A GUIDE TO SHORT-TERM RENTAL OPTIONS FOR YOUR INVESTMENT PROPERTY
If you have one or several investment properties that you’ve bought for the price of a car and want added income without building a bathroom, bedroom or finished basement, read on for insights on growing your cashflow in the short-term rental market. WHAT IS A SHORT-TERM RENTAL PROPERTY? A short-term rental property is a property that is rented out for an evening or a couple of days to a few weeks or months. In short, anything rented out for less than a year under an annual lease is viewed as short-term. The types of properties that can be rented out short term come in many flavors including: your home sweet home a tiny house or cottage that you place, either temporarily or permanently, in your backyard or a side lot next to your home a single family investment property a small multifamily investment property of 2-4 units an entire apartment building bought solely for the purpose of short-term rentals ADVANTAGES OF A SHORT TERM RENTAL INVESTMENT PROPERTY Short term rentals can provide you with increased cashflow on the revenue, expense and personal budget fronts, giving your pockets a wonderful case of the mumps. Your Own Vacation Getaway: If your investment property is located in a city that you frequent for vacations, family reunions or get-togethers, then a short-term rental can save you money by avoiding hotel costs, and generate income when you’re not using it. Also, having a vacation rental that you own makes it easier to block off vacation timeframes that work for you. Fewer maintenance headaches: Short term rentals are subject to less wear and tear than year-round rentals because: 1) they’re occupied in only short bursts of time (for instance, an evening or weekend), 2) the unit is furnished so there’s no wear and tear from furniture or other large belonging being moved to and from, and 3) the damage deposit for a short-term rental of a couple of hundred dollars usually invites a greater level of precaution from visitors than a long-term rental might. Additionally, because of the gaps between guests visits, repairs and minor cosmetic work can be done quickly before any issues turn into a more expensive problem. Higher overall monthly rental income: The daily rate for a short term rental is higher than the equivalent daily rate for a monthly rental. As an example, the average monthly rent for a 3-bedroom, 1-bathroom house in New Jersey is $1,800, which translates into an equivalent daily rent rate of $60 over a 30-day period. The average short-term rental rate for a 3-bedroom, 1-bath house in New Jersey is more than twice this amount, or $130-$150 a day. Although your investment property will certainly have some level of vacancy, over the long-term, your short-term rental will out-earn its long-term peers. Real-time Price Adjustments: A long-term rental under an annual lease offers the ability to adjust prices only once per year. Additionally, depending on the state and tenant population, the annual increase amount might be capped. In contrast, short-term rental investors can adjust their prices after each and every occupant, based on market conditions and opportunities. Thus, if a concert or sporting event is coming to your area on a particular weekend, you can raise the price for your rental unit based on the increased demand. DISADVANTAGES OF SHORT TERM RENTAL INVESTMENT PROPERTY Of course, as with most investments, there are always downsides that should be discussed. Short-term rentals will require more day-to-day involvement than annual rentals in terms of marketing and communicating with the revolving door of guests you will have. As such, before diving headfirst into short-term rentals the moment your annual leases expire, consider the challenges that come with this territory: Edging out Competition: In order to minimize vacancies and negative reviews, short-term rental landlords will need to consider as competition both short-term rental properties as well as commercial properties like inns, long-term stay hotels and conventional hotels. Investing both money and time on well-appointed furnishings will pay dividends in the short-term market more so than for long-term, unfurnished annual leases. Likewise, promotional discounts and other marketing sizzle will be required to keep your property top-of-mind with potential guests. Maintenance and Repairs: While renting out your property or a room in your house to a new guest each week may result in less overall wear and tear versus an annual rental, the frequent in and outs mean lots of mini and ongoing housekeeping on your end. If you are serving as the head handyman and housekeeper for your short-term rental business, this translates into a never-ending list of chores, honey-do’s and home repair purchases. Off-Peak Vacancies: Just as you factor in a vacancy rate for a traditional real estate investment property, you will need to price in the cost of vacancies for a short-term rental property. Do your homework to find out when vacation travel is down in your area and adjust your pricing and offerings accordingly. Alternatively, schedule large maintenance and capital improvement projects during off-season. Property Management: In many ways a short-term rental is like a traditional rental property that is located out of state. Both will require the use of a capable property manager to screen and choose tenants, address repairs and collect rent. Because of the added work, however, a short-term rental will attract property management fees that are significantly higher, from a low of 10% of the rent to a high of 50%, vs. a long-term rental where property management fees range from a low of 5% to a high of 15%. This added cost will need to be priced into the value of the short-term rental opportunity. HOW TO MAXIMIZE YOUR PROFITS WITH SHORT-TERM RENTAL PROPERTIES Short-term rental properties will provide returns throughout the year, but as discussed above, a more active engagement strategy is required. LOCATION AND CONDITION OF THE PROPERTY – The largest driver of profitability, more so than with long-term rentals, will be the location of the property because of it serving as a vacation residence for guests. Inspecting your property from the vantage point of guest will help ensure that
SHOULD A REAL ESTATE INVESTOR OBTAIN A REAL ESTATE LICENSE?
