#111 An Intro To Short-Term Rentals

Welcome to the Passive Income MD Podcast where we talk about creating your ideal life through multiple streams of income. I'm your host, Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now let's get on with the show. Hey everyone, hope you've had another great week. This week we're gonna be talking about short term rentals. Now, if you've been following my blog, you've been on our Facebook group. You know that I've been talking about my first venture into short term rentals. It's something that I picked up last year, which is 2021 in November. It's been a fun project. I've learned so much from it. I shared a lot of it in a blog post that I did recently. Something about seven things I've learned from investing in a short term rental. Go ahead and check that out if you're interest in this episode. I thought we just kind of do a primer on short term rentals, talk about it kind of as a asset class, talk about it overall, about some of the benefits and why people are getting into these things and just, and just provide an intro into all of this. Now, over the past few years, I'm sure you've noticed short term vacation rental platforms like Airbnb and VRBO as they now call it, they've been tremendously popular. I mean, in fact, they've been more popular than years ago a lot. Because especially with everything happening in the pandemic, people were staying closer to home. As you know, short term rentals can be cheaper than hotels. They provide plenty of space, especially if you've got a family, you're traveling with other people. Oftentimes they're a lot more conveniently located depending on where you're trying to be. In fact, as you know, many vacationers, they're not even looking at hotels anymore. They're going to one of these platforms exclusively to find a place to stay. And again, everything happening over the last couple years, people liked kind of having these private properties, then maybe staying in a larger hotel with a ton of other people. And it's been very interesting to see the shift in mentality when it comes to vacation and staying in different places. Now that's great for the consumer. You've probably booked a place yourself, like an Airbnb. Let me know if you have. But do short term rentals really provide a great opportunity for you as an investor as well? Well, that's the question. And with anything, there are a ton of Factors to consider. But there are some major perks to investing in short term rentals, even over traditional long term rentals, like owning your own apartment buildings or condos, whatever it might be. I mean, one of the benefits we're going to talk about later, just one of the big major tax breaks that might come your way, especially if you're a high income professional. You may have never considered it, but let's talk about that today. So let's jump into why a short term rental might just be the thing to add to your portfolio. Now, one of the major reasons is the profit that comes from these things, the nature of these things, these short term rentals means that what you charge in rent, it's really flexible. You know, traditional long term rentals, like single family homes, apartment buildings, whatever it might be, they do provide consistent monthly cash flow, but that depends on how much you charge. And it's based on many factors including the local market average. And typically you are doing these for a longer term, so you're kind of locking these things in place for a longer term. Now with a short term rental though, most people understand that they're willing to pay a premium price for a shorter stay. This means that potentially one or two tenants a month could bring in more profit than a traditional monthly rent payment. And it's also based on demand, meaning that if the area is more popular, the rent can go up, meaning that if it's a holiday or if there's a special event in that time, then the rent payments can be flexible and can be dynamic in terms of their pricing, which can actually lead to a lot of profit for you as an investor. I mean, example, if you have a rental property within, let's say an hour's drive of like a national park, for example, a traditional rental property might bring in about $1,500 in rent, for example. But you can make so much more from that, from a single five night stay, for example, listed on Airbnb. And obviously the closer you are to the park, whatever it is, that price goes up during holidays, price goes up. Now, the same again goes with cities that have popular college football teams, nice tourist attractions, or just like locations with good year round weather, like around the coast, or these type of things. Now the flip side of all that is that even though you do make more money, let's say from a single tenant or single stay, your rental property could go vacant for several days, maybe even weeks at a time. And this can potentially eat into those profits. So that means that running these short term rentals does Require a bit more hands on management than traditional rentals. I mean, not only are people coming in and out, tenants are coming in and out. So there's more turnover, perhaps more damage, more things that need to get fixed, there's cleaning and things like that. But then also the marketing side of it, meaning that you're not just getting a tenant for an entire year and you can just kind of set it and forget it. You actually have to go and advertise and market these things and have people book many times over a month for you to actually gain that profit. So that's one side to consider. However, putting that all together, if you've got a good short term rental and you can find good property management for it, the potential for cash flow versus a long term rental in the same area, the potential is much higher. And I think