What is Rental Arbitrage?

Rental arbitrage is a unique real estate strategy that allows investors to lease properties long-term and sublet them on short-term rental platforms, such as AirBnB.com, Booking.com, or VRBO.com for profit. This model allows you to enter the lucrative short-term rental market without the need to purchase property, making it a lower-cost alternative to traditional real estate investing.
As demand for short-term accommodations continues to grow, rental arbitrage presents a low-risk, high-return opportunity to generate passive income without the large upfront costs associated with traditional property investments.
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Introduction to Rental Arbitrage

At Prosperity Capital, we use advanced market analysis tools such as AirDNA to project rental returns, ensuring data-driven decisions that maximise profitability.

Why Rental Arbitrage is a Smart Investment

Rental arbitrage requires less upfront capital than traditional real estate, as investors lease properties instead of purchasing them, while still benefiting from the higher income potential of short-term rentals. This model offers flexibility to operate in high-demand locations, maximising returns by taking advantage of the difference between long-term rental costs and short-term rental prices. Several factors influence the potential profit in rental arbitrage, such as property size, type, occupancy rate, and location. Properties situated near popular tourist attractions typically have higher income potential. At PCP, we conduct thorough research to identify the most promising Australian cities and suburbs for AirBnB investments.

How AirBnB short-term rentals compare to traditional long-term leasing models

With many AirBnB Superhosts around the globe earning six-figure passive incomes, the potential for short-term rentals has emerged as an appealing alternative to more traditional leasing models, such as Defence Housing Australia (DHA). According to a recent Oxford Economics report, AirBnB contributed approximately $13.6 billion to Australia's GDP and supported nearly 95,000 jobs from March 2022 to March 2023, representing around 7.8% of the tourism sector’s GDP contribution. This comparison will outline the benefits and challenges of each approach, helping investors determine which model best aligns with their financial goals and preferred level of involvement.

AirBnB short-term rentals (STR)

  • High Returns: STRs, especially in desirable locations and with effective management, can generate significantly higher returns than long-term rentals (20% or more is achievable).
  • Flexibility: You have much greater control over pricing, availability, and even the type of guest you target (families, couples, etc.) This allows you to adapt to market demand and maximise revenue.
  • Fully managed: Owners can maintain a hands-off investment approach. By signing a lease, the property is handled on the owner’s behalf, minimising involvement and allowing for passive income. Fully managed services prioritise property care, ensuring maintenance and upkeep are performed regularly. This is a core principle of Prosperity Capital's AirBnB arbitrage.
  • Property Wear and Tear: More frequent guest turnover can lead to increased wear and tear. At Prosperity Capital, owners can enjoy peace of mind, expecting the property to be returned in equal or even better condition, with regular updates like carpet cleaning, painting, and minor repairs to keep it fresh and well-maintained.
  • Location limitations: Allows you to invest in locations with high tourist demand or strong STR markets, potentially offering more resale opportunities.

Defense Housing Australia (DHA)

  • Income Potential: While DHA guarantees a stable rental income, it's generally lower than the potentially higher returns achievable through dynamic pricing and high occupancy rates with short-term rentals.
  • Reduced Control and Flexibility: Long-term DHA leases reduce your control over your property. You can't adjust rental rates based on market demand, easily access the property for personal use, or choose the type of tenant you prefer.
  • Tenant Quality: Tenants are generally Australian Defence Force personnel, known for their reliability and respect for properties.
  • Management Fees: DHA charge management fees (up to 16.5% of the rent). This service fee is calculated as a percentage of the gross rent and is deducted from your monthly payments.
  • Property Condition: DHA has specific property standards. You may need to make upgrades to meet their requirements before leasing to them.  
  • Location limitations: Properties are often located near Defence bases, which may restrict your investment options and potentially limit the pool of potential buyers if you decide to sell.

Potential Returns and Profitability

Rental arbitrage offers the potential for significant returns on investment. Here’s how the profitability breaks down: Cost Efficiency through Expert Management: This profitability is further enhanced by our years of Airbnb management expertise. Over time, we've developed strategies to minimize ongoing operational costs, ensuring that net profits remain high. By leveraging our experience, we can reduce costs in key areas such as AirBnb service fees and cleaning/maintenance fees.
ROI Projections:
Investors can typically expect a 10-20% gross annual income, depending on the location, property type, and market conditions.
Comparative Advantage:
Compared to traditional real estate investments, which often rely on long-term appreciation, rental arbitrage offers more immediate and positive cash flow.

How to Get Started

Ready to explore rental arbitrage with Prosperity Capital? Contact us to discuss your investment goals and how rental arbitrage can fit into your portfolio.
Address
A: PO BOX 20120, World Square, Sydney CBD, NSW 2002, Australia H: 7 Ewart Street, Yarralumla, ACT 2600, Australia
Phone
M: 0434 194 178

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