By Lauren Rosales-Shepard, Content Writer
For years you’ve heard that real estate is one of the best investments you can make. It’s considered something of a safe bet; unlike the literal dollar, real estate doesn’t lose value to inflation over time. Plus, real estate investing is a tax savvy way to diversify your portfolio, as there are many write-offs available to you, as well as other benefits. And don’t forget the largely passive income boost! Where do I sign up?
However, there are many ways to invest in real estate. You could buy a house or a condo, and rent it on a yearly lease. You could also rent a whole house or individual unit as an AirBnb or other short-term rental. That said, there are other ways to invest in real estate without becoming a landlord or host of any kind! Let’s take a closer look at each of these possibilities to get a better idea of what might work best for you.
Perhaps you’re thinking, “Owning my own home is stressful enough!” If you don’t want the added responsibility of being accountable for the functionality of somebody else’s living space–or the anxiety of finding a tenant who will treat that space kindly–then you may want to eschew purchasing an investment property altogether. However, you can still invest in real estate by purchasing shares of a real estate investment trust (REIT). REITs are companies that own, finance, or manage various properties; they pay the majority (90%) of the rental (or other) income out to the investors who finance them.
With an REIT, you benefit from capital appreciation and receive dividends. (Note, however, that those generous dividends are in fact taxed as ordinary income). And in addition, because a single REIT has a large variety of properties in its portfolio, your shares are automatically diversified. That diversification cuts down on the risk, as it spreads your figurative financial eggs into many, many baskets. However, REITs tend to perform poorly when interest rates are high, and can sometimes be at the mercy of real estate trends over which you can have no control. (Consider the increasingly defunct suburban shopping malls, for example).
While purchasing shares in an REIT doesn’t come with the responsibilities of being a landlord, there are still risks and potential pitfalls.
Renting Out an Investment Property
Let’s say that you aren’t at all discomfited by the idea of taking on additional landlord responsibilities. Perhaps your family has outgrown your current home, and you think it might be worthwhile to rent it out after you move, rather than sell it. If you don’t relocate to another locale, you can keep an eye on the property and be fairly available to your tenant. Or, you might have your eye on a particular property–say, a condo in the increasingly trendy downtown area, or a duplex near the local university. What are the benefits of such an arrangement?
You could see a return on investment (ROI). Think about it; over time, the rents you collect can pay off the mortgage and account for any maintenance costs. Once you’ve paid that mortgage, those monthly rents go straight into your bank account, saved for a rainy day. That’s the obvious perk. There are also some tax benefits, like the ability to deduct your insurance, mortgage interest, maintenance costs, and other ordinary and necessary experiences.
However, leasing a property to a tenant has some inherent risks involved. Despite the careful language you may place in the lease, there’s no guarantee that a tenant is not going to be destructive or irresponsible. You might require them to put down a security deposit; however, if they don’t pay their rent on time, chain smoke in the living room, and have a secret cat who destroys the carpets, that probably won’t be much consolation.
It’s also important to note that a rental property is not a liquid asset. In other words, you can’t just cash it in, on the spot, if you need money. It can take months to sell a property–plus, you’ll incur taxes on the profit!--and you can’t eject a tenant before their lease expires just because you have a sudden expense. You may also experience difficulties with unexpectedly rising taxes and insurance premiums, or a swift shift in neighborhood desirability, that makes the asset much less lucrative.
Don’t forget, too, that you may find yourself driving across the city at two o’clock in the morning to deal with a heater that stopped working. If you hire a property manager, it can save you such headaches; however, that convenience can cost you between 8-12% of the monthly rent.
While renting a unit or a house on a yearly lease will grant you regular income, converting a space into a vacation or temporary rental–for listing on apps like AirBnb or Vrbo–is increasingly popular. In 2021, worldwide revenue for vacation home rentals totalled a staggering $57.94 billion! Though AirBnb (and Vrbo, for that matter) charges a service fee, the platform takes care of payments, and markets the property. And you wouldn’t be a landlord per se, so much as a host–you can take however many bookings as you want, instead of being on call 24/7 for a tenant.
There is also more flexibility in short-term vacation rentals. While a lease locks a tenant into a specific monthly rent for an entire year, you have the ability to change your prices for an AirBnb based on a variety of factors. Friday and Saturday nights, for example, might be listed as a higher rental price; summer months could cost more than the dead-of-winter (unless your property is near fabulous skiing, of course).
Although selecting a responsible long-term tenant can be tricky, you take that risk hundredfold when you imagine how many renters with whom you might contract via AirBnb. Unless you especially wish to go this route, you might run into trouble with those seeking a so-called “party house.” If that happens, you will be responsible for getting the space spick and span again–including replacing any broken furniture!--in time for your next rental.
Speaking of furniture, a considerable added cost to running a short-term rental is the need to furnish and stock the space. Since one of the major perks for many vacationers to renting a home or apartment unit is the use of a kitchen, you will need to remember to include basic dining and cooking implements, as well as pantry ingredients. A long-term tenant will bring her own furniture and buy her own toilet paper; you will have to purchase the entirety of both for an AirBnb. And since the competition can be pretty high, you won’t want to skimp, either. Attractive rooms and luxurious furnishings are increasingly the mainstay of short-term rentals. Haven’t you ever searched for an AirBnb that specifically had a hot tub?
If you want to list a short-term rental, you will need to diligently look into your city’s laws and regulations. Some may not allow them, and others will require a permit–and if you see fit to skip the latter, you may be looking at an enormous fine. In many cities, AirBnbs are seen as a vanguard of gentrification and propagator of affordable housing shortages; therefore, cities from New York City to Plano, TX, and New Orleans to Morristown, VT are combatting the prevalence of short-term rentals in their vicinities. With the situation in flux, it may not be an ideal time to dip one’s toe in the water, so to speak.
If you’re considering a real estate investment of any kind, you’ll want to go above and beyond doing your due diligence. Like many things in life, there is no one-size-fits-all model for real estate investment. Obviously, any type of large investment is a huge decision which necessitates a gargantuan amount of research. Whatever investment pathway you pursue, a Unison equity sharing agreement may help secure the starting capital you need to diversify your portfolio.
Our equity sharing agreements are designed to empower homeowners like you to live the life they’ve always wanted, by giving them a liquid slice of your home equity in exchange for a percentage of your home’s future change in value. Unlike a HELOC or home equity loan, we don’t require monthly payments or charge interest–that means no added debt! Unison does have an owner-occupancy requirement,so if you are interested in liberating the equity in your home to fund an investment opportunity, know in advance that you will need to occupy that home at least 180 days out of every 365-day period and must never be away for 60 consecutive days.