In the first half of the article I begin with an introduction to AirBnB and an explanation of the arbitrage opportunity. The second half of the article goes on to talk about Flatbook, a Canadian startup out of Montreal that is quickly exploiting this opportunity and taking it to the next level.

AirBnB is considered one of the greatest internet success stories of today. What started out as a crazy idea in 2008 (offering your home to a complete stranger?!) has turned into a global phenomenon.  Over 25 million guests have used AirBnB as an alternative to booking a hotel; turning unused capacity into a new source of revenue has caught hospitality groups by surprise as AirBnB has quickly become the 3rd largest hospitality company by valuation.

AirBnB vs Traditional Hotel Companies

Unlike hospitality groups such as  Hilton, Marriot and Starwood, AirBnB does not build a network of large and expensive hotels. Rather, AirBnB is a platform where home owners can put their home up for short-term rent. As a result, AirBnB can scale much faster than any hospitality group. Even though hospitality companies don’t operate the actual hotel themselves, they are still limited within the concept of a “traditional” hotel – using large buildings with fixed capacity. AirBnB does away with this by just managing the platform, allowing home owners to easily add and remove capacity in real-time. Best of all are the unique properties that are available. Over the years guests have stayed in apartments, houses, cabins, boats, tree houses, and even castles.



AirBnB has become so popular that some hosts have turned the platform into a full-time source of income for themselves. Many have realized that income made from AirBnB can entirely offset rent or become a way to pay off a mortgage.

In Toronto, some of the top AirBnB spaces go for $100+ per night depending on how nice the home is, if it is a shared room or a whole apartment, and its location. Established AirBnB hosts with five star reviews do very well for themselves. Comparing  five of the top listing in Toronto shows that the best locations in June had an average capacity utilization rate of 76%. That means that a five-star host will have guests for 23 days of the month; with an average rate of $118 for a one bedroom apartment, that totals $2,700/month in revenue. AirBnB takes 3% of that as a service charge, leaving the host with $2,618. Keeping utilization at 76%, a host is looking at $10,472 for the summer tourist months or $31,416 for the whole year. Not bad for letting a stranger into your home.

AirBnB listings

In Comes Flatbook

Flatbook CEO, Francis Davidson, started the company upon recognizing two emerging trends in the hospitality market:

1) Hosts were making a significant amounts of money off short-term rentals on AirBnB. Francis himself tried the system himself by renting out his apartment in the summer of 2013, earning $15,000. During that time he stayed at a friend’s apartment for $1000 per month.

2)  In university towns, thousands of students flock back to their family homes during summer break, leaving the apartments and houses they rent completely empty. As a McGill university student, Francis, like many of his friends, found it incredibly difficult to sublet his place during these summer months.

These trends led Francis to creating Flatbook, an intermediary between intermediaries. The company selects properties from renters that they believe would be sought after on AirBnB. Flatbook guarantees the tenant his monthly rent without having to worry about finding a sublet. Flatbook then takes the property, cleans it up, and lists it on sites like AirBnB. At the end of the month, Flatbook pays the owner his usual rent, and anything extra is revenue for Flatbook.

Using the example above, the top AirBnB host in Toronto can net $2,600 for a one bedroom + one bathroom apartment. That same apartment can be rented on a 12 month contract between $1,500 – $1,800 per month. Assuming the high-end, that nets Flatbook $800 in revenue per month. Flatbook managed 82 properties in the summer of 2014, meaning roughly $787,200 in annual revenue; not far off from the $1M The Star reported as of March 2015. Of course Flatbook manages properties with multiple bedrooms as well and the arbitrage opportunity extends to these larger properties. Not bad for a company with two years of operations.


So why don’t renters list their property on AirBnB themselves?

Their are a number of reason why renters (especially students) would not list their own property on AirBnB:

1) Time: Managing an AirBnB listing is not easy and takes time. In addition to checking the website, responding to inquiries and accepting bookings, hosts have to spend time managing all the logistics. This includes making sure the unit is clean before the guests arrive, handing them the keys, answering any questions/concerns, and ensuring that when they leave nothing is damaged or ruined. Time adds up, which is why some of the top AirBnB hosts do this as a full-time gig.

2) Location: Unless you have someone that can take care of your unit (like Flatbook), you are required to stay in the city. This stops students from being able to go home for the summer while their unit is on AirBnB. On the other hand, with a sublet, the contract is 4 months allowing students to leave at the beginning of the summer and come back at the end. Finally with subletting, renters don’t require the same level of attention as short-term travelers.

3) Stress: For many people, there is considerable stress that comes with finding someone in time. The AirBnB platform does not make the situation any better as short-term rentals only create more uncertainty for cash-strapped students. With Flatbook, the stress is removed by guaranteeing that they will receive their four months of rent, all without having to find someone themselves.

Looks like a solid business model, so what’s next?

