Understanding the Intricacies of Rental Arbitrage: A Guide for Beginners
In recent years, rental arbitrage has seen a significant rise, primarily due to the growth of short-term vacation rental booking platforms like Airbnb and Vrbo. But what is short-term rental arbitrage, and why has it become so popular?
Rental arbitrage goes by several different names: lease arbitrage, short-term rental arbitrage, Airbnb arbitrage, apartment arbitrage, re-rent and more.
Rental arbitrage is a business model where an individual or entity rents a property long-term and then re-rents or sublets that property on a short-term basis on booking platforms like Airbnb or Vrbo. The difference in rent collected from short-term rentals and the long-term rent paid to the landlord is where the profit lies, hence the term ‘arbitrage’.
This concept is not without its complications, especially one in an industry that already has such high risk associated with it. With multiple parties involved – the guest, the arbitrageur, and the landlord, things can quickly get complex.
In this comprehensive guide we’ll explain the rental arbitrage model, provide three actionable steps for getting started, discuss legal and insurance considerations, and answer common questions about Airbnb arbitrage insurance.
Whether you’re an aspiring real estate investor or just curious about this buzzworthy term, read on to learn all about the world of short-term rental arbitrage and how it can potentially lead to lucrative results with the right approach in place.
What is Rental Arbitrage: Definition and Explanation
You may be wondering what rental arbitrage even is. Rental arbitrage is a business model where an individual or entity enters into a long-term lease agreement with a landlord and then re-rents or sublets that property on a short-term basis through booking platforms like Airbnb or Vrbo.
The ‘arbitrage’ in rental arbitrage refers to the profit made from the difference between the long-term rental cost and the income generated from short-term rentals.
Roles and Interests in Rental Arbitrage
Gaining a comprehensive understanding of the roles and interests of all key players in the short-term vacation rental arbitrage business is crucial. The following points provide a clear and concise breakdown of these roles:
Landlords are property owners who are primarily focused on getting a long-term lease for their unfurnished property. Their main goal is to maintain the value of their property and ensure a stable income from long-term leases. Unlike property owners who use third party management to short-term rent their furnished homes, landlords have zero involvement in day-to-day short-term rental activities.
The rental arbitrageur is the entrepreneur in this scenario. They sign a long-term lease with a landlord and then re-rent the property on short-term rental platforms like Airbnb or Vrbo. Their primary interest lies in successfully operating a short-term rental business from the property. This means they are responsible for managing bookings, maintaining the property’s cleanliness, addressing guest inquiries and concerns, and ensuring a positive guest experience.
The guest is the end customer who rents the property on a short-term basis from the arbitrageur. They are key to the arbitrageur’s business model but do not have a direct relationship with the landlord. The guest’s primary interest is in having a comfortable, safe, and enjoyable stay at the property.
Risks and Benefits: Arbitrageur and Landlord
The arbitrageur and the landlord both face different types of risks and benefits in a rental arbitrage situation. However, it’s fair to say that the arbitrageur carries more operational risk but also stands to benefit more financially if the business is successful.
|Risks||Financial Risk: The arbitrageur is responsible for the long-term lease and any related expenses. If the short-term rentals do not generate enough income, they could lose money. Needs to insure for specific guest related property damages||Financial Risk: Although the arbitrageur’s insurance should cover damages caused by guests, the landlord may still face risks. Landlord holds reasonability of insuring the physical structure for property losses such as electrical fire, etc.|
|Business Interruption: The arbitrageur’s business could be interrupted due to property damage, legal issues, or changes in market demand.||Loss of Rents: The landlord could face loss of rents from long term lease due to structure damages to the home. Should insure on loss of rents on landlord insurance for covered losses such as fire.|
|Liability: The arbitrageur could be held liable for injuries or property damage occurring during a guest’s stay.||Liability: Landlord can face liability issues arising outside guest of arbitrageur stays such as tree falling on neighbor’s house, weather conditions like collapse of deck/roof from snow load, etc resulting in injury|
|Benefits||Profit Potential: The arbitrageur stands to profit from the difference between the long-term lease cost and the income generated from short-term rentals.||Steady Income: The landlord gets the benefit of a guaranteed long-term lease, ensuring a steady stream of income.|
|Flexibility: They have the flexibility to adjust rental prices based on demand and can manage multiple properties to scale their business.||Less Management: The landlord does not need to worry about managing short-term rentals or dealing with guests.|
In conclusion, while the arbitrageur faces more immediate risks, they also stand to gain more if the rental arbitrage business is successful. The landlord faces less direct risk and benefits from a steady income, but they also have less potential for profit.
