Real estate investing news and advice!

Welcome to your source for real estate investing news, insights, and guidance.

As industry experts, we stay up-to-date with real estate market trends, and actively work to stay ahead of changing market conditions. We’re excited to share our research and analysis with you! With these market insights, and real estate investing tips, you’ll have a competitive advantage over other investors in your local market.

The topics we cover include real estate news, interesting market trends, buying and selling real estate, and managing rental properties. We also share company news from Gatsby Investment, so you’ll have the inside track as Gatsby continues to expand operations.

Want to learn even more? Click the links to view educational articles, press releases, and explainer videos.

Real Estate Investing Options for Millennials Who Can’t Afford to Buy a Home

Homeownership is a critical step in gaining financial freedom. In fact, a 2021 report by the National Association of REALTORS found that homeowners gained around $225,000 in wealth from 2011 to 2021 simply by owning a home.

But, let’s be real. With higher-than-normal interest rates and the price increases of the last few years, homeownership has become less accessible for many millennial buyers.

Many of us can’t afford to buy a home, even though we’re well aware of the many benefits of property ownership, like appreciation and tax breaks.

In this article, we’re exploring three real estate investing options for millennials who can’t afford to buy a house. We’ll also give you the benefits and considerations of each of these options.

Who knows…with some smart real estate investing, you might build enough wealth to purchase your own home sooner than you think!

3 Real Estate Investing Options for Millennials Who Can’t Afford to Buy a Home

No down payment? No problem. Here are three ways you can invest in real estate without shouldering the financial burden of direct ownership alone.

1. House Hacking

If your heart is set on owning your home but can’t quite swing the mortgage payments alone, house hacking might be your ticket to affordable homeownership. House hacking is when you generate passive income from your own home. This can be done by renting out a spare room, storage space, or parking spots.

Some enterprising house hackers are even purchasing multi-family properties and using the rental income from the other units to cover the full mortgage payment, including the unit they live in! The purchase price and down payment may be higher on a multi-family property, but with the rental income potential, this could still be financially favorable over buying a single-family home. Plus, if you qualify for a VA or USDA loan, you might be able to purchase a property with up to four units for 0% down as long as you live in one of the units.

Benefits of House Hacking

The advantages of house hacking for millennial investors include:

A path to homeownership. House hacking could help you get on the property ladder.
Lower personal housing costs since your mortgage payments can be offset by rental income.
An education in property management.
Favorable financing compared to buying an investment property that you don’t live in.
Potential for rental income growth over time. With each passing year, you may be able to charge a bit more.

Things to Consider Before House Hacking

Before you purchase a property with the intention of house hacking, consider the following:

Are you comfortable sharing your space?
Is there a demand for the space you’re planning to rent out?
Will you be disciplined enough to set aside a portion of the rental income for future repairs or vacancies?

2. REITs

REITs (Real Estate Investment Trusts) allow you to invest in income-generating real estate without actually owning property. REITs are companies that own income-producing properties (like apartments, offices, storefronts, etc.). You can purchase shares in a REIT, which entitles you to a percentage of the company’s profits.

Benefits of REITs

There are several advantages to investing in REITs, including:

Low minimum investment amounts. You may be able to get started with around $500.
Greater flexibility than direct ownership, since it’s easier to sell shares of a REIT than to sell a property.
Very little time commitment. You only need to spend a bit of time researching REITs to choose the one you want. Then place your investment and check in on it periodically.
Automatic diversification. Since a REIT owns multiple properties, your investment is spread among different assets. This protects your portfolio from the underperformance of any one asset.

Things to Consider Before Investing in REITs

Before you purchase shares in a REIT, consider the following:

Are you comfortable not knowing exactly which properties are owned by your REIT or how the individual assets are performing?
Will you be happy with the rates of return? Or would you rather look for another investment with higher return potential?

3. Real Estate Crowdfunding/Syndication

Real estate crowdfunding and real estate syndication are very similar models of real estate investing. Both methods pool funds from multiple investors to finance specific real estate projects. The primary difference between crowdfunding and syndication is the ownership structure. With syndication, you get a more stable structure in which all investors become members of the LLC or trust that owns the property. This means you have an ownership stake in the underlying real estate.

Crowdfunding and syndication cover a wide range of real estate projects including:

In most cases, you get to choose the specific property you wish to invest in, giving you more control than you would have in a REIT.

Benefits of Crowdfunding/Syndication

The main benefits of crowdfunding and syndication include:

Access to bigger, more valuable projects than you could finance alone.
Flexibility. You can choose from short-term flips or longer-term rental holdings.
Deal-by-deal control. You typically get to choose individual projects to invest in.
Competitive Returns. Depending on the projects you choose, you can potentially outperform the market.

Things to Consider Before Investing in Crowdfunding/Syndication

Before you buy into a crowdfunded or syndicated deal, consider the following:

Which crowdfunding platform should you use? Make sure to read up on the key factors to consider when choosing a crowdfunding service.
Can you commit to the project timeline? Your investment may be tied up for 6-24 months for a renovation or development project. Long-term rental investments may require a commitment of 5-10 years.

Start Your Real Estate Investment Journey

Every big adventure starts with one step. So take your first step today!

You can call a local real estate agent to ask about small multi-family properties that might qualify for a 0% down USDA loan, for example. Or research REIT options. Or choose a crowdfunding service to invest with.

Then keep investing, learning, and growing until you’re exactly where you want to be.

Luxury Real Estate Investment Fails

You may know Bel Air as an elite Los Angeles neighborhood, one that has been home to stars like Beyoncé, Michael Jackson, Taylor Swift, and Lady Gaga. And the Fresh Prince, of course (can you still sing the theme song?).

Residential development in Bel Air has made millions for tuned-in real estate investors. But in recent years, there has been a string of luxury real estate investment fails in Bel Air. Three deals in particular have been making headlines. They were each projected to be worth over $85 million upon completion. Now this is a story all about how these deals got flip-turned upside down…

Let’s take a look at the results of these disaster deals, analyze what went wrong, and help you avoid making the same mistakes in luxury real estate.

Hadid Mansion - Bel Air, CA

Of the fails on this list, this is the only one that had to be demolished by court order.

Mohamed Hadid, established real estate developer (and father to models Gigi and Bella Hadid) was granted city approval to build a 15,000-square-foot mansion on a 1.2-acre lot he purchased in Bel Air in 2011. Instead, he began constructing a 30,000-square-foot behemoth that also exceeded height restrictions for the area. The structure included a massive wine cellar and a 70-seat IMAX theater that were not in the approved plans.

Hadid was criminally charged in 2017 for this construction stunt. He pleaded “no contest,” paying nominal fees of around $3,000 and being ordered to serve 200 hours of community service. This stopped construction, but it wasn’t the end of the saga. Concerned neighbors sued in 2018 over worries that the oversized structure was compromising the integrity of the hillside on which it was being built. The judge agreed that the property posed a risk to the area. The neighbors were awarded nearly $3 million, and a judge ordered the property to be demolished.

The property was expected to be worth around $100,000 million when complete. Instead, it sold for $5 million at auction in December 2021, with the agreement that the buyer would demolish the property within nine months of closing because Hadid claimed to be unable to cover the cost. The demolition reportedly cost around $5 million, but it may pay off for the current owners as the razed site is now on the market for $18 million.

The lesson: Respect the permit process.

777 Sarbonne - Bel Air, CA

Alex Khadavi, a local cosmetic doctor and speculative real estate investor purchased the property at 777 Sarbonne Road in Bel Air for $16 million in 2013. After investing an estimated $30 million in developing an over-the-top luxury estate, using mostly debt financing from multiple creditors, Khadavi was forced to file bankruptcy and sell the asset in 2021.

The contemporary mansion, with its “extra gold” Calcutta marble, hydraulic-lifted DJ booth, and NFT art gallery, generated zero interest at the list price of $87.78 million. So it went to auction with a reserve of $50 million.

Interestingly, the reserve was not met, with the high bid coming in just under $45.8 million. Typically, when the reserve is not met, the bid is not accepted, and the owner retains possession. However, with Khadavi having filed bankruptcy, the bid was approved by a bankruptcy judge, despite failure to meet the reserve. Records from the LA County Tax Assessor’s office confirm that the deal was finalized on June 1, 2022, with an official sales price of $45,760,450.

The lessons: Don’t over improve, and be cautious with financing.

The One - Bel Air, CA

A 105,000-square-foot mega mansion, dubbed “The One” recently sold for $126 million at auction. According to Sotheby’s Concierge Auctions, this price was "more than double the highest US sale at auction and nearly 50% higher than the world record." And yet, it is widely considered to be a local real estate fail…

Widely considered to be the largest modern single-family residence in the US, The One is an impressive feat of construction, developed by film producer/real estate developer Nile Niami. With 26 bedrooms, 42 bathrooms, a 10,000-square-foot sky deck, cigar lounge, wine cellar, full-service spa, bowling alley, movie theatre, nightclub, tennis court, putting green, and five (yes, five) swimming pools, this is more of a resort than a home.

The One was designed and built to be the most expensive property ever sold, with an estimated after-construction value of $500 million. But the scope of this ambitious project created difficulties, with multiple delays in permitting and construction and unsustainable cost overruns. In 2021, after nearly 10 years of construction, the property was placed in court-ordered receivership, and bankruptcy was filed shortly after.