Real estate, even in today’s hot market, offers the opportunity to buy a house for the price of a car, both for new and seasoned investors alike. The decision to buy, rehab and rent or buy, rehab and sell often comes down to market conditions. Which raises the question of whether a real estate license is required or provides an edge in assessing market conditions and becoming a successful investor. A REAL ESTATE AGENT OR A REAL ESTATE INVESTOR? First, to the question of requirements: real estate investors are nonrequired to become or to be licensed as real estate agents. While some real estate agents invest in properties and property-related businesses such as property management, and some real estate investors sell property as agents, the two are separate activities, and the pursuit of one does not require engagement in the other. That said, obtaining a real agent license offers certain advantages and can serve as an asset for real estate investors. Deciding on whether to pursue a real estate license should not be considered lightly as a significant time investment is required along with licensing costs. To help better inform your decision, let’s take a look at the pros and cons of pursuing a real estate license. BENEFITS OF OBTAINING A REAL ESTATE LICENSE One of the biggest advantages of a real estate license is instantaneous and comprehensive access to information on upcoming and sold properties. If your goal is to spend significant time researching, buying and selling properties, not just on behalf of your own portfolio but on behalf of others, then obtaining a real estate license will serve you well. Likewise, if you intend to amass a significant investment portfolio or plan on selling a number of properties through the services of a real estate company, then representing yourself in these transactions as a licensed real estate agent may offer advantages, particularly in terms of the commissions that will no longer have to be paid to a third-party selling agent. Real estate licenses are issued state by state, with some states allowing holders of a license in another state to qualify to buy and sell property in their state through reciprocity provisions. As such, if you have or intend to build a multi-state real estate portfolio or real estate agency, the requirement for multiple real estate licenses and availability of reciprocity should be weighed. ACCESS TO MLS- THE MULTIPLE LISTING SERVICE: As mentioned earlier, the biggest advantage of becoming a licensed real estate agent is access to the MLS (Multiple Listing Service): Particularly in a hot market, receiving immediate notifications of new sales listings can provide an edge in getting ahead of investment competition. The MLS system also speeds your research, offering detailed information about recent sales, fast-selling neighborhoods, popular home types and comparable properties without having to check multiple sites. INCREASED INDUSTRY KNOWLEDGE: Another advantage of becoming a real estate agent is firsthand introductions to appraisers, title companies, lenders, inspectors and other key players in the real estate industry. This exposure increased your expertise in the many facets of the real estate process. Additionally, directly working with lenders and appraisers improves your negotiating position and assists in reaching quick settlement on terms and conditions. GET PAID TO BUY AND SELL YOUR OWN PROPERTIES: By becoming your own agent and representing yourself as the buying or selling agent, you can receive the buying agent’s commission when you buy a property for your portfolio, and likewise the selling agent’s commission when you sell a property. As an example, if you buy a property that has a standard 6% commission, a commission of $12,000 would be paid to the selling agent, who would then split it, 50/50 with the buying agent. Since you’re representing yourself as the buying agent, you receive the $6,000 commission, effectively lowering the purchasing cost for you for the house from $200,000 to $194,000. EXPANDED CONNECTIONS: As a real estate agent, you will work under a licensed real estate brokerage firm. The relationships you form with other agents at your brokerage will yield tips and lessons about the market. Additionally, through your colleagues you will build a strong network that helps you find and close good deals quickly and gain intelligence on recently-visited properties. DRAWBACKS OF A REAL ESTATE LICENSE While becoming a real estate agent offers many advantages, it is not without its challenges, especially for beginners. DIFFICULT TO ACQUIRE: Obtaining a real estate license requires a time investment on the order of 4 – 8 months for most in terms of classes, exams, applications and background checks. While the required courses differ from state to state, they generally cover topics including fair housing laws, ethical standards, real estate practices and record-keeping. In addition to time, an investment of a few hundred dollars to a couple of thousand dollars is required