Rental Arbitrage on Airbnb: A Data-Driven Guide
As of the second quarter of 2021, there were over 600,000 multifamily listings in the U.S. listed on Airbnb or Vrbo as short-term rentals (STRs). The vast majority of these listings are located in the largest American cities, many of which were ravaged by the COVID-19 pandemic.
With a large percentage of workers able to work remotely—and the high cost of living that comes with many of these cities—it's no surprise many people have opted to move to lower-cost areas until the benefits of living in the city match or surpass the cost again.
Apartment rent increases in June 2021 and yearly growth in long-term rental (LTR) rates increasing by more than 10% in 53 of the 150 largest metro areas in the US, according to RealPage Market Analytics, suggest that some momentum may be building.
In the 50 largest cities, however, demand for STRs has increased after declining by 50% in 2020. Even if demand is still around 25% lower than it was in 2019, a full recovery is anticipated by 2023. Demand has decreased by more than 37% in the high-density sections of these cities, where the majority of high-rise flats are found. In contrast, demand in suburban areas with many single-family houses and garden flats is down barely 7% from 2019 levels.
Demand and rent are still fluctuating for both long-term and short-term rental markets, but there are chances to rent out apartments for short periods (known as the apartment rental arbitrage model). Having the appropriate information is a smart place to start when looking for a rental arbitrage property.
What is Airbnb rental arbitrage?
The practice of renting a home long-term and then re-renting it briefly on vacation rental websites like Airbnb or Vrbo is known as Airbnb rental arbitrage.
For illustration, suppose you sign a long-term lease for $2,500 per month to rent an apartment. You might make more money than you spend in rent by subletting the same property to an STR for $200 per night in less than two weeks. Any additional STR money you receive during the month would be profit after expenses. The difference between what you spend for LTR and what you make in STR rent is what determines whether there are prospects for STR arbitrage.
Is arbitrage in Airbnb rentals legal?
Airbnb rental arbitrage is advantageous for STR operators, apartment owners, and building inhabitants. It is not only legal but also commonly used.
Many landlords of apartments are aware that a resident's rental arbitrage company increases occupancy, resulting in higher rents for both the long-term tenant and themselves. Apartment owners can benefit from these chances through rental arbitrage. Additionally, it allows them to diversify their rental income.
Home-sharing activities in a building can be tracked and monetized by building owners using Migo by RealPage. Before beginning the activity, each participant should, however, execute a rental arbitrage contract. Additionally, researching rental arbitrage insurance is a prudent financial move. Additionally, Migo makes this easier for landlords of apartments.
But not all of it benefits the apartment owner. Rental arbitrage on VRBO or Airbnb gives other long-term tenants in the building a different amenity. (Wouldn't it be fantastic to have an STR unit in your building for your in-laws to use instead of your fold-out couch the next time they came to visit?) When discussing the possibility with the owner of their apartment, residents should keep this in mind and frame it as a win-win situation for both parties.
Arbitrage data for apartment rentals
Methodology
Our analysis contains information on the 34 U.S. areas with the most STRs and their submarkets. Multifamily listings, which are largely found in apartment complexes, are concentrated in the largest U.S. cities. (Short-term rental performance is provided by AirDNA, while LTR rates and occupancy levels are provided by RealPage Market Analytics and Migo.) Both datasets employ Real Page's market and submarket geographic definitions, and both cover the period from 2016 through 2021.
To produce results and guarantee that a small sampling of listings didn't distort the results, a submarket had to have more than 20 total active STR listings throughout the five-year timeframe as well as at least 10 listings of each unique bedroom type. With the supposition that cleaning fees, taxes, and other fees would be added to the rental rate to cover those costs, we looked at the revenues removing these expenditures.
To properly manage an STR property, it's crucial to take into account additional costs. These include start-up costs (appliances, furniture, décor, and licensing and legal fees), as well as ongoing costs (utilities, maintenance, toiletries, and insurance). They were not included in our analysis due to the variable nature of these costs.
COVID-19 and rental arbitrage
The number of short-term multifamily rental postings decreased by just 2% during the past two years in all 34 cities, but there was a big variation between them. Greater than 25% drops in listings were observed in Boston, Seattle, Los Angeles, and New York, four major Urban coastal marketplaces. On the other side, over the same period, listings in Dallas, San Antonio, and Jacksonville, Florida, increased by more than 40%.
Numerous elements, such as the following, could be to blame for the variations in listing activity:
1.Markets like Boston and Los Angeles now have new rules.
2. STR businesses like Lyric and Stay Alfred closing their doors
3. Like Sonder, Mint House, and Vector Travel, new and developing organizations
4. The economics of STR prospects are evolving
Before 2021, the average revenue per listing received in the LTR and STR markets had relatively little correlation with one another, and all markets had historically demonstrated a favorable average arbitrage opportunity. That altered as a result of the pandemic's drastic changes in rents and income. Demand patterns for the multifamily housing and lodging sectors shifted as a result.
Apartments in places like New York and San Francisco experienced an increase in vacancies and a decrease in effective rentals, which, depending on the size of the unit, reduced the average effective rent by 10% to 25%. This decline coincided with a sharp decline in STR revenue over the same period. Any chance for rental arbitrage in these markets looks to be gone given the greater fall in revenue from lodging uses.