In 2022, the property was listed for $295 millions, which would have still made it the most expensive sale in history, just passing the $250 million record-holder in Manhattan. But, ultimately, The One was sold at auction for a deeply disappointing $126 million.

Niami estimated his losses on the deal at $44 million “and 10 years of my life.”

The lesson: Make sure there is adequate demand for your finished product.

Fannie Mae Just Made Small Multi-Family Properties More Accessible for Homebuyers

Big news! Fannie Mae just announced a new option for homebuyers to put as little as 5% down when they purchase a multi-family residence. This is a dramatic shift from the 15-25% down payment previously required.

Now, to be clear, this deal is reserved for the buyer-investors who purchase a duplex, triplex, or 4-plex to live in one of the units while renting out the other(s). BUT other real estate investors still benefit from this new low down payment offer.

This article will explain why this is such a big deal and how you can benefit from it even if you’re not looking to personally occupy a multi-family property.

The Big Benefit for Multi-Family Investors Who Occupy an On-Site Unit

The low 5% down payment is a potential game-changer, especially for first-time investors looking to build a real estate portfolio and learn how to manage rentals.

You may have seen this strategy laid out in our article on house hacking: instead of buying a single-family home, a homebuyer purchases a multi-family property of up to four units (this is the maximum unit count before a property technically stops being classified as residential and gets classified as commercial). The buyer resides in one unit and rents out the other(s) for passive income to help offset their mortgage and maintenance expenses. Over time, as rents increase, and the mortgage debt is paid down, the income from the rented units more than covers all property expenses, effectively allowing the owner to have $0 housing costs of their own, and potentially even putting cash in their pockets.

Decreasing the down payment requirement from around 20% to just 5% makes this opportunity far more achievable for a wide range of investor-buyers. On a $800,000 duplex, for example, a 20% down payment would have required the buyer to lay out $160,000 in cash (in addition to the closing costs and any urgent repair expenses). With a 5% down payment, a buyer could put down just $40,000.

Quick reminder: the monthly payment will be much higher because of the lower down payment. And the buyer might also need to pay for private mortgage insurance to help offset the additional risk to the lender. But by reducing the upfront expense, investor-buyers can get a foot in the door and cover much of the higher monthly mortgage costs with their new passive rental income.

The Big Benefit for ALL Real Estate Investors

So, if you’re not looking to occupy your own small multi-family building, how does this affect you?

It’s simple: by making this property type more accessible to a wider range of buyers, Fannie Mae is increasing the demand for these properties. Anyone investing in multi-family properties with 2-4 units stands to benefit from this increased demand. A wider pool of buyers means more buyer competition, which means quicker sales and potentially higher sales prices!

At Gatsby Investment, we offer multiple opportunities for investors to get in on the small multi-family strategy.

Our ground-up multi-family developments, for example, involve building a new structure with the intention of selling to an investor-buyer. Thanks to Fannie Mae, we can look forward to higher-than-projected demand once construction is complete.

Or consider our multi-family value-add investments. This unique model starts with a full renovation of an existing multi-family building to quickly build equity in the property. Then we lease up the property, creating passive income for our investors. When the property has had two to three years to stabilize and appreciate, we can sell the property, perhaps to one of these investor-buyers who’s taking advantage of the low 5% down payment option.

The Bottom Line

Fannie Mae’s new 5% down payment might directly benefit buyer-investors who plan to live in one of their new units. But it indirectly benefits any investor who’s got a stake in small multi-family properties. So if you’re not already investing in this property type, now’s the time to pick your new investment opportunity.

0% of LA Homes Are More Affordable to Buy Than Rent

Los Angeles is officially among the least affordable housing markets in the country. According to a report from proptech giant, Redfin, 0% of LA homes are more affordable to buy than rent. This means that locals are pretty much guaranteed to have higher monthly housing expenses if they buy than if they rent.

This hasn’t always been the case. Before 2014, LA locals could save money by purchasing a home because rental rates were typically higher than mortgage payments. In fact, this was standard housing market economics for decades. Residents had the option to rent while saving for a down payment or transitioning to a new area, but most people purchased homes as soon as possible to start saving money and building equity.

So what happened? How did LA become a market of renters? And what does this mean for would-be homebuyers and real estate investors?

Renting vs. Buying in LA by the Numbers

As of March 2023, the estimated median monthly mortgage cost for a single-family home in Los Angeles was $6,454. By comparison, the median monthly rental rate of $3,612 seems like a bargain! After all, the average renter could save $2,842 per month in housing expenses compared to the average homeowner.

How did we get to this point where it costs so much less to rent?

Why is Homeownership So Expensive in LA?

