How To Rent Out On Airbnb Without Owning Property
March 24, 2022
Many individuals are interested in renting out a property as a source of extra income. It is commonly believed that you have to own real estate in order to rent out a property to others, but this belief is actually a common misconception.
While owning real estate may be the safest and easiest way to rent out a property, you can also rent out property without owning anything. The process is called rental arbitrage and it is becoming an increasingly popular way to make extra income without having the responsibilities of owning the property. This blog post will explain what rental arbitrage is and how to use it effectively through Airbnb.
What is Rental Arbitrage?
Arbitrage is a term used in finance that describes the practice of profiting by buying a commodity at a lower price and selling it at a higher price in a different market based on the varied pricing. The arbitrage process takes advantage of an imperfection between markets which allows the investor to make a low-risk profit.
Rental arbitrage is the process of renting out a property that is already being rented out to someone. The tenant or renter leases the rental long-term, usually a year, and then rents out the property again on a short-term basis to tourists or travelers. Of course, the best way to reach the traveler market is through vacation rental apps like Airbnb and Vrbo which is why the term “rental arbitrage” is becoming much more well-known.
In theory, a $2,500 per month apartment could be rented out on Airbnb for $250 per day, which would pay off the rent in just 13 days. Rental arbitrage may sound like a simple process but in some cases, it’s anything but.
Is Airbnb Rental Arbitrage Legal?
With short-term rentals on the rise, more localities are considering putting regulations and prohibitions on property owners’ ability to rent out properties for short periods of time. Many of these new short-term rental regulations are being put into effect in cities with expensive housing like Los Angeles, San Fransisco, New York City, and Miami. Not surprisingly, these cities are also popular destinations for vacation rentals.
The obvious argument against short-term rental regulations is that property owners should be able to use or profit from their property as they see fit as long as they follow the law. However, there are three main reasons short-term rental laws are gaining traction in different cities.
- Out of state and sometimes out of country real estate investors are buying up houses to use them as short-term rentals, especially in areas with a lot of tourism. This causes an increase in property prices and rental costs.
- Real estate investors buying up property for short-term rentals also cause a shortage in the supply of homes for local residents.
- Local residents can have a problem with short-term guests coming in and out of their neighborhoods. There can be noise complaints, parking issues, and a general lack of respect when it comes to the well-being of the neighborhood.
Short-term rental regulations can be anything from the property owner needing a permit to a complete ban on any short-term rental in the area. Depending on where you plan to implement Airbnb rental arbitrage, you’ll need to check the local laws regarding short-term rentals thoroughly to make sure you are legally in the right.
Typically it is the bigger, more expensive cities that have the most stringent regulations and smaller cities have little to none. However, there will also be less demand for vacation rentals in smaller cities.
In any case, you should double-check the regulations in your city, state, county, and country before partaking in Airbnb rental arbitrage to avoid potential legal difficulties. Here are five common regulations to look for:
1. Business License or Permit
Many cities require that anyone renting out property apply for and get a business license before starting their rentals. In the eyes of the government, anyone renting out a property is a real estate business owner. This can cause a problem for people doing Airbnb rental arbitrage because some business licenses require you to be the owner of the property you are trying to rent out.
There also might be permits or certificates that you’ll need to obtain before renting out a property like a land-use permit or a TOT certificate.
2. Zoning Laws
Zoning ordinances set out the way residents can use their homes. Many local governments see short-term rentals as hotels or bed and breakfasts which are typically prohibited in residential zones. Zoning ordinances can allow short-term rentals, prohibit them, have certain restrictions, or require special permissions.
The zoning districts will also define what it means for a rental to be short-term. Less than 30 days is the usual definition although different areas will have different criteria for short-term rentals. You’ll have to look at the different zones in the city closely to see which zones will allow you to rent out a property via Airbnb.
