Following the recent departure of David Moyes as the Hammers' boss, the club have identified Benitez as their number one target to take the job this summer.
However, for West Ham to be able to tempt Benitez away from his Newcastle project, Waddle believes they would need to offer the Spaniard some 'unbelievable' assurances to get him to sign.
Speaking on BBC Radio 5 Live, Waddle discussed Benitez's current situation at Newcastle and what it would take for him to make the switch to east London.
"Benitez might look at it and think, 'You know at Newcastle, I've got that budget which is not obviously great' and he wants more and rightly so," said Waddle, as quoted by the Express.
"But going to West Ham it might be a very similar budget and he says at Newcastle, he's absolutely loved, the fans love him, and rightly so, he's done a great job. He could go to West Ham, lose the first five games and it's like, 'What [are] you doing here?'"
Rafa to West Ham links may be a good thing if they quicken the pace of talks, which are 'ongoing' but have frustrated Benitez so far. They'll need to go further than they have so far to tie him down to long term deal.— Mark Douglas (@MsiDouglas) May 17, 2018
Would be an absolute disaster for #nufc if he goes.
Benitez has demanded assurances from Newcastle that he will receive adequate funds in the summer after working with almost nothing for the previous few transfer windows. Owner Mike Ashley has announced he will give Rafa 'every penny' to spend on players, but that news has been met with scepticism from the fans.
Waddle continued: "So for him to move it would have to be an unbelievable sort of deal to say, 'I'm allowed to spend a lot of money to bring certain players in I've identified who I'd probably like to bring to Newcastle, who are even bigger players.'
"Where do you wanna be? That is the question for any manager going into West Ham. Where do you want to be? Will it be a relegation battle? Will it be a mid-table, where actually does the club wanna go?"
The same question could be asked of Newcastle United, who need to start spending more money to maintain their push into the top half of the Premier League table.
Waddle added: "If they don't spend, Newcastle, then obviously to get the maximum out of them players again is very difficult, that'll be three years running, with the same basic squad."