Airbnb is becoming increasingly versatile when it comes to different ways to earn from the platform. Airbnb rental arbitrage is one popular avenue to consider as a means of building a business on Airbnb and it can be very profitable.
Here’s how smart entrepreneurs are making money with Airbnb rental arbitrage and some important things for you to know.
Arbitrage is the practice of earning a profit from the price difference between two or more markets by matching imbalanced deals. When it comes to Airbnb, Airbnb rental arbitrage refers to the practice of buying properties just to rent them out on Airbnb.
Essentially, there is money to be earned via rental arbitrage on Airbnb if a property can be rented for more than it costs to acquire it. For example, if there is a nice 1 bedroom apartment available in downtown San Francisco in a prime location, you might find that you’re able to earn a 25% profit by renting it out on Airbnb by the night.
People are always in need of short-term accommodations. In major cities and tourist destinations, hotels can be expensive. Airbnb has filled the gap in the market for more affordable accommodations.
As a result, Airbnb arbitrage allows anyone to benefit from properties that they own or lease in high demand areas by simply listing their properties at a daily rate that is significantly higher than their property expenses. However, the unit must still be less than what a person might pay for a comparable room at a hotel in the same area.
The right formula for achieving a profit will largely depend on your business goals. However, you can get a general idea of whether you can make a profit on a rental by calculating the weighted average Airbnb rate for your area.
Here is the formula:
1. Obtain an Average of the Daily Rental Rates for Your Area for Weekdays and Weekends
You can get this information directly from Airbnb listings. Just search for comparable properties in your area and write down the weekday and weekend prices of these properties. Use a spreadsheet to make things easier.
2. Calculate Weighted Average Airbnb Rate of All of the Properties
Weighted Average Airbnb Rate = (Weekday Average Airbnb Rate * 5 + Weekend Average Airbnb Rate * 2) / 7
For example, if the weekday average Airbnb rate is $50 and the weekend average Airbnb rate is $100, the Weighted Average Airbnb Rate is $64 because ($50 * 5 + $100 * 2) / 7 = $64.
3. Calculate Cost of Your Property Expenses by Day
Now take your total monthly property costs and divide it by 30 to obtain the daily cost of your property expenses.
If your total property costs (including the rent and any fees) are $2,000 per month, then the cost of your Property Expenses by Day is $67.
4. Divide the Weighted Average Airbnb by Your Daily Property Costs
This will give you a Final Ratio to help you determine how many days per month you’ll need to rent your property in order to profit.
In this example, the final ratio is $64/$67 = 0.95.
This means that you’ll have to rent out your property for the majority of the month in order to turn a profit.
However, if this ratio equals 1 or greater, then that means you can turn a profit by renting for fewer days during the month.
Let’s say the Weighted Average Airbnb Rate is actually $125 and your Property Expenses by Day are still $67, then that means the Final Ratio is 1.87 ($125/$67), which means that you’ll be able to turn a profit in less than a month.
Ideally, you want to do arbitrage with a property that has a Final Ratio of 2.0 or higher. By aiming for a higher Final Ratio, you’ll have some leeway so that you can ensure that you at least break even on your property every month.
If you plan to invest in rental Airbnb arbitrage you should be aware of the risks. Here are some of the top risks that you should be aware of: