By: Brad Greiner, CEO of Open Air Homes and OpenAiRE Brokerage
August 26, 2024
The Case Against Rental Arbitrage: Why Open Air Homes Prioritizes Long-Term Success
Short-term rental arbitrage is an attractive idea for those looking to break into the vacation rental market. The premise? Rent a property long-term at a fixed rate, then lease it out on platforms like Airbnb or Vrbo for a higher nightly rate, pocketing the difference. While this might sound like a win-win scenario, the reality is far more complex.
At Open Air Homes, we’ve seen firsthand the pitfalls of this approach.
We remain steadfast in our belief that a commission-based model aligns the incentives of homeowners, property managers, and guests far better.
Sunsplash with Pool and Mountain Views in Palm Springs
The Illusion of Arbitrage
Rental arbitrage can seem like a gambler’s dream. Imagine renting a home for $5,000 a month and making $10,000 by leasing it out. From 2016 to 2021, many entrepreneurs jumped on this bandwagon, some even out-earning traditional property management companies like ours.
But as Carl Shepherd, a prominent figure in the vacation rental industry, pointed out in a recent Skift article, this model is fraught with risks and often lacks the long-term sustainability needed for true success. Shepherd notes that “arbitrage increases inventory and if tenants don’t have skin in the game, short-term rentals have more potential to do bad than good for a neighborhood.”
At Open Air Homes, numerous homeowners have approached us with the idea of a fixed monthly payment where we, as property managers, keep any excess profit. While this might seem like a win-win on the surface, it creates a dangerous misalignment of incentives.
The property manager is motivated to maximize short-term profits, often at the expense of the property’s long-term condition and the neighborhood’s peace.
Sunsplash with Pool and Mountain Views in Palm Springs
Here’s what often happens:
- Overcrowding and increased wear and tear on the property.
- Higher likelihood of one-night rentals, leading to parties.
- Short-term revenue prioritized over long-term care and sustainability.
This approach, unfortunately, led to the rise of “party houses” on Airbnb, which became notorious for noise complaints and property damage.
As Shepherd highlighted, “arbitraging has always been risky in any industry. But it has been damaging in the short-term rental industry, because I think it increased inventory at the time that we saw the inventory went up, that affects the entire industry.”
Sunsplash with Pool and Mountain Views in Palm Springs
The COVID-19 Reality Check
When the pandemic hit, the fragility of the arbitrage model became glaringly apparent. Occupancy rates plummeted overnight, and those relying on arbitrage found themselves with unsustainable business models.
At Open Air Homes, we operate on a commission split model, which allowed us to maintain flexibility during this unprecedented time. I personally called every homeowner and proposed a switch to “extended terms and complete flexibility.” This strategy allowed us to fill homes with guests who were stuck in Southern California, offering them flexible terms while maintaining the properties’ integrity.
Our strong relationships with homeowners made this possible.
The guests we hosted during the pandemic appreciated our flexibility, and many have since become repeat customers, booking for extended stays.
Key benefits of our commission split model:
- Flexibility to adjust pricing and terms quickly.
- Ability to maintain and enhance property conditions.
- Strong, trusting relationships with homeowners, leading to long-term success.
Sunsplash with Pool and Mountain Views in Palm Springs
Managing Rental Homes for the Long Haul
One of the most significant drawbacks of the arbitrage model is the focus on short-term gain over long-term property improvement.
At Open Air Homes, our goal is simple: Your home should get nicer over time.
Some of our top properties have the same guests returning year after year, often staying for months at a time. We work closely with these homeowners to ensure their homes improve with each passing year, adding amenities and features that enhance the guest experience. With our commission split model, we invest in long-term partnerships. Our success is directly tied to the homeowner’s success. We have a vested interest in maintaining high occupancy rates and ensuring that the properties we manage are in excellent condition, leading to positive reviews and repeat bookings.
Sunsplash with Pool and Mountain Views in Palm Springs
The Case Against Rental Arbitrage
In a challenging industry like short-term rentals, rental arbitrage has given the entire sector a bad name. While it may seem like an attractive option, we believe it lacks the sustainability and alignment of interests necessary for long-term success.
For homeowners looking to partner with a property manager, we strongly recommend choosing one that focuses on high occupancy, net returns, and a commission-based model. This approach ensures that your property will be well cared for, guests will have a positive experience, and the neighborhood will remain a peaceful and enjoyable place to live.
At Open Air Homes, we prioritize continuous property improvement and aligned incentives, ensuring that your investment yields returns for years to come.
Choose a property management partner who values long-term relationships.
