By Max McCusker
Real estate investing is a tried and tested strategy to reach financial independence. Everyone needs a place to live, and property is a scarce resource. So, with high demand and limited quantities, real estate is an attractive investment. Unfortunately, property can be expensive; not everyone has the funds to put down 20% on a house. For those who do purchase a property, the most common ways to maximize returns are to rent it out long term or to rehab and sell it. For renting out, a good monthly cash flow is $200 to $300 per unit. Although this is a substantial return, it would take investing in a lot of properties to make enough money to replace a full-time job.
However, Airbnb has been a game changer because it has allowed real estate investors to maximize cash flow on their properties with the new and popular sharing economy. Airbnb rentals can even generate more cash flow than long-term rentals. This is primarily because of the difference in daily rates. You can charge a lot more per day for a short-term vacation rental than for a long-term rental. So, if you can find a property in a location with high demand, you can see your monthly cash flow go from $200 per month to $1000+ per month. As a long-term rental investor, you would need to have five rental properties to match the same result as a single vacation rental. However, even with short-term rentals, there is still a roadblock in the cost of acquiring the land.
Here I will introduce a new real estate strategy that involves renting properties on Airbnb and other vacation rental sites—without owning a single property. This strategy has the potential to skyrocket your monthly cash flow, allowing you to quit your 9–5 job and have more time to focus on things that are important to you. This strategy is called Airbnb Arbitrage.
Airbnb Arbitrage Explained
According to the Oxford English Dictionary, the term arbitrage means “the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.” So, in the case of Airbnb Arbitrage, the idea is to rent a property from a landlord, rent it out on Airbnb, and collect the difference. For example, you find an apartment and rent it from the landlord for $800 per month. You then list the apartment on Airbnb and bring in $1,600 per month in revenue. After paying rent to the landlord, you walk away with $800 per month in profit. You are simply renting an apartment and using Airbnb to charge nightly rates that are higher than your long-term lease.
It’s a Win for You
The figure below[1] shows the average nightly rate by city comparing short-term rentals to long-term. In every city, you can charge at least trice as much for a vocational rental than for a long-term rental. To be clear, a short-term rental is generally for one night to a month while a long-term rental is for six or more months at a time. Airbnb Arbitrage leverages this difference in pricing and enables you to make money with very little risk.
The beauty of this strategy is that you get to enjoy some of the greatest benefits of real estate investing without having to own a single property. This means that you don’t need to save up thousands of dollars to buy a property; you can simply rent someone else’s property and reap the rewards. Obviously, there’s a risk of getting stuck with a lease payment and no one renting the unit, but with proper market analysis, you can prevent this from happening. I’ll share more on market analysis later in the step-by-step guide.
It’s a Win for the Landlord
You may be wondering, why would a landlord let you rent out their apartment to other people on Airbnb and make money off of their property? But the real question is, why not? You are offering this landlord many benefits:
- You pay the exact amount of rent they ask for each month.
- You are taking property management responsibilities off of their hands.
- They don’t have to worry about property cleaning and maintenance.
- They could earn more money if you offer a revenue sharing option.
With these benefits, it is a win for both you and the landlord.
Examples of Airbnb Arbitrage
Not every landlord will be excited about this opportunity, but that doesn’t mean that there isn’t a market for it. One example of a company who uses this strategy at the core of their business model is Lyric. In fact, Lyric just raised $160 million in debt and equity this past April with one of their main investors being Airbnb.[2] Lyric acquires its inventory of units through partnerships with landlords. From there, they bring in their design team to beautify the units and fill them with amenities. The company currently operates 500 units and hopes to use the capital they raised to partner with more landlords in the 13 cities they operate in. Their goal is to hit 1,000 units by the end of 2019.[3] This is a great example of a company who has taken this business model and scaled dramatically. Companies like this show us that there is a market for this business, and there are landlords that are willing to partner with people like us who are interested in Airbnb Arbitrage.
Another example of this strategy in action comes from the former stars of The Bachelorette JoJo Fletcher and Jordan Rodgers. In their TV show on CNBC, Cash Pad, they partner with homeowners and renovate shipping crates, airstreams, warehouses, and much more and turn them into cash flowing Airbnb rentals. JoJo and Jordan pay for all of the renovations and, in turn, get all the revenue from renting it on Airbnb. In order to partner with the owner of the property, JoJo and Jordan pay them $700 per month in rent after the renovations are complete. Their strategy is a slight twist on the traditional idea of Airbnb Arbitrage, but the principle is still the same.[4]
Where You Should Do Airbnb Arbitrage
Now that you know what Airbnb Arbitrage is, it’s important to know where to try it. A study done by AirDNA discovered the best and worst markets for one- and two-bedroom units by taking the average monthly rent in a city and subtracting it from the average Airbnb monthly revenue. The figures below show the results from the study:[5]
These data include a wide range of monthly rental markets, giving us important insights on the best locations to partner with landlords. The places with the most potential are Boston, with an average monthly rent of $2,400, and Detroit, with an average monthly rent of $610.
