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Is Rental Arbitrage Legal? (5 Legal Risks PLUS How to Manage Them)
Yes, rental arbitrage is legal in all US states. However, some major cities, like New York City, Los Angeles, San Francisco, and Santa Monica, have made short term rentals (STRs) illegal or heavily restricted.
For instance, you can’t rent out a property in New York City for less than 30 days without being physically present as the host. In Santa Monica, California, you’re required to live on the property you’re renting out, as well as register for a business license and collect a 14% transient occupancy tax on your rental income for Airbnb reservations up to 30 nights. These local laws make it difficult to scale your short term rental arbitrage business to a point that generates significant cash flow.
Even now, more localities (like Atlanta, Georgia and Chattanooga, Tennessee) are cracking down on the short term rental market, and their regulations vary. Some require you to obtain a business license or special permit before listing short term vacation rentals on Airbnb or Vrbo. And some limit the number of days that you’re allowed to rent out your property in a year.
In a YouTube video by Robuilt, the legality of rental arbitrage is addressed within the broader discussion of its viability as a business model. Robuilt emphasizes that for rental arbitrage to be legal, transparency with the landlord is crucial. This means obtaining explicit permission to sublease the property on platforms like Airbnb, which must be formalized in the lease agreement. Robuilt's insights underline the importance of adhering to rental agreements and local regulations to avoid legal issues, highlighting that while rental arbitrage can be profitable, it must be conducted within the bounds of the law to ensure long-term success and stability.
Rental arbitrage discussions on Reddit swing between success stories and cautionary tales. Entrepreneurs on the platform generally agree that short term rental arbitrage is high-risk and definitely not passive income. Some highlight how leases are legally binding, and ignoring those terms for your Airbnb rental can leave you screwed in court. Others share that they've made it work by being exceptional tenants, taking on maintenance, targeting out-of-state landlords, and having high credit scores.
Still, many Redditors warn of low-profit margins unless you manage multiple units, and even then, you might attract problematic guests that annoy neighbors. The work involves around-the-clock commitment, from guest communication to property maintenance.
A Reddit post highlights that rental arbitrage can be done legally by being upfront with the landlord or real estate agency and ensuring it's covered in the lease agreement. However, you’re limited to the number of occupants as per the lease. The post points out that making it profitable requires subleasing at higher rates than the total rent, but tight rental markets make for slim margins. It also warns against exploitative practices like overcrowding a rental unit, noting that landlords usually won't agree because of wear and tear, insurance, and moral issues, making such actions likely illegal and in breach of the rental agreement. The post emphasizes that without a proper understanding of renting, managing multiple agreements and tenants would be highly challenging.
In a Reddit post, a user criticizes the promotion of rental arbitrage by some podcasters and gurus, calling it reckless and risky. They point out that the legality of rental arbitrage can be tricky, especially in areas that aren't tourist hotspots. The Reddit user warns of significant legal and insurance risks, such as tenant deaths, crimes, or problems with evicting tenants. He emphasizes that adding another party to the rental process makes things more complicated, underscoring the need to carefully consider this legal and insurance issues before trying rental arbitrage.
Rental arbitrage allows you to run a short term rental business without owning property or investing in real estate. Because of this flexibility and low barrier to entry, the business model is quite popular, despite the demand for vacation rentals dropping to 10.4% in 2023 from 22.6% in 2021, according to AirDNA. But, navigating the local rules in this ever-changing legal landscape can be a headache. Don't find yourself on the wrong side of the law. Read on to discover the ins and outs of the legality of rental arbitrage in specific states and countries, the risks involved, and the steps to start on the right legal footing.
Additionally, Rental arbitrage laws change constantly and vary depending on the location. While regularly updated, this blog post is purely informational and can’t substitute for personalized legal advice. So, consult with a legal professional or contact your local government to double-check your local regulations.
Local lead generation, often referred to as digital real estate. It involves creating and optimizing websites to capture leads for local businesses. Unlike rental arbitrage, this method doesn't require any physical property and involves significantly less maintenance. Once set up, these websites can generate consistent leads with minimal ongoing effort. It makes it a more passive income stream compared to the hands-on management required in rental arbitrage. In contrast, rental arbitrage involves leasing physical properties and subleasing them on platforms like Airbnb. While it can be profitable, it requires substantial initial investment, constant maintenance, and compliance with legal and insurance regulations. The added complexities of managing tenants and property issues make rental arbitrage a more labor-intensive and risky endeavor. It is compared to the relatively low-maintenance and scalable nature of local lead generation.
5 Legal Risks of Rental Arbitrage and How to Manage Them
1. Local Regulations and Zoning Laws
Not all areas allow short term rental arbitrage. Many US cities have strict local regulations and zoning laws that can affect how and where you operate. These regulations include registration or licensing requirements and a limit for how many days you can rent out a property. Understand that these laws have a purpose: They’re put in place to manage housing availability, protect the local housing market, control property usage, and keep neighborhoods stable. That’s why more areas around the world are putting regulations in place for short term rentals.
In 2014, San Francisco passed strict STR laws that limited the number of days you can rent out your property to 90 days a year if you don’t live there. And in 2015, the city required all Airbnb hosts to register through a difficult process. While the city eventually settled with Airbnb regarding the registration requirements, Airbnb listings still dropped by almost 50% from 10,000 to 5,500 listings.
Running afoul of local laws can also lead to fines and legal trouble, like in this Wired report about 9 people who built an illegal network of Airbnb units worth $5 million in New York, which is known for its strict short term rental regulations. So, if you’re not updated with these regulations, they can seriously impact your business.
How to Manage the Legal Risk of Local Regulations and Zoning Laws:
