You might’ve read about “rental arbitrage” lately as it has become a trendy investment topic to talk about in investment forums and newsletters, but do you actually know what it is or how it works? Here are a few things you should know before adding it to your investment portfolio.

What is rental arbitrage, and how does it work?

Rental arbitrage is the practice of investing in properties that are in short supply and then renting them out at a higher price than what they would cost to buy. The idea is that by making a profit on rent, you can offset any losses on the purchase side instead of needing to refinance your mortgage for investment capital, as some startup real estate investors do.

There are several reasons why rental arbitrage is becoming a hot buzz term right now. First, there is a growing demand for rental properties as the population ages and becomes more mobile with trends like digital nomadism. Second, there is a glut of rental properties in some markets, leading to higher prices and potential profits. Finally, many investors love the idea of renting out properties to generate passive income, which can be reinvested into other opportunities.

What are the risks of investing in rental arbitrage?

There are a few risks associated with investing in rental arbitrage. The most common risk is that the property you’re buying or renting will become unavailable for rent, which can happen for a number of reasons, including a natural disaster. Another risk is that the property you’re buying or renting will become too expensive to rent, which can happen if the market for rental properties becomes saturated. Finally, you may not be able to recoup your investment if the demand for rental properties crashes.

Is rental arbitrage a good investment?

There are a few reasons why rental arbitrage is a hot investment right now, with the biggest reason being that rental prices are rising faster than the cost of owning a home. This means that investors can make money by buying rental properties and renting them out at a higher price.

However, you must understand the high level of risk you’re taking on by investing this way. First, if the market for rental properties dries up, investors could lose money. If the property becomes damaged or destroyed, you could have to spend more money getting it back into rental shape, losing any gains you’ve made.  The third and most significant risk is that someone could sue you for rent if they feel that you are not giving them the proper amount of rent. In these types of lawsuits, it can be difficult to prove that you are not responsible. Rental prices are typically capped in major metropolitan cities, and if you price your property too high, that could grab the attention of your local City Council or District Attorney.

The bottom line

Yes, rental arbitrage can be an excellent investment but do your homework first to make sure it’s right for you. Be sure to do your research and consult with a financial advisor before starting, as the risk is high and the investment costs are high.

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