment in 24 of the 100 largest cities in America. This shows that home prices have risen alongside rental charges.
What does this mean for an Airbnb arbitrage investor?
Simple: there’s a large market for short-term rentals in various cities; investors just need to know where to look. To help you with the latter part of this statement, here are five cities with high demands for Airbnb properties:
- Honolulu, HI
- Boston, MA
- Detroit, MI
- Nashville, TN.
- Corpus Christi, TX
It’s worth noting that the household income-to-home price ratio isn’t the only driver of demand for Airbnb rentals.
If you closely look at the above five cities, you’ll notice that they have one thing in common: they constantly receive business and personal travelers throughout the year. This, too, is a significant driver of demand because the more people travel to a given city, the more likely they are to book a place to stay for the weekend or a few weeks.
To get the inside scoop of short term rental prices in your market, we highly recommend using a short term rental analysis tool like AllTheRooms Analytics before making a commitment to a landlord.
Regulation Imposed by Different States and Cities
The regulatory framework in your state/city will also significantly affect how much you make through Airbnb arbitrage. Many cities and states have strict regulations that govern when/if a traditional rental property can be rented out short term. Breaking these laws can trigger penalties, which eat into your earnings.
On the other hand, some states and cities have less prohibitive regulations for the same. Some have even adopted non-restrictive regulations to encourage investment in short-term rentals. Ohio and Arizona are perfect examples here of such states. Arizona, in particular, has seen a significant increase in Airbnb tax revenue as a result of less restrictive regulations.
Airbnb Arbitrage: The Formula for Success
By the above heading, I’m not referring to the marketing strategy. Instead, I’m talking about an actual formula that anyone looking to break into the Airbnb arbitrage sector needs to be aware of the Average Weighted Rate.
Before you rent a property in any area, you need to calculate its Average Weighted Rate to determine whether it’s possible to make a decent profit.
Here are the steps involved:
- Figure out the average daily rental rates for your location. Do this for both weekdays and weekends. You can find this information on Airbnb listings for similar properties to the one you’re looking to rent.
- Compute the weighted average rates. Weighted Average Airbnb Rate = (Weekday Average Airbnb Rate * 5 + Weekend Average Airbnb Rate * 2) / 7
- Compute your daily property expenses. To do this, divide the total monthly property expenses (rent plus fees) by 30.
- Divide the figure you got in step 2 by what you got in step 3. The result is your final ratio, which indicates the number of days you’ll need to sublet the property in a month to realize a profit.
- The closer your final ratio is to 1, the more days in a month you’ll need to rent out the property each to turn a profit.
- If the ratio is equal to or exceeds 1, it means you can rent out the property for just a few days (like weekends) each month and still make a profit.
- As a general rule, you should aim for arbitrage property with a final ratio of 2 or greater.
- For a complete strategy on running a successful short term rental on Airbnb, I highly recommend the book Optimize Your Bnb (Amazon).
That does it for today’s post. Hopefully, you’ve understood how Airbnb arbitrage works, the formula for success, and the potential earnings. Regarding the bit about potential earnings, I’d like to emphasize that the way you market your property also matters a lot.
We didn’t touch on it when discussing the factors affecting your potential earnings because it’s such a broad topic beyond this post’s scope. If you’d like to learn about Airbnb marketing, check out my blog: I have several posts explaining that in greater detail, such as using marketing your Airbnb on Instagram. Cheers!