Airbnb arbitrage is a method of making money where you sign leases with landlords to rent their houses or apartments. In turn, you “flip” the cash flow by Airbnb’ing it out for a higher price.

• Example: You pay a landlord $2000/mo in rent, but you Airbnb it out to collect $4000/mo. You pocket the difference.

Why do Airbnb arbitrage?

• Compared to buying a single family rental home (which I don’t recommend at all), you don’t need as much capital.
• Example number for one of my previous investments:
  • A down payment on a $120K house could cost $40K with a 20% down.
  • You might be able to rent this out at $1600/mo
  • Mortgage is roughly $900/mo.
  • Let’s allocate revenue like this: 10% for management fees, 10% capex, 10% operating expenses, and 5% vacancy.
  • All these numbers combined is a 4.2% cash-on-cash (how much cash you get back annually through cashflow, divided by your bet size).
• Compare this to another example of mine:
  • Our bet-size is: $4K deposit + $4K furniture = $8K, instead of $40K.
  • You can rent out a tiny apartment for $4000/mo to travel nurses in the SF Bay Area.
  • We used to pay our landlords an average rent of $2000/mo.
  • Suppose 35% vacancy.
  • With a profit of $7200/yr over the $8K all-in, we’re looking at a 90% cash-on-cash.

Mainly, you wanna do Airbnb arbitrage if you’re looking for massive cashflow opportunities.

Steps On Doing Airbnb Arbitrage

Even though this post will conclude in me advising you to avoid this business model altogether, I’ll show you how we used to do Airbnb arbitrage.

Not sure why I’m doing this. Probably for irony. And probably for those of you too stubborn to heed my warnings because you’re too focused on the opportunity, and not focused enough on the risk.

First, Vet Properties

You want to do rental research via Craigslist, Hotpads, StreetEasy, or Rentometer to establish how much gross income you’ll collect. Make sure these are short-term rental listings you’re vetting.

You may also use AirDNA, but I find their calculations extremely optimistic.

Take the lowest number across these resources to give yourself the highest safety margin.

Depending on where you are, you might want to target 1bd/1ba instead of a big house. Reason’s because your cleaning fees will be lower for 1bd/1ba and your turnover’s a lot quicker. For example, if you have a guest leaving and another one coming in at the same day, it’s less likely that you can double-book if your cleaners have a large home to clean.

Don’t bother reaching out to landlords if their apartment is weird in any way. Examples:

• In busy street
• Below ground level
• Dark
• Have a lot of big trees next to apartment
• Have planned construction adjacent to the apartment complex.

Your vacancy will be enormous with these “weird” listings, so don’t do it or you’ll lose a ton of money.

Then, Get Landlords To Allow You To Do Airbnb Arbitrage

I used to mostly use Hotpads and Craigslist to get leads. Some people love cold-calling because “it builds a better relationship.”

Well, I agree there but it takes a lot longer. I value the relationship between me and my time more than the relationship between me and some landlord.

For max efficiency, we’d just send out the following template where we just personalize it by changing their names:

“Hey <name, if available>! Was wondering if you allowed for corporate sublets? Our company does corporate rentals, guarantee owners their monthly rent, don’t allow pets, and take care of small maintenance issues so it’s less churn for you. We also have a bunch of references of local landlords we work with if you’d like to do your due diligence on us. Have a great day!”

This is a short and sweet structure because it has the following elements, in chronological order:

• Direct question. I don’t like going back and forth because it’s a waste of time. They either let me pay them rent, or they don’t.
• Benefits to them. Ultimately, they care about how you can benefit them. The landlords don’t want to take extra risk for you. It makes no sense. So make it worth their while.
• Social proof. We already had landlords we worked with (though you can fake references if you’d like). This builds confidence that someone else in the market has done it before, and are willing to give you a positive review. This makes them trust you more, just like how 5-star Amazon reviews are more likely to make you trust a product more.

Get Cheap Furniture

Get cheap furniture from Craigslist or any used classified websites.

We got lazy later on and didn’t wanna shop around. Instead, as we scaled, we bought all-new furniture.