that's where so many people are seeing the benefits of having a short term rental. So I know I've been using the term profit, but another way to think about it is cash on cash return. Now what is cash on cash return? We've talked about it before, but it's about what kind of return or what kind of profit are you getting based on the amount of cash that you initially put or invested into the deal. For example, yeah, it's great that you make a thousand dollars in profit a month, but depends on how much money you put in to get that thousand dollars. And so that is really determined by the cash on cash return. And so for long term rentals, that cash on cash return tends to be a little bit lower, seems to be a little bit more squeezed. But with short term rentals, it's possible that that cash on cash return can be so much higher. For example, in the area that I have my short term rental, I would say if you are a long term tenant, a landlord getting a 5% cash on cash return, even making profit at all can be very difficult unless you put a large down payment down. This is because it's a high cost of living area. However, if you have a short term rental, it's not uncommon that you can get 10% on your money per year just by having that short term rental. And this is in the exact same area. It just has to do with the economics of a short term rental and how things are renting for and all those levers that you can pull to increase demand and increase prices. Another factor to consider is control. Now with a long term rental, most tenants, they're allowed to make small but nice impactful changes to the property. And this can include things like painting the walls, mounting TVs, adding a playset in the backyard and things like that. Now, with a short term rental, you are in complete control of the property, including its appearance. Tenants are not there to make changes, they're there to just enjoy what you've provided for them. And some of the tenant laws that are in place, especially some of the places that are a little bit more restrictive in terms of their landlord tenant laws, like where I live in California or maybe on the coast, when it comes to short term rentals, the landlord tenant dynamic is quite a bit different in the laws. And in terms of the tenant rights aren't necessarily the same as they are for example, again where I'm at. So you get a lot more control in that way. It's possible that might add some peace of mind for you and knowing that if the tenant things don't go well, you can kick them out per policy if you're not listening or they're going to be gone in a couple of days anyway so you don't have to worry about it. And with that short term rental, knowing that you could make it into a long term rental if necessary, or go ahead and sell it, it just seems like you have more outs, you have more options. And for people who really want that control, sometimes that's a really nice benefit of having a short term rental. Hey everyone, real quick, are you going to be joining me for the Financial Freedom Through Real Estate Conference 2022 in Los Angeles on September 23rd through 25th? It's also known as PIMDCON. It's a conference we put on every year and it's the largest real estate investing conference for doctors and high net worth individuals. It's your opportunity to network with others, learn from 30 plus experts in the areas of real estate. We're going to have Brandon Turner, who is the host of the Bigger Pockets podcast, as our keynote speakers. And again, there's going to be tons of other doctors who have created Freedom through Real Estate who are going to be there to share their knowledge. It's going to be your chance to network with others who are like minded and trying to go for the same goal of financial freedom. It's a ton of fun and I will tell you it's going to be a high yield event. I'd love to see you there. Definitely check it out in person. There are limited seats left. You can find out more info@www.pimdcon2022.com. Look forward to seeing you there. Thanks. If you own any Rental properties. You're probably familiar with taxes and a lot of the benefits of owning real estate. So we'll be talking about tax benefits now. Now, when utilized correctly, real estate, I believe it has some of the most powerful tax benefits available to us as high income professionals. We all know that taxes are our greatest costs. Being able to keep more at the end of the day, utilize that to grow and create more wealth, that can be an extreme benefit and it's something that can compound really quickly over time. Now, I know many of you investing in real estate and you've heard of these things called passive losses by using something called depreciation. If you're not familiar what that is, I've talked about it in previous podcasts before. And the problem with having a day job and having your doctor job being your primary source of income is that you can't often use some of those tax benefits that you get with real estate to offset your day job. I mean, that'd be the holy grail to most people to use the tax losses, at least the paper losses created on your real estate side to offset a lot of your day job income. So you have to pay less in taxes. Now, you might have heard me talk about this thing called real estate professional status, where if you qualify by the irs, there are certain qualifications about spending more time in real estate than you are in your day job, which is pretty tough for a lot of doctors out there. You're able to take some of these passive losses and offset that day job like we talked about. But for a lot of people, that's just not practical for you or your spouse and partner to be able to do that. However, when it comes to short term rentals, there is an exception. Some people like to call it a loophole, I just like to call it an