What is Airbnb Arbitrage?

Airbnb arbitrage is a business model where the renter of a house or apartment sub-lets the property to Airbnb users. This is a model where the Airbnb arbitrageur can transform a long-term rental, with the main property owner, into a short-term rental, with higher rates and margins.

Understanding Airbnb arbitrage

One of the most common misconceptions about the Airbnb platform is that one has to own property to make money.

Airbnb arbitrage, also known as rental arbitrage, enables renters to leverage other people’s properties and sub-let them to Airbnb users.

Airbnb arbitrage is based on a centuries-old system of arbitrage where one buys low with the intention to sell for a profit.

In this context, consider an individual who rents an apartment in a popular tourist city for $3,000 per month.

The individual lives alone, so they decide to sub-let the spare bedroom on Airbnb for $150 per night.

Assuming the spare bedroom is booked out for the full month, the renter can earn $4,500 or $1,500 in profit before fees and other overheads such as utilities.

Even if the room was only booked for 20 days out of 30, the individual can easily cover their rent.

Is Airbnb arbitrage legal?

Airbnb arbitrage is legal in most cases, but it pays to check short-term rental laws which seem to be in a constant state of flux around the world.

Those interested in the business model are not immune from laws around how often a room can be rented out on a monthly or annual basis.

More important to the success of Airbnb arbitrage is permission from the landlord.

Some explicitly prohibit the practice in the rental agreement, while others are open to the idea but may need to be convinced of its merits.

Some tips on how to achieve this include:

The individual can show the landlord that by sub-letting, they have a vested interest in the maintenance of the property. In other words, scuffed walls and cobwebs in the cornices are not good for business or 5-star reviews on Airbnb.
The landlord could also be informed that since Airbnb arbitrage is a lucrative and sustainable business model, the tenant will never miss a rent payment.
To appease landlord concerns over who may be staying at their property, the renter could also screen problematic guests or utilize tools such as Alexa Guard. This feature of Amazon Echo detects unauthorized parties and avoids undesirable noise.

Airbnb arbitrage best practices

The Airbnb arbitrage business model appears simple on paper, but several best practices will maximize its effectiveness:

Choose cities wisely

The most profitable cities for Airbnb arbitrage are popular with tourists but with relatively low hotel room availability and housing costs.

Cities that are tourist hotspots tend to be saturated with Airbnb accommodation.

Be aware of expenses

While it is possible to make a profit with sub-letting, there will be initial and ongoing expenses.

These include additional utility and cleaning costs, furniture for the guest bedroom, insurance, and other supplies such as toiletries and linen.

It is also important for renters to have a financial safety net in place should the arbitrage adventure turn out to be less profitable than first thought.

Use automation where possible

Unless the sub-let is to a long-term tenant, the renter may find dealing with multiple guests to be time intensive.

To make property management more efficient, tools can help automate processes such as guest communication, check-in, bookkeeping, and the scheduling of cleaning.

Airbnb arbitrage case study

Here is a more detailed look at how the Airbnb arbitrage business model works.

Imagine you live in the United States and are open to moving to an area where Airbnb arbitrage is most effective. You could start with a search for the cities with the highest occupancy rates based on these criteria:

Each city must have a median property price of less than $1 million.
Each city must have a minimum monthly rental income of at least $2,000.
Each city must have an occupancy rate of at least 50%, and
Each must also have at least one hundred active properties on the Airbnb platform.

Based on the most recent short-term rental data from January 2023, the ten U.S. cities with the highest Airbnb occupancy rates include:

San Pedro, California (71% occupancy rate).
Madison, Wisconsin (70%).
Bellingham, Washington (70%).
Waltham, Massachusetts (69%).
Tigard, Oregon (67%).
Union City, New Jersey (67%).
Olympia, Washington (67%).
Somerville, Massachusetts (66%).
Burlington, Vermont (66%), and
San Fernando, California (65%).

Note that in the context of Airbnb arbitrage, the occupancy rate is the number of booked nights divided by the total nights available across all listings.

Choosing a city with a high occupancy rate increases the likelihood that you’ll be in profit even if you don’t host guests every day of the month.

Consider the average rent

We know that for Airbnb arbitrage to work, the amount you receive from renting out a room needs to be more than what you pay in rent plus utilities.

It may be tempting to choose a city with the cheapest rent, but you also need to balance these costs with the city’s attractiveness as a destination.

Tourists are an obvious source of income, but the city may also be a destination for students or tech workers, among other things.

Let’s run through three cities from the list above to determine their attractiveness.

San Pedro, CA

According to Zumper, the average monthly rent for a two-bedroom apartment in San Pedro, CA is $2,298 or $76.60 per day.

