(TNS)—On a corner lot, surrounded by lush live oaks and Florida-style bungalows, sits Jonathan Wilson’s first real estate investment: a 2,100-square-foot, bone-colored duplex. The area was a big draw for Wilson. Seminole Heights is part-hipster and part-historic, as one of Tampa’s oldest neighborhoods and home to local breweries, art galleries and yoga studios.
Some 2,400 miles due west in the Mojave Desert is a multi-colored spectacle, called “Rancho de Colores,” one of the most popular Airbnb listings in Joshua Tree, Calif. The 1,500-square-foot, three-bedroom house, painted in blazing reds, oranges and greens, stands out among the placid chestnut-colored playas of the desert. Popular among Pinterest and Instagram enthusiasts, it was conceived by artist Patrick Hasson.
Located on opposite coasts, in contrasting environments and rented out via different channels, these two properties share one important feature: They’re both part of a long-term personal investment strategy.
Wilson and Hasson each wanted a way to create security for themselves in a time when few employers offer pensions and most people must rely on their own savings to keep them afloat in their later years.
“In 2013, I was living in Los Angeles. I realized then that I’d never be able to afford a house in L.A. unless I hit the lottery. I thought, ‘I don’t have a pension. I don’t have a retirement. What do I do?’ I had already been interested in Joshua Tree, so I started asking people how much they paid for their house,” Hasson recounts. “I bought my first house in Joshua Tree for $73,000 in 2014. I was excited I had a house, but now what?”
An Airbnb in the Desert
Hasson batted around the idea of renting the house which, he figured, would bring in just enough to cover the $600 monthly mortgage payment. He wasn’t keen on managing tenants, however, so he decided to try the Airbnb option.
The house he bought was once home to meth dealers, so to communicate that the house was under new ownership—and to deter meth seekers from stopping by—Hasson painted the house in vivid colors, using a rainbow theme throughout. Ironically, this eye-catching palette was a hit with Airbnb renters who wanted a great deal in a unique space.
The experiment worked. Airbnb was generating enough income that Hasson was able to buy a second house in Joshua Tree, on three acres of property, as well as a trailer. He moved to Joshua Tree full-time in 2016 and now rents out the trailer, dubbed “The Color Trip Trailer,” and continues to Airbnb what he calls Rancho de Colores, while living in his second house, which de named “Rancho El Reposo.”
A Duplex in a Booming Neighborhood
Like Hasson, Wilson wanted to invest in real estate as a way to help secure his future. He knew he wanted to buy property that could accommodate him and a tenant, but he wasn’t particular about what form that took, as long as the location was desirable and the price was right.
“I was very flexible in what I was looking for. I was looking for something that had a mother-in-law suite or an extra lot. And when this came up, it was a perfect fit,” Wilson says.
Wilson originally offered $225,000 with no contingencies for the duplex with a two-car garage, but the owners passed in favor of a cash buyer. When that deal fell through, Wilson ended up getting the house for $210,000. It had tenants in place, so he was able to generate income from one unit immediately, while moving into the other unit.
He plans to convert the two-car garage into another rentable space, which would cost him about $30,000 and add approximately $150,000 in value, he estimates.
For both men, buying real estate as a way to generate income was a new venture. Neither had deep pockets, a background in real estate investing or a huge nest egg to fall back on, and they both admit to making mistakes along the way.
And they’re not alone. More than 33 percent of renters live in single-family homes, which are largely owned by individuals like Wilson and Hasson, rather than corporations or banks. This is a $2.3 trillion industry, according to a paper by the UCLA Anderson School of Management.
Single-Family Rentals Are Historically Good Investments
It turns out, however, that investing in property was a good decision. A recent study by Andrew Demers, a real estate specialist at Structured Portfolio Management, and Andrea Eisfeldt, a UCLA finance professor, shows that the yields of single-family rentals are on par with stock market returns.
The pair examined the net yields and price appreciation of single-family rental homes in the 30 largest metro areas between 1986 and 2014. Separately, net yields resulted in a 5 percent return while price appreciation accounted for a 4 percent return, on average. However, both factors must be looked at to get an accurate picture of value, argue the researchers.
Both factors combined averaged a 9 percent annualized rate of return. Compare that with the S&P 500’s annualized long-term rate of return of about 10 percent and investing in single-family rentals doesn’t seem like such a bad idea.
The ratios of the total return, the study found, depended on the price range of the house. For example, the top 20 percent most expensive homes made the bulk of their profits from price appreciation, around 5 percent, whereas net yield only made up about 3 percent.
The reverse was true for houses in the bottom 20 percent. In that case, net yield was the big earner at around 6 percent and appreciation only brought in 3 percent.