There are several factors contributing to the increased cost of homeownership in LA. Consider the following:

High demand. Los Angeles is a highly desirable location thanks to world-class amenities, pleasant weather, and ample job opportunities.

Low inventory. Between geographic barriers, lower-density zoning laws, a general lack of new construction, and older homeowners opting to “age in place,” there just aren’t enough homes to meet the high demand.

Higher interest rates. While today’s interest rates are still below the 50-year average, they are a shock from the extremely low rates we’ve seen since the Great Recession of 2008. Interest rates make a big difference in housing expenses. For example, an interest rate increase from 5% to 7% increases the monthly mortgage payment by $513.93 on a $400,000 loan. And many buyers are taking on loans much larger than $400,000 in high-value markets like LA.

What Does This Mean for Would-Be Homebuyers?

Renting is currently far more affordable than buying in LA. And there’s no shame in renting rather than buying. Plus, real estate investment companies are developing unique housing solutions to better serve you. For example:

ADUs (accessory dwelling units) are being built on single-family lots to increase the inventory of affordable housing.

The US government is incentivizing developers to build more Section 8 housing units, which are designed as an affordable option for veterans, senior citizens, low-income families, and differently-abled residents.

Developers are designing “co-living” spaces for renters with multiple roommates. Apartments with four or five bedrooms allow for more roommates, which means more people to split the rent. This ultimately reduces the rent required from each roommate.

Developers are also designing rentals for growing families. These “build-to-rent” units give you a similar experience to having a home of your own without the prohibitively high mortgage payment.

If you were hoping to buy a home in LA, take heart. It might not feel like the right time to buy, but timing the market is a poor strategy. The fact is, there’s never a bad time to invest in real estate. As long as you can afford the mortgage payment, you will benefit from long-term appreciation of your home. And you won’t be subject to ongoing rental price increases when you own your home!

What Does This Mean for Real Estate Investors?

Real estate investors have an opportunity to serve the millions of renters in LA. But you have to be more strategic to be profitable today.

When buying was more affordable than renting, you could practically buy any property, and then rent it for enough to cover your ownership expenses. In today’s market conditions, you need to carefully choose investment projects that can command rental rates that exceed the cost. This means considering ground-up developments, perhaps build-to-rent residences, rather than turn-key rental properties. It also means designing structures that meet the needs of today’s renters (like the ADUs, Section 8 housing, or co-living spaces we just discussed in the previous section).

Of course, as real estate prices increase, along with labor and material costs, individual investors may have a hard time financing a real estate investment project alone. This is why today’s real estate investors are joining real estate crowdfunding projects which provide all the benefits of real estate investing without the high upfront expense or time-consuming project management.

The Bottom Line

None of the homes in Los Angeles are more affordable to buy than rent. But that doesn’t mean there aren’t opportunities in the LA housing market. You just need to find the right real estate investment strategy for you.

Residential Proptech: The Good, the Bad, and the Silly

Residential proptech (shorthand for “property technology”) has exploded over the last decade, bringing amazing innovations to the residential real estate space. But it’s not all good news. The increase in Proptech has also created some less desirable outcomes, as well as some “advancements” that are just plain silly.

Let’s explore some of the ways that proptech has forever changed residential real estate. Here’s the good, the bad, and the silly of residential proptech.

The Good in Proptech

There is a lot to be excited about in the world of residential proptech. Here are some of the most impressive applications for technology in today’s residential market:

1. Remote Online Notary (RON) Services

Prior to 2011, property owners were required to meet face-to-face to have a licensed notary witness their signatures on critical documents like deeds and loan docs. Virginia was the first state to authorize remote online notary (RON) services, which allowed notaries to witness signatures via live video feed with the signatories.

Other states were slow to follow suit, but the COVID-19 pandemic forced the issue when people were encouraged to stay home and handle their business online. As of 2023, only a handful of states are holding out on the RON revolution.

In states that allow RON, owners and buyers can sign docs without leaving home or wasting money on expensive courier services.

2. Automated Property Management

Today, tech automation can handle many of the tasks that were once completed by property managers manually. These include:

Rent collection tracking,
Email reminders to tenants with past due rent.
Applicant screening,
Maintenance appointment scheduling,
Renewal rate calculations,
Lease, renewal, and disclosure generation.

This allows property managers to work more efficiently to better serve their residents and increase their properties’ profitability.

3. Smart Home Features

Smart locks, smart lights, smart doorbells, and smart temperature control are making homes safer, more comfortable, and more energy efficient. Smart features allow residents to monitor and affect their home systems directly from their phones.

