Rental Arbitrage: Renting Properties to List on Airbnb

Rental arbitrage means leasing a house or apartment from a landlord and listing it on Airbnb or another short-term rental site, keeping what the bookings bring in above the rent and operating costs. It is allowed only where your lease and state law permit subletting to guests and the city lets someone who does not live in the unit host it. New York City, San Francisco, Los Angeles, and Denver all require the host to live in the home, which rules out whole-unit arbitrage there. Get the landlord's permission in writing, and because the rent is due whether or not guests book, work out the occupancy you need to break even before you sign the lease.

Does your lease or state law allow subletting to guests?

Start with the lease. California's Department of Real Estate warns that most rental agreements prohibit using the unit as a short-term rental through sites such as Airbnb and VRBO, and that many local laws prohibit it too, with heavy fines.

Where the lease is silent, state law decides. California lets a tenant sublet unless the rental agreement requires the landlord's consent first. Texas Property Code section 91.005 goes the other way: during the lease, a tenant may not rent the unit to anyone else without the landlord's prior consent.

Listing without permission puts the lease at risk. In California, subletting in violation of the rental agreement is one of the at-fault reasons a landlord can use to end a tenancy, even under the state's just-cause law. Permission does not shift responsibility either: California's guide says a tenant who sublets with the landlord's approval stays responsible for the unit, so damage a guest causes is yours to pay to the landlord.

Get the permission as a signed lease clause or addendum that names short-term rentals to guests, not general consent to sublet.

Cities that require the host to live in the unit

Where a city does allow hosts who live elsewhere, check for a permit, a registration number to show on the listing, and any requirement for a local contact. Short-term rental regulations shows how to check the rules for a specific address.

Landlord-approved buildings and platform programs

Some apartment owners sign up with Airbnb's Airbnb-friendly buildings program, which lets residents host under the building's own rules. Under the program:

• Building management can set the number of nights you may host per year, minimum or maximum stay lengths, blackout periods (dates when hosting is not allowed), and limits on the number of guests.
• The building can require you to share part of your Airbnb earnings, and can change the percentage on at least 30 days' written notice.
• Airbnb gives the building your name, unit number, nights hosted, payouts, listing details, and booking details such as guest names and dates.

Because the building can cap your hosting nights and take part of your earnings, run those terms through the break-even math below before you count on a program building for a full-time rental.

What a written landlord agreement should cover

Before you sign, get these points in writing, either in the lease or in an addendum both of you sign:

• Permission: stays shorter than 30 nights on named platforms, whole unit or rooms, and any cap on nights per year.
• Compliance: who applies for the permit or registration, and the landlord's signature on any authorization form the city requires.
• Guests: maximum occupancy, parking, quiet hours, and building or HOA rules guests must follow.
• Insurance: the liability limits you will carry, and whether the landlord is to be named as an additional insured, which extends your liability policy to cover the landlord.
• Damage: who pays for repairs between stays, the deposit, and how damage claims from guests are handled.
• Taxes: who registers for and remits lodging taxes.
• Payment: the rent, any revenue share or premium for hosting rights, and how it is calculated.
• Exit: what happens if the city bans the use, the building changes its rules, or the landlord sells, including notice, refunds for future bookings, and removing your furniture.

Break-even: how a fixed rent payment changes the risk

Example for a one-bedroom apartment, with assumed costs:

Each booked night at $160, with a $90 cleaning fee per 3-night stay, brings in $190 ($160 plus $30 of cleaning fee). Airbnb's 15.5% host service fee takes $29.45, and the cleaner, paid $80 per stay, costs $26.67 a night, leaving $133.88. Divide the fixed costs by that: $31,500 divided by $133.88 is about 236 booked nights, or 65% occupancy (the share of the year's nights that are booked), before you earn anything. At 70% occupancy (256 nights) the unit clears about $2,770 a year; at 55% (201 nights) it loses about $4,590.

An owner of the same unit has fixed costs too (the mortgage, property tax, and insurance), but the risk differs in two ways. Part of each mortgage payment pays down the loan, so some of the cost comes back as equity. And if short-term rentals are banned, an owner can rent to a long-term tenant, while an arbitrage tenant still owes the landlord rent for the rest of the lease unless the agreement has an exit clause for that case. A ban four months into a 12-month lease in this example leaves $16,000 of scheduled rent (8 months x $2,000) with no bookings to pay it.

If you move out early instead, state law may reduce that amount. Texas, for example, requires a landlord to try to limit its losses, such as by re-renting the unit, when a tenant abandons a lease, and a lease clause waiving that duty is void. Financial analysis for short-term rental properties covers the full return math, including the cash you put into furniture.

Insurance and a business entity

Airbnb's AirCover for Hosts includes $1 million of host liability insurance and up to $3 million of host damage protection, and Airbnb says it is not a substitute for personal insurance and suggests asking your insurer how your own policy overlaps with it. Ask your insurer in writing whether your renters policy covers paying guests; if it does not, buy short-term rental liability coverage before the first booking. Short-term rental insurance compares the options.

If you run the listings through an LLC but sign the lease or a personal guarantee yourself, the LLC does not limit what you owe the landlord. Setting up a legal entity for your short-term rental covers when an LLC helps.

Starting an Airbnb business compares arbitrage with buying a property or converting a rental you own.