One simple reason: Rental Arbitrage
Why does it seem like every other person you talk to knows of someone who listing or will be listing on Airbnb? The answer is simply due rental arbitrage.
What is Rental Arbitrage?
When the revenue potential of something is significantly more than the cost to acquire it, you have opportunity. Let’s say have a nice studio apartment in downtown LA that costs you $1350 a month. It’s in a prime location with ideal amenities. You then find out that one of your neighbors is listing her own studio on Airbnb and is averaging $150 a night.
You do some simple math and realize that if you could rent out your unit for about 9 days of the month, you’d pay for your rent. What if you could rent out the unit for 27 days a month? That means the rental potential of the unit on Airbnb is about 3X the cost of leasing the unit month to month!
When your achievable daily rental rate is clearly greater than your actual daily rental cost, you have rental arbitrage.
Why Does It Exist?
Simple. There are always folks needing short term lodging and hotels are expensive. These folks want something more economical and Airbnb is the answer. It allows anyone to capitalize on their available space by listing the unit at a daily rate that is substantially higher than their daily cost of the unit, but still less than what someone would pay for a comparable hotel room. Win-Win. Unless you’re in the hotel business.
How Much Arbitrage is Good Enough?
This will largely depend on your goals but here is one way for you to gauge.
- Get an average Airbnb daily rate for weekdays and weekends of SIMILAR units in your area
- Get the weighted average Airbnb rate:
Weighted Avg Airbnb Rate = (Weekday Rate * 5 + Weekend Rate * 2) / 7
- Example: $50 weekday rate and $100 weekend rate will become ($50 * 5 + $100 * 2) / 7 = $64
- Take your monthly lease rate and divide it by 30 (e.g. $1500/30 = $50. This is your daily rental cost.
- Now divide the weighted avg Airbnb rate by your daily rental cost (e.g. $64/$50 = 1.3
So what does this number mean? Well, if it’s a 1, it means you have to rent it out the entire month just to cover the cost of your rent, before any fees are taken out.
If you’re renting out your own space, then you don’t have a choice but at least it’ll give you a sense of how worthwhile it would be.
If you’re looking at a dedicated unit, then you want to find a place where the ratio is 2.0 or more. In urban areas, this ratio will often be 2.5 or higher.
The higher the ratio, the fewer days you need to host to cover your rent and the more days available to make profits.