So, for example, if someone rings your doorbell, you can access the doorbell camera from your phone to see who’s there and decide if you want to unlock the door for them. No more leaving your keys with the neighborhood teen who waters your plants while you’re on vacation! You can simply open the door for them at the agreed-upon time. You can even schedule the door to automatically unlock at certain times, so you don’t have to interrupt your vacation!

4. Online Real Estate Investment Platforms

Tech-based real estate investment platforms have made it easier than ever for real estate investors to access pre-vetted, professionally managed real estate development deals. This has been particularly important in the growth of real estate crowdfunding services. With crowdfunding, investors can buy into a deal for a fraction of the capital that would be required for a traditional real estate investment. And, because the deals are professionally managed, you don’t need any prior experience or market knowledge to see strong returns from your investments.

For these reasons, the global crowdfunding market is expected to grow from $11 billion in 2021 to over $250 billion by the end of the decade according to Polaris Market Research.

Learn more about crowdfunding and find out how to invest in a crowdfunded real estate project.

5. “Generative AI” for Marketing and Management

Have you used ChatGPT to write correspondence to tenants? Have you used virtual staging software to insert digital furnishings into photos of your vacant units for market purposes? Those are both examples of generative AI.

“Generative AI” is something of a misnomer, implying that artificial intelligence is creating brand-new content. What’s actually happening is that sophisticated algorithms are predicting what characters or pixels should be used to fulfill a prompt, based on existing text, images, and videos online.

While this tech is still new, and the results can be unpredictable, the algorithms are getting better with use, so you can expect this tech to continue improving.

The Bad in Proptech

Here are some of the worst outcomes of recent proptech innovations:

1. Increased Application Fraud

Renters and homebuyers now have easy access to software that can generate fraudulent documents for their rental or loan applications. Pay stubs, tax returns, bank account statements, and any other document that has traditionally been used to confirm income and assets can now be faked, leading to an increase in fraudulent applications.

In 2021, property managers and rental property owners received an estimated 11 million fraudulent rental applications.

2. Unfair Denials

Automated tenant screenings and mortgage borrower evaluations are intended to remove any human bias from determining who has access to housing. Unfortunately, the automation models are trained on existing approvals and denials, which often contain subliminal biases.

If, for example, applicants from a certain area code are historically less likely to qualify for a home loan, the evaluation algorithm may interpret this as a sign that applicants from this zip code should be given a lower eligibility score.

This can perpetuate biases while removing accountability from people who have the power to intervene for these unfairly denied borrowers or renters.

3. Obsolete Jobs

As with any technological advancement, some jobs become obsolete as tech automation replaces human labor. And, even if certain jobs aren’t made obsolete, you may need fewer workers if many of their tasks can be efficiently automated.

But there is a silver lining: studies show that tech advancements typically create as many new job opportunities as they displace.

The Silly in Proptech

And finally, here are the proptech “advancements” that are just silly:

1. Online Property Value Estimates

Having an algorithm calculate fair market values for individual properties is a brilliant idea in theory. But in practice, there are simply too many variables for online home value estimates to be accurate.

Take Zillow’s Zestimate as the industry benchmark. Zillow claims the nationwide median error rate for on-market homes is 2.4% (as of September 2023). That sounds impressive. But then you look more closely and find that:

This applies only to active listings, which have presumably been recently updated to reflect renovations and upgrades. When you look at off-market properties, the error rate jumps to 7.5%
It’s not uncommon for Zestimates to be 20% or more off from the actual market value.
The accuracy varies by market. In Pittsburg, for example, the median error rate is 12.7%.

As an example, if you have an off-market property in Detroit (where the median error rate is 8.7% and the Zestimate falls within 20% of the sales price only 78.2% of the time), a $1,000,000 Zestimate means that your home is most likely worth $800,000 to $1,200,000. But there’s still a 21.8% chance that the actual value falls outside of that range.

Unless we have bots physically combing properties to keep their conditions current, online property value estimates are a bit of a joke. You’re better off having a real estate agent complete a “comparative market analysis” to determine the real value of your home.

2. Gambling Obscene Amounts in Fad Tech

The first Bitcoin-backed mortgage originated in 2018. The first home transferred via NFT was purchased in 2022. But demand for both Bitcoin and NFTs has plummeted over the last year, providing a good lesson in the dangers of gambling large amounts of money in tech that has no proven track record of success.

While alternative investments can offer higher return potential than traditional investments, they also come with more risk. Investing more than you can afford to lose in untested proptech is just silly.

3. Dismissing Valuable Tech After One Failed Application

The NFT bust is a good example of promising tech that was improperly utilized. Without getting too technical, NFTs (non-fungible tokens) are simply unique strings of code that can be used to transfer ownership of an asset digitally. NFTs were notoriously used to create a marketplace of worthless digital cartoons. The ownership code could be bought and sold, but anyone could save a copy of the image and use it freely.

