Back in July 2022, we purchased our lake cabin back in my home town of Cumberland Wisconsin, which we wanted primarily for personal use, but then decided we could off set costs by operating it as a short term vacation rental. After not spending as much time there as initially planned, and the fact that it wasn’t a lucrative investment, we decided to sell. However, as we plan to invest in real estate again someday, we wanted to share with you the considerations we will ask ourselves beforehand the next time around. I hope you can use these questions in your favor to determine if real estate investing is right for you.

👉 Short Term or Long Term Renting: A question you'll want to ask yourself upfront is do I want to rent out the property short term (aka vacation rental, generally less than 30 days) or long term? How to come to this conclusion is to understand the pros and cons of each.

For a short term rental, while it may be more lucrative (highly dependent on the home and location), you will need to pay significantly more upfront costs which can be risky if you don't have the cash flow to support. This includes furnishings and amenities (think towels, sheets, dish soap, etc.), paying for marketing to bring awareness to your vacation rental, costs to secure permitting to rent, and fees for a hosting company to support you if you're not in the area or don't have the time. There is also more lag time if you're not already buying a turn key vacation rental, so make sure you bake in the additional overhead for carrying costs before you're able to begin taking in earnings. I would suggest this can take roughly two months if you move quickly to get the place in working order, furnished, photography, listing site up, etc. You can also be limited in the options available to you as an investor on the search for a vacation rental. For example, some cities now have strict rules on vacation rentals, and condos are creating guidelines limiting them as it can be off-putting to have a vacation unit next to long term tenant in the building.

For a long term rental, there are less upfront costs associated, so less risk than a short term rental, however, your monthly net earnings are generally less. The way and tear is often not as significant as a vacation rental if you secure the right tenant, and the turnaround time is often quicker if you purchase a turn key property, so you have less carrying costs.

👉 Calculating reserves I think real estate is an incredible investment, especially when you're planning for the long run, and I thought this long before I was even a Realtor myself. You can eventually get to a place with your real estate investments where your mortgage is paid off, the property is appreciating, and you're earning cash flow monthly. However, in the beginning it is important to know your numbers, as it is crucial that you have reserves available to make this work in your favor. I suggest starting out your real estate investment search by running a cap rate (Capitalization Rate = Net Operating Income / Current Market Value) on any property you have your eye on. It is important to analyze the numbers from a worst case scenario basis to ensure you can cover any unexpected costs, regardless if you choose short term or long term renting. For example, when the home needs repair, or the lag time between renting out. To determine your estimated earnings to better understand your capitalization rate, here are some options for each:

For a short term vacation rental, I suggest reaching out to a local vacation rental management company, and asking them to calculate based on the numbers they see. Most of them offer this service complimentary, as they would love to earn your business if you decide to move forward. This will give you a good idea on vacancy rates and your average nightly rate. If this isn't available in the area you're looking to purchase, you can look on sites like Airbnb and Vrbo, to see what homes of similar specs are going for nightly, and what their availability looks like. Again, I would error conservatively on the numbers if you're not completely sure.

For a long term rental, I would suggest partnering with a local Realtor to gain insight, or you can look at similar properties that have recently rented in your same area for how to price it, and for how long it was on the market for. I wouldn't suggest looking at what is listed for rent, as that is not an accurate representation of price, since they could be listed for over market.

👉 Where should I buy? This depends on if you plan to use this for personal use as well, or if it is strictly for an investment. If for personal use, you'll want to default to a short term vacation rental so that you can use it when you'd like, and then secure it in a place that you either personally enjoy, or that has a healthy tourist attraction. If you're only looking to invest, it will just come down to the numbers. You'll want a strong cap rate (5% or more), and something that doesn't have harsh weather conditions as this adds to your overall costs (think having to plow snow, or make repairs due to hurricane damage.) Also, looking for properties that are located in a high rental areas like college towns can ensure you'll be able to rent quickly at a good rate due to overall demand.

👉 Condo vs. Detached Home? As always, there are pros and cons to each. A condo can be less maintenance to manage, and offer more amenities like a pool or gym, but the overall appreciation is often less, and don't forget about those HOA fees. For a detached home, you can maximize your earnings by purchasing a multi-unit like a duplex to get double rents for one mortgage payment, but generally houses have more issues like need repair for the plumbing or the roof, and then there is also the landscaping maintenance costs.

👉 Do I have the time? Regardless of which option you choose (short term or long term rental) it is important you have the time to manage or the resources to have someone else do it for you. There is effort and risk required, but if you plan ahead accordingly, the payoff can be significant.

👉 Is real estate the right investment for me? There are so many different investment options out there that it can sometimes be challenging to navigate. I recommend connecting with a financial advisor (I have a great one if you need a referral) to see what options are available for you. Real estate can be a great investment, especially for the long game, but it is a larger initial investment than some other options out there. The benefit to the risk is you can gain overall appreciation, you can pay down your mortgage with the income earned, there are tax benefits, and you can even potentially gain cash flow. You will need to ensure you have not only the start up funds, but the liquid reserves to cover any unforeseen costs. If real estate investing is looking like a potential option for you, I'd love to support you by discussing with you what your options look like, and how to get started, even if it is outside of San Diego area. Reach out to me to schedule a complimentary consultation.