What is rental arbitrage?
Rental arbitrage is when you sign a long-term lease to rent out a place, then list it on Airbnb. You can make a lot of money doing this because Airbnb charges guests more than the cost of your rent. So, as long as you find tenants willing to stay for at least a month, you’ll make a profit.
Best cities for rental arbitrage
Savannah, Charleston, New Orleans, Nashville, Jacksonville, San Diego, and Tampa all offer good opportunities for rental arbitrage. In each of these cities, the cost of renting a property is lower than the average cost of owning a property. So by buying a property and renting it out, investors can earn a steady stream of income while also benefiting from price appreciation.
How to find rental arbitrage properties?
Rental arbitrage is the process of finding a property where the rent charged is higher than the mortgage payment, and therefore providing positive monthly cash flow.
There are a few key things to keep in mind when doing rental arbitrage:
- Location is key. Look for areas where the cost of living is high and the rent prices are correspondingly high. This will ensure that you can make a healthy profit on your investment.
- Research the market carefully. Make sure you understand what kinds of properties are in demand in the area you’re targeting, and invest accordingly.
- Have a solid plan for repairs and maintenance. Rental arbitrage can be risky if something goes wrong with the property and you’re not prepared to deal with it financially.
- Be prepared to be patient. It may take some time for your investments to pay off, so be prepared to stay calm or relax for that time period.
- Check out online listings for cheap properties that are also in high-demand areas. Sometimes, you can find great deals on apartments or houses that are in neighborhoods where people are always looking for housing.
- Network with local real estate agents and property investors. Ask them if they have any leads on cheap, high-demand properties that might be worth investing in.
- Do some research on your own and find undervalued properties that could be rented out at a higher price point. This takes a bit more work, but it can be worth it if you manage to find a good deal on a property.
How to start a rental arbitrage business?
There are a few things you’ll need to do to start a rental arbitrage business:
- Choose a market: Arbitration occurs when there is a disagreement over the price of something, so your first step is to choose a market where prices are in flux and there is some uncertainty about what something is worth. Real estate, for example, is a good market for this type of business because prices can vary dramatically from one neighborhood to the next.
- Scout for good deals: Once you’ve chosen your market, start scouting for good deals. This will involve doing some legwork and traveling around to different areas in order to find properties that are undervalued relative to their surrounding neighborhoods.
Step By Step Process
- Find a property that you can rent out at a higher price than you’re currently paying in rent.
- Collect the security deposit and first month’s rent from your tenants.
- Use the difference between your old rent payment and the new rent payment to cover your own costs, such as mortgage payments, insurance, and repairs/maintenance on the property.
- Repeat steps 4-5 each month to keep generating a profit!
Pros & cons of rental arbitrage
Pros –
- Increased cash flow: When you invest in a rental property, you’re able to collect rent each month which helps to pay off the mortgage and other associated costs. This increases your monthly cash flow, giving you more money to work with each month.
- Tax benefits: Rental properties offer a number of tax benefits that can help reduce your overall tax burden. These benefits can include depreciation, section 1031 exchanges, and others.
- Appreciation: Over time, rental properties tend to appreciate in value, which means you can sell them for a higher price down the road than what you originally paid for them. This increase in value can help boost your overall investment portfolio.
Cons –
- It can be difficult to find quality rental properties in desirable locations.
- There is always the risk that the property will be re-rented at a higher price before you are able to find a new tenant, resulting in a loss of rent for the period of time between tenants.
- There is also the risk that the property will incur damage while you are renting it out, which you will then be responsible for repairing or replacing.
- You need to have a certain level of knowledge about real estate and property management in order to be successful with rental arbitrage. Feel free to check the top real estate books here!
Is rental arbitrage worth it?
There is no simple answer to this question as it depends on a number of factors, including the rental market in your area, the cost of repairs and maintenance, and your ability to manage the property yourself or hire a property manager. That said, if done correctly, rental arbitrage can be a very lucrative real estate investment strategy.
In general, rental arbitrage is the process of buying a property below market value and then renting it out at a higher rate. This allows you to generate a healthy return on your investment while also building equity in the property. However, it’s important to remember that there is always some risk involved in any real estate investment, so please do your own research before getting started.
Is rental arbitrage legal?
Yes, rental arbitrage is legal. However, it’s important to remember that real estate investments are always risky, and there is no guarantee that you will make a profit. Always do your research and talk to an attorney before making any investments.
Bottom Line
So there you have it—a rental arbitrage 101 if you will. This strategy can be a great way to make some extra cash on the side or even become your full-time gig. But as with any business venture, there are both pros and cons to consider before diving in head first. Be sure to do your research and come up with a solid plan (and a backup plan!) before getting started.