But there are legitimate proptech applications for NFTs. For example, NFTs could replace paper deeds to confirm ownership of real property. Furthermore, when combined with blockchain technology, NFTs could track ownership transfers over time, effectively eliminating the need for title searches and title insurance over time.

Don’t dismiss promising proptech because it was impractically applied.

The Bottom Line

Proptech is a broad category, with the potential to change the lives of property owners, investors, and renters. While there are a few downsides and silly uses, there is too much good in proptech to ignore.

TRD LA Real Estate Forum Event - Sponsored by Gatsby Investment

On September 21, 2023, The Real Deal hosted the annual Real Estate Forum event at the Londonderry in Los Angeles. – Sponsored by Gatsby Investment!

The Real Deal covers all the latest and greatest industry news in the City of Angels.
Over 500 real estate professionals came together attended this event to hear from the biggest names in SoCal real estate, mingle with top industry experts, and get inside intel on the next big news at the Los Angeles Forum.

A great panel of speakers gave their insight and analysis of current market conditions as well as projections for the next year. The panel included top speakers like:

Jason Oppenheim, President and Founder of The Oppenheim Group, recognized as the Best Real Estate Agent in the United States. Also, a star of two hit Netflix shows, Selling Sunset and Selling the OC. He gave insight into the luxury real estate market, as well as how the ULA mansion tax is affecting the market.

Jade Mills, from Coldwell Banker. Jade is currently ranked the #1 Agent Worldwide for Coldwell Banker and the #5 Agent Worldwide for all Brokerages. Jade has achieved the highest sales volume on record of any agent in Coldwell Banker history, just surpassing an astounding $8 Billion in career sales. Speaking on how the volume of deals is decreasing due to interest rates, and her opinion on why now may be the right time to buy.

Leo Pustilnikov, top real estate developer. He was speaking on difficulties he faces in the development industry, and how to find ways around challenges.

A great event where industry professionals could inspire and learn from each other!

Gatsby Investment was a proud sponsor of the event. All 500+ attendees wore the Gatsby Investment lanyard with our iconic blue logo.

We are looking forward to attend the next TRD Florida Forum event!

The Pros and Cons of Vacation Rentals for Real Estate Investors

According to a 2023 study of the vacation rental industry, an estimated 63% of family travelers reported that they prefer to stay in vacation rentals rather than hotels. This desire for an authentic experience in a travel destination equates to high profitability potential, with average rental rates sitting around $217 per night.

But is a vacation rental a better investment than a traditional long-term rental? And is it the right investment for you?

To help you decide if a short-term vacation rental is in your future, we’ve compiled a list of the pros and cons of vacation rentals for real estate investors.

Pros of Vacation Rentals

Let’s start with the benefits of vacation rentals as compared to long-term rentals.

1. Potential for High Rental Income

At an average rate of $217 per night, the per-night rate for vacation rentals is substantially higher than the rate for a long-term rental (which currently sits at $1,702 per month, equating to $55.96 per night). This can lead to higher cash flows with a vacation rental, even if the property sits vacant several nights per month.

2. Flexibility for Personal Use

Your vacation rental could serve double duty as both an income property and a vacation home for you. When the property is not occupied, you could stay there yourself or offer it to family and friends.

3. Peak Periods

Depending on the location, vacation rentals can experience peak periods of high demand. During holidays, spring break, or summer, for example, you might be able to charge premium rates to maximize income.

4. Quick Adjustment to Changing Rates

Unlike long-term rentals, which often come with one-year leases, vacation rentals may have a term of just a week (or even just one night). This provides flexibility to adjust rental rates and terms regularly based on market conditions and guest demand.

5. Tax Benefits

As with long-term income properties, short-term vacation rentals could qualify for various tax deductions and benefits. You might be able to deduct rental expenses and property depreciation from your income tax calculations.

Cons of Vacation Rentals

Now let’s consider the potential downsides of vacation rental investments.

1. Regulatory Challenges

Some cities have specific regulations governing vacation rentals (like New Orleans, which has a permit process and requires the property owner to live onsite). And many more cities are voting on new restrictions. So investors need to be aware of the existing regulations as well as the threat of increasing regulations.

2. High Operating Costs

The high turnover rate of vacation rentals means higher maintenance, cleaning, and marketing costs compared to long-term rentals. Keeping the property’s furnishings in good condition and keeping the property stocked with toiletries and pantry items adds to the expense.

3. Continuous Marketing and Guest Management

In addition to the financial cost, vacation rentals also come with a greater time commitment as they require ongoing marketing efforts and guest management to attract bookings, handle inquiries, coordinate check-ins, and address guest concerns. Handling this yourself is a time-consuming job, which is why many vacation rental owners hire property management companies.

