[Read A Bit Blog] Real Estate: Smart Investment Choice
Have you tossed around the idea of investing in real estate? Real estate can be a smart investment choice.
The residential rental market is now the fastest-growing segment of the housing market. In the United States, the demand for single-family rentals has risen 30 percent in the past three years.1 In Canada, rental units now account for nearly one-third of the country’s homes.2
At the same time, the short-term, or vacation, rental market is also booming. 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.
WHY INVEST IN A RENTAL PROPERTY AT ALL? The Top 5 Reasons
There are five key reasons investors choose to own real estate over other investment vehicles:
Appreciation: 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.
Cash Flow: Rental income can be used to pay the mortgage, taxes, 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 grow your savings.
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.
Hedge Against Inflation: As inflation rises, the money you have sitting in a savings account will buy less tomorrow than it will today. 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.
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.
Tax Benefits: Don’t overlook tax benefits that can come with a real estate investment. 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.
LONG-TERM (TRADITIONAL) RENTAL MARKET
Traditionally, investors use their rental property to generate an additional stream of income while benefiting from the property’s long-term appreciation in value.
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. Traditional tenants generally translate into less time and effort spent on day-to-day property management. Long-term rentals are an attractive option for many investors.
Limitations to long-term rentals:
The most obvious one is that you do not get to use the home or closely monitor its upkeep.
In addition, 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.
SHORT-TERM (VACATION) RENTAL MARKET
Short-term rentals are often referred to as vacation rentals. In fact, according to Wells Fargo, vacation rentals are steadily growing and predicted to account for 21% of the worldwide accommodations market by 2020.4
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 a steady demand from travelers. And during non-rented periods, you enjoy the home yourself. In addition, you can also adjust your rental price around peak travel demand to maximize your returns.
Risks and drawbacks of short-term rentals:
They require greater day-to-day property management, and owners are typically responsible for furnishing the property, upkeep, and utilities.
Rental revenue 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. So make sure you understand any existing or proposed restrictions on rentals in the area where you want to invest.
WHICH INVESTMENT STRATEGY IS RIGHT FOR YOU?
If your goal is to generate steady, predictable income with less time and effort spent on property management, or 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.
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!
NOTE: The above references are 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: USA Today | 2. The Globe and Mail | 3. Phocuswright | 4. Turnkey Vacation Rentals
