Airbnb Rental Arbitrage: Learn What It Is And How It Works in 2023

During the height of the COVID-19 lockdown policies, the online rental app Airbnb decided to list its IPO on the US stock market.

While that may not have seemed like the most favorable time to attract shareholders, Airbnb’s stock is up hundreds of percentage points as it becomes a formidable force in the modern hospitality industry.

Today, this global rental platform now has over 4 million hosts and billions of guests worldwide. 

As Airbnb’s market penetration grows, more entrepreneurs are interested in listing properties on this app for passive income opportunities.

However, as median home prices hit record highs in many US markets, owning an Airbnb property is becoming infeasible for many would-be hosts.

For some, the only practical way to get started on Airbnb’s app is through a practice known as “rental arbitrage.” While this method may sound complex, it’s a straightforward and common strategy on apps like Airbnb and Vrbo.

For those who want to get involved with the Airbnb economy but aren’t interested in buying a new property, it’s worth reviewing the basics of the rental arbitrage technique. 

What Is Airbnb Rental Arbitrage? — A Simple Definition 

No matter what market people are involved in, “arbitrage” always refers to buying and selling the same asset for a profit. So, in the context of Airbnb rental arbitrage, you’ll rent an apartment or condo and sublet it to short-term renters on apps like Airbnb and Vrbo.

Your profit is the difference between your monthly rent and the money you receive from Airbnb guests (minus extra expenses like legal fees, furnishings, and cleaning). 

Is It Legal To Use Airbnb Rental Arbitrage? 

It’s no secret that lawmakers in metro markets like New York and San Francisco are targeting Airbnb hosts. However, as long as there aren’t specific laws against subletting apartments in your area, Airbnb rental arbitrage is legal.

Barring any special short-term rental policies at the state, county, or city level, you can use an Airbnb rental arbitrage strategy as long as your landlord allows it. Indeed, for many people new to investing in rental arbitrage, finding a landlord willing to accept subletting is the biggest hurdle to getting into this market. 

If you’re unsure about the legal restrictions on Airbnb in your target territory, be sure to speak with a lawyer familiar with the rental policies in your area. Also, always double-check the leasing agreement with a new landlord includes provisions for subletting apartments or condos.  

Why Consider Airbnb Rental Arbitrage? — A Few Pros to Think About

Many people get into Airbnb rental arbitrage because it’s cheaper than buying a property.

Although real estate is traditionally a solid long-term investment, it’s increasingly difficult for new investors to save enough funds for a down payment on a standard house. According to data from the Federal Reserve, median home prices in the USA dipped slightly from a recent peak in Q4 of 2022, but they’re still at near record-high levels of ~ $436,800.

Compared with financing a mortgage purchase at the peak of the housing market, acquiring rental properties is far less capital-intensive. Although median rental rates in the USA are also at record highs, it’s more feasible for investors with limited capital to put their money to work in the rental space. 

Besides the lower entry price, rental arbitrage takes some of the stress of property ownership off your shoulders. Although you’ll need to furnish and “freshen up” your Airbnb, the landlord will handle many nuisances like bookkeeping expenses (e.g., HOAs). The fewer responsibilities associated with rental arbitrage give you greater flexibility and scalability as you build your Airbnb reputation. 

Are There Downsides to Airbnb Rental Arbitrage?  

While Airbnb rental arbitrage is an attractive option, it has a few drawbacks. One of the biggest obstacles people face with this strategy is negotiating with landlords.

Finding a landlord willing to sublet apartments to Airbnb clients can be challenging, and even those who agree to this method may have strict requirements. Remember that the landlord can cut your lease at any moment, so there’s an ever-present and uncontrollable threat to your cash flows. 

Another negative associated with Airbnb rental arbitrage is hosts won’t enjoy any appreciation for their properties.

Even if the value of the apartments or condos you’re renting continues rising year-on-year, you won’t realize any of these gains for your business. Also, since you don’t own properties, you cannot pivot business models or liquidate them if Airbnb goes stagnant or regulations limit your profit potential. 

As a final note: Keep in mind Airbnb rental arbitrage isn’t a “passive income” strategy. Sure, you can generate significant cash flow subletting these units, but they will require a lot of your time and energy to furnish and fix—especially when guest issues arise. While this isn’t a con specific to rental arbitrage, new hosts should set their priorities so they aren’t surprised once they try this model.

Getting Started With Airbnb Rental Arbitrage: A Few Beginner Tips 

Before scouting out potential rental properties for Airbnb, take some time to review analytics on the rental market to get a feel for where the best opportunities are for arbitrage.