incentive. There's this rule called the IRC section 469 which states that an activity isn't considered rental activity if the average length of the stay is seven days or less. So what does this mean? It means that with a short term rental, if your stays, or if the length of stay for people coming in is seven days or less, the IRS oftentimes can look at this thing as not a real estate play perhaps, but more like a business, like an active business. So it's possible again, if you do certain things and you qualify in the right sort of way, meaning you spend a certain number of hours, you spend a certain amount of time on it more than everyone else, you're able to deduct those losses that are created on that real estate, on that short term rental, and then use it to offset your active day job income even without being a real estate professional. Now I've seen people use this to great effect, especially high income professionals like physicians. This is a huge advantage. I've seen physicians be able to write off several hundred thousand dollars of losses using these short term rentals to offset their day job income and reduce their taxable income quite significantly. It can be really powerful. And so when tax time comes, the ability to again take that deduction, take that depreciation from your real estate properties, it just means you're going to pay so much less to the government at this time. Now there could be a time later on where you have to pay some of that back, but that's years down the road and that may not even happen if you structure things correctly. So that can be extremely powerful. All right, so we've talked about short term rentals, we talked about profit, we've talked about control, we've talked about tax benefits. So if you're someone who is looking to create these income streams that are cash flowing to help replace some of your income, all of your income, whatever it might be, short term rentals can be a powerful way to really juice that, to get that going pretty quickly, not only in the profit side, but also on the tax savings side, which can ultimately help you create that wealth in a pretty quick fashion. Now, as you know, every investment comes with risk. The biggest one, especially short term rentals, has to do with the economy. After all, most people really seek out these short term rentals for vacations. And so what is going to happen over the next year or two? The economy already is slowing down. There are signs everywhere you look in terms of the media talking to other people, there's a lot of pessimism out there right now. So the question is, are people going to be going on vacation? Is the short term rental market going to get hit quite a bit? Are vacations the first things that get cut from a budget? So what happens in these times? Now I will say that I've done a lot of analysis on this. I've talked to a lot of people in the industry. Now there are differing opinions, but one thing I have heard from people is that especially for the high end short term rental market, that area is expected to continue to do well. It means that people who typically go on more lavish vacations will still be going on vacation. But maybe they do it locally, maybe they do it somewhere within the states, maybe it's somewhere that they can drive to. So if you can choose a place that still does well in terms of the economy, in terms of vacation, in spite of the economy and you, you can find those places, you can find metrics on that. You can find and talk to people who have been in this market, in terms of the hospitality market for a while and see where the trends are. If you can find something like that that will significantly help your investment and that might be a safe place. Safer place I'd say to buy a short term rental, put it in place now. I would also recommend that doctors, you don't manage these types of places yourselves now you're a busy professional. Your time is worth way more than the hassle in my opinion. If you think managing your own long term rentals is difficult, it can be difficult managing your short term rentals because of the number of people you have to talk to, all the turnover, all the cleaning and things like that. I would say factor the cost of management into your numbers. Whenever you do any sort of analysis, make sure that it still creates a great profit for you on top of that. So in order to make the best decision, whether a long term rental, a short term rental or a passive investment, ask yourself how comfortable you are with this level of risk, how hands on you want to be. Because when it comes down to it, again, short term rentals do require more attention but they can be even more rewarding in terms of profitability. And honestly I love having a short term rental because my family can use it. Also, it feels nice to have some sort of hospitality, you know, type place where people can come and stay and there's some pride of ownership there. It can be a really great thing and I've seen it work well for me. I love talking about this topic. I wonder if you've ever considered short term rental property. Let me know. Did you go for it? Do you have one? Let me know just by responding to us, emailing us. I'd love to hear about your experience. Let us know in the Facebook groups and let's talk again soon. Thanks. Enjoy the show. Let me know by dropping a review in the podcast app you're listening to us in. And if you haven't already, make sure to hit subscribe. Are you a part of our community yet? Join thousands of physicians who are also on this journey to creating their ideal lives through multiple streams of income. You can join us on our Facebook group Passive Income Docs and you can always learn more at our website. Passive Income md Thanks again for allowing me to be a part of your journey. See you next time.