Renters for a Weekend or a While: What’s the Best Use of Your Investment Property?

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The residential rental market is now the fastest-growing segment of the housing market. In the United States, the demand for single-family rentals, defined as either detached homes or townhouses, has risen 30 percent in the past three years.1And in Canada, rental units now account for nearly one-third of the country’s homes, with particular demand for multi-family units, including apartments and condominiums.2

At the same time, the short-term, or vacation, rental market is also booming. The popularity of online marketplaces like Airbnb, HomeAway, and VRBO has helped the short-term rental market become one of the fastest-growing segments in the travel industry.3

Now, more than ever, there is an abundance of opportunity for real estate investors. But which path is best: leasing your property to a long-term tenant, or renting your property to travelers on a short-term basis?

In this post, we examine the differences between the two investment strategies and the benefits and limitations of each category. 

 

WHY INVEST IN A RENTAL PROPERTY? The Top 5 Reasons

Before we delve into the differences between long-term and short-term rentals, let’s answer the question: “Why invest in a rental property at all?”

There are five key reasons investors choose to buy real estate over other investment vehicles:

I. Appreciation

Appreciation is the increase in your property’s value over time. And history has proven that over an extended period, the cost of real estate continues to rise. Recessions may still occur, but in the vast majority of markets, the value of real estate does grow over the long term.

II. Cash Flow

One of the key benefits of investing in real estate is the ability to generate steady cash flow. Rental income can be used to pay the mortgage and taxes on your investment property, as well as regular maintenance and repairs. If appropriately priced in a solid rental market, there may even be a little extra cash each month to help with your living expenses or to grow your savings.

Even if you only take in enough rent to cover your expenses, a rental property purchase will pay for itself over time. As you pay down the mortgage every month with your rental income, your equity will continue to increase until you own the property free and clear … leaving you with residual cash flow for years to come.

III. Hedge Against Inflation

Inflation is the rate at which the general cost of goods and services rises. That means as inflation rises, the money you have sitting in a savings account will buy less tomorrow than it will today. On the other hand, the price of real estate typically matches (or often exceeds) the rate of inflation. To hedge or guard yourself against inflation, real estate can be a smart investment choice.

IV. Leverage

Leverage is the use of borrowed capital to increase the potential return of an investment. You can put a relatively small amount down on a property, finance the rest of the investment with a mortgage, and then profit on the entire combined value.

V. Tax Benefits

Don’t overlook the tax benefits that can come with a real estate investment, as well. From deductions to depreciation to exemptions, there are many ways a real estate investment can save you money on taxes. Consult a tax professional to discuss your particular circumstances.

These are just a few of the many perks of investing in real estate. But what’s the best strategy to maximize returns on your investment property? In the next section, we explore the differences between long-term and short-term rentals.

 

LONG-TERM (TRADITIONAL) RENTAL MARKET

When most people think of owning a rental property, they imagine buying a home and renting it out to tenants to use as their primary residence. Traditionally, investors would use their rental property to generate an additional stream of income while benefiting from the property’s long-term appreciation in value.

In fact, that steady and predictable monthly cash flow is one of the key advantages of owning a long-term rental. And as an owner, you don’t usually have to worry about paying the utility bills or furnishing the property—both of which are typically covered by the tenant. Add to this the fact that traditional tenants translate into less time and effort spent on day-to-day property management, and long-term rentals are an attractive option for many investors.

However, there are also limitations to long-term rentals, which often come down to your ability to control the property. Perhaps the most obvious one is that you do not get to use the home or closely monitor its upkeep (this is different from a short-term rental, which we’ll share in the next section).

In addition, while you can usually generate a steady, predictable income stream with a long-term rental, you are limited in your ability to adjust rent prices based on increasing or seasonal demand. Therefore, you may end up with a lower overall return on your investment. In fact, according to data from Mashvisor, in the 10 hottest real estate markets, short-term rentals produced “significantly higher rental income” than long-term rentals.4

 

SHORT-TERM (VACATION) RENTAL MARKET

Short-term rentals are often referred to as vacation rentals, as more and more travelers enjoy the benefits of staying in a home while on vacation. In fact, according to Wells Fargo, vacation rentals are steadily growing and predicted to account for 21% of the worldwide accommodations market by 2020.5

Investing in a short-term rental or funding your second-home purchase by renting it out can offer many benefits. If you purchase an investment property in a top travel destination or vacation spot, you can expect steady demand from travelers while taking advantage of any non-rented periods to enjoy the home yourself. In addition to greater control over how your property is used, you can also adjust your rental price around peak travel demand to maximize your returns.