3. Tax Laws
As someone using Airbnb for rental arbitrage, you will most likely have to file taxes as a self-employed worker. Simply put, the self-employment tax is a 15.3% tax that covers the funding for Social Security and Medicare. There are other taxes you may have to pay as an Airbnb host, but the tax laws will vary by jurisdiction and by the zone you are renting out the property. Some jurisdictions demand that hosts pay an occupancy tax for each overnight stay, while others require Airbnb to collect and pay occupancy taxes automatically on behalf of the hosts.
Airbnb requires tax information and certain documents as a host, and if you don’t provide them with the proper documents, they may withhold 24% – 28% of your income to use for tax season. Airbnb has a short guide on tax obligations by city and state, but it’s always recommended to speak to a local tax professional about how your Airbnb rental arbitrage business should record and pay taxes.
4. Building and Housing Standards
Most jurisdictions have building and housing codes when it comes to construction, design, maintenance, habitability, health, and safety. Since you don’t own the property, there isn’t much you can do about any disparity between the property being rented out and the local building/housing standards. Most likely, the landlord will have already been putting in an effort to meet the local standards. However, some jurisdictions may have specific requirements in order for a rental to be used short term.
For example, in Chicago, a short-term rental is described as a “dwelling unit that contains 6 or fewer sleeping rooms that are available for rent or for hire for transient occupancy by guests.”
5. Check The HOA Bylaws
Even though the local government may permit rental arbitrage and you may be in the correct zone, if there is a Homeowner’s Association that your property resides in, then you still have to ultimately abide by the HOA’s rules. Many Homeowners Associations are uncomfortable with the idea of having transient renters in their communities. There may be special regulations that the HOA enforces for short-term rentals or they may ban the practice entirely.
Read More: What Are Homeowner’s Associations (HOAs)
For Airbnb rental arbitrage, it’s important to be thorough to make sure that you are following all of the rules and regulations that could possibly impact your business. Speaking with a local legal consultant is the best way to make sure that your Airbnb rental arbitrage business is operating within the law. There are also new regulations being implemented every year across the United States which means that you will always have to stay on top of any and all changes with the law.
How To Be An Airbnb Host Without Owning Property
Airbnb is an online marketplace for vacation rentals and transient travelers. Hotels can be costly for travelers, especially when in large groups. Short-term rental platforms such as Airbnb can be more cost-effective and have amenities that are convenient to live with.
Since 1960, median household incomes in the United States have not kept pace with house prices. Renting out property without owning it allows you to make money from real estate without having the obligations of homeownership.
Airbnb rental arbitrage is a newer practice in which a host signs a lease for a property and then lists said property on the rental platform at a higher price. Tourists and travelers are willing to pay more per day for short-term rentals and only a week or two of stays should cover the rent, leaving the rest to be profit.
Before beginning Airbnb rental arbitrage, you need to get permission from the landlord or owner of the property and you need to get it in writing. Most landlords are against rental arbitrage and it may be difficult to persuade them, but there are a few things you may do to sweeten the deal.
Pitching To The Landlord
Convincing landlords to allow you to do rental arbitrage on their property is the biggest obstacle you will face. They may not like the idea of you making money by using their property. There is always the possibility that they will steal your idea and will rent out properties via Airbnb themselves. Here are a few ways you can persuade landlords to let you re-rent their property on Airbnb.
1. Address Their Concern For Short-Term Renters With Poor Behavior
Landlords don’t want to put any extra effort into managing their rental properties than they already do. Noise complaints and rowdy renters can bother long-term tenants. Explain to landlords how you will make sure that the renters will abide by the rules. Airbnb allows hosts to clearly state the house rules and a violation of those rules can result in a termination in their stay.
2. Maintaining The Property
As you are not the owner of the property, you will not be ultimately responsible for any repairs or maintenance that the property will need. Reassuring the landlord that you will handle any repairs or maintenance will ease their worries about the potential costs in a worst-case scenario.
Airbnb provides hosts with coverage in the case that a guest damages themselves or the rented property during their stay. The guarantee covers up to $1 million in protection.
