Using Rental Arbitrage to Start an Airbnb
- Selecting a location that attracts a lot of vacation visitors
- Identifying ideal customers who will find our property particularly interesting
- Tailoring the property and our offer to the needs and expectations of this niche
- Marketing your offer effectively through different channels
- Managing the business to deliver a great experience to our guests
What is Rental Arbitrage?
Rental arbitrage involves taking property on lease at low rates and sub-letting it at higher rates to make money. This is a practical option for short term rentals because accommodation for short periods can be charged at significantly higher rates compared to long-term leases. Short term vacation rental rates are comparable to hotel rates.
The question is why should the owners of the property allow you to do something (and make money) when they can do it themselves? The answer could be:
- They donât know about the short-term rental business opportunity or
- They donât have the time or inclination to go to all the (continuing) trouble involved in running a short term rental business.
It is best not to depend on the first of the above situations. Instead, you should explain your plans to the landlord and get that personâs permission to sub-let it. Otherwise, you could find your short term rental business coming to an end once the landlord finds out what is going on and terminates the lease.
Short term rental involves several important issues not applicable to long term non-business leases:
- Several cities have banned renting for short terms and if your business is in one of these, you would be doing something that is not permitted. You can email or call the local municipality in question and ask about permits and rules.
- Insurance risks are different and any existing policies on the property might not cover it.
- The landlord might not be willing to face the risks posed by the flow of unknown guests to whom you rent the property.
It is extremely important to disclose your plans and get the landlord on board. You should be able to do it through the right kind of negotiations. Many landlords are not interested in managing a constant flow of guests. You can also offer some kind of incentive to the landlord for allowing you to sublet it.
Working out a deal with a Landlord to sub-let their property can be tricky to navigate but it’s a must if you’re interested in rental arbitrage. Insurance is another issue; you have to get additional cover for any claims from guests who will stay at the place, and also any damage to the property that might be caused by them.
Sean from Airbnb Automated has a fantastic YouTube channel that covers this topic and more about starting and growing an STR.
So how do you go about starting a rental arbitrage business?
Steps to Starting a Rental Arbitrage Business
As mentioned earlier, the requirements for success are similar for all types of short term rental businesses. Hence we will order the steps in the same sequence as the success requirements outlined at the beginning.
Location
In addition to checking the demand for short term accommodation at the location you plan to start, and any local authority regulations for such accommodation, you have to check the availability of long term leases there at low rates. You should be able to make a profit from subletting the property after accounting for expenses of running the business, including any repairs to and fitting up the property.
Your Niche
In an overcrowded vacation rental market, a key option to stand out is to cater to the needs and expectations of specific segments of customers. Vacationers are a mixed group with segments like families with (or without) children, couples, millennial groups and business travelers. The expectations of each group differ significantly.
Identify the segment for whom a vacation at your property is likely to appeal most, and make a conscious effort to tailor your offer to cater to their needs and expectations. We discussed the specifics in a previous post.
In the case of rental arbitrage, you have the advantage of selecting the location. Select a location near major attractions – nearness to the downtown area for example.
Marketing
Marketing will be the same as in other options of short term rentals:
- Develop an offer that appeals to your target group
- Present it in a way (supported by professional photographs) to resonate with them and
- Get the presentation in front of the group by selecting channels that reach them.
The channels will include popular vacation rental listing sites like Airbnb, niche sites like Kid&Coe, your own website, social media platforms like Instagram and newsletters. Start with tools like Hootsuite & Mailchimp.
Getting your offer in front of target groups will involve some active promotional effort, such as:
- Following the best practices for visibility at the listing sites (OTAs)
- Running ad campaigns to promote your website
- Using each social medium the right way
Email marketing is a great way to establish fruitful relationships but must be done right by building an opt-in list and sending newsletters with valuable content on a regular basis.
Delivering a Great Guest Experience
The specific ways to deliver an experience that exceeds guestsâ expectations have been discussed in previous posts. These include:
- Setting up a system that ensures prompt response to all communications
- Ensuring that guests can find and enter your place with no problems
- Keeping the property clean and well fitted up at all times
- Welcoming the guests with a welcome message and small gift
- Having a visitor manual to help them enjoy their stay
- Adding enhancements such as wifi, and automatic sensor lights, air conditioners and intruder alarms
The Co-Hosting Option
We mentioned above about property owners who might not be interested in going to all the troubles of running a short term rental business. For these owners, co-hosting is an option that will allow them to earn a return on the property. The option involves finding someone (such as a rental arbitrage entrepreneur) to attend to all the work involved, in return for a share of the income. Twitter and LinkedIn are great places to start.
This is what co-hosting involves. Platforms like Airbnb could actually help you find interested co-hosts if you have a suitable property.
Conclusion
In this post we looked at rental arbitrage, which is a way for non-property owners to tap the thriving market for short term vacation rentals. We looked at the issues involved and the best practices to make the business a success. We also looked briefly at its complement, co-hosting, which allows property owners to tap the market without getting involved in all the trouble of managing short term rentals.
