By Natalie Campisi Bankrate.com
WWR Article Summary (tl;dr) Before you consider becoming a landlord or Airbnb host you may want to consider a few important steps to limit liability. Those who have been there and made plenty of mistakes say, "put everything in writing, leave nothing to the imagination."
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, 3-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-dollar 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.
1. Put everything in writing, 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.