But short-term rentals also have risks and drawbacks that may dissuade some investors. They require greater day-to-day property management, and owners are typically responsible for furnishing the property, upkeep, and utilities.

And while rental revenue can be higher, it can also be less predictable based on seasonal or consumer travel trends. For example, a lack of snowfall during ski season could mean fewer bookings and lower rental revenue that year.

In addition, laws and limitations on short-term rentals can vary by region. And in some areas, the regulations are in flux as residents and government officials adapt to a new surge in short-term rentals. So, make sure you understand any existing or proposed restrictions on rentals in the area where you want to invest. Urban centers or suburban communities may be more resistant to short-term renters, thus more likely to pass future limitations on use. To lower your risk, you may want to consider properties in resort communities that are accustomed to travelers. We can help you assess the current regulations on short-term rentals in our area. Or if you’re interested in investing in another market, we can refer you to a local agent who can help.

 

 WHICH INVESTMENT STRATEGY IS RIGHT FOR YOU?

Now that you understand these two real estate investment options, how do you pick the right one for you? It’s helpful to start by clarifying your investment goals.

If your goal is to generate steady, predictable income with less time and effort spent on property management, then a long-term rental may be your best option. Also, if you prefer a less-risky investment with more reliable (but possibly lower) returns, then you may be more comfortable with a long-term rental.

On the other hand, if your goal is to purchase a vacation or second home that you’ll use, and you want to defray some (or all) of the expense, then a short-term rental may be a good option for you. Similarly, if you’re open to taking on more risk and revenue volatility for the possibility of greater investment returns, then a short-term rental may better suit your spirit as an investor.

But sometimes the decision isn’t always so clear-cut. If your goal is to purchase a future retirement home now to hedge against inflation, rising real estate prices, and interest rates, then both long- and short-term rentals could be suitable options. In this case, you’ll want to consider other factors like location, market demand, property type, and your risk tolerance.

 

HERE OR ELSEWHERE … WE CAN HELP

If you’re looking to make a real estate investment—whether it’s a primary residence, investment property, vacation home, or future retirement home—give us a call. We’ll help you determine the best course of action and share insights and resources to help you make an informed decision. And if your plans include buying outside of our area, we can refer you to a local agent who can help. Contact us to schedule a free consultation! (904) 373-8453.

The above references an opinion and is for informational purposes only.  It is not intended to be financial advice. Consult the appropriate professionals for advice regarding your individual needs.

Sources:

  1. USA Today –
    https://www.usatoday.com/story/money/personalfinance/real-estate/2017/11/11/renting-homes-overtaking-housing-market-heres-why/845474001/
  2. The Globe and Mail –
    https://www.theglobeandmail.com/real-estate/the-market/article-demand-for-rental-housing-in-canada-now-outpacing-home-ownership/
  3. Phocuswright –
    https://www.phocuswright.com/Travel-Research/Research-Updates/2017/US-Private-Accommodation-Market-to-Reach-36B-by-2018
  4. com –
    https://www.rented.com/vacation-rental-best-practices-blog/do-long-term-rentals-or-short-term-rentals-provide-better-investment-returns/
  5. Turnkey Vacation Rentals –
    https://blog.turnkeyvr.com/short-term-vs-long-term-vacation-rental-properties/
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Can a Landlord Be Held Liable for Tenant Injuries?

