The 2022 real estate market can feel like a modern-day gold rush (though, let’s be honest, it’s felt that way for the past two years): Mortgage rates are low (though maybe not for long)! Demand for Airbnbs has never been higher! Real estate has long been heralded as a relatively safe investment, and now seems like the time to consider an investment property. The only problem: Everyone’s buying homes right now, driving up the costs of every house on the market.
If you don’t have the cash to cover a down payment and closing costs—not to mention furnishing a place to list on Airbnb or VRBO—can you still get in on the short-term rental game while it’s hot? Yes, you can. It’s called rental arbitrage, and the buzzy term is quickly gaining traction online (searches are up 300 percent year over year, according to Google). But what is it, exactly? And is it a smart investment? We turned to Realtor.com Chief Economist Danielle Hale for insights.
What Is Rental Arbitrage?
Think of arbitrage as a fancy term for flipping something: You buy something low and sell it for a higher price to turn a profit. (Like what Christina Haack and Tarek El Moussa do on Flip or Flop, or when your cousin scoops up Pokémon cards at garage sales for pennies and sells them online for hundreds.) Rental arbitrage is when you sign a long-term lease to rent out a place, then list it on Airbnb, VRBO and other sites as a nightly, weekly or monthly rental.
You’re “taking advantage of the fact that monthly rent in a long-term lease is typically lower than short-term rents that might be paid for a nightly rental,” Hale explains. So, you might pay $1,500 a month for that apartment, but you can book it 18 nights of the month for $150 a night, bringing in a cool $2,700.
Of course, that doesn’t mean you’re raking in $1,200 in profit—you’ll have to subtract the cost of utilities, internet (highspeed Wi-Fi is pretty much a non-negotiable in Airbnbs these days), cleaning services, furnishing the place and marketing your property. Still, there’s money to be made here—without the upfront costs of buying a house (or being on the hook for a 30-year mortgage).
How Does Rental Arbitrage Differ from Subletting?
“Rental arbitrage is a special case of subletting,” Hale says. “Instead of subletting to one person longer-term who will take over the rest of the lease, you would hope to have multiple subletters in the form of nightly or short-term renters.”
Is It Legal?
This is where things get complicated. You’ll need to check a lease closely—and have an honest talk with your landlord to explain what you intend to do—to ensure there’s no clause against subletting or providing short-term rental services. “Even if the landlord says it's OK, apartments, condo and homeowners associations, and even localities may have rules prohibiting short-term rentals, so do your research,” Hale says. Check with the city and county where the rental is zoned—some won’t allow short-term rentals at all and others have certain restrictions, like the minimum stay length is 30 days. Those are crucial factors to consider before signing a lease, which brings us to our next major question…
How Can I Determine Whether It’s a Smart Move for Me?
With its lower barriers to entry, rental arbitrage can be an appealing way to launch a side hustle. But just because you’re not paying closing costs doesn’t mean there aren’t a host of other upfront costs coming at you (like furnishing the place, stocking up on toilet paper and other necessities, and plunking down first month’s rent, last month’s and a security deposit).
Here are a few things to consider before diving in:
Location — What’s the demand like for rentals in your area? How often are short-term rentals typically booked? Sites like AirDNA, Vacasa and Airbnb offer tools that can provide insights into how often you can expect to be booked, and what the going rate is for bookings throughout the year. Looking at an average of the three can give you solid insights into the area’s potential.
The Vibe of Your Neighborhood — Is the complex very tight-knit and community-driven? Or does everyone do their own thing, with a more live-and-let-live attitude? It's worth weighing how they'd react to a short-term rental next door. (Beyond being considerate to your neighbors, you may also deal with more hassles than it's worth, should a disgruntled neighbor make it their mission to end your rental.)
Budgeting for Furnishing and Repairs — Short-term rentals are typically furnished, so you’ll need to estimate what that will cost you. And expect to have to replenish certain supplies (like toiletries) throughout the year—as well as deal with wear and tear (pillowcases and linens get stained fast).
Your total costs — When you run the numbers, do you feel you can have this place booked often enough to cover all of the associated costs of running a short-term rental?
The Bottom Line:
“Keep in mind that markets can and do change,” Hale says. “Even if the rental arbitrage model works today, it may not continue to work in the future. As more people get involved to take advantage of the arbitrage opportunity, the costs should even out, which means the ability to profit could go down.” With that in mind, it makes sense to resist the hype to scale quickly, and instead, start with just one property.
Once you get the hang of a year of rental arbitrage, you can look ahead to market forecasts—is the cost of rent in your area still seeing double-digit growth? And if so, is vacation rental demand keeping up with (or exceeding) that?—to determine whether you should sign on for another year’s lease, or even expand to a second property.