long term rental

Short term pain-Long term gain

by John Rice

I was showing one of my rental houses to a prospective tenant yesterday. This young lady said she was torn between buying and renting.

Know what I told her…..while she was standing in my house which was for rent?

I told her to buy a house if she could. I said that I think right now it seems scary and might not be any fun to have such a high interest rate, but in 5 years, she will surely look back and be glad she had bought something.

Why? Because history shows us that rates won’t stay high forever. It also shows us that prices won’t stay where they are right now forever. The odds are very strong that you will one day be able to refinance and the odds are even stronger that prices will at minimum rise slowly over time.

Also because when you are paying rent, you are paying down somebody else’s mortgage and are getting absolutely nothing in return other that getting to live somewhere for the next month. When you buy a house, at least part of your payment goes to building equity in an appreciating asset. Then, too, there is the fact that the principal and interest portion of your mortgage payment will NEVER go up, unlike your rent.

About the only time I advise people to rent is when they know they will not be in a house for more than 3-4 years. If you know you will need to move again in that short of a time, you may come out ahead by buying but the difference is so slim that it may not be worth the risk.

So pretty much, I told here that buying right now is a short term pain, but a long term gain. For her own sake, I hope she can buy a house.

Airbnbust?

by John Rice

One of the most valuable lessons I learned from my dad is how cycles work.

I remember one of the first times I ever thought about such things was when we lived in a starter home neighborhood in Frankfort. I remember him telling me that the houses in our neighborhood would eventually get run down because everybody who buys such an entry level home only plans to stay there for a few years. You don’t do a room addition, kitchen renovation or anything when you’re thinking so short term. Forty years later, the neighborhood is pretty run down. Houses only got fixed up when the values got so low that an investor could buy them cheap enough to make a profit.

Another thing I learned about cycles is to expect them. There will be good times. There will be bad times. Most people view the good times as the norm and are shocked when bad times come.

We are there now with the short term rental market.

Over the past few years, I’ve had several clients ask me about getting into the STR (Short term rental) market. I have always been cautiously optimistic. I tell them sure, you can make some money, but have a backup plan because one day, the market will be saturated and/or demand will not be as strong. We had several things line up perfectly all at once to create the buzz for short term rentals. We had many people wanting to travel after the pandemic, we had a robust economy, and we had people eager to try using an Airbnb. I knew that would not last forever, especially with so many so eager to buy a house and use it for short term rentals.

The downside of the cycle is happening now. I am on a facebook group for real estate investors. Just about everybody is saying their bookings are waaaaaaay down compared to last year. We have several things that have lined up but none of them are good: Everybody travelled a lot after the pandemic and demand is down, we have a not-so-robust economy, and people are a little more cautious of short term rentals (Excessive fees, terrible hosts, pretty houses in scary areas, etc.)

In time, demand will pick up. Those who were merely Airbnb hobbyists will get out of the market leaving only those who view it as a serious business. This is part of a cycle too.

So what’s my advice to anybody wanting to buy real estate for STRs? Have a backup plan. Make sure the numbers also work as a long term rentals. Be ready to pivot when needed. Buy a property that is a good investment. Don’t buy a terrible house in a slummy neighborhood where the only desirable feature would be your trendy decor. Have an exit plan because one day you will be as excited to sell your property as you were the day you bought it.

Good time to buy rental property?

by John Rice

I get asked this quite a bit. Some people want a long term rental and some are interested in airbnb-ing a property.

Here is the one single thing to know when considering any type of rental: There is no good or bad time. The numbers work or they don’t. If the numbers don’t work it, they don’t work even if it is a Buyer’s Market. If the numbers work, then you buy regardless of what the market is like.

What do I mean by this? Long story short, the house has to support itself without you having to throw in your own money every month. That is called cash flow. Positive cash flow means the house supports itself. It covers your mortgage, taxes, property insurance, maintenance and has at least a little left over for a profit. Negative cash flow is when the expenses exceed the rent.

Now, what about Long Term Rental verses Short Term Rental? I personally think Short Term Rentals are risky right now. I know, I know…..Many of you have made good money with your Airbnbs the past couple of years. I do not dispute that. My concern is that this trendy investment option will get oversaturated AND slow down drastically during tougher economic times. It is much more volatile than long term rentals. If you want a shot at huge returns and can stomach volatility, it’s easier to invest in stocks. So what I tell people when they ask me if they should get an Airbnb is to do it only IF they want to invest in real estate in general. If you do, then you can switch between short and long term rental as demand swings. Move your furniture out and you’ve got a long term rental. Best of both worlds for you.