UpperKey Explains How Rental Arbitrage Works

PropTech specialists UpperKey share their expert insights into rental arbitrage.

Okay—what is rental arbitrage?

Rental arbitrage is the process of renting or leasing a property and then sub-letting it at a higher rate to turn a profit. How can that be possible? Well, long-term rents are far cheaper than short-term rates for the same property.

However, stringing together a year’s worth of short-term tenants takes a lot of work, and those guests harbour greater expectations from their bookings. Putting a long-term tenant in place delivers a simpler, passive income for the landlord.

For the arbitrage practitioner, the profit available is the difference between the two rates less all expenses.

As straightforward as this most basic overview sounds, rental arbitrage is far from simple. It takes a great deal of organization, efficiency, hard work, and dedication. As experts in iRenting and PropTech, we’re here to provide a basic introduction to see if rental arbitrage is right for you.

Rental arbitrage in the current property market

The property market has regularly been a reasonably predictable beast. But, with the continual rise in population and homeowners staying put and sitting on investments for as long as possible, there are far fewer properties available.

Many young families are desperate to invest in a long-term or forever home, yet it’s far from easy in a market showing little change and an industry slow to catch up with demand. As a result, fewer investment opportunities are available, as income from rentals or additional properties still offers worthwhile returns.

And don’t get us started on the hikes in property prices. Even if more properties were available, so many are way out of reach, price-wise, for younger, first-time buyers.

Do you need to own a property to turn a profit?

No—that’s where arbitrage comes into its own. Once your system is established and proving successful, it’s a simple enough step to repeat, offering true scalability.

Rental arbitrage provides a healthy opportunity that requires a far lower level of investment than an owner-based operation.

The rise of Airbnb rental arbitrage

Over the past ten years, Airbnb hasn’t just grown into a successful business; it’s exploded into the industry, earning the lion’s share of an almost untapped digital marketplace.

With 5.6million+ listings in over 100k countries, filling those short-term lets has never been so easy. With a massive market of travellers actively searching 24/7 for a great deal, a great property, in all prime locations, the marketplace arbitrage practitioners can access to fill their calendars has been made easier than ever by the hospitality tech giant.

That’s why you’ll find just as much content based around Airbnb arbitrage as rental arbitrage—this simple one-stop marketplace has delivered a rebrand to a long-existing practice.

It doesn’t stop at Airbnb, though; there are plenty of alternative online opportunities to help fill your apartments and rentals. But, for the time being, Airbnb is king, and using it independently to run an arbitrage model is more than viable.

Why arbitrage is good for you

For you, you don’t need to find the capital to buy your rental property. All you need is a little business savvy, a little set-up capital, and the determination to make it work. It’s incredibly scalable, and for entrepreneurs the world over, it’s a model functioning better than ever with modern technology and data availability.

Why arbitrage is good for your landlord

Your landlord collects steady rent—their key goal. However, they also get cost-free maintenance and upkeep into the deal.

As a sub-letter, the best margins are achieved from the most attractive properties. That means you’ve got to make sure they’re fitfor-purpose on day one, day thirty, and day 365. Nobody wants to stay in a tired and neglected rental, so it’s up to you to keep them ship-shape at maximum profit potential.

Setting up your arbitrage empire – do your research

We advise every potential rental or Airbnb arbitrage practitioner builds their operation on facts and figures. Without accurate data, your practice is built on a foundation of guesswork.

There are more providers than ever with the data to reveal key operational areas, not just the cities but the districts and neighbourhoods where arbitrage profits are highest. You may have to pay to access some of this data, but it will be worth it.

Before making that commitment, however, there are free sites full of the information you can use to make a start.

What should the budding iRenter or arbitrage practitioner research?

  1. Dive into rental forecasts for areas that are appropriate to you. Data aggregators track rental markets providing the trends and insights you need. Use them.
  2. Choosing a location and your perfect property/properties. Build accurate calculations and forecasts to determine the bottom line that can provide your anticipated profit. If the numbers don’t add up, the property isn’t for you.
  3. Investigate all local regulations.Airbnb has caused all sorts of issues with short-term let regulations in major cities and tourist destinations. Almost all have delivered brand new rules to accommodate changes to cultural balance and workers’ habitats. You may need planning permission to change usage or any one of many permits and certificates required to fill a property with short-term lets year-round.
  4. Calculate your set-up and running costs.It’s essential to know that you can cover your initial investment as well as your monthly costs. Don’t skip any areas, and always err on the side of caution. Unpredictable expenses will appear out of nowhere and sink you if you aren’t suitably prepared for them.

