What Is Rental Arbitrage? What Landlords Need to Know

New terms enter the industry every few years, and you may start to feel like you’re falling behind. That’s how many landlords think when they hear discussions about rental arbitrage.

What is rental arbitrage, and should you be making use of it?

Rental arbitrage is a term that emerged to talk about renting leased spaces on short-term stay sites like Airbnb and VRBO. Many landlords who have been in the business for a few years may think of this more like subleasing. In either case, landlords need to understand the current rental arbitrage methods used and how it may affect their business.

Are you ready to protect your property as an arbitrage rental? Learn all about these rentals, the contracts that need to be in place, and more in today’s article.

A Table Of Contents On Rental Arbitrage Methods

Rental arbitrage, or when a tenant lets their property out to other parties, is becoming more common, but it’s not always in the landlord’s best interest. Learn more about this process, rental arbitrage methods, and more by following this guide:

What Is Rental Arbitrage?

What Is Rental Arbitrage?

Rental arbitrage is when a tenant renting a property from a landlord subleases the apartment to someone else or utilizes platforms like Airbnb to rent the unit out as a short-term rental. Through this process, the tenant becomes a kind of middle manager of the property as they rent it out to other individuals.

The rental market over the last decade and the prevalence of sites like Airbnb have created a demand for this type of business. Landlords are often asked if they are willing to allow rental arbitrage, which has created a unique set of problems and benefits for the industry.

Subletting rental units in this way can often net more profit than a long-term rental. Short-term rentals are typically priced higher, so doing this consistently can turn big profits for the tenant.

Is Rental Arbitrage The Same As Subletting?

Rental arbitrage is usually considered a specific type of subletting. Subletting usually involves a lease being turned over to one individual for an extended period. Rental arbitrage, however, typically describes renting to many different short-term renters.

Is Rental Arbitrage Legal?

Generally speaking, it is legal to rent a property yourself and then list it for rent on a site like Airbnb. However, this only holds true if the landlord permits this and renting on short-term vacation sites like Airbnb is legal in the area.

Contracts should include clear terms about subletting policies, conditions, and requirements. Whether or not you want to permit this, make sure that your lease agreements make your rules explicit. This will ensure that your rental investment is protected and not put at risk by someone else’s irresponsibility.

The Pros And Cons Of Arbitrage

Are you considering allowing your tenants to try out rental arbitrage at your property or getting into the process yourself at a property you rent?

Regardless of how you approach this business venture, it’s important to learn about the pros and cons to understand what is happening behind the scenes. Being informed will help you make the right decisions for your long-term financial comfort and success.

Pros

For those planning to rent a property and then enter into the short-term market, these are the most significant benefits:

  • Limited startup costs
  • Relatively easy to set up online
  • Helps build capital for future investments
  • Can utilize the property for personal use as well

For landlords considering allowing arbitrage at their property, they may see these benefits:

  • Fill a long-term rental
  • Reduce overall vacancies
  • May be able to increase rent or add a premium for bookings

Cons

Of course, there are cons as well. Those setting up the short-term rentals need to watch out for:

  • Increased responsibilities in maintaining the property’s condition
  • Seasonality may affect profits and bookings
  • Need to have cash on hand to handle rent and fees if needed
  • Utilities and extra housing costs need to be covered

Landlords have their own sets of concerns to keep in mind:

Should You Permit Rental Arbitrage?

Should You Permit Rental Arbitrage?

Ultimately, it is entirely your decision whether or not you want to allow rental arbitrage, subleasing, or similar setups at your rental properties. You can write your lease agreement to allow or ban these practices and include specific conditions.

From our perspective, the answer to whether or not you should permit rental arbitrage is primarily dependent on your location, property type, and specific vacancies.

Finding an investor who wants to rent your property for this business can be hugely beneficial in securing a long-term tenant, but it can also be risky. However, thoroughly vetting the investor before you lock in a deal can set you up with a steady income stream for years to come if you get things right.

The key is to ensure your investment property is being protected no matter what. Ensure your security deposit, as well as your move-in and move-out inspections, are held to high standards. Document everything, and make the terms of your lease agreement as straightforward as possible.

As long as you have the proper protections described above, permitting rental arbitrage may be a successful part of your overall rental strategy.

Tenant Screening Required

If you decide that allowing rental arbitrage for the right individuals works for your business, you want to ensure that your tenant screening methods are top tier. Trusting a tenant to rent out the property without your involvement in screening is a big step, and it’s essential you thoroughly screen this tenant before signing an agreement.

Don’t struggle with tenant screening alone. Getting all the information you need gathered and verified can be challenging; why not simplify the process? Utilize RentPrep’s high-quality tenant screening services in many different package types today.

FAQs: Rental Arbitrage & Airbnb

What is Airbnb rental arbitrage?

Rental arbitrage is when someone rents out their own long-term rental for a short period. Usually, this happens when an investor or entrepreneur signs a lease agreement on a property and then rents the property out on Airbnb, VRBO, and similar websites.

Should landlords allow rental arbitrage at their properties?

Like you, many landlords wonder whether or not permitting rental arbitrage makes sense. Are the benefits of renting to investors working in the short-term rental industry worth the risks?

You need to think about whether or not you are willing to deal with the main issues that landlords face when allowing rental arbitrage. Primarily, landlords worry about on-time payments and the condition of the unit.

Having many guests come and go will add more wear and tear to the unit, and the tenant needs to guarantee they will be able to keep it in a clean, well-kept condition. For high-quality investors, this won’t be a problem. They want to keep the property in excellent condition to be able to rent it out as often as possible, so most will be in agreement about this.

Tenants should be managed and tracked down like any other tenant. Screen tenants thoroughly before signing the lease agreement. If payment is late, send a notice and move toward eviction for nonpayment of rent as soon as possible.

If you can manage the risks of these two problems, allowing rental arbitrage may set up a long-term rental for you while also helping another investor start their business. For many, that is a win-win situation.

Is rental arbitrage always profitable?

Like any other type of rental business, there is no guarantee that rental arbitrage will be profitable for the investor. It can be a great side hustle or even a main business, but it takes work to determine the best way to rent a property and manage it as a short-term rental listing.

Many things need to be done to find success, and various factors can affect how profitable it is or is not. Just a few things to consider while making a plan to try out rental arbitrage include:

  • Location: Are short-term rentals in high demand?
  • Neighbors: Will they be open to this operation happening next door?
  • Budgeting: Is furnishing and stocking the property possible with a profit margin?
  • Repairs: Do you have the cash on hand to fix problems?

Running a short-term rental is a business in and of itself, and you must treat it as an investment. Many landlords do not like to allow their tenants to do short-term rentals or subleases for this reason but often agree to permit this activity as long as the investor has a solid plan.

Is rental arbitrage legal?

In most cases, yes. Rental arbitrage is legal as long as:

  • The property owner allows it
  • The area where the property is located permits this type of rental

First, let’s talk about ownership. Landlords who rent their properties out to individuals may or may not permit rental arbitrage through third parties like Airbnb. That’s up to you as a landlord to decide. No matter which side of the equation you are on, clarify what is and what is not allowed on this front in the rental agreement.

When it comes to the area’s laws, you’ll want to ensure that short-term vacation rentals are permitted. Some cities and counties have forbidden this type of rental or placed them under strict limitations due to housing prices skyrocketing and driving out locals. You may need to get a hospitality license or take other specific steps before running this type of rental.

In some cases, only certain areas of the state or city can have short-term vacation rentals. In other cases, they’re entirely forbidden. As a landlord and an investor, it’s in your best interest to be familiar with your area’s rules on rental arbitrage.

Do you need an LLC to do rental arbitrage?

Individuals are not legally required to form an LLC to rent properties on short-term marketplaces such as Airbnb, nor are they needed to create an LLC to rent a property. However, many landlords and investors agree that it is incredibly beneficial.

By forming an LLC before you list properties for short- or long-term rentals, you ensure that you protect your personal assets from business-related problems. LLCs are limited liability entities that help absorb liability away from you as an individual. Additionally, there are significant tax benefits and protections to doing business this way.

If you don’t feel inclined to form an LLC at this time, however, it is OK to simply work as a sole proprietor as long as you are only doing business for yourself.

Rental Arbitrage: The Expansion Of The Rental Market

Rental arbitrage has been a growing trend among landlords and other investors in recent years. Whether you’re thinking about doing short-term rentals yourself or renting to investors who will be involved in this part of the industry, today’s article will provide you with the base knowledge needed to succeed.

Remember:

  • Your lease should include clear terms on whether rental arbitrage is allowed and the conditions if it is allowed.
  • Tenants renting out the property from you are responsible for all damages, regardless of who is actually causing the damage if they sublease it for short-term rentals.
  • Not all states and cities allow this type of rental splitting to occur; so make sure you follow all ordinances and regulations.

Some landlords have found the expansion into the rental arbitrage arena to be an incredibly successful way to boost their business. In contrast, others want to stay away from it altogether. No matter which side of the table you’re on, knowing the details of how rental arbitrage works is sure to improve your overall business sense.