to obtain a license, along with ongoing investments icon continuing education and license renewal. TIME COMMITMENT: Once a license is in hand, it can take new agents several months before they obtain their first client or close their first deal. Marketing, advertising, showing and helping to stage homes can take many hours a week, all of which takes time away from searching for investment properties. MUST ENSURE NO CONFLICT OF INTEREST: Real estate agents have a legal obligation to prioritize the interests of their clients. As such, agents must ensure that they act in the ethical interests of their clients and disclose any conflicts of interests, such as if an agent is selling their own investment property to a buyer that the agent represents. A conflict of interest could lead to a lawsuit and/or penalties and damages. As such, it is crucial that agents who are also investors ensure that no conflict of interest, perceived or actual, occurs. Read my other Blogs: Click Here Follow Us at: @MySmartCousin
Community Development Block Grants (CDBG), a Gateway to Affordable Housing
The development of its citizens is the surest path to the development of a country. People who are homeless or who cannot afford to purchase a home can become property owners through a little-known program sponsored by the U.S. Housing and Urban Development Agency (HUD), the Community Development Block Grants program (CDBG). HUD’s CDBG program, established in 1974, was created to provide a path to homeownership for low and moderate-income families. Under the program, states, cities, and counties are able to apply for grants annually to revitalize housing stock and infrastructure in their communities. Eligible activities under the CDBG program Funds provided through CDBG grants support housing-related activities including housing repairs and rehabilitation, down payment assistance and closing costs, and the purchase or construction of rental housing or owner-occupied housing. Housing counseling and relocation assistance are also provided to help aspiring owners in their home buying journey. You can read my recent blog here: Click Here
REO Properties for First Time Real Estate Investors
What Are REO Properties? Real estate owned properties (REO) are properties that the bank or mortgage holder takes ownership of— often due to foreclosure or a reverse mortgage balance — underscoring why the moniker, ‘homeowner’, applied so jubilantly the moment closing happens and the bubbly is poured, is rarely ever so. Depending on when you pull the stats, 1 in 3,000 to 1 in 4,000 homes in the U.S. are in foreclosure at any given time. According to ATTOM Data, approximately 151,000 foreclosure filings were filed in 2021, down from 2.8 million peak during the Great Recession. Foreclosures processes differ across states, but generally the mortgage holder begins the process to foreclose on a home three to six months after the ‘homeowner’ (again, not actually) misses their mortgage payment. The Pluses and Minuses of Investing in Foreclosed Properties REO properties are often sold at a discount to a move-in ready home in the same neighborhood, largely because the home is sold both in as-is and unknown condition. A home being sold in as-is condition offers little to no room for negotiation since the discounted price reflects the disrepair. The unknown aspect of these properties means that what you get is not only what you see, but also what you don’t see. Has the basement recently flooded? Who knows— the seller, who is the lender, doesn’t know the home’s condition, and the homeowner is not required to disclose it. Additionally, the seller offers no warranties on the sale, meaning there is no recourse for undisclosed defects. Where to Find Foreclosed Properties The REO route to property investment has a sense of derring-do and inside scoop, what with its off-book listings and short sale structures. These properties, however, are often hidden in plain sight.Government agencies are a plentiful if overlooked market for REO finds. Agencies ranging from Fannie Mae and Freddie Mac to Veterans Affairs and the Department of Agriculture find themselves the unintended owner of foreclosed properties as a mortgage guarantor. Private sector entities such as auction companies and mortgage lenders are another channel for properties. Purchase Checklist: Before buying an REO property, ensure that you do a thorough inspection. Using a professional inspector is the gold standard but if you give the property the once-over yourself or with a contractor, pay particular attention to structural or foundation issues, the electrical wiring and panel box (copper is great, aluminum or knob and tube, not so much), the heating system age and type (a furnace that’s less than 10 years old and gas is great), the attic/roof condition, evidence of mold or water damage, and the plumbing. Appliances, drywall, flooring, cabinets and fixtures are cosmetic, easily fixed and much cheaper to remedy. See also: The Skinny on Fix & Flip Investments