There are dozens of real estate tools dedicated to the short-term and mid-term rental markets, such as AirDNA, Mashvisor, and SeeTransparent, which give valuable insights into historical trends, occupancy rates, and average rental performance.

It’s also essential to set up software tools to help you manage your guest relations, insurance requirements, and cash flows, such as Host Tools, Guesty, and InsuraGuest.

Once you’ve completed your preliminary research and have software tools to manage your new business, it’s time to start looking for properties in your preferred area at a price that fits your budget.

Always remember to calculate extra expenses like cleaning, furniture, and legal fees into your monthly costs to get a clear picture of how much you need to turn a profit. When you’ve found a few rental areas you think have potential, it’s time to talk with the landlord to see whether they’re open to subletting to short-term renters—which is far easier said than done! 

Unfortunately, many landlords aren’t keen on letting short-term renters in their complexes, especially if you don’t have a proven track record for screening guests and taking care of other Airbnb properties.

If you don’t already have a portfolio of successful Airbnbs or solid connections in the real estate and hospitality markets, it’s helpful to start networking on social media or attending Airbnb-related events in your area to get involved in the industry.

It may also help to apply for an LLC to give your Airbnb rental business a more professional appearance when negotiating with landlords.

Getting the first rental arbitrage opportunity is the most challenging stage, but once you sign a lease for subletting, you can start building a reputation on Airbnb. 

What Are The Best Markets for Airbnb Arbitrage?

Trends in the rental and hospitality sectors are in constant flux, and laws surrounding Airbnb aren’t the same in every state or city.

Therefore, hosts must stay up-to-date on the latest market analytics and be nimble if they want steady cash flow in the rental arbitrage game.

What may be the “best” market today could sour depending on new regulations or trends in the industry. For this reason, it’s essential to use analytics tools like AirDNA to get a read on different markets and spot warning signs or opportunities in real-time.

That being said, a few broad trends have emerged in the Airbnb rental scene post-2020. According to 2022 data compiled at AirDNA, the condominium rental market recovered more significantly than apartments in the USA following the COVID-19 lockdowns.

In September 2022, condo listings were up 11% compared with 2019 levels, while apartments were 7% below 2019’s rates. Coastal cities with beachfront condos appeared to perform exceptionally well in AirDNA’s analysis, and all of the best-performing cities for rental arbitrage were in the South (including New Orleans, Savannah, Charleston, Nashville, and Jacksonville).

By contrast, coastal urban areas tend to perform the worst for rental arbitrage, with cities like Boston, New York, and San Francisco posting double-digit declines since the COVID-19 lockdowns.

This data aligns with the 2022 United Van Lines National Movers study, which shows that most US states with the most outbound residents tend to be in the Northeast (e.g., New Jersey, New York, and Massachusetts). Also, densely-populated cities like San Francisco and New York tend to have the most restrictive policies on Airbnb. 

Hosts should also keep in mind Airbnb primarily caters to millennials. Data published on Zebra suggests 60% of people who use Airbnb are in the millennial demographic. Zebra’s analytics also suggest beachfront properties like condos are hot in the US market, with areas like Southern Maine, Cape May (NJ), and Cape San Blas (FL) performing well post-2020. 

So, Is Airbnb Arbitrage The Right Strategy For You? — A Few Closing Thoughts 

Airbnb rental arbitrage has many positive features, especially for entrepreneurs just getting involved in the short-term rental space. True, rent prices have been rising double-digits due to elevated inflation rates, but it’s more affordable for many hosts to acquire and manage rental properties versus buying real estate.

The affordability and simplicity of the rental arbitrage model makes Airbnb’s platform more accessible for people dipping their toes in this industry. Using this strategy can help you build a reputation on Airbnb with a minimal down payment and scale your operation. 

However, those serious about making Airbnb a profession rather than a side hustle may want to use rental arbitrage as a stepping stone rather than a long-term strategy. Although past performance isn’t an indicator of future success, the average annual appreciation rate on real estate properties is 10% in the USA.

Owning properties not only gives Airbnb hosts exposure to potentially higher values in their properties, it eliminates the risks and legal hurdles associated with landlords and leases. While investing in real estate is a substantial commitment versus retinal arbitrage, it may be the better option depending on your long-term vision.

Take some time to consider how you want to fit Airbnb into your revenue-generating strategy to decide whether rental arbitrage is the right move for your financial goals.