This was a huge mistake because it severely wrecked out cash-on-cash. Instead of $4K to furnish a unit, it might take $8K-$10K. This effectively cuts our cash-on-cash (i.e. doubles are risk with respect to the objective of these Airbnb arbitrage projects, which is to maximize cash flow).

List It On Airbnb

Airbnb is a big monopoly for this space, so you’ll get the most revenue for your time spent with Airbnb.

Why Did We Stop Doing Airbnb Arbitrage?

By October 2018, we 14 units and were doing quite well.

Until some tenant installed a hidden camera inside the bedroom smoke detector and told Airbnb we installed it.

We got banned and Airbnb cancelled all of our bookings for the winter months.

• Winter is generally where we lose the most money, because it’s the most vacant.
• For 2018, we had a record high in winter bookings and were looking very financially secure going forward.
• Since all our bookings were cancelled, and winter bookings are hard to get, we were paying about $30K/mo in vacancy, or $1K/day.

We continued with other platforms, and they didn’t perform nearly as well. It took an order of magnitude more time and effort to fill up a vacancy. It’s definitely safe to say that Airbnb is a monopoly in the short-term rental space as most transactions will go through there.

Here’s the reasons why we stopped the business:

• We eventually got backup Airbnb accounts, but decided it’s impossible to scale a business built on a house of cards, with only one point of failure (Airbnb deciding to ban us or not).
• Also, the risk-to-reward for this business model is too high. If anything crazy happens, you can go from making $10K/mo net to -$30K/mo and wipe out all your earnings very quickly.
• Scaling is also hard in real estate as there’s a plethora of issues, which makes it hard to systematize. One day, it’s a lightbulb. Another day, the toilet is clogged. Another day, a tenant wants us to go over and kill a spider for them. Another day, someone “finds” a hidden camera in their bedroom. To get to a 6-figure net business and replace my income, I’d probably need to work 5-6X as hard as my current job, so what’s the point? It’s ultra-active income.
• Lastly, as each year went by, I found that more and more people at real estate conferences were jumping into this Airbnb arbitrage strategy. Saturation means price wars. Price wars = lower margins = lower cash-on-cash which defeats the entire thesis of the business model in the first place.

Don’t Do Airbnb Arbitrage

But if you’ve found this page by googling it, your mind’s probably already set.

In that case, please follow the guidelines above for what to avoid so you’ll lose less money than what you were originally going to lose anyway. Here’s some examples of staying lean:

• First, minimize your startup costs by always having the cheapest furnitures
• Minimize your rent by always negotiating
• Avoid “weird” listings
• Don’t get lazy and hire everything out like we did. This will eat into your cashflow and margins greatly. So much so that it’ll get very hard, if not impossible, to weather a financial storm since you’ve pissed away so much money already there’s not much left in your war chest.
• Only recommend a unit for Airbnb arbitrage if your rent’s so cheap that you can safely tolerate a 50%+ vacancy.
• Finally, I’d recommend you negotiate all your leases so you can kill all your leases without consequence. A lot of our costs are from underperforming rentals we can’t get rid of until the lease is over.

Please let me reiterate: this isn’t passive income. In fact, it’s hyperactive income. It won’t matter much if you hire virtual assistants or try and systematize stuff. New and novel issues will always come up. The most successful people in this space I find constantly has a stick up their ass because they’re so stressed out.

For the love of God, if you’re wanting to jump into this to get “passive income,” DON’T. DO. IT.

In conclusion: This is a super high-risk, high cash-flow business model. It’s not impossible to do well in this, but the risk-to-reward is too high for my preference. There’s only one point of failure (Airbnb), and the business fundamentals for Airbnb arbitrage just isn’t there.

Plus, the word “arbitrage” is misleading because it implies little to no effort. In fact, it’s more effort than a 9-5 engineering job.

So if not Airbnb arbitrage, then what? Nowadays, my favorite business model is e-commerce due to its low risk-to-reward, its ability to let you rapidly learn, and also its scalability.