It depends. If the injury occurred on leased property and was caused by one of the five following items, the landlord may be liable:

  1. Common areas (hallways, stairs). The landlord has a duty of reasonable care to maintain and repair the common areas. Safety in common areas is also a duty.
  2. Latent (hidden) defects. The landlord has a duty to disclose any hidden defects that he or she should reasonably be aware of. For example, if an apartment door has a defective knob that could harm a tenant and the defect is not readily apparent, then the landlord has a duty to disclose of that defect to the tenant. (Or simply repair it)
  3. Assumption of repairs. If the landlord chooses to self-remedy a broken handrail on a staircase, but does so erroneously, and a tenant subsequently gets injured from the handrail, then the landlord has assumed the liability flowing from his attempted repair.
  4. Public use. If the tenant operates a convenience store and is aware there is a defect on the premises, and also knows the tenant is unlikely to correct the problem, then the landlord has a duty to repair the problem or will be liable for the defect.
  5. Vacation homes or short-term rentals. The landlord is liable for any defects in the dwelling that cause harm to the tenant. (It may be advantageous to use a “terms of acceptance with an indemnification clause for certain activities in the rental contract, and carry a landlord insurance policy).

Source: CriticalPass Property Law MBE Flashcard. http://www.criticalpass.com

Image Source: Pixabay

Disclaimer: This information is not to be construed as legal advice and is provided for educational purposes only. The reader assumes responsibility for the use of this material and information. The author assumes no responsibility or any liability whatsoever on behalf of any reader of this material. If the reader has any questions about the subject matter, he or she should consult with an attorney who practices real estate law and is duly licensed in the jurisdiction where the subject property is located.

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The Game of Time

I’m playing a game and my opponent is the time thief. So far he’s been winning, but I’ve been observing his strategies for awhile.

I’ve also been calculating my own strategies for some time now, and pretty soon I’m going to gain a very competitive advantage!

Image source: http://absfreepic.com/free-photos/download/game-wood-3351x2589_96539.html

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The 3 Duties of a Real Estate Transaction Lawyer

As law students, we are trained to identify the legal risks of a given scenario and then advise our clients of those risks. That is the essence of lawyering.

As a transaction lawyer, because we can recognize the potential for misconduct within a transaction, we have a fiduciary duty to protect our client’s interests in the transaction by structuring it in a way to optimally minimize such risks. Our three duties, then, are to:

  1. Identify
  2. Reduce
  3. Deflect

Identify the nature and scope of any perceived risks that can disrupt the transaction.

Reduce the probability of loss (i.e., transaction costs, opportunity costs, out-of-pocket costs, or sunk costs) from those identifiable risks.

Deflect, to the extent most possible, the costs of inalienable risks.

Put another way, our goals are to protect our client’s interest (identify, reduce, deflect) & facilitate the completion of their desired transactional interest.

Source: Rick Daley, Real Estate Development Law, West Publishing (2011)

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Pros and Cons of Real Estate Investments

Here’s 5 Advantages:

  1. High rate of return, typically better than stocks or bonds;
  2. Tax shelter (depreciation, 1031 exchanges, and capital gains exemptions);
  3. Hedge against inflation;
  4. The power of leverage: making money with OPM;
  5. Equity!

Here’s 5 Disadvantages:

  1. Illiquid (not a quick cash option);
  2. Local market risk (casualty from storms, changes in jobs or government regulations);
  3. Requires expert knowledge (contractors, engineers, attorneys, banks, realtors, title insurance);
  4. Asset management expenses, and
  5. Risks (on-site, local market, regional, national, and international.

The tv shows make real estate investing look easy and glamorous, the reality of it is – it is not easy or glamorous.

Yes, you can make good money if you do it under the right conditions and you should own real estate, especially if you are currently renting.

You’re better off building equity and taking advantage of deducting the tax interest payments from your taxable income, than paying someone else’s mortgage off (rent).

In conclusion, with a decent plan of action, using OPM, you could fund your retirement lifestyle far better than relying on interest from your own savings and depending on social security.

Go, buy some real estate!

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Waiting for Hurricane Irma

Hurricane Irma Forecast Updated 09.08.2017 @ 10:00 a.m.

Forecast Path of Hurricane Irma as of 09-08-2017.

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Jacksonville Beach

This is one of my favorite venues in Jax Beach…the Casa Marina Hotel.

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2 US Visa Options for International Investors

If you are an entrepreneur and have the ability to invest in or start a US business, there are two visa options that may be right for you: the EB-5 (Foreign Investor) Visa and the E-2 (Treaty Investor) Visa.

EB-5 Visa

The foreign investor with a capital investment of $500,000 dollars, or more, who is willing to enter a business within a designated TEA (target employment area), which may be either a rural location or an area with a high unemployment rate, may be eligible for the EB-5 Visa.

Q: Does the foreign investor have to manage the business?

A: No. The investor does not need to personally oversee managing the business, and is able to hire a manger to oversee the operation. The investor can also choose to be a limited partner.

Q: Does the investment capital have to be all cash or can it include debt or intangible assets?

A: No. The investment does not have to be all cash. It can include a mix of cash, equipment, goods, other tangible assets (furniture, fixtures, & equipment), cash equivalents, and secured credit lines.

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What To Do in Jacksonville?

Hi Folks,

Last week we saw an amazing array of properties and the luscious live-work-play community of Downtown Doral, a city within a city (Miami) in sunny South Florida. In today’s Virtual Tour, we’ll be exploring Downtown Jacksonville & it’s hip, urban lifestyle. Here’s a lineup of the places we’ll see on today’s tour:

  • Springfield Single Family Residences
  • Bayside Condominiums
  • The Metropolitan Loft Apartments
  • The Strand
  • The Carling 11 East
  • Churchwell Lofts
  • The Broooklyn – Riverside
  • 220 Riverside
  • Visit Jacksonville Video Tour
  • Jacksonville Art Walk
  • MOSH – Museum of Science & History
  • The Jacksonville Landing
  • River City Brewing Company
  • The Florida Theatre
  • The Elbow – Bars, Restaurants, & Entertainment Venues
  • Visit Jacksonville.com
  • What to Do in Downtown Jacksonville in 2-3 Hours (PDF)

I hope you enjoy today’s presentation and would love to have you back next Saturday at 10 am for our next virtual tour of another South Florida community. Don’t forget to download your guide and have a fantastic 4th of July!

What to Do Downtown in 2-3 Hours 2014

Cheers!

John W. Tanner, M.S.

Realtor Associate

BHGRE Lifestyles Realty

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Do I Need a Home Inspection?

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Doing Your Due Diligence?

 

In Florida, home sellers (and their listing agents) are required to disclose any defects that are not readily observable and materially affect the property value. (Ch. 475.2701, F.S.) With that being said, there may be times when certain defects are unknown to the current homeowner.

The home inspection is a major step in the due diligence process of purchasing real property and serves to protect the buyer from expending money on a property that may be worth less than anticipated if material defects later become known. Moreover, oftentimes the lender will require a home inspection and/or a Wood Destroying Organism (WDO) report prior to approving a loan for closing.

Q:  What does a home inspector examine?

A:  The home inspector will examine the exterior and interior construction of the property, the mechanical and electrical systems, as well as the plumbing system. Below is a list of the common elements observed during a home inspection.

Exterior Inspection:

  • Topography and foundation or crawlspace
  • Driveway, sidewalk, porch & patio areas
  • Walls, siding, trim, windows & doors
  • Roof
  • Garage(s) and/or carport(s)

Interior Inspection:

  • HVAC and/or wall unit(s)
  • Electrical system
  • Plumbing, well/septic system
  • Energy efficiency

Environmental Inspection:

  • Radon gas
  • Lead-based paint
  • Asbestos
  • Radiation
  • Other external concerns

Are home inspectors licensed?

A:  In the state of Florida, home inspectors are required to be licensed. Check with your state’s division of licensing or ask your local real estate agent.

Action Steps:

  1. Use a Seller’s Property Disclosure Statement when you are buying/selling a residential property.
  2. During your walk-through, inquire of any observable defects/recent repairs.
  3. Contact your local government’s permitting department to inquire of any open/closed permits on the subject property. The most important aspect of this step is to ensure that any work done in the past was permitted, up to code, and that all permits are closed. Finding out there is an open permit prior to closing can cause delays and frustrate the closing process, not to mention the potentially high repair costs that may surface.

In closing, it is highly recommended you hire a licensed, insured, and experienced home inspector, ask the seller for a property disclosure statement, and check the property history with your local permitting department. While these tasks may be a bit tedious, your real estate professional should be there to guide you through the process and ensure that you have a smooth closing!

 

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