In contrast, but along a similar line, demand for both hotels and housing has grown significantly in many American cities. In comparison to 2019, the second quarter of 2021 saw an increase in demand for STRs in coastal areas of more than 20%. Because of the rising demand, these markets saw their revenue per unit rise even further. The opportunity for rental arbitrage increased in some markets and submarkets that maintained high demand throughout the pandemic, coupled with fairly small increases in apartment rents.
What cities were the best in 2021 for Airbnb rental arbitrage?
The top cities for Airbnb rental arbitrage are shown in the table below, which ranks the 34 biggest markets with multifamily STR listings. You can sort by LTR rates and arbitrage possibility, which is the deciding determinant. To switch between various bedroom types, use the filters (studio, one bedroom, two bedrooms, three-plus bedrooms, and the market average).
The top markets once again in 2021 were well-known ones. The five markets that would average the greatest rental arbitrage premium after five years of analysis of the same data are still Nashville, New Orleans, Savannah, Georgia, Charleston, South Carolina, and Jacksonville, Florida. Only Jacksonville has experienced large increases in multifamily listings since 2018, reflecting the risk involved with rental arbitrage, while new rules have probably limited growth prospects in other regions.
San Diego has recently risen to the top of the list, where apartment rentals have quickly increased by 4% annually over the last five years but are still much lower than the 10% annual growth rate for STRs.
As apartment rates only decreased in seven of the 34 locations, the majority of markets (25 out of 34) observed a fall in the revenue potential from rental arbitrage.
What designates a successful Airbnb arbitrage strategy?
1. Research each property thoroughly:
The data offered in this research shows the average performance of properties in that area or submarket, but every sale is unique, so it's vital to keep that in mind. In any market, there are possible opportunity pockets. Even if a market doesn't seem alluring on the surface, there are always potential winning submarkets and bedroom types.
Each property should be examined separately because no one property's performance is comparable to the submarket or market average. A more thorough investigation can be aided by the following resources:
Rentalizer: Rentalizer can estimate how much every home anywhere in the world would bring in as a holiday rental by examining the booking activity of more than 10 million vacation rentals listed on Airbnb and Vrbo worldwide.
MarketMinder: Gain useful information about the performance of more than 10 million vacation rentals spread across 80,000 cities worldwide using MarketMinder. To fully grasp the direction of the STR industry's evolution, research the crucial developments that have affected your market over the previous three years.
Migo: Owners of multifamily buildings can permit, oversee, and profit from home-sharing activities on Airbnb thanks to Migo, a partner of Airbnb. Based on address and unit mix, Migo's proprietary revenue estimator (found on Migo.com) can precisely predict an owner's home-sharing income for every property.
RealPage Market Analytics: Stakeholders can see, visualize, and use insights, data, and reports at the market, submarket, and property levels thanks to our multifamily market intelligence platform, which offers complete visibility into the market, business, and asset performance.
2. Larger units typically perform better.
The potential for rental arbitrage increases with unit size. The STR premium rises from an average of 46% for studio apartments to 53% for one-bedroom residences, 75% for two-bedroom residences, and 140% for residences with three or more bedrooms.
3. Rental arbitrage presents chances for tenants.
More workers have more freedom because of the recent increase in remote work, which occurred before and was accelerated by the epidemic. This flexibility allows them to work anywhere there is a reliable Wi-Fi connection. As of 2021, renters who simply want to engage in rental arbitrage when traveling will have new options.
Renters in some of the most costly cities in the nation can rent out their apartments for as few as five nights per month in several submarkets across the country, covering the entire month's rent.
4. Be mindful of risk.
There are inherent hazards and numerous cautionary tales with any kind of real estate arbitrage. Understanding the data and the potentially transient nature of the arbitrage opportunity is crucial. According to economic theory, arbitrage should only be used temporarily because the market will eventually react to supply and demand pressures.
In our multifamily scenario, that would happen either by decreasing the number of vacant apartment units or by raising rent across the board, which would decrease the chance of making a profit. There may be more competition for visitors as more units are built in a given neighborhood, which could result in discounts and a decline in an STR's overall revenue potential. New rules issued by the city or the state, as well as adjustments to building owner policies, may present additional dangers.
Why it's not difficult to establish a rental arbitrage business
There has probably never been a better time to enter the market, given the abundance of rental arbitrage opportunities that are accessible around the nation. To ensure a successful venture, due diligence must be performed and tools must be investigated.
That's where MarketMinder and Migo fit in. While MarketMinder provides renters with the data they need to improve their pricing strategy to take advantage of revenue opportunities for both themselves and their apartment owners, Migo brings apartment owners and residents together in the rental arbitrage enterprise.
Migo and MarketMinder are powered by the most trustworthy data in the STR market to support the optimization of rental arbitrage enterprises. Data makes the difference.
Conclusion:
Airbnb rental arbitrage is the process of renting out one or more properties and then subleasing them on websites for short-term rentals like Airbnb. It is now more challenging to become a homeowner as housing costs grow and incomes remain flat. For individuals who wish to start investing in real estate but cannot afford to buy a home, this is a perfect first step. You can utilize this method to accumulate the funds necessary to buy your first home. One of the better business ideas for folks without a lot of real estate experience or beginning funding is starting an Airbnb rental arbitrage business because many of the technicalities are taken care of for you. The ability to establish and scale your business more quickly makes it even better if you do have these things. If you focus on this and work hard, you will be earning six figures in 12 to 18 months, which is a level of achievement that is nearly unheard of in most businesses.