Whether you’re a tenant, landlord, or property manager, it’s essential that you keep up with the latest trends in the rental property market. One of the latest strategies is making a buzz is rental arbitrage. But what is it exactly? Rental arbitrage is the practice of leasing a property long-term to have it rented out for short-duration stays.
Now this begs the question: Is rental arbitrage legal in Texas? To help you answer this, here is an introduction to the concept of rental arbitrage in real estate. We’ll explain how it works, review legal considerations, and list its potential pros and cons for both landlords and tenants. Ready? Let’s begin!
Key Takeaways
- Rental arbitrage involves leasing a property and subletting it for profit, often through short-term rental platforms
- Landlords should weigh the risks and benefits, including wear and tear, HOA restrictions, and consistent rent income.
- A detailed rental arbitrage agreement outlining permissions, responsibilities, and insurance terms protects both landlord and tenant.
What Is Rental Arbitrage?
In our time as one of the leading Austin Texas property management companies, we have noticed that rental arbitrage has started to become increasingly popular over the past couple of years. Brought about by the rise of short-term rentals (such as Airbnb), rental arbitrage refers to the practice of a tenant leasing their rented property to other parties. But how does this work?
Imagine a tenant renting a bare single-family home. They went through the process of securing a lease contract – from sending in their application, going through the tenant screening process, and giving their security deposit. But once they have the lease on hand, and with the required written permission of the landlord, they prepare the property itself and list it on sites like Airbnb and Vrbo as a short-term rental option. Typically, tenants charge short-term renters a nightly or weekly rate, with prices higher than their monthly rent obligations.
Taking this into consideration, rental arbitrage is a method some landlords use to generate rental income without having to actually invest in a property. While tenants still pay the landlord their monthly rent, whatever they gain extra from the short-term rentals becomes their profit.
Is Rental Arbitrage Legal in Texas?
With all things considered, this begs the question, “Is rental arbitrage legal or not?” Well, the answer is not as simple as a hard yes or a hard no. Instead, there are several factors in play that dictate whether the practice of subleasing a rental for short-term stays is legal or not.
First, and most critically in Texas, there’s the law itself. Texas Property Code 91.005, “Subletting Prohibited,” states that a tenant may not rent the leasehold to any other person without the prior consent of the landlord.
For a rental arbitrage to be legal, it’s essential that the tenant has the landlord’s consent. This means that there must be an agreement and a clear understanding between the tenant and the landlord about the plan for rental arbitrage. This should be set in writing, included in the primary lease agreement.
Therefore, unlike in some other states, in Texas, subleasing (including for short-term rentals) is prohibited by default unless the landlord gives explicit consent. This is true even if the primary lease agreement is silent on the issue of subleasing. If a tenant attempts rental arbitrage without the landlord’s written permission, it is a breach of the lease and is a violation of Texas Property Code 91.005. That may end with the tenant and subtenant both facing eviction and legal action. Crucially, the original tenant remains primarily and fully liable to the landlord for rent and any damages their short-term guests cause.
Another factor to consider regarding legal arbitrage is the state and local regulations on short-term rentals (STRs). While Texas has minimal statewide STR regulations (primarily the state Hotel Occupancy Tax for rentals under 30 days), local rules can be very strict. For example, in Austin, there are very specific rules and requirements for short-term rental businesses. Austin’s regulations on non-owner-occupied STRs (Type 2 licenses) are particularly restrictive, often limiting them to commercial zones and making this arbitrage model highly challenging in residential areas.
Aside from this, there are also zoning considerations, strict safety standards, and other applicable codes you need to meet to ensure that your short-term rental is legal.
Lastly, there are some HOAs that prohibit short-term rentals in their communities. In such cases, if you have a short-term rental through rental arbitration, you’ll be violating the HOA rules. So, you need to be aware of that, too.
That said, this (and everything in this article) is simply meant to be educational, and it isn’t intended as legal advice. So, you should always reach out to a trusted legal professional to get their definitive say on the topic.
Landlords: Should You Allow Rental Arbitrage?
For landlords, rental arbitrage comes with its fair share of pros and cons. Here are some to consider so you can form your own conclusions:
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What Should Be in a Rental Arbitrage Agreement?
Let’s say that the landlord and tenant were able to reach an agreement regarding subleasing the property for short-term stays. But in order to start this business endeavor, there should be a clear written contract detailing respective responsibilities, obligations, and other lease terms. In Texas, landlords typically do this through a formal Lease Addendum specifically governing Short-Term Rental (STR) Operations.
Specifically, the agreement must include the landlord’s explicit, written authorization, permitting the tenant to sublet the property on a short-term basis. It should also include the specific agreement regarding insurance coverage and requirements, and who’s responsible for carrying them. The landlord should be named as an “Additional Insured” on the tenant’s commercial STR liability policy to protect against guest-related claims.
Given the complexities of rental arbitrage, the agreement should also detail the tenant’s legal and compliance obligations, including the responsibility for obtaining any required local STR permits or licenses, property upkeep responsibilities, and even the safety standards they need to maintain. Landlords can also add certain house rules, such as occupancy limits, quiet hours, no smoking policies, and restrictions on the maximum number of nights per month the unit can be rented (e.g., to manage HOA/community impact).
On top of that, the agreement should indicate financial terms, such as the monthly rent rate, late fees, deposits, and any other additional fees. These financial terms should include a clearly defined, non-refundable STR administration fee, or a profit-sharing clause, to compensate the landlord for the increased risk and wear-and-tear. The contract should also specify the clear and expedited conditions under which either party can move to terminate the agreement, and the steps to follow, especially concerning compliance failures or excessive neighbor complaints. During this process, it is best to have a qualified Texas-licensed attorney review the terms of the lease.
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Essentially, rental arbitrage is a strategy where a tenant leases a property long-term and then sublets it for short-term stays to earn a profit. In Texas, it’s not legal for tenants to automatically just do this. In fact, it is strictly illegal unless the tenant has the landlord’s explicit, written consent, and both parties should formalize this through a detailed rental arbitrage agreement.
Also, landlords considering this model should weigh the benefits of reliable rent and reduced vacancies against the potential, big drawbacks. For example, they may have to deal with increased wear and tear, regulatory complexities, and the need for specialized insurance.
If you want help sorting out all the legal and logistical complexities, Bay Property Management Group can help. Our professionals manage over 6,000 rentals in Texas, Pennsylvania, Northern Virginia, Maryland, and more, so we have the experience you need to protect your investment. Our luxury property management can provide premium services to take your rental to the next level. Interested? Contact us today to find out more!