What Is Rental Arbitrage?
What Is Rental Arbitrage?
With vacation and short-term rentals rising in popularity, more tenants are considering exploring rental arbitrage to generate a profit while renting. This is an easy way to enter the vacation rental industry without the upfront costs of buying a property, but both landlords and tenants should know whether or not this is legal and what factors to keep in mind.
In this article, we share information about rental arbitrage and provide resources that can ensure landlords are protected from major property damage and unpaid rent.
What Is Rental Arbitrage?
Rental arbitrage is when tenants commit to a 12-month to 15-month lease for multi-room rental properties to rent out as either vacation rentals on Airbnb or short-term rentals. This is often done to help tenants make money while renting and utilize rooms they’re not using to get started in vacation real estate investing.
If a tenant is paying $1,800 in rent per month, they can rent out a room for $160/per day. If a guest stays for one week, they can generate a profit of $1,120 to either use on rent or other expenses.
How Does Rental Arbitrage Differ From Subletting?
While rental arbitrage and subletting may seem the same, there are some notable differences. When tenants sublet a room in a rental, it’s generally for one month to three months, depending on their situation. In the case of rental arbitrage, tenants allow guests to rent a room for a few days to several weeks.
States may also vary in laws regarding subletting and short-term rentals, so it’s important to refer to local landlord-tenant laws to be well informed about what is (and isn’t) allowed.
Is Rental Arbitrage Legal?
In most instances, rental arbitrage is legal but that does not mean there aren’t restrictions to keep in mind. States can have laws regarding short-term rentals that can impact how rental arbitrage is handled, but landlords can also deny tenants from renting out rooms. Unlike subletting, most states don’t require landlords to accept a tenant’s proposal to rent out rooms as vacation rentals but refer to local ordinances to confirm.
Additionally, it may be helpful to complete the following steps:
- Review the lease agreement terms: Lease agreements should generally include a clause on short-term rentals that can outline whether or not rental arbitrage is allowed. If allowed, tenants can see what steps to take before posting listings online.
- Talk to the landlord: If tenants consider renting a room as a vacation or short-term rental, it’s important to first talk with the landlord. Speaking with them can help determine if it’s allowed without any penalties and if any laws regarding short-term rentals to consider. This will also allow landlords to add a lease amendment to cover both parties if something happens due to rental arbitrage, if not already included in the lease.
Do Landlords Allow Rental Arbitrage?
Landlords have the right to accept or deny a tenant’s ability to rent out unused rooms to guests as short-term rentals. Despite the benefits of rental arbitrage for tenants, landlords may be hesitant to allow it due to increased foot traffic to the rental, which can result in more wear and tear and constant turnover. Additionally, if guests aren’t being screened before renting a room, this can increase the risk of hiccups occurring during rental arbitrage.
As a tenant, you can talk with your landlord to see what their thoughts are on rental arbitrage and what you can do to calm their worries. For example, if landlords are worried about property damage, you can let guests know they’ll be responsible for covering associated costs. The key is knowing what reservations landlords have on renting out rooms to guests to create a plan both parties are comfortable with and convince them to allow it.
How to Determine If Rent Arbitrage Is For You?
There are benefits to rent arbitrage, but it’s important first to determine if it’s the right option for you. To help you decide, you can consider the following factors:
- Local ordinance requirements: If local ordinances allow for short-term rentals, it’ll be easier to get started. However, some states may limit whether or not tenants can rent out rooms in the unit or may require you to complete certain steps before publishing the listing online. For this reason, refer to local ordinances.
- Location and neighborhood: Some neighborhoods may have a higher demand for short-term rentals than others, especially if the rental is located in a major city or high-traffic area. If the rental demand is high, then rental arbitrage can be a great way to generate income while renting.
- Total costs: Although guests rent the room, the person on the lease agreement will still be responsible for supplying furniture and fixing property damage caused by the short-term guests. The original tenant is also responsible for paying the entire rent amount and utilities each month, so it’s important to determine if you can afford the additional costs.
Lawyer-Written Lease Amendments
Rental arbitrage is a great way for tenants to generate monthly income by renting out guest rooms as vacation or short-term rentals. However, it’s important to know how to handle this to comply with local landlord-tenant laws and avoid costly hiccups.
One way landlords can protect themselves in the case of rental arbitrage is by adding a lease amendment to an existing lease to modify the terms legally. The lease amendment can include what steps tenants need to complete before listing the room, what they’re responsible for covering, and what can happen if hiccups arise due to rental arbitrage.
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