Rental arbitrage is the act of renting a property longer term, to re-rent it on a short let basis in order to turn a profit. So how does it all work?
Property prices have soared over the last decade particularly, and when compared with the trajectory of the average salaries, most countries are experiencing a growing gap.
Looking at the ratio of house prices to salaries in the US and the UK, we can see that clear upward trend; a trend often more exaggerated in ‘popular’ rental markets with a ratio of 8.5 in New York City for example.
With this ratio rising, so is the difficulty of buying property to flip or rent for profit. As a result, some people have turned to taking out longer term leases on property instead of buying, in order to let for profit on a short-term basis on platforms like Airbnb and HomeAway. As a business model, rental arbitrage requires little investment with a reduced risk, whilst providing some cash flow — and yes, it’s entirely legal.
So what does this look like in practice? Let’s look at Phoenix as an example:
2 bedrooms single family units in Phoenix:
| Return on investment (gross)* | ||
| Purchase price | $332,896 | |
| Long term rent (anualized) | $20,064 | 6% |
| Short term rental revenue (based on 2019 numbers) | $34,573 | 10% |
| Delta | 72% | 72% |
*Note that for an accurate return on investment analysis you need to compute the cost of operating a long term rental vs. a short term rental.
Top locations for rental arbitrage
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