In the world of real estate, there are a lot of different investment strategies that people can use to make money for themselves. For example, from flipping houses to buying and holding rental properties, there are many ways that investors can make a profit from real estate investing.
One of the lesser-known but very profitable strategies is known as “rental arbitrage.” Learn more about this investment strategy and how it can help you to grow your real estate portfolio!
What Is Rental Arbitrage?
Rental arbitrage is an investing strategy focusing on buying rental properties at the right price to generate cash flow from them. This is done by buying properties with a good balance of rental income, cash flow, and equity.
Rental arbitrage has become popular in recent years as more people see the potential for growth with this investment strategy. As a result, many investors choose to capitalize on rental arbitrage to build their portfolios and create wealth over time.
Why Is Rental Arbitrage So Popular?
There are many reasons why rental arbitrage has become so popular in recent years. Some of the biggest reasons include the following:
Access to Rentable Properties
There are many different types of rental properties that investors can purchase when they choose this investment strategy. From single-family rentals to large apartment complexes, there are numerous types of properties that investors can choose from when looking for an excellent rental arbitrage investment.
Affordable Properties
When an investor uses this strategy, they are typically looking for properties that are not that expensive. This is because these properties will require less capital to purchase and still generate a high enough return on investment.
Leverage
When an investor decides to use this strategy, one of the best things they can do is leverage their money to buy as many rental properties as possible. This will allow them to grow their portfolio quickly while still having enough cash flow left over to cover their expenses and make a profit.
As you can see, there are many great reasons why more and more investors choose rental arbitrage as their investment strategy. Whether you’re just starting or you’ve been investing for years, this strategy can help you to grow your portfolio and see excellent returns on your investment.
Rental Arbitrage: Pros and Cons
As we’ve discussed, rental arbitrage is a type of real estate investment strategy that allows investors to take advantage of the price differences in different rental markets. This can be a very profitable opportunity for any savvy investor, but it also comes with some significant risks.
One of the main pros of rental arbitrage is that it can be relatively simple to start with. There are many online platforms and tools that allow investors to take advantage of rental arbitrage without having to invest a significant amount of time or money upfront.
However, there are also some significant risks involved with rental arbitrage. First, it can be challenging to identify suitable properties to invest in and determine the “sweet spot” for rental prices. Additionally, there is always a risk that rental markets can change rapidly, which could make it challenging to maintain profitability.
Overall, if you are considering investing in rental arbitrage, it is essential to do your research and keep these risks and potential challenges in mind. However, rental arbitrage can be a very profitable investment strategy with the right approach.
If you are interested in learning more about rental arbitrage and whether this could be a good fit for your real estate investing goals, many online resources can help. One great place to start is with the website of a reputable real estate investment firm.
In doing so, you can find a wealth of information about rental arbitrage and other real estate investing strategies, as well as tools and resources to help get you started. And, of course, always consult a trusted financial advisor or real estate expert before making any significant investment decisions.
Popular Types of Rental Arbitrage
In almost all cases, rental arbitrage is limited to houses and apartments. But it isn’t unheard of for people to engage in some forms of rental arbitrage with other properties, such as vacation rentals or commercial real estate.
Entire Home Airbnb, Vrbo, Homeaway Rental Arbitrage
Some property owners have used this short-term rental arbitrage to make money. For example, they rent their entire home on Airbnb or VRBO while traveling.
This is an excellent way to make extra short-term cash while away. It can also be a lucrative alternative to traditional rental properties if you live in an area with high demand for tourists or business travelers.
Entire Home Rentals
While the entire-home Vrbo/Airbnb rental arbitrage is popular, they aren’t the only kind of rental arbitrage you can engage in. This is another way rental arbitrage can work if you own a property and want to rent it out while you live elsewhere. So it’s an excellent way to make extra money if you are moving for work or other reasons, and it can help you save money on rent while getting used to your new locale.
Entire Home Renovations
This is another popular form of rental arbitrage if your property needs renovation. For example, you buy a property that needs work, repair and renovate it and rent it out. This can be a lucrative investment if you renovate your properties for less than what people will pay in rent.
Entire Home Rentals with Renovations
Still, another form of rental arbitrage is to buy a property that needs work and then make the necessary repairs and renovations before renting it out. This can be a great way to add value to your investment by increasing its cash flow potential.
It’s also worth noting that real estate investors can engage in this kind of rental arbitrage even if they do not own the property. So if you are interested in flipping houses, for example, you could always partner with another investor who wants to buy a flipped property and rent it out.
Single Family Rentals
This is the standard type of rental arbitrage that most people think of when they hear the term. It’s simply buying a single-family property and renting it out. Some investors use this part-time to make extra money, while others make it their full-time profession.
Single Family Rentals with Renovations
This is another way rental arbitrage can work, similar to the “entire-home renovations” approach. For example, you buy a property that needs work, make the necessary repairs and renovations, and rent it out.
Single Family Rentals with Renovations & Property Management
If you want to automate your rental arbitrage income, then this is the way to do it. Simply buy a property that needs work, make the necessary repairs and renovations, and hire a property management company to handle everything else.
Your only job will be to collect rent checks each month, pay your bills, and report taxes when you file them. This can be an appealing option for busy people who want to make money from real estate but don’t have the time or energy to be a landlord.
Multi-Family Rentals
Another common type of rental arbitrage is multi-family rentals. These can sometimes be single units, but they are generally duplexes, triplexes, four-plexes, and even apartment buildings. The key to making money from multi-family rentals is scale.