Ultimately, the lower-priced houses fetched more overall—earning a total of 9 percent, compared with 8 percent from the more expensive homes. That would mean people who want to earn more today should invest in a less expensive house, whereas those who are looking for a windfall when they cash out should consider more expensive homes.
What to Consider Before You Become a Landlord or Airbnb Host
Wilson and Hasson both cite mistakes they made when they first began renting their property. The main takeaways from both of them is to limit liability, treat others fairly and spend every dollar on repairs and upgrades wisely.
- Put everything in writing and leave nothing to the imagination.
If you’re renting out your home, then you’ll want to have a well-articulated lease in place. This should include when rent is due, when the lease expires, what the property owner is responsible for and what the tenant is responsible for, including lawn and large appliance maintenance. Some places require tenants to care for amenities like pools and Jacuzzis.
“Everything should be spelled out in the lease. You want to eliminate any risk of ambiguity,” says Joe Santoro, founder of Personal Property Managers in Pennsylvania.
The best way to ensure your lease is well-written and amenable to both parties is to have an attorney review it.
For an Airbnb rental, the rules are different. Hosts can ask their guests to sign a contract prior to renting their house, which is a good idea for a number of reasons. First, Airbnb offers a type of insurance called a “Host Guarantee,” which is a good start, but it’s not comprehensive.
This guarantee covers damage to your property up to $1 million, with photo evidence and receipts required to proceed with any claims. However, there are conditions. This guarantee doesn’t cover damage caused by pets and limits coverage for art and collectibles, for example. For people like Hasson, who don’t allow pets at their property, creating a contract that discloses this rule is important.
- Screen your tenants.
One key to minimizing risk is knowing who is occupying your space, Santoro says. A minimum screening is essential, but a more thorough background check which includes credit history, employment history, criminal infractions and past evictions is even better.
Deeper dives into a tenant’s background, as opposed to a simple credit report, are costlier, between $100 and $150, but can be a worthy investment in the long run.
“It’s better to get the right person in than to try to evict the wrong person. Evicting someone can be a long process. Every day that your house isn’t rented is another day you’re losing money,” says Salvatore Friscia, managing broker at San Diego Premier Property Management.
With something like Airbnb, hosts can check guest reviews, look at the guests’ Airbnb profile and communicate with the guest within the Airbnb website. Airbnb offers several features such as social connections, which allows guests to add their Facebook profiles, and verified profile statuses. To get verification, users must submit identifiers such as their Facebook profile, phone number, email address or government-issued ID.
- Nix the expensive stuff.
Unless you’re catering to a high-end clientele, you don’t want to sink all of your capital into marble countertops and amenities. Adjust the amount of money you spend on fixing up your rental or providing amenities to the price point.
For example, if your Airbnb is priced at $400 per night, then you’ll probably want to include a few extra treats, such as wine and late-night snacks.
However, for hosts like Hasson, who cater to budget-minded crowds, those bottles of wine can add up.
“When I first started, I’d put different color M&Ms in different dishes and leave a bottle of wine. After a while I was like, ‘What am I doing? This is expensive,'” Hasson says.
The place to splurge in an Airbnb, says Hasson, is the bed. Save money on fancy appliances and expensive furniture and put those savings into a good mattress, 500-thread count sheets and a nice comforter. Unhappy guests are guests who didn’t sleep well, Hasson points out.
Likewise, if you’re renting your home at a low- to mid-level price point, you can get away with putting in less-expensive countertops. When Wilson bought his duplex, he had to change the fixtures and he opted for the most budget-friendly ones he could find for the rental unit.
“I want the property to look nice, but I also don’t want to spend a lot on upgrades,” Wilson says.
- Treat your renters with respect.
The golden rule might be the most effective mantra when it comes to renting your space.
What people don’t realize, says Santoro, is that tenants have rights. He says that many property owners are under the false assumption that because they own the real estate they can show up and even go inside whenever they want. Not only is that illegal in most cases, but it can make for a poor relationship.
“My advice is to be polite. Treat your tenants fairly. You want to give them at least two or three days’ notice before you come over, even if you live on the property. This kind of respect goes a long way,” Santoro says.
When it comes to repairs or problems with the house, be expedient. If you don’t live near the property, then you’ll want to find someone you trust who can do repairs quickly. That said, Santoro warns against would-be landlords who rely too heavily on third parties to do repairs.
“If you want to make money off renting your house, then you have to be able to do some things yourself; otherwise, those little fixes and paint jobs will eat at your profits,” Santoro says.
©2018 Bankrate.com
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