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Rental Arbitrage: Top 6 U.S. Markets | Real Estate Investing

Rental Arbitrage: Top 6 U.S. Markets | Real Estate Investing


Can you enter the rental market without owning? It’s possible with rental arbitrage.

For those unfamiliar with the terminology, rental arbitrage is the act of renting a property long-term and then re-renting it on a short-term basis on Airbnb, HomeAway, or other vacation rental platforms.

The degree of success among those who employ this strategy is heavily dependent on location. Here we’ll explore some of the top markets.

U.S. Markets with Highest Arbitrage Potential

Generating passive income through running a short-term rental is typically a practice reserved for property owners. However, savvy rental entrepreneurs have figured out a way to enter the short-term rental market without buying property: rental arbitrage. With rental arbitrage, you make a profit from the difference in price between long-term and short-term rent.

While rental arbitrage can be both challenging and risky, it can also be incredibly lucrative. The biggest challenge for someone looking to generate passive income via arbitrage is picking the right market.

In this post, we’ll cover the U.S. markets with the biggest arbitrage potential (based on the difference between short-term and long-term rental prices), then dive into the various challenges and opportunities in each.

Best Markets for 1-Bedroom Properties

Market Monthly Rent Short-Term RevPAR Arbitrage Potential
Honolulu, HI $1,700 $3,446 $1,746
Nashville, TN $1,380 $3,043 $1,663
Boston, MA $2,400 $3,920 $1,520
Detroit, MI $610 $1,883 $1,273
Des Moines, IA $810 $2,000 $1,190

 

Best Markets for 2-Bedroom Properties

Market Monthly Rent Short-Term RevPAR Arbitrage Potential
Boston, MA $2,750 $5,338 $2,588
Honolulu, HI $2,230 $4,772 $2,542
Nashville, TN $1,390 $3,580 $2,190
Corpus Christi, TX $1,070 $2,690 $1,620
Detroit, MI $690 $2,165 $1,475

 

City-by-City Challenges and Opportunities

Honolulu

Hawaii is a state of changing regulations when it comes to short-term rentals. Currently, many rentals in Honolulu are operating under the radar since the state is still deciding how to enforce regulations. Lawmakers are currently proposing rules that would restrict short-term rentals to tourist areas.

One of the biggest reasons people run short-term rentals in Honolulu is that seasonality is nearly nonexistent. There’s rarely a dip in tourism to the islands, so short-term rentals are consistently in high demand throughout the year. If you can deal with uncertainty regarding pending regulation, Honolulu can be a lucrative market for arbitrage.

Panoramic view of Honolulu city, Waikiki and Diamond Head from Tantalus lookout

Nashville

Tennessee is a hot market for vacation rental investors, as well. We included Sevierville, Gatlinburg, and Nashville, in our list of the top 100 vacation rental markets in the U.S. based on their short-term revenue potential.

Nashville has seen a boom in short-term rentals in the last few years, leading to increased regulation in residential areas. This market has a ton of potential, so if you’ve already navigated complex and changing regulations in another city, it might be a great fit for you.

Related: 4 Obligatory Ways to Generate Vacation Rental Profits

Boston

Boston is the only major East Coast city with high arbitrage potential. Unlike New York and Philadelphia, long-term rents aren’t unreasonably high for one- and two-bedroom properties, and there’s enough short-term rental demand from business and vacation travelers to make rental arbitrage feasible.

However, like Nashville, Boston has begun to pass legislation to regulate short-term rentals in residential areas. This makes it difficult to run a short-term rental in certain parts of town unless you’re an owner and the property you’re renting satisfies certain conditions. This market has potential, but definitely proceed with caution.

Detroit

This Midwestern city has the lowest barrier to entry on this list, with one-bedroom rents averaging $610 per month and two-bedroom rents only slightly higher at $690. Additionally, this market has moderate seasonality and doesn’t see huge dips in demand during the cold winter months of January and February.

In terms of regulation, Detroit has made efforts recently to curb short-term rentals in residential areas, but these rules only apply to room rentals in single and multifamily homes. Rental arbitrage is fair game for the time being in Detroit, making this a great market to explore for anyone who doesn’t want to deal with high up-front costs and complex regulation.

Aerial view of downtown Detroit at twilight in Michigan USA

Des Moines

This market shares many of the same advantages as Detroit, with a low financial barrier to entry (the average long-term rent for one-bedroom properties is only $810) and unenforced regulation. However, this may change soon as Des Moines legislators plan to draft new short-term rental legislation in the near future.

Related: 6 Vacation Rental Beginners: Look Where They Are Today!

Corpus Christi

While the average long-term rent for a two-bedroom apartment is just $890 in Corpus Christi, high seasonality and low revenue growth make this market riskier than Des Moines and Detroit.

Short-term rentals aren’t technically allowed under current city rules, but local authorities aren’t enforcing current laws. Instead, their plan is to draft legislation that would create a legal pathway for short-term rentals.

Conclusion

Every market comes with risks and opportunities. Are you more comfortable dealing with a market that has changing regulations or a market with higher seasonality? Would you rather spend more money upfront (and potentially see higher returns) or take less financial risk but see lower returns?

While the cities in this post have the highest arbitrage potential, 50 of the cities AirDNA analyzed had a monthly arbitrage potential of more than $500 per month.

To download a data set with the one- and two-bedroom arbitrage potential of every city we analyzed, head over the the AirDNA blog.

Considering rental arbitrage? Which city are you leaning toward? Do you have any questions for me?

Let’s talk in the comment section. 

 





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