These properties can continue providing income each month with minimal time, effort, or capital invested on your part; you just need to collect the rent checks and manage your property manager if you have one.
Multi-Family Rentals with Renovations & Property Management
This is the most effective way to scale a rental arbitrage business. Simply buy a multi-family property that needs work, make the necessary repairs and renovations, and hire a property management company to handle everything else.
This can be an appealing option for busy people who want to make money from real estate but don’t have the time or energy to be a landlord. It will be a long-term rental property, so you will also want to avoid renovations that are too expensive or time-intensive.
With this, you have a complete rental arbitrage strategy to use as you begin your real estate investing journey. Remember that there are no shortcuts, and you need to learn the basics before moving on to bigger and better things.
5 Ways to Find Rental Arbitrage Properties
In your quest to find rental arbitrage properties, you will need to look at your current assets and the properties currently zoned for rentals. You can also consider looking at rental arbitrage properties online to get a feel for how profitable the properties are in your area.
When looking at rental arbitrage properties, you should consider five key factors. Explore these below to help you make the most informed decision when choosing your rental arbitrage properties.
1. Search for the Best Rental Sites for Listings
This is one of the most effective and efficient ways to identify rental arbitrage properties in your area. You can then compare properties based on their square footage, the number of bedrooms and bathrooms, amenities, price per square foot, year built, and other relevant factors.
Numerous websites allow you to view rental properties in your local area. Some of the best sites include RentRange, HotPads, Zumper, Trulia, and Realtor.com.
2. Find Landlords Who Allow Subleasing
Some landlords are indeed against subleasing. But there are just as many landlords who allow properties to be rented, like Airbnb. You’ll need to carefully read the lease agreement of any rental property you’re considering and research the landlord or management company to find out if they’ll permit subletting.
3. Build Relationships
Networking is vital when it comes to finding great rental arbitrage properties. As you build relationships with real estate agents, property managers, landlords, and other investors, you will increase your chances of finding rental arbitrage properties that aren’t listed online or may come at a better price than similar listings.
4. Talk to Real Estate Agents
Another strategy for finding rental arbitrage properties is to build relationships with real estate agents in your area. Real estate agents will often have access to off-market deals and listings that haven’t yet been formally placed on the open market.
By talking to real estate agents, you may be able to find rental arbitrage properties that aren’t yet listed but have the potential to be profitable.
5. Reach Out to Airbnb Hosts
You might be surprised to learn that countless Airbnb listings have poor pictures, no reviews, and an overall lack of detail and response rate. These properties may be excellent rental arbitrage opportunities.
With this in mind, contact Airbnb hosts to learn more about their rental property. Gauge the market demand for these properties, and research how much you can rent them if you manage them.
As you can see, there are many ways to find rental arbitrage properties that may be right for your investment portfolio. By taking the time to research and evaluate these properties, you can find great opportunities that will help you build wealth and increase your ROI.
Rental Arbitrage FAQs
What’s an Airbnb Rental Arbitrage?
An Airbnb rental arbitrage is a type of real estate investment strategy in which an investor leases or buys a property specifically to rent it out on short-term rental platforms like Airbnb.
By renting their property on Airbnb, investors can generate passive income while capitalizing on the rising popularity of home-sharing platforms.
Is Rental Arbitrage Profitable?
It certainly can be. However, many factors must be taken into consideration before deciding whether or not to pursue a rental arbitrage strategy. With the right approach and planning, you can enjoy the many benefits of a rental arbitrage investment, including higher returns and lower costs than other real estate investments.
However, there are also significant risks involved in this type of strategy, so it’s essential to approach a rental arbitrage investment with the right mindset and a sound understanding of all the potential pitfalls.
Just be aware that profits aren’t guaranteed, and you may need to make significant upfront investments, such as repairs and renovations, before renting your property. Additionally, you’ll likely have to contend with increased competition from other investors, regulatory hurdles, and fluctuating housing markets.
Is Rental Arbitrage Legal?
That depends on your local laws and regulations. Meeting all the legal requirements for short-term rental platforms like Airbnb will likely be a crucial part of any rental arbitrage strategy.
Some cities and jurisdictions may have restrictions or prohibitions on short-term rentals, so it’s important to do your research and ensure you understand your property’s local regulations. But in most instances, you will find rental arbitrage legal.
Is an LLC Mandatory for Rental Arbitrage?
It is not mandatory, but it may be a good idea to set up an LLC when investing in rental arbitrage. This will give you more legal and financial protection, as it can help to shield your assets from any potential liabilities related to the property.
Josh Dudick
Josh is a financial expert with over 15 years of experience on Wall Street as a senior market strategist and trader. His career has spanned from working on the New York Stock Exchange floor to investment management and portfolio trading at Citibank, Chicago Trading Company, and Flow Traders.
Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business. He has held multiple professional licenses during his career, including FINRA Series 3, 7, 24, 55, Nasdaq OMX, Xetra & Eurex (German), and SIX (Swiss) trading licenses. Josh served as a senior trader and strategist, business partner, and head of futures in his former roles on Wall Street.
Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently holds areas of expertise in investing, wealth management, capital markets, taxes, real estate, cryptocurrencies, and personal finance.
Josh currently runs a wealth management business and investment firm. Additionally, he is the founder and CEO of Top Dollar, where he teaches others how to build 6-figure passive income with smart money strategies that he uses professionally.
