Since the collapse of the housing market and the 2009 recession, many individuals seeking to invest in the real estate market, but unable to generate the capital necessary to purchase properties, have turned to rental arbitrage. Rental arbitrage involves an individual entering into a long-term rental agreement for a property, and then renting that same property to others on a short-term basis. This is primarily done through platforms like Airbnb, HomeAway, and VRBO.
Is rental arbitrage legal?
Rental arbitrage is legal in all 50 states, though some states and counties have specific restrictions and requirements that must be conformed with at all times. In Florida, for example, the short-term vacation rental market is overseen by the Department of Business and Professional Regulation (DBPR). The DBPR requires all individuals renting out short-term vacation properties to obtain a license. Florida offers two types of licenses, one for single or group vacation rentals, and another for collective vacation rentals. In a single or group rental, all the units are located within the same building or group of buildings in a single complex. On the other hand, a collective rental includes units spread across various locations. Also, individuals engaging in rental arbitrage in Florida must register with the Department of Revenue to ensure all tax obligations are paid. Moreover, it is important to obtain the consent of the landlord before engaging in rental arbitrage.
Do you need an LLC for rental arbitrage?
In order to avoid any tax or regulatory violations, investors engaging in rental arbitrage should establish an LLC. Not only are there tax benefits associated with operating a business under an LLC, it is also the best way to shield personal assets in the event of a lawsuit. The LLC should be registered in the home state of the investor, and if the property is located in another state, then that LLC could be registered as a foreign LLC in that state. For example, if a Georgia resident enters into a long-term lease of a single-family home in Florida, the LLC should be formed in Georgia, and then registered as a foreign LLC in Florida.
What are the pros and cons of rental arbitrage for tenants?
Tenants looking to use their rental property for rental arbitrage are usually drawn in by the low up-start costs. While setting up an LLC and obtaining the requisite licenses does require some initial spending, those costs are quickly recouped. Importantly, rental arbitrage does not require purchasing a property, as is the case with most investment properties. Instead, as long as the house is properly furnished and all the necessary paperwork is obtained, the property may be listed on Airbnb and similar sites. Also, the earnings from the sublease may be used to supplement the rental payments, and in some occasions may fully cover the lease.
On the other hand, the main drawback to rental arbitrage is the volatile nature of the rental market. While certain locations will always be more in demand than others, and make for more lucrative investments, rental arbitrage is at the mercy of the economy. Booking rates constantly fluctuate, and economic downturns can result in a significant decrease in booking income. This is particularly dangerous for tenants that use the rental income to cover the cost of their own rent.