4. Seasonal and Cyclical Nature

While vacation rental investors can take advantage of peak season demand, they are also susceptible to off-season lows. Reduced demand during slow seasons can result in periods of low occupancy and reduced rental income.

5. Potential Rental Risks

With so many guests coming through your property, there is an increased risk of rental cancellations or damage to the property. This can result in additional expenses for repairs, replacements, or lost rental income.

The Bottom Line

Vacation rentals come with substantial profitability potential, but they also represent a greater risk than traditional long-term rentals. Before you invest in a vacation rental, do your due diligence, have reserves ready to cover vacancies and maintenance, and prepare an exit strategy.

Buy Assets, Not Liabilities

Pop quiz: can you explain the difference between an asset and a liability?

Bonus points if you can name an asset you bought in the last year.

Here’s the answer key…

Assets are items that appreciate. This means they generally grow in value over time. Liabilities are everything else.

Take your home, for example. If you own your home, you have an asset. Over the long term, your home will increase in value. This will give you options in the future. You could sell the home to downsize to a more manageable property or enjoy a retirement community, giving you a surplus of cash to draw on in your retirement. Or, you could live in the home, “rent-free,” paying just property taxes, insurance, and maintenance. If you rent your home, you never receive the ownership benefits in the future; you continue to pay ever-increasing rental rates, even on a fixed income in retirement.

So what about your car? Super necessary, right? Unless you live in a city with a serious public transportation system, you probably need a vehicle. But that doesn’t make it an asset! Your car is still losing value every year. No matter how much you paid for it, it’s going to be worth just a fraction of that amount in a few years.

Assets vs. Liabilities

Let’s consider a few assets and a few liabilities that many American adults own.

Assets:

Real estate (your home, rental properties, land, etc.)
Financial assets (stock, bonds, mutual funds, REITs, etc.)
Intangible assets (patents, trademarks, intellectual property, copyrights, licenses, etc.)
Businesses (proprietary systems, client lists, franchises, etc.)
Collectibles (art, wine, sports memorabilia, quality furnishings, etc.)

Liabilities:

Tangible liabilities (cars, boats, electronics, mass-produced furnishings, etc.)
Intangible liabilities (loan balances, credit card balances, etc.)

Notice that many of the liabilities are useful in our everyday lives. But, just because something is useful doesn’t make it an asset.

Buying liabilities reduces your net worth.

So, one of the most widely used principles among the wealthy is this: buy assets, not liabilities.

How to Buy Assets, Not Liabilities IRL

In real life, you need to buy useful liabilities regularly. Not everything you buy will be an asset. But, you have control over your discretionary money, and you can choose to waste it on liabilities or invest it in assets.

Bonus tip: instead of flat-out buying a liability you want, buy an asset that will pay for the liability!

Example:

Let's say you have a luxury item you desperately want: a fancy watch, designer handbag, or new VR set. You plan to spend around $5,000 on this splurge. If you spend your paycheck on that item, you've traded your cash for the item, and now you watch it lose value as you enjoy it.

Instead, what if you invested in a real estate development that would generate the $5K you need? Now, you can get the liability you want plus an asset that can generate income and grow in value over time!

Win, win!

How ADUs are Changing the Landscape of Housing in CA

Accessory Dwelling Units (ADUs) have exploded in popularity over the past decade, providing numerous benefits for residents and transforming the housing landscape in California. ADUs are secondary housing units, located on the same lot as the primary residence. These units can be attached to the main house, converted from existing structures such as garages or basements, or built as standalone structures in the backyard.

Also known as guest houses, granny flats, in-law suites, or casitas, these innovative dwellings are helping to ease the housing shortage in CA while creating environmentally friendly, affordable housing. Additionally, with the state of California easing regulations and streamlining the approval process, ADUs have become a viable financial opportunity for homeowners and investors.

Adding Units to California’s Low Inventory

The well-documented California housing crisis prompted lawmakers to implement various policies with the intent of reducing barriers to constructing new units. In the late 2010s and into the 2020s, the state passed several laws that simplified ADU regulations, including reducing parking requirements, streamlining the approval process, and reducing minimum lot sizes. The state even created grants and other financial incentives to help owners fund construction.

These new units can be used to house Californians in multiple living situations. Here is a look at the demographics most likely to benefit from living in ADUs:

Students,
Young professionals,
Downsizers, and
Multi-generational households looking for separate living spaces.

And, by increasing the available inventory of units for rent, we are also stabilizing the rate of rental growth that had become untenable in recent years. In Los Angeles, for example, US Census Data shows an increase of 15.9% in the median rental rate from 2019 to 2022. While these additional units will likely not be enough to trigger any decrease in California’s high rents, they may be enough to bring the growth rate back to sustainable levels.