Application, permits, and legal fees, city-based taxes

Deposit (Inclusive of first month’s rent, final month’s rent, security, bond, etc.)

Insurance policies

Legal fees

Maintenance and updates to the property

Decoration, furnishings, toiletries, kitchenware and kitchen supplies, health and safety installations and certification

Wi-Fi connection, account fees, and entertainment subscriptions

Marketing costs and fees

Cleaning service fees

Monthly utility expenses

  1. Optimize all listings.How to list a rental property is a complete topic in itself, but to ensure the best possible returns, it has to look and sound fabulous. A lot of that work will be done to the property, but your marketing all happens online. Always present properties professionally, make sure they look amazing and include everything your guests could wish for.
  2. Automate, automate, automate… To deliver a scalable business, automation is everything. The more efficiently you work and the more tasks you can leave to apps, systems, and technology, the more time you’ve got to build your empire. iRenting is the key to continued success, and PropTech (property technology) is how you do it.

Using technology to streamline your operation

There are plenty of superb tech options to help you run every type of business—iRenting or rental arbitrage is no exception.

If you’d like to see more, we delivered an in-depth explanation of iRenting for the readers at digitalisthub.com. Our article includes a list of the different ways we use technology to make our system easier to operate day to day and provide the space to scale the business.

Property Management Systems – The key to streamlining and containing your system.

Automated messaging – Why spend time emailing guests when your AI (artificial intelligence) can manage it for you? Automated check-ins – Digital keys and key boxes mean you no longer have to meet and greet tenants physically. Industry leaders like KeyNest are a great place to start!

Dynamic pricing – There are now apps that calculate the prices you should charge to maximize returns for your property and area through each season.

Automate maintenance and cleaning processes – Automate wherever you can. Digitally managing cleaner schedules and restocking supplies is a must. The more upkeep, repairs, and maintenance you can leave to your digital system, the more time it earns you.

Payment processing – Why would anyone manually manage payments anymore? Organize your gateway and automate it. Screening tenants – We spoke about the advantages of hard data earlier. There are apps and websites for almost everything you can imagine. Screening your tenants lowers risk and ensures trouble-free rentals.

Market rental stay estimators – Again, using data to guide your decision-making is far more accurate than any kind of ‘hit and hope’ system. Find your best-bet data aggregators and the trends you can take advantage of.

Noise and other sensors – There are sensors that alert you to tenants throwing parties. Each notification allows you to nip the problem in the bud. Even Alexa can help if you have one installed for your guests. However, in the interest of data management, you must let your guests know of any such monitors.

Digital guidebooks and services – You can eliminate physical check-ins and guided tours if your guests can access everything they need online.

Insurance algorithms – You need insurance, so automate the search to ensure you achieve the best deal and package for each property.

Rental arbitrage set up checklist

This article offers a simple Internet guide into rental and Airbnb arbitrage. For those serious about taking up the gauntlet, you’ll need a far further reaching list than this. However, for those wondering if it’s for them, it provides a simple starting point to build on.

How to get started with Rental Arbitrage:

Create a complete financial forecast.

Always obtain the landlord’s permission and make sure the details are reflected in your contract.

Ensure lease terms are long enough to deliver the anticipated profit.

Plan for all risks, down days, maintenance and damage costs, as well as high and low season incomes. Your financial forecast models need to cover the good times and the bad.

Investigate market conditions in your area.

Understand and include the costs of any location-specific regulations.

Always expect the unexpected. No matter how much you plan, there will always be something to slip through the net. You can’t prepare for what you don’t know, but you can be financially ready for unseen emergencies.

Arbitrage doesn’t offer an easy-to-predict flow of clients or cash. Model for an unstable income and build a safety net to cover all eventualities.

UpperKey – an oracle of arbitrage

UpperKey successfully places travellers, workers, consultants, students, and more in some of the finest properties in the United States and European capital cities. As leading iRenters in the PropTech market, we’re perfectly placed to manage properties for owners who don’t have the time or energy to maximize their potential.

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Adam Ali