Both parties should ensure they have adequate insurance coverage to mitigate their respective risks. The Landlord in a rental arbitrage scenario should make sure they are listed as Additional Insured on the liability coverage via the policy purchased by the arbitrageur.
Rental Arbitrage vs. Co-Hosting
This model, short-term rental arbitrage, is often confused with co-hosting, but the two are not the same. In a co-hosting arrangement, the property owner and the co-host are essentially in business together, usually with a commission-based agreement. The co-host manages the short-term rental operations on behalf of the property owner who has furnished the property but wants to have limited engagement in the day-to-day operations of the property. This co-mingling of business activities requires a different insurance perspective compared to rental arbitrage where the property owner buys a STR specific policy and names Co-Host as additional insured.
Whether it is rental arbitrage or co-hosting it highlights the importance of having separate insurance policies for the landlord and the arbitrage host. For instance, if the landlord neglects to maintain the property and an incident occurs (such as a roof collapse), the arbitrage host might have a claim against the landlord. In such situations, having separate insurance policies can ensure that each party’s interests are adequately protected.
How to Start Rental Arbitrage: Three Key Actionable Steps
Starting a rental arbitrage business involves several steps, from selecting the right property to pitching your business model to the landlord and ensuring you’re adequately insured.
Here are the three key steps to help you successfully begin your rental arbitrage business.
1. Find the Right Property
The first step to starting a rental arbitrage business is finding the ideal property. When choosing a property, it’s essential to consider factors such as location, demand for short-term rentals in the area, and the potential profitability of the property.
2. Pitch to the Landlord
After identifying a suitable property, the next step is to pitch your rental arbitrage business model to the landlord. This involves explaining how short-term rental arbitrage works (as we’ve discussed above) and how it can be beneficial for both parties.
Once you’ve selected a suitable property and gained permission, the next step is to furnish it attractively and comfortably to appeal to potential short-term renters. This can involve investing in quality furniture, appliances, and decor items that will make the space feel inviting.
Landlords typically appreciate the idea of locking up a long-term lease, but they also want assurance that their property is adequately protected. Therefore, it’s important to reassure them that you will take good care of their property and that any potential damage or liability issues will be covered by your insurance policy.
3. Secure the Appropriate Insurance
Once you’ve secured the landlord’s approval, the final step is to get insurance for your rental arbitrage business. Rental arbitrage insurance from Proper Insurance can cover accidental and intentional damage caused by guests, liability issues, loss of business revenue due to a covered caused, and more.
Starting a rental arbitrage business requires careful planning and preparation. By taking these steps, you can ensure that you’re well-positioned to succeed in this potentially lucrative field.
Rental arbitrage is not for everyone – it takes a certain mindset to be successful in this field. Most importantly, it’s essential to take all necessary precautions to ensure your venture is legal, safe, and protected.
Legal Aspects of Rental Arbitrage
The concept of short-term vacation rental arbitrage, while potentially lucrative, is not without its legal considerations and implications. These involve understanding the legality of the practice, Airbnb’s stance on the matter, and the varying regulations across different locations in the U.S.
The Legality of Rental Arbitrage
Rental arbitrage, at its core, involves renting a property long-term and then re-renting it short-term (such as through platforms like Airbnb or Vrbo) at a higher rate. While there are no explicit federal, state, or local laws that deem this practice illegal, it’s crucial to get the property owner’s permission to sublet the property. Without explicit consent, you could face legal repercussions, including eviction.
Furthermore, it’s essential to note that while the practice itself may be legal, certain aspects surrounding it may not be. For instance, some cities or counties have specific restrictions or requirements on short-term rentals, making it illegal to engage in rental arbitrage without obtaining the necessary permits or adhering to the set rules. Therefore, before starting a rental arbitrage business, it’s recommended to research local laws thoroughly.
Review of Airbnb’s Terms and Conditions Related to Arbitrage
Airbnb’s terms and conditions do not explicitly mention or prohibit rental arbitrage. However, the platform does state that hosts must comply with local laws and regulations, which may include obtaining necessary permissions or licenses before listing their property.