If you are looking at these charts and find that you live in a market that is defined as having a negative arbitrage potential, don’t fret. Consider checking out the book, Long-Distance Real Estate Investing, written by David Greene, which details how to build a team that will help you excel in investing in real estate outside of where you live. This will unlock your potential to try this strategy and will give you a cool excuse to go visit the markets you invest in.
A Step-by-Step Guide
Here are the basic steps on getting started:
Set up your business: Treat your arbitrage efforts like a business, especially if you are wanting to scale and quit your 9–5. Most people favor LLCs because of the ease of creation, simplicity to manage, and tax benefits. Do your due diligence and see what would be best for you and your business.[6]
Build a team: Having a good team is essential in real estate, especially when using Airbnb as your investment strategy. A good place to start is to find an attorney and accountant. Look for an attorney that specializes in real estate law and has personal experience with real estate investors. An accountant on your team should be one that specializes in tax strategy and has experience with real estate investors. These two teammates will help you get started and will help you avoid common mistakes most newbies make.[7]
It may also be helpful to find property managers that specifically manage vacation rentals. For a small fee of 10–15% of the unit’s monthly revenue, they will handle everything from cleaning to guest relations. In order to scale quickly, this can be a great way to grow your portfolio without wanting to pull your hair out. Another benefit of the property manager, if they are local, is that they will have a good idea of the market and can offer great advice with areas to invest in and areas to avoid. You can find a good property manager through a google search or by consulting with members on the forums of BiggerPockets.
Market Research: This is one of the most important steps in the process. The good thing is that there are free ways to do this if your budget is tight. Here is a free way to conduct market research, provided by Jason Allen, an expert on Airbnb Arbitrage:
- Go onto the Airbnb website.
- Search for homes in the market you are interested in.
- Make sure to select “Entire Home” and set a minimum nightly rate of $100.
- Assume a 50% percent occupancy as a worst-case scenario.
- Using the map view, identify clusters of listings and look through each of them.
- Identify patterns in these listings. For example, property types, number of bedrooms, proximity, and amenities.
- Find the nightly going rate in your target location.
- Identify the revenue of your potential location by assuming a 50% occupancy (15 days booked) and multiply it by the nightly rental rate.
- Take the revenue found in step 8 and subtract your rent expense to find out the estimated profitability of your property.[8]
You will have other expenses, so make sure there is enough cash flow in your calculation to account for that, but this is a great way to identify the feasibility of a location. If you are willing to pay for market research, AirDNA is a great company that provides an in-depth analysis of markets and specific locations.
Finding properties: Zillow is a great tool for finding units that are being rented. Simply go onto Zillow’s website and do a search for a specific zip code. If you want to be extremely cost effective, you can even filter your search by including the word “furnished” as a keyword to find units that are already furnished.[9] After you get the results in your specific search criteria, pick up your phone and start calling.
Listing your property: This is the easy part. Once you have locked down a unit, go onto Airbnb and follow the instructions after selecting “Become a Host”. You can create your schedule, set your daily prices, and write your requirements for guests. Once this is set up, Airbnb handles mostly everything else on the website and app. If you are using a vacation rental property manager, they should take care of this for you.
One last piece of advice is to hire a professional photographer to take pictures of your beautifully furnished and designed unit. This is the first impression that people have of your listing and can make or break someone’s decision of renting your unit. A photographer shouldn’t cost you more than $150–200.
Conclusion
Now you are aware of this profitable opportunity with Airbnb
arbitrage and are equipped with the resources you need to get started. As seen,
there are people and companies already implementing this strategy and seeing
success. If you are trying to get away from a 9–5 work schedule and this
opportunity speaks to you, what are you waiting for?
[1] Andrew Simmons, “Short-Term vs. Month-to-Month vs. Long-Term Rentals: Which One Is the Best?” 2nd Address Research, August 14, 2019, https://www.2ndaddress.com/research/shortterm-vs-month-to-month-vs-long-term-rentals/.
[2] Jordan Crook, “Lyric Raises $160 Million in Debt and Equity to Power the next Generation of Hospitality,” TechCrunch, April 17, 2019, https://techcrunch.com/2019/04/17/lyricraises-160-million-series-b-led-by-airbnb/.
[3] Ibid.
[4] CNBC, “Cash Pad,” CNBC, September 12, 2019, https://www.cnbc.com/cash-pad/.
[5] Mark Saldana, “Which US Cities Are the Best (and Worst) for Rental Arbitrage on Airbnb and HomeAway?” AirDNA, June 27, 2019. https://www.airdna.co/blog/best-worst-rentalarbitrage-airbnb-homeaway.
[6] Jason Allen, “Make a Fortune on Airbnb Without Owning Property: Real Estate: Blog,” BiggerPockets, May 13, 2019, https://www.biggerpockets.com/blog/airbnbarbitrage.
[7] Ibid.
[8] Ibid.
[9] Ibid.
