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.
US house price to income ratio
UK house price to income ratio
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)*|
|Long term rent (anualized)||$20,064||6%|
|Short term rental revenue (based on 2019 numbers)||$34,573||10%|
*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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