Airbnb, along with other vacation rental sites, have caused an explosion of short term rentals across America. As a result, many investors are now considering this as an avenue for earning additional income.
Recent growth in the short-term rental economy underscores why it’s essential to do your due diligence before entering this field. Rising interest rates are also having an effect on this market, so it’s vital to comprehend how they’re altering things.
Rising Interest Rates Are Affecting Both Positively And Negatively
Rising interest rates can have a major impact on the real estate market. One of the most noticeable ways is by decreasing property values – which may be beneficial for homeowners looking to sell their houses, but renters may find they no longer afford their properties.
Interest rates also have an effect on the real estate market by affecting access to mortgages and other loans. When rates are low, people can borrow money more easily and use that for investing in businesses or developing new products. This could cause a boom in economic activity as well as give business owners the ability to refinance their debt to extend loan terms.
However, when interest rates are higher, it can become harder for people to borrow money and even build new housing units. This could result in a decrease in supply of homes as well as an increase in prices.
Additionally, interest rates can influence how much investors are willing to pay for rental properties. For instance, if interest rates rise by 1%, it could decrease a house’s value by $100 000.
Interest rates rise, making it more costly for landlords to finance their properties. If they can’t bear the increase in borrowing expenses, landlords may opt to pass along the expense to tenants through higher rent prices.
Rents may go up, but this could also make it simpler for landlords to purchase more properties and expand their investment portfolio. Therefore, it’s critical for landlords to be prepared and have a strategy in place before interest rates rise.
Many real estate professionals concur that an increase in interest rates can be beneficial for short term rentals. This is mainly because fewer people qualify for mortgages, and if they cannot obtain loans, they might instead choose to rent out their property.
Another way in which higher interest rates may benefit investors is that it reduces prices. This is because higher rates make it less likely that people will qualify for loans, making it more challenging to locate buyers able to afford mortgage payments.
A rise in interest rates might also motivate homebuyers to purchase rather than rent, as their mortgage payments would be higher and they may not be able to afford owning a property at that price point. This could assist the housing market and make it more appealing for real estate investors as well.
At the end of the day, it comes down to what you choose to do with your money. If you are renting, saving for an attainable home may be wiser if interest rates drop and then use that cash towards buying one.
Alternative Real Estate Investments
Alternative real estate investments, such as self-storage units or vacation rentals, offer investors a higher return than other investment options. Furthermore, these asset classes may help investors diversify their portfolios and reduce risk.
One of the most sought-after and profitable real estate investment opportunities is short-term rental (STR) investing. STRs give landlords the freedom to set rates and lease terms on a temporary basis as tenants move in and out quickly. Furthermore, property owners’ cost structures tend to be lower with this type of investment, potentially increasing profits.
Alternative real estate investments come with certain risks that you cannot control, such as changes in the market and external influences like government restrictions or community opposition. These potential hazards should never be overlooked when making such a decision.
For instance, an increase in interest rates could prompt more tenants to move out of a property and lower rents for landlords. Likewise, a cyclical decline in the economy or financial markets may affect an investor’s portfolio.
Alternative real estate investments can be profitable when done correctly. To maximize gains, investors should thoroughly research and comprehend all available options available to them.
Alternative real estate investors should collaborate with experienced professionals who can guide them toward making informed decisions and avoiding bad investments. Doing this can yield better long-term results and a more balanced portfolio overall.
Starting your investment journey involves assessing your own risk tolerance. Some options may be better suited for investors with high risk tolerance, while others are ideal for those who have low risks.
Alternative investing options include Real Estate Investment Trusts (REITs). REITs are companies that own and manage commercial properties that generate income and distribute it to shareholders. They provide an accessible way for those with little or no experience investing in real estate to take advantage of this growing alternative investment vehicle.
REITs offer an excellent way to diversify your risk in alternative real estate investment and can be started with minimal capital.
While rising interest rates can have a negative effect on short-term rental investments, there are still numerous ways to profit from these assets. Some of the best ways to do this include joining a franchise system, joining a mortgage pool through an MMIC, or purchasing real estate through REITs or ETFs.
Finally, many investors are finding success with crowdfunding. This method allows them to invest in real estate through a crowdsourced model and even earn a portion of the profits.
Alternative real estate investments can be an excellent way to diversify your portfolio and accumulate wealth over time. These assets tend to have lower volatility than stocks or bonds, making them suitable for those seeking consistent returns over the long term.
How To Get Out Of The Short Term Rental Game
As a short term rental owner, it’s essential to have an emergency strategy in case your property no longer generates cash flow. Whether that means selling the investment property to pay off debt or renting through an HOA, having such a strategy in place can help safeguard your hard earned funds and maximize return on investment.
Investors often choose a short-term rental as it offers a higher return than traditional rentals, especially during peak tourist seasons when demand for these rentals increases significantly. Therefore, short-term rentals provide an additional source of cash flow during busy periods.
Additionally, vacation rental properties give you the chance to build a successful portfolio without worrying about long-term management responsibilities. The key is finding suitable properties and charging competitive nightly rates.
To ensure you charge a fair rate for your property, take into account its location, tourist attraction and season of operation. For instance, if the beach destination is popular but winters are cold and rainy, it may be difficult to attract visitors during those months.
Another crucial aspect to consider is the number of other short-term rentals in the area. If there are too many competitors, it could be difficult to attract tourists and generate a positive cash flow on your property.
Therefore, research the market before investing in an investment. To do this, familiarize yourself with local tourism trends for the area as well as review booking schedules of competing short-term rental companies.
Before renting short-term, be sure to research local laws and regulations regarding short-term rentals. Some cities or towns may cap them at a certain percentage of housing stock or outlaw them altogether; for instance, San Diego limits them to 1% of their total housing stock.
Thankfully, many cities and towns are recognizing the financial advantages of short-term rentals and taking steps to enable them. San Francisco for instance allows up to 2% of their housing stock to be rented as vacation homes through Homeaway service. Furthermore, some cities require new construction be designed with rental units in mind.