Promoting Sustainable Living

ADUs also provide environmental benefits. By utilizing existing infrastructure and avoiding the need for large planned community developments (complete with new roadways, electricity lines, and sewer connections), ADUs reduce carbon footprints and promote sustainable living.

Additionally, by concentrating residents in existing neighborhoods, we can build more walkable neighborhoods around a more dense populous, rather than continuing the development of sprawling suburbs. This reduces reliance on private vehicles and encourages public transportation infrastructure. Consider LA’s new Metro expansion as an example. With enough residents living centrally, more people are willing and able to use public transport, prompting investment in new rail lines.

Providing Opportunities for Homeowners and Investors

And, finally, ADUs are changing the landscape of housing in CA by allowing homeowners and investors to quickly add value to their properties.

As home values have skyrocketed, enterprising homeowners have used ADUs as a house-hacking strategy to generate income from their property. This can be used to help offset mortgage expenses and make homeownership more affordable. Or, as is the case with many “free and clear” homeowners, the passive rental income from an ADU can be used to help cover living expenses in retirement.

Investors are also finding impressive returns through ADUs as a value-add project. Take house flippers, for example. In a traditional flip, the investor would purchase a distressed property, renovate it, and resell it, hoping to make a profit. Today’s house flippers can build an ADU in addition to renovating the primary structure, thereby adding the value of a second unit without the expense of buying two separate properties. This is exactly how one group of investors earned over 19% on a 13-month project in Los Angeles.

The Bottom Line

As California continues to tackle its housing crisis, ADUs have emerged as a practical solution to increase the housing supply, create sustainable communities, and provide unique opportunities for homeowners and investors.

Whether you’re a renter, homeowner, or real estate investor, you will see ADUs change the landscape of housing in California over the coming decades.

Why “Timing the Market” Doesn’t Work

How many times have you heard stories of real estate investors buying at the bottom of the market and selling at the peak, making a killing in the process?

Before you dive into real estate investing looking to replicate the success of those investors, let’s do a quick reality check. Get-rich-quick schemes, even those based on legit investment models like real estate investing, result in losses and frustration more often than they result in impressive gains.

Now look, I’m not saying you can’t make money quickly in real estate. In fact, some real estate investors averaged returns of over 24% per year from 2017-2022 making smart investments.

What I am saying is that you should be wary of anyone who claims they know how to time the market. I guarantee luck played a bigger factor than those investors are willing to admit!

Let’s get real about timing the market. I’ll show you why it’s a fool’s errand. And what you should do instead!

By the Time You Find “The Right Time,” It’s Too Late

The real estate market is influenced by countless factors that are as unpredictable as the weather. Economic conditions, interest rates, supply and demand, and local market trends all come into play. Sure, you can watch the trends and base your investment decisions on hard data. But trends take time to show themselves. By the time you recognize something as a trend, you’ve missed the peak or valley.

Take the insane pandemic-era housing market as an example.

In April 2020, as news of the COVID outbreak spread, creating serious economic uncertainty worldwide, we watched the housing market stutter. Buyers were afraid to make a move, listings were sitting on the market longer, and home values started dipping. No one could have predicted that. All data pointed to an impending housing market stagnation.

Then, just as suddenly, and just as shockingly, buyers showed up to the market in droves as the Fed lowered interest rates to unprecedented levels. And the buying frenzy began.

In May 2020, the median sales price in the US was $299,000. By May 2022, the median was $431,830.

Buyers who waited for signs that the market was ok ended up paying more than they would have in the spring of 2020. And those who waited for the frenzy to pass ended up paying higher purchase prices and getting substantially higher interest rates.

How to Work the Market Without Timing It

If you focus on a long-term real estate investment strategy, you will always come out ahead. Why? Because real property always appreciates in the long run, even if it stumbles periodically in the short term. Think about the investors who bought at the worst time in modern history: right before the housing market collapse. The average buyer in Q1 2007 saw their property value plummet from $250K to $208K over two years. Those properties are now worth over $436K. And, those who invested in rental properties all those years ago have been enjoying the explosion in rental rates for over a decade!

Having said that, it is also possible to capitalize on short-term real estate projects. If you’re going to focus on short-term gains, don’t expect the market to do the work for you; get in there and force appreciation by adding value to your properties! This will grow the value of your properties, even in a stagnant market.

Only amateurs try to time the market. Real investors focus on strategies that work under any market conditions.

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Since the start of the company in 2016, Gatsby has acquired over 64 deals. As of November 1, 2023, 44 of those offerings have been completed. This makes Gatsby Investment the leading real estate syndication company in Los Angