Rental Arbitrage: What Landlords and Tenants Need to Know

There is more than one way to become a real estate investor, from residential to commercial to REITs and short-term rentals. However, one of the biggest barriers to entry, whichever strategy you choose, is getting together the cash required for that first deposit.

Which is where hybrid investment strategies and creative financing become important. One such real estate strategy, and the strategy we’re going to be talking about in this article, is rental arbitrage.

Rental arbitrage provides landlords and tenants with new opportunities to generate income, overcoming the traditional barriers of property ownership. However, while the potential rewards may seem enticing, rental arbitrage also comes with legal, financial, and operational complexities that both parties need to understand.

What is Rental Arbitrage? Definition

Rental arbitrage is a real estate strategy in which an individual or entity rents a property on a long-term basis and then subleases it, typically as a short-term rental on platforms such as Airbnb or Vrbo.

The difference between the long-term lease cost and the short-term rental income can.

This approach allows you to generate income from real estate without owning the property yourself. This reduces both the capital required to get started and the risks that come with such a large capital investment.

However, it also comes with legal complexities and a variety of risks unique to this particular strategy. We’ll go into these risks and rewards in greater detail further on in the article.

How Does Rental Arbitrage Work in Practice

The rental arbitrage model is straightforward in concept but requires careful execution:

Step 1: Lease a Property

The arbitrager (tenant or property manager) signs a long-term lease, typically for 12 months or more, with the landlord.

Step 2: Secure Landlord Consent

Explicit permission from the landlord to sublet the property is essential. This is usually formalized in the lease agreement.

Step 3: Prepare and Furnish the Property

The space is furnished and equipped to meet the standards expected by short-term guests. This may involve upfront investments in furniture, décor, and amenities.

Step 4: List on Short-Term Rental Platforms

The property is listed on platforms like Airbnb, Vrbo, or Booking.com, where it is marketed to travelers and short-term visitors.

Step 5: Manage Operations

The arbitrager handles bookings, guest communications, cleaning, maintenance, and compliance with local regulations.

Step 6: Profit from the Spread

Income is generated when the total short-term rental revenue exceeds the monthly lease and operating costs. For instance, if a property is leased for $2,000/month and generates $3,000/month in short-term rental income, the arbitrager profits from the $1,000 difference (minus expenses).

Rental Arbitrage: Example Scenario

The arbitrager (tenant/property manager) leases a two-bedroom apartment in a high-demand urban area for $2,000/month. After furnishing and listing it on Airbnb, the property averages $150/night and achieves 20 nights of bookings per month, totaling $3,000 in gross revenue.

After deducting rent, utilities, cleaning, platform fees, and other management expenses, the arbitrager nets a profit of $500–$700/month (not including the up-front costs such as the security deposit and furnishing costs).

Legal and Lease-Related Considerations

For Landlords

Lease Agreements: Clearly state in the lease whether subletting or short-term rentals are permitted. Consider adding clauses that address guest limits, insurance requirements, and property use.
Local Regulations: Ensure that short-term rentals are legal in your jurisdiction. Many cities have restrictions, licensing requirements, or outright bans on short-term rentals.
Insurance: Standard landlord insurance may not cover damages from short-term guests. Consider requiring tenants to obtain appropriate short-term rental insurance.
HOA/Condo Rules: Check if homeowners’ associations or condo boards restrict or prohibit short-term rentals.

For Tenants

Landlord Permission: Never engage in rental arbitrage without written consent from the landlord. Unauthorized subletting can lead to eviction and legal action.
Local Laws: Research and comply with all local ordinances regarding short-term rentals, including taxes, safety requirements, and licensing.
Lease Terms: Ensure the lease allows subletting and clarify responsibilities for damages, maintenance, and guest behavior.
Insurance: Obtain comprehensive insurance that covers short-term rental risks, including liability and property damage.

Common Pitfalls and Liabilities

Rental arbitrage is not without risks. Both landlords and tenants should be aware of the following:

Legal Violations: Operating without proper permissions or in violation of local laws can result in fines, eviction, or lawsuits.
Property Damage: Increased guest turnover can lead to higher wear and tear, accidental damage, or even intentional misuse.
Neighborhood Complaints: Frequent guest turnover may disturb neighbors, leading to complaints or action from HOAs or local authorities.
Financial Risk: Seasonality, market fluctuations, and unexpected vacancies can impact profitability. Tenants remain responsible for rent even if bookings decline.
Insurance Gaps: Standard policies may not cover short-term rental activities. Both parties risk financial loss if not properly insured.

When Rental Arbitrage Makes Sense-and When It Doesn’t

When It Makes Sense

High-Demand Markets: Cities with strong tourism or business travel demand, where short-term rental rates significantly exceed long-term rates.
Flexible Landlords: Owners open to creative arrangements and willing to structure leases to allow subletting.
Legal Compliance: Jurisdictions that permit short-term rentals, with clear regulatory frameworks and manageable licensing requirements.
Professional Management: Tenants or property managers with experience in hospitality, guest relations, and property upkeep.

