What’s the Deal with Rental Arbitrage? And Is It the Best Investment of 2022?

“Rental arbitrage is a special case of subletting,” Hale says. “Instead of subletting to one person longer-term who will take over the rest of the lease, you would hope to have multiple subletters in the form of nightly or short-term renters.”

Is It Legal?

This is where things get complicated. You’ll need to check a lease closely—and have an honest talk with your landlord to explain what you intend to do—to ensure there’s no clause against subletting or providing short-term rental services. “Even if the landlord says it's OK, apartments, condo and homeowners associations, and even localities may have rules prohibiting short-term rentals, so do your research,” Hale says. Check with the city and county where the rental is zoned—some won’t allow short-term rentals at all and others have certain restrictions, like the minimum stay length is 30 days. Those are crucial factors to consider before signing a lease, which brings us to our next major question…

With its lower barriers to entry, rental arbitrage can be an appealing way to launch a side hustle. But just because you’re not paying closing costs doesn’t mean there aren’t a host of other upfront costs coming at you (like furnishing the place, stocking up on toilet paper and other necessities, and plunking down first month’s rent, last month’s and a security deposit).

Here are a few things to consider before diving in:

• Location — What’s the demand like for rentals in your area? How often are short-term rentals typically booked? Sites like AirDNA, Vacasa and Airbnb offer tools that can provide insights into how often you can expect to be booked, and what the going rate is for bookings throughout the year. Looking at an average of the three can give you solid insights into the area’s potential.
• The Vibe of Your Neighborhood — Is the complex very tight-knit and community-driven? Or does everyone do their own thing, with a more live-and-let-live attitude? It's worth weighing how they'd react to a short-term rental next door. (Beyond being considerate to your neighbors, you may also deal with more hassles than it's worth, should a disgruntled neighbor make it their mission to end your rental.)
• Budgeting for Furnishing and Repairs — Short-term rentals are typically furnished, so you’ll need to estimate what that will cost you. And expect to have to replenish certain supplies (like toiletries) throughout the year—as well as deal with wear and tear (pillowcases and linens get stained fast).
• Your total costs — When you run the numbers, do you feel you can have this place booked often enough to cover all of the associated costs of running a short-term rental?

The Bottom Line:

“Keep in mind that markets can and do change,” Hale says. “Even if the rental arbitrage model works today, it may not continue to work in the future. As more people get involved to take advantage of the arbitrage opportunity, the costs should even out, which means the ability to profit could go down.” With that in mind, it makes sense to resist the hype to scale quickly, and instead, start with just one property.

Once you get the hang of a year of rental arbitrage, you can look ahead to market forecasts—is the cost of rent in your area still seeing double-digit growth? And if so, is vacation rental demand keeping up with (or exceeding) that?—to determine whether you should sign on for another year’s lease, or even expand to a second property.