The company’s recent success has led them to launch three major strategies:

1) The company is moving past renters and going straight to property managers and landlords. One of the biggest concerns with dealing with renters is that they sublet their unit without permission from the property owner. This can lead to awkward run-ins where guests are kicked out of their unit. In those cases, Flatbook has to scramble to find a new property, not to mention that those guests will likely never come back to a Flatbook property.

2) The company has begun an aggressive expansion plan. What started off in Montreal is now expanding to 31 cities across Canada, United States, Europe and the Middle East. This is a large undertaking that will require a team in each city to manage properties and ensure customers are satisfied.

3) The company is moving into the “mid-term” rental market. Specifically people looking to rent units for 4 – 10 months at a time. This benefits students and contractors who  do not plan to be present in a single city for very long. This also benefits Flatbook  when it cannot get enough utilization from AirBnB – locking in a mid-term renter during low tourist seasons.

Thoughts on Flatbook’s Strategy

City Expansion Plan: Flatbook will likely not try to move into all 31 cities at once. That can become an operational nightmare if the company has not perfected its roll-out strategy. If that’s the case, then which cities make sense for Flatbook to move into next?

  • Supply < Demand: In order for the Flatbook model to work, it is important that they manage properties in cities where their is substantial demand for AirBnB like services. AirBnB has been largely successful in North America and Europe, but has not yet penetrated emerging markets to the same extent. For example, in Riyadh, Saudi Arabia, AirBnB only turns up 9 property listing. Of those 9, only one property actually has reviews and almost all properties have full availability in their calendars meaning there are no travelers scheduled to visit. In a city like this, it can becomes very difficult for Flatbook to make money while guaranteeing.
  • Target Tier 2 Cities: Flatbook would be better off sticking to North America and Europe. Specifically cities like Chicago, Houston, Philadelphia, and Phoenix. These are cities with large populations and high demand for AirBnB services. Flatbook should try to stay away from mega cities like New York and Los Angeles, as there is already a large supply of AirBnB properties, many of which are managed by property companies similar to Flatbook. These “2nd Tier” cities are heavily penetrated by AirBnB, but do not have the same level of competition as other cities.

Mid-Rental Market: With two approaches to renting out a unit (AirBnB or mid-term rentals) Flatbook can now more efficiently manage inventory.

  • Algorithms to manage distribution channels: In each city Flatbook moves into, the company can design an algorithm that helps figure out how many properties it can put on AirBnB to maximize its revenue over the course of a year. As with many cities, demand will be variable, affected by weather and local events (tourist seasons). The algorithm can scrape all supply and demand information off of AirBnB (based off availability calendars) and then compute scenarios where Flatbook adds or removes an additional property to see how that affects its top-line. Properties that need to be removed off AirBnB can then be listed as a mid-term rental on Flatbook’s own website. When demand picks up on AirBnB, those mid-term rentals can then be moved back onto the platform when their leases expire. The more properties Flatbook owns in a city, the more effective this algorithm becomes for the company.
  • Micro City Penetration: Another strategy that Flatbook can employ is to corner off a section of the market inside a city. In each city there are favorable places to live; for Toronto, visitors are more likely to stay in the downtown core, specifically in the west-end where there are entertainment choices, great restaurants, and tourist attractions. Flatbook can have a micro strategy in each city where it acquires as many properties as possible in half-mile block. With enough properties, Flatbook will be able to control the supply curve in that section of the city giving it the ability to increase the price of its listing (within reason) while still maintaining a high utilization rate.


Properties in this area of Toronto tend to be $30 – $100 more per night than the rest of the city due to its location. Cornering off this section of the city can help Flatbook maximize its revenue in Toronto

Conclusion: It’s a People Business

Flatbook has a great opportunity ahead of it; the company has discovered an arbitrage opportunity where big profits can be made. While there are many property management companies on AirBnB, most of them cater to hosts who want to put their property on AirBnB, but do not have the time to do so themselves. Flatbook is different in that it targets renters and property owners who just want a stable stream of monthly income. Flatbook guarantees this income and then gets to pocket the incremental revenue from hosting their property on AirBnB. This model is much more lucrative than what other property managers are currently doing.

In the end, the Flatbook model does not have a moat around it. Companies aware of this model can start to replicate this in other cities, hence why Flatbook has been aggressive to expand quickly. However, Flatbook needs to be cautious that its aggressive plans do not damage the brand that the company has developed. Travelers will look to the Flatbook brand to provide properties that are clean and welcoming. They will expect to have seamless communication around checking in and out, obtaining local information, and making inquiries. At the end of the day, Flatbook is still a hospitality company where people are key. Any poor expansion plan that damages this brand can kill the company all together. That’s why its important to perfect the expansion plan by rolling out to a few cities at a time, accelerating along the way as the expansion model becomes refined. Through this method, Flatbook will become a stronger company known for the kind of customer service you would find in a Marriot or Starwood hotel – except that Flatbook is not a hotel, but an online intermediary that can scale much faster.

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