You can also invest in short-term rental insurance to provide more reassurance that any damages will be covered and that they won’t have to pay a dime to fix anything.
3. Pay For Rent On-Time and Earlier If Need Be
Landlords like to receive rent payments on-time and in full. Even better than that, they like to receive rent early and in full. Offering to pay for a few months of rent in advance can make them more likely to agree to your proposal. It also shows that you are serious about this business venture and that you have the financial stability to back it up.
4. Profit Sharing
If the landlord seems entirely hesitant to allow you to rent out their property, then you may have to sweeten the deal by offering them more money. Tell them that you will give them a percentage of your profits in return for them letting you use your property.
Starting out in rental arbitrage, this technique is a great way to persuade landlords and establish a track record so that landlords won’t give you as much of a hard time in the future.
There are a variety of methods you can use to convince landlords to let you use their property. Try to see things from their perspective in order to see which points to address and how you can persuade landlords more effectively. Also, make sure you have any approval from landlords in writing with explicit permission to rent out their property on vacation rental platforms like Airbnb.
Getting Started in Rental Arbitrage
Assuming you get the permission of the landlord and find the correct zoning district for the rental, now comes listing and marketing the property to be booked on Airbnb. Since you don’t need to own real estate, getting started with rental arbitrage doesn’t take a lot of money. You only need a couple of thousand dollars to start.
1. Starting an Airbnb Rental Arbitrage Business
If you plan on doing rental arbitrage long term, then you need to start a business. Choose a name and location for your business and then decide on a legal entity (sole proprietorship, partnerships, LLC, S Corporation, or C corporation).
Setting up a business now will help you appear more professional to landlords which may help in winning them over. There are also cases where property owners will want to sign a corporate lease with your business (a contractual agreement between a landlord and a business that states the business has the right to perform rental arbitrage with the landlord’s rented unit) before allowing you to rent out their property.
2. Doing Market Research
Next, you’ll have to do market research to see what’s in demand and what’s in supply. What price are people willing to pay? What locations are best? Will renters be willing to pay more for certain amenities? How many bedrooms are ideal?
Market research will allow you to understand who you’re targeting and how you will draw them in. It will also give you insights into the local market including what has and hasn’t worked for others, to help you figure out how to find and market a property successfully.
3. Listing The Property on Airbnb
Now comes the fun part. After you have narrowed down a property, gotten permission in writing, and done market research, you can list the property on Airbnb. The process of listing a property is fairly simple. The software will guide you through setting the daily rates, requirements, house rules, availability, etc.
However, the hard part about hosting on Airbnb isn’t the listing process, but how to get guests to book your property. Just like any other online marketplace, presentation and appearance play a huge role in how attractive your property will be to users. The photos and the descriptions are extremely important and they should not be rushed through. Sometimes it helps to buy new furniture and decor to make the rental look new and well taken care of.
Look at the best performing Airbnb listings in the area and observe how they took pictures and the descriptions they used. You can mimic their style to convey to guests that you are just as trustworthy. Remember, you are starting out with no reviews and no track record which means any guest booking your property is taking a risk. You’ll want to reassure them that you are trustworthy and reliable in any way you can. It may help to lower the price starting out and then raise it as you get more reviews.
Rental Arbitrage Can Be Successful But Regulations Are Stifling The Industry
Many neighborhoods are cracking down on rental arbitrage because of the reasons listed above and for many more. There is still a lot of money to be made with this technique but you’ll have to keep a close watch on any new regulations that are implemented locally. If you have multiple locations in different areas, then you’ll have to monitor the law in many areas. In any case, we always recommend consulting with a real estate professional before starting this journey like a Negotiator.
Looking to get into real estate investment? Negotiators consist of the best real estate agents that have years of expertise and a lot of knowledge about the real estate market. They are known to go above and beyond for their clients to get them the best deals possible. Find your local Negotiator here.