Has Rental Arbitrage Ushered in a New Era of Real Estate Investing?

Understanding Airbnb Rental Arbitrage 

What is rental arbitrage? One of the countless expressions in human nature of buying something and then remarketing it to sell it for more. More specifically, lease arbitrage is a financially-savvy way to get into real estate: a tenant enters into a long-term lease with a landlord and then re-rents that space to short-term guests on a platform like Airbnb or Vrbo.

This new movement in real estate was brought on by the ever-increasing demand for short-term rentals paired with historically steep housing prices, as it’s a solution for people who want to start Airbnb hosting on a larger scale. But it’s also a potential boon for landlords looking for additional ways to boost their business.

Logistics to Consider with Lease Arbitrage 

The two biggest factors in rental arbitrage are (1) the legality and (2) the landlord. There are other logistics associated with becoming an Airbnb host, but in rental arbitrage, these are the big two. Overlook the details on either of these things and you’ve put yourself in a high-risk situation that will almost certainly end poorly. 

(1) Legality 

Even though much of rental arbitrage is a private agreement between the arbitrageur and the landlord, you must still follow the short-term rental regulations in your area. Many locales have strict and very specific permitting processes and restrictions or regulations on short-term rentals; making it illegal to engage in rental arbitrage without adhering to the legal framework in the location of the short-term rental. Research your local laws thoroughly. 

(2) Landlord 

Regardless if it’s allowed by the law, the landlord is the lawmaker of their property and, in turn, your lease – they’re the one that says whether or not rental arbitrage is allowed. When proposing Airbnb lease arbitrage to your landlord, any agreement entered into should be detailed, and both parties should ensure their insurance policies cover short-term renting and Airbnb arbitrage.

Be sure to consider the importance of coverage for lost business revenue when shopping around for a commercial insurance provider who specializes in this type of property insurance.

Risks Associated with Short-Term Rental Arbitrage 

It’s one thing to have one Airbnb that’s your apartment and residence. You’re local and you’re familiar with the space, building and neighborhood.

It’s another thing to be an Airbnb arbitrageur. You’re dealing with multiple relationships with landlords, properties you may be far away from or unfamiliar with, different short-term rental regulations by locale, significantly more guests than if you were only a tenant– the list is long.

With more variables and more bookings comes more risk, for both the Airbnb host and the landlord allowing the rental arbitrage:

Landlord risks of rental arbitrage: 

• You have less control of what’s happening with the property, including how it’s maintained and used, as well as who stays there.

• There’s a higher risk of property damage as well as more wear and tear with guests coming in and out of the space than with a single tenant.

• Seasonality or an inability to keep bookings can cause your tenant to fall behind on rent payments and/or break their lease. 

Host risks with lease arbitrage: 

• Volatile income fluctuations during seasonality can hurt your ability to keep the Airbnb arbitrage venture going and even risk failing to make rent and getting evicted. 

• As the tenant on the lease, you are responsible for any problems/damage caused as a result of short-term renting your apartment. 

• As the property owner, the landlord has the option to terminate your hosting or even your lease, should they feel it’s no longer in their best interest. 

Perhaps the greatest risks for both parties are the guests. These are people you don’t know who are in a place they don’t know. Whether accidents, cultural differences or intentional acts, the liability you carry as a landlord or an arbitrageur can leave you exposed to potentially-disastrous financial situations, especially when bodily injury is involved.  

For this type of real estate venture to be successful, you need comprehensive commercial insurance for rental arbitrage. It’s the best way to ensure both parties are covered when something goes wrong. Because, should your business be successful, something eventually will go wrong; it’s just a matter of time.

Advantages of Airbnb Arbitrage for Hosts 

When you do it right, the risk: reward ratio of this type of real estate investing is attractive for both landlords and tenants, especially when it comes to profit potential.

Benefits of Airbnb arbitrage for landlords: 

• Reduced vacancy: A tenant using their leased space for short-term hosting is likely to stay a long time, reducing lease turnover and providing consistent rental income. 

• Ability to reduce your landlord duties: The agreement you make with your tenant can include requiring them to perform all the necessary routine maintenance and repairs on the property that are associated with guest and tenant use. 

• More income: The rental arbitrage agreement can also include a fee or premium, such as a fee per stay booked or a quarterly share of the tenant’s profits. Landlords can also approach a rental arbitrage pitch asking to be a “co-host”, a separate concept where the property owner may be more involved in the process, which would justify negotiating increased profit shares.

Benefits of lease arbitrage for Airbnb hosts: 

• Small initial investment: You aren’t purchasing a property, so you don’t have to come up with a huge down payment – just a security deposit at first, and then the interior contents like furnishings, decorations, linens, kitchen utensils, etc. 

• Ability to scale quickly: Low necessary capital and potential for landlord agreements on multiple properties can both provide ample opportunity to scale your business quickly. 

• Simple logistics: If you’re a property owner renting an Airbnb, you’re dealing with maintenance, permits, municipal fees, utilities, insurance, leases, etc. If you’re hosting under a rental arbitrage agreement, you’re only dealing with operational costs and your fee(s) to the landlord, and your property is always conveniently listed and booked on a short-term rental platform like Airbnb or Vrbo. 

Proper’s Comprehensive Solution to Rental Arbitrage Insurance 

As with the short-term rental phenomenon, insurance companies simply weren’t ready for the meteoric spike in rental arbitrage across the US. This means landlords and hosts across the nation are still using landlord and renter’s insurance to cover these lease arbitrage ventures. But when it comes to successfully arbitraging a rented space as an Airbnb, this isn’t going to cut it. Eventually, the gaps in those outdated policies will lead to catastrophic consequences for you and your business. 

Proper Insurance is here for just that. A leader in short-term rental insurance and the only commercial insurer endorsed by Vrbo, we offer comprehensive insurance policies for Airbnb arbitrageurs. Our policy makes rental arbitrage insurance simple and ensures your financial ventures are secure with coverage options for damage caused by guests, lost business revenue and $1,000,000 in commercial liability. 

When running a business that relies on uncontrollable variables, namely, people that are complete strangers to you, the property, and the area, it’s best to operate under the theory of whatever can go wrong eventually will. Proper’s insurance policy for lease arbitrage can give you the peace of mind that when things do go wrong, you have comprehensive coverage in place.