When It Doesn’t

Strict Local Regulations: Areas with bans or heavy restrictions on short-term rentals.
Unwilling Landlords: Property owners who prohibit subletting or are concerned about increased risk.
Seasonal or Volatile Markets: Locations with unpredictable demand or high vacancy rates.
Inadequate Insurance: Properties lacking proper coverage for short-term rental activities.

Best Practices for Landlords in Rental Arbitrage Agreements

If you’re a landlord considering allowing rental arbitrage, establishing clear expectations and safeguards is essential. These best practices will help protect your property, ensure compliance, and foster a positive relationship with your tenant.

1. Screen Tenants Carefully

Not all tenants are suited for managing short-term rentals. Prioritize individuals with a professional approach or proven track record in hosting. Look for clear communication skills, financial stability, and an understanding of hospitality and property management.

2. Define Lease Terms Clearly

Your lease should leave no room for ambiguity. Clearly outline whether subletting or short-term rentals are allowed, and under what conditions. Include rules about guest behavior, quiet hours, cleaning expectations, insurance requirements, and who is liable for any damage caused by guests.

3. Monitor Activity and Compliance

Don’t “set and forget” the agreement. Conduct periodic property inspections and request booking summaries or platform links to ensure that the property is being used as agreed. This helps you spot red flags early, like excessive guest turnover or unauthorized changes to the property.

4. Require Short-Term Rental Insurance

Make it mandatory for your tenant to carry appropriate insurance that covers short-term rental operations. Ask for proof of coverage upfront and require renewal documentation each year to protect yourself against liability and damages.

5. Set Boundaries and Limits

To minimize wear and tear and reduce the risk of neighbor complaints, consider setting a cap on the number of guests allowed per stay or bookings allowed per month. This helps maintain the property’s condition and ensures it continues to comply with local zoning or HOA rules.

Tips for Tenants Considering Rental Arbitrage

Rental arbitrage can be a profitable venture, but it’s not without challenges. To increase your chances of success—and maintain a good relationship with your landlord—keep these key practices in mind.

1. Always Get Written Permission

Verbal agreements are risky. Ensure you have explicit, written consent from the landlord that allows you to operate the property as a short-term rental. Include specific terms in the lease to avoid legal disputes later on.

2. Know the Legal Landscape

Short-term rental laws vary widely by city and state. Research local zoning rules, tax requirements, and any necessary permits or licenses before you launch. Staying compliant can save you from costly fines or forced shutdowns.

3. Plan Your Budget Carefully

Beyond rent, you’ll need to account for cleaning costs, regular maintenance, platform fees, insurance, and occasional vacancies. Create a conservative financial plan to ensure you’re profitable even in slower seasons.

4. Invest in Presentation and Maintenance

High-quality furnishings and attention to detail will pay off in guest satisfaction and reviews. Prioritize comfort, cleanliness, and aesthetics—think hotel standards, not just basic functionality.

5. Automate with Smart Tools

Use property management software to streamline operations. These tools can help you automate guest communication, manage booking calendars, coordinate cleanings, and monitor occupancy trends, freeing up your time and reducing human error.

Conclusion: Is Rental Arbitrage Right for You?

Rental arbitrage lowers the barrier to entry for those looking to profit from real estate, offering the potential for high returns with relatively low upfront investment.

However, success in rental arbitrage depends on transparent communication, robust legal agreements, diligent property management, and strict compliance with local laws.

Both landlords and tenants should conduct thorough due diligence, seek professional advice, and use modern property management tools like Landlord Studio to streamline operations and minimize risk.

Create your free Landlord Studio account today to see how it can help you streamline property management, minimize vacancies, and increase profitability.

Rental Arbitrage: FAQs

Is rental arbitrage legal?

Rental arbitrage is legal if the lease permits subletting and all local regulations are followed. Unauthorized subletting or operating in prohibited areas can result in eviction and fines.

Do I need the landlord’s permission for rental arbitrage?

Yes. Written consent from the landlord is essential. Engaging in rental arbitrage without approval is a breach of most lease agreements.

What are the main risks of rental arbitrage?

Legal issues, property damage, neighbor complaints, financial losses from vacancies, and insurance gaps are the primary risks.

Can landlords benefit from rental arbitrage?

Yes. Landlords can enjoy consistent rent payments, reduced vacancy, and potentially higher rents, but must weigh these against increased wear and legal exposure.

How much can I make with rental arbitrage?

Profits vary widely based on location, demand, expenses, and management. Successful operators in high-demand markets can net hundreds or even thousands per month, but losses are also possible if bookings fall short.