With an average occupancy rate of 71% (21.3 days per month), you would need to charge at least $107.88 per night for the room to break even.

Madison, WI

The average monthly rent for a two-bed apartment in Madison, WI is $1,618 or $53.93 per day.

With an average occupancy rate of 70% (21 days per month), you would need to charge at least $77.05 per night for the room to break even.

Somerville, MA

The average monthly rent for a two-bed apartment in Somerville, MA is $2,950 or $98.33 per day.

With an average occupancy rate of 66% (19.8 days per month), you would need to charge at least $148.99 per night for the room to break even.

Analyzing the results

While San Pedro, Madison, and Somerville possess similar occupancy rates, the differences in average rent skew the results.

Madison looks like the most attractive proposition on paper because it offers to lowest rent. Further research shows that Madison is the fastest-growing city in the state of Wisconsin thanks to a booming tech sector.

Somerville is home to Tufts University and a cohort of almost 13,000 students whose incomes are likely to be lower than tech workers in Madison. San Pedro, on the other hand, is advantaged by its evergreen location near the sea in Los Angeles.

Ultimately, additional research is required to determine the best city for Airbnb arbitrage. In addition to the average rent and occupancy rate, one must also consider other factors such as platform fees, maintenance, cleaning, seasonality, length of stay, and other associated costs.

How to determine the viability of Airbnb arbitrage

The example we outlined above may be a good place to start, but rental markets are in a constant state of flux and as a result, it is important to conduct further research.

To determine the viability of Airbnb arbitrage, one should look for markets with a combination of affordable rent and short-term rental (STR) income potential. Rental analytics platforms such as Wheelhouse Pro and AllTheRooms Analytics track short-term rental market trends and can also provide actionable insights.

For those who want to make a business out of Airbnb arbitrage and need a loan to seed their venture, AirDNA may be more suitable. The company’s MarketMinder product is powered by Airbnb and VRBO data from 10 million properties in 120,000 markets.

Importantly, MarketMinder can provide credible and detailed metrics on the STR market such as average nightly rate, occupancy, and competition. Airbnb arbitragers can also plan an STR strategy based on real booking activity and use the Rentalizer tool to determine the rental potential of any address, anywhere in the world.

We recommend a combination of free and paid analytics products. Free tools are useful but tend to provide broad or less detailed results than paid subscriptions such as those offered by AirDNA. The latter is a worthwhile investment for those entrepreneurs committing a substantial amount of money.

Airbnb arbitrage and occupancy rates

When searching for an Airbnb arbitrage rental market, the individual must be aware of the market’s average occupancy rate and how it may impact profitability. While some may come close, most properties do not enjoy a 100% occupancy rate all year round.

This is due to several factors.

Seasonality

Seaside markets are more popular in the warmer months and may be fully booked for weeks or months at a time. However, these same properties may sit dormant for months in winter.

Discounts can be offered to lure visitors in the less attractive times of year – particularly if they book stays spanning multiple weeks or months.

Maintenance and cleaning

If, for whatever reason, an Airbnb property cannot be cleaned between a guest checking out and another checking in on the same day, a one-day gap between stays may be required.

If the property is in a location characterized by a high percentage of short stays, however, a day left for cleaning becomes a problem and soon eats into profits.

Orphan days

Certain days of the week can be hard to book irrespective of the market. Orphan days are the unoccupied days between stays and tend to occur on Tuesdays and Thursdays most often.

Like maintenance and cleaning, they create gaps that lower revenue and increase operational costs. Offering one-night stays is the most obvious solution, but this must be balanced with cleaning and maintenance as above.

Otherwise, the guest can be incentivized to stay an extra night or change both their arrival and departure dates.

Always look for average occupancy rate (AOR) data when gauging the viability of a listing. AOR takes into account:

The number of days the owner and their friends and family stay at the property, and
The number of days the property is on hold while it is cleaned, maintained, or repaired.

Once AOR has been determined, compare it with occupancy rate (OR) which is the number of nights booked out of a specific period.

If the two numbers differ by more than 10% and are not related to the owner staying at the property for personal use, the discrepancy should be considered lost income potential.

Key takeaways:

Airbnb arbitrage is a business model where the renter of a house or apartment sub-lets the property to Airbnb users. It is based on a centuries-old system where one buys low with the intention to sell for a profit.
Airbnb arbitrage is legal in most cases, but it pays to check short-term rental laws which seem to be in a constant state of flux around the world. In most instances, it is more important to get the permission of the landlord before proceeding.
To maximize the effectiveness of Airbnb arbitrage, it must be treated as any other business. The renter must perform market research to choose cities wisely, be aware of expenses that could eat into profit, and use automation to make property management processes more efficient.

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