Rent a property you don’t own, make money
Emailing a stranger to sleep on their couch didn’t (and will never) sound like a safe idea. But, if you remember planning those post-high school Euro trips and wanting to extend your vacation after your Contiki tour ended, you either had to pay for a hotel or couch surf. Our options were limited. And it wouldn’t be till many years later that the option to rent a room in someone’s house would become possible.
Now we’re yet again faced with a financial dilemma. Having lived through a pandemic that changed priorities and pushed many people out of their comfort zones, old jobs, and into new cities… people have been trying to figure out ways to make passive income.
One way is short-term rental arbitrage (STR), something you may not realize is a thing.
Renting and re-renting is legal
As home prices have skyrocketed, and with home sales significantly declining (with no improvement ahead), the real estate market has seen innovative trends. In addition to communal homebuying and fractional ownership, renting a property and re-renting seems to be a creative loophole allowing one to earn a profit without actually having to buy anything.
STR arbitrage is the practice of renting out long-term properties and re-renting to others on a short-term basis. And it can be quite lucrative if you know what you’re doing.
- First things first: Find a property in a desirable location and get the owner to like you. Analytics companies like Airbtics and Beyond can help you do the finding, helping you to instantly see your estimated annual revenue with a snapshot of the market, including trends, occupancy, daily rate, seasonality, and booking patterns.
- The getting the landlord to like you part, that’s all you. But, if you’re well-researched, you’ll be able to deliver plenty of upsides which is what you’ll need to close the deal.
- Tell them you’re going to pay the rent on time, in addition to making them believe they need you (they actually don’t). If not, they’ll end up renting it themselves instead of leasing the property to you.
Once you’ve found the property and the owner is on board (don’t try and sublease without the landlord knowing, you’ll get in trouble), you need to wrap your head around the law.
Letter of the law
Different states have different regulations enforced at the state or local level so make sure you study up.
- What kind of rental is your desired property? Is it a home-share, short-term rental, or long-term vacation rental? Will the owner be present for the entire time or not at all? Not all places will allow your listing, and there are different rules for different types of listings.
- You’re going to be a real estate business owner in the eyes of your local government, so there could be permits or licenses you’ll need to obtain depending on your city. In Santa Monica, for example, you must apply and obtain a Home-Sharing Permit and Home-Sharing Business License.
- You might need to register for a tax ID so that you can pay taxes on your rental income, so make sure you check taxation rules.
- Airbnb insurance protects guests during their stay but doesn’t cover damage to your property, so you’ll need to get insurance.
It’s a lot to know, but the money could be worth your effort.
Rake in the dough
So, how much money could you be making? Well, that depends on a variety of factors, and there are formulas to help determine that. Here’s a look at how vacation rental software iGMS broke theirs down:
- Know the daily rental rates for your area for weekdays and weekends. Airbnb just released a new feature, Airbnb-friendly apartments, and it has all the info you need. Their insights even review 12 months of similar listings.
- iGMS says you should next calculate the weighted average rate of all the properties. Weighted Average Airbnb Rate = (Weekday Average Airbnb Rate * 5 + Weekend Average Airbnb Rate * 2) divided by 7. For example, if the weekday average Airbnb rate is $50 and the weekend average Airbnb rate is $100, the Weighted Average Airbnb Rate is $64 because ($50 * 5 + $100 * 2) / 7 = $64.
- The third step is to calculate your total daily property expenses (monthly costs / 30)
- Rental deposits.
- Furnishings. You should at least do semi-furnished, but if you were to fully furnish the place, you should be to do this for under 5K.
- You’ll need photography, although you can take the pics yourself to ditch this cost.
- While cleaning is included in starting costs, you’ll need to eventually spend on cleaning services — probably $50 to $250, depending on size and location.
- Having legal counsel available is important should you need help with damage claims, insurance, and or any other mishaps.
- To get your final ratio, divide the weighted average rate by your daily property costs. This will let you know how many days you need to rent your property to make any money. If your ratio equals 1 or more, you can turn a profit by renting fewer days per month. iGMS advises a ratio of 2 or higher to make sure you at least break even.
If you pick the right location and property, you could be making tens of thousands a month. Some folks have even laid out their step-by-step success models as this side hustle has become quite popular as of late.
Your path you must decide
While you need to think about upfront costs, the landlord being able to halt subleasing whenever they want, wear and tear costs, inconsistent bookings, and maintenance costs, we think the pot of gold over the rainbow could very well be worth it as you’re upfront costs are low, there is huge opportunity to scale, and you’d then be able to use those profits to further invest.
The building of your empire could begin now. You’re welcome.