This means that while Airbnb doesn’t directly oppose rental arbitrage, hosts engaging in this practice must still ensure they’re adhering to any local regulations and have obtained permission from the property owner. Failure to do so could result in the removal of the listing from the platform and potential legal issues.
Brief Overview of Short-Term Rental Regulations Across the United States
Short-term rental regulations vary widely across the United States, with rules often differing between states, counties, and even cities. Some areas may require hosts to obtain a permit or license before they can list their property for short-term rental. Others may impose rules around noise control, parking, or the maximum number of guests allowed.
In some cases, property owners may also be subject to taxes on their rental income. It’s essential for anyone considering rental arbitrage to familiarize themselves with these regulations to ensure they’re operating within the law.
In conclusion, while short-term vacation rental arbitrage can be a profitable venture, it’s important to navigate the associated legal landscape carefully. This includes understanding local rental regulations, respecting property ownership rights, and adhering to platform-specific terms and conditions.
Protection for Rental Arbitrage
Insurance is an essential component of protection for the rental arbitrage business model.
Having a comprehensive insurance policy in place can help protect both the landlord and the arbitrage host from the high risks associated with running a short-term rental business.
With multiple parties involved – the guest, the arbitrageur, and the landlord – it’s crucial that each party’s interests are adequately protected in such a high-risk industry.
Coverage for Tenant and Guest-Caused Damage
A good Airbnb arbitrage insurance policy should include coverage for damage caused by guests. This ensures that any costs associated with damage or accidents are covered.
For example, if after 12 months of rental arbitraging, there is $20,000 worth of damage to the property from the increase of guest traffic in the home (holes in the walls, broken blinds, carpets destroyed, etc.), what recourse does the landlord have?
They can sue the arbitrageur/host and keep the security deposit, but they cannot file an insurance claim on their landlord policy because such policies do not cover damage caused by tenants or their guests. Additionally, wear and tear is excluded on all insurance contracts as insurance policy only responds to “sudden” and/or “accidental” losses covered on the contract. Damage over time, like heavy foot traffic on carpet is the cost of ownership when you are landlord.
So where does rental arbitrage insurance come into play? Proper Insurance offers unique coverage that not only covers the contents in the property (e.g., couch, TV, dishes, linens, decor) but also that limit of insurance extends to cover guest damages to the physical property (subject to selected limit of coverage by insured) that occur in a sudden occurrence.
This means that if a guest or tenant damages the property, in a sudden occurrence (not over long period of time such as wear and tear), the arbitrage host can file a claim with Proper Insurance. Clients can choose their limit for property coverage, typically ranging from $20,000 to $100,000 depending on the size of the property and desired insurance limits of the insured.
The second crucial aspect of rental arbitrage insurance is liability coverage.
The policy offered by Proper Insurance includes $1 million of commercial general liability (CGL) coverage. This coverage protects the rental arbitrage host from most bodily injury or property damage that they could be held liable for.
For instance, if an Airbnb guest slips and falls down the stairs due to a loose handrail and decides to sue the arbitrage host, the policy would respond to that.
The policy also allows for the addition of the property owner as an additional insured, which is typically required by landlords on the lease agreement. This means that if the property owner is named in a lawsuit from a guest of the short-term rental operation, they have protection under the arbitrage host’s policy.
Business Interruption Coverage
Another important facet of rental arbitrage insurance is coverage for loss of business revenue. If there’s damage to the property that makes it unrentable or uninhabitable, the arbitrage host can file a business revenue claim with Proper Insurance for their lost rental revenue from a covered cause of loss.
For example, if water pipes freeze and break due to a power outage, causing water damage inside the unit including the furnishings, resulting in the property being unrentable for 90 days, the arbitrage host can file a claim for lost rental revenue (subject to insured limits). The landlord would be responsible for the repair of the water pipes and file an insurance claim with their carrier.
Costs Associated with Rental Arbitrage Insurance
The cost of Airbnb arbitrage insurance is very competitively priced and should not be a barrier to entry for those looking to get involved in the Airbnb or rental arbitrage business. It can range from as low as $80-$100 per month to $150-$200 per month, depending on the limits of insurance chosen for the rental arbitrage business.
In the next section, we will answer some common questions about rental arbitrage insurance.
Frequently Asked Questions About Rental Arbitrage Insurance
Do I need special insurance for rental arbitrage?
Yes. Proper Insurance’s rental arbitrage insurance is a specialized insurance product that is designed to protect the interests of both the landlord and the arbitrage host. The policy covers property damage, liability claims, and business revenue losses due to property damage or unrentable periods from a covered cause of loss.
Does rental arbitrage insurance cover damage caused by tenants/guests?
Yes, Proper Insurance’s rental arbitrage insurance covers property damage and liability claims due to the actions of guests, or third parties on the premises. This coverage can be critical in protecting both the landlord and the arbitrage host from unexpected losses due to property damage or liabilities.
Is rental arbitrage insurance expensive?
No. Rental arbitrage insurance is very competitively priced and should not be a barrier to entry for any aspiring Airbnb or rental arbitrage hosts. Depending on the size and location of the property, it can cost as little as $80-$100 per month to get coverage with Proper Insurance, depending on the limits of insurance chosen for the rental arbitrage business.
Can I add my landlord as an additional insured on my policy?
Yes. Proper Insurance’s rental arbitrage policy allows for the addition of landlords as additional insureds on the policy. This means that if a short-term rental arbitrage host is named in a lawsuit, their landlord will also have protection under their insurance coverage.
What is the difference between rental arbitrage insurance and landlord insurance?
Landlord property insurance provides coverage for landlords who are renting out their properties to tenants on long-term leases. This type of policy typically covers your typical perils (not related to business activity) such as fire, lightning, wind/hail, burglary/vandalism, etc.
Rental arbitrage insurance is specifically designed for hosts who are renting out their properties on a short-term basis. The policy covers intentional and accidental damage caused by guests, as well as liability claims due to the actions of a guest or tenant on the property. Additionally, it provides coverage for business interruption losses if the property becomes unrentable due to damage caused by guests.
Does renters insurance cover rental arbitrage?
One of the most frequently asked questions is whether a standard renters insurance policy can cover rental arbitrage. The answer is a definite no.
A standard renters insurance policy, also known as an HO4 policy, specifically covers the renter’s personal contents, personal liability and use of the property as a primary residence. It is not a business policy.
Rental arbitrage is essentially running a business out of rented space. Just like you wouldn’t rely on a personal renters insurance policy to cover a restaurant you’re running in a rented space, you can’t rely on it to cover your rental arbitrage business. What you need is a specialized business or commercial insurance policy, such as the one offered by Proper Insurance.
How does insurance apply to non-guest-caused damage?
Another common question pertains to how insurance would apply to damages not caused by guests. For instance, if a tree falls and damages the roof of the rental property, making it unrentable or uninhabitable for a period of time, what happens then?
In such scenarios, the arbitrage host can file a business interruption or business revenue claim with Proper Insurance for their lost rental revenue. This coverage ensures that the host doesn’t lose out on potential revenue while the property is being repaired, which is a significant advantage of choosing Proper Insurance for rental arbitrage insurance.
In the case of non-guest-caused damage, such as a tree falling on the property, the landlord’s insurance would typically cover the repair costs for the physical damage to the property. However, the rental arbitrage insurance from Proper Insurance steps in to cover the loss of business revenue from a covered cause of loss, compensating the host for the income that would have been generated during the period the property is uninhabitable and undergoing repairs.
How can I use insurance to pitch to landlords?
A key part of the rental arbitrage business is convincing landlords to allow you to sublet their property on a short-term basis. One way to do this is by leveraging your insurance coverage.
You can tell the landlord that you carry your own insurance, which provides coverage for accidental and intentional damages caused by guests—an upgrade to the insurance they currently have. You can also add the landlord as an additionally insured party on your policy. This means that if they are named in a lawsuit arising from the use of the property as short term rental, they have protection under your policy, which can be a significant selling point.
*Please note that civil matters such as noise complaints, overgrown trees, trash, etc. are not covered on liability insurance. Liability responds to covered bodily injury and property damage claims.
Is Rental Arbitrage Right for You?
Contemplating whether rental arbitrage is the right fit for you involves consideration of several factors. It’s an entrepreneurial venture that can generate substantial income, however, it does require an initial investment, time commitment, and a willingness to navigate potential challenges such as property damage or changing local regulations.
The addition of rental arbitrage insurance can ease some of these concerns by providing coverage for a range of potential issues. But ultimately, the decision depends on your individual capabilities, resources, and risk tolerance. If you’re someone who is proactive, adaptable, and comfortable with the dynamics of the short-term rental market, rental arbitrage could be a suitable opportunity for you.