What Is Residual Income Arbitrage?
Let's break up two concepts to explain it.
What Is Residual Income?
Residual income is income that one continues to receive after the completion of the income-producing work. Examples of residual income include royalties, rental/real estate income, interest and dividend income, and income from the ongoing sale of consumer goods (such as music, digital art, or books), among others. In corporate finance, residual income can be used as a measure of corporate performance, whereby a company's management team evaluates the income generated after paying all relevant costs of capital. Alternatively, in personal finance, residual income can be defined as either the income received after substantially all the work has been completed, or as the income left over after paying all personal debts and obligations.
What Is Arbitrage?
Arbitrage is the simultaneous purchase and sale of the same asset in different markets in order to profit from tiny differences in the asset's listed price. It exploits short-lived variations in the price of identical or similar financial instruments in different markets or in different forms.
Arbitrage exists as a result of market inefficiencies, and it both exploits those inefficiencies and resolves them.
For example, ‘Rental arbitrage’ is the act of renting a property long-term and then re-renting it short term on sites like Airbnb or Vrbo. This analysis focuses on understanding the current opportunity for renting apartment units as STRs (apartment rental arbitrage) by looking at the difference in the costs of a long-term lease (1+ years) and the potential revenue of renting it out nightly on a platform like Airbnb, Vrbo, or Booking.com.
Imagine you rent an apartment for $2,000 per month. If you sublet that same apartment on Airbnb for the month at $150 per day, you could pay off your rent in just under two weeks. Once you’ve paid off the rent, the rest of the month is pure profit. With the possibility of $2,000 in profit each month in our example, after subtracting potential maintenance and overhead charges, short-term rental arbitrage allows you to grow your income and save without owning property. Of course, that’s an oversimplification. There are expenses to running short-term rentals.
Seems too good to be true? Yes and no. Airbnb rental arbitrage is a tactic that can work well in some markets. It’s a great way many investors use with cheap rental properties to make them more money. However, there’s a lot of due diligence required on your part before jumping in with both feet. That is way it is best to work with us, so we can help you succeed in this area.
Residual Income Arbitrage: Is when you create income from an asset in a lower market and selling in a higher paying one for long term financial returns.
Residual income is income that one continues to receive after the completion of the income-producing work. Examples of residual income include royalties, rental/real estate income, interest and dividend income, and income from the ongoing sale of consumer goods (such as music, digital art, or books), among others. In corporate finance, residual income can be used as a measure of corporate performance, whereby a company's management team evaluates the income generated after paying all relevant costs of capital. Alternatively, in personal finance, residual income can be defined as either the income received after substantially all the work has been completed, or as the income left over after paying all personal debts and obligations.
What Is Arbitrage?
Arbitrage is the simultaneous purchase and sale of the same asset in different markets in order to profit from tiny differences in the asset's listed price. It exploits short-lived variations in the price of identical or similar financial instruments in different markets or in different forms.
Arbitrage exists as a result of market inefficiencies, and it both exploits those inefficiencies and resolves them.
For example, ‘Rental arbitrage’ is the act of renting a property long-term and then re-renting it short term on sites like Airbnb or Vrbo. This analysis focuses on understanding the current opportunity for renting apartment units as STRs (apartment rental arbitrage) by looking at the difference in the costs of a long-term lease (1+ years) and the potential revenue of renting it out nightly on a platform like Airbnb, Vrbo, or Booking.com.
Imagine you rent an apartment for $2,000 per month. If you sublet that same apartment on Airbnb for the month at $150 per day, you could pay off your rent in just under two weeks. Once you’ve paid off the rent, the rest of the month is pure profit. With the possibility of $2,000 in profit each month in our example, after subtracting potential maintenance and overhead charges, short-term rental arbitrage allows you to grow your income and save without owning property. Of course, that’s an oversimplification. There are expenses to running short-term rentals.
Seems too good to be true? Yes and no. Airbnb rental arbitrage is a tactic that can work well in some markets. It’s a great way many investors use with cheap rental properties to make them more money. However, there’s a lot of due diligence required on your part before jumping in with both feet. That is way it is best to work with us, so we can help you succeed in this area.
Residual Income Arbitrage: Is when you create income from an asset in a lower market and selling in a higher paying one for long term financial returns.