What Is Airbnb Arbitrage?

  

Forbes, by Harry Campbell

In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.

Over the past couple years, the on demand economy has created a lot of imbalance in marketplaces and numerous opportunities for arbitrage.  Smart consumers have taken advantage of this imbalance by opting for Airbnb rooms instead of hotels, Uber cars instead of taxis and food delivery in lieu of a trip to the grocery store.  But smart producers have been able to leverage their entrepreneurial spirit in another way to create new kinds of opportunities.

I’m not talking about the casual Uber driver or the occasional home-sharer either.  There are people who are making a full time living off the sharing economy just by leveraging existing capital, resources and ideas.  I recently had the pleasure of meeting one of these beneficiaries and he told me all about what he likes to refer to as ‘Airbnb Arbitrage’.

Pacific Beach, San Diego, CA

Daniel Chinh bought his condo in Pacific Beach, California back in early 2013 before he had ever rented or stayed with Airbnb.  But it wasn’t the thrill of becoming a home-owner that drove this purchase.  Instead, he was looking to rent out his property on Airbnb and see just how much money he could make.

“I initially heard about this strategy from a friend in Austin, TX who was making a killing renting out his house for big events like SXSW and Texas football games.  We don’t have any of that in San Diego, but hotel prices are pretty outrageous in the summer and I figured there was some real opportunity seeing as San Diego is a top coastal tourist destination.”

Chinh didn’t jump right into buying a condo though, he played it smart by doing hours of research, running the numbers with friends and speaking with local real estate agents.  He even went as far as running a test Airbnb rental with his apartment at the time.

“I started off by looking around my area on the Airbnb website to see what people were charging for similar properties just to get a feel of nightly rates.  I also compared it to other cities I’ve lived in in the past and saw that rates in San Diego were significantly higher.  I eventually listed my apartment and I was amazed at the response.  I got a bunch of bookings pretty quickly and even after I discontinued the trial, I kept the ad up and was still getting rental requests all winter.”

This isn’t Chinh’s first foray into real estate though.  He owns a multi-unit property in Oceanside, CA but as he told me, “Short-term rentals are a much different game than traditional real estate.  My 4 unit property provides great steady income but it’s not a lot in terms of cash flow.  With Airbnb, there is the potential for a much higher return.”

That return has worked out beyond Chinh’s wildest dreams and heading into the summer months, he is already booked solid at the highest nightly rate he’s ever charged.  Based off Chinh’s calculations, he will cover his yearly mortgage with just 3 months worth of rentals.  Everything on top of that will be pure profit.

Chinh is doing so well with this property (and his multi-unit) that he recently quit his day job as a billing analyst in order to pursue his passion for real estate.  I caught Daniel as he was getting out of the water (his sixth consecutive day of surfing down at Mission Beach) and asked him to break down his motivation for doing what he does and he summed it up in two words: “Passive Income.  For me, that’s what it’s all about.”

Chinh’s investment isn’t completely passive though, it does require about 3-4 hours of work cleaning the apartment and organizing each time there’s a new tenant.  Plus a couple hours a month managing the online listings, booking clients and dealing with paperwork.  He uses a multitude of Airbnb like sites in order to increase his exposure.

“During the winter, most rentals are anywhere from 2-4 weeks which means there’s less work for me so I also charge less.  I charge a premium rate though during the summer, where the average stay is 3-4 nights and I have higher expenses due to more frequent turnover.”

Chinh recently celebrated his retirement from corporate America with a two week trip to Thailand.  While he was gone, his Airbnb rental was fully booked and it even helped defray most of the cost of the trip.  For Chinh, the best part about this arbitrage discovery is that it has allowed him to quit his day job and follow his passion.  Chinh is currently investigating other ways to profit from the sharing economy and says that the next thing he’s going to look into is renting out cars with services like Flightcar or Getaround and “maybe investing in another property or two.”

Chinh chalks up a lot of his success to experience and “a willingness to go against the grain” but he knows that the good times may not last forever.  In regards to Airbnb rentals, Chinh warns that, “it all falls into a big gray area right now.  If you’re renting a condo, you have to check with your HOA and then there are still taxes and local city regulations to deal with.”

Nobody ever said arbitrage was going to be easy but Chinh seems to have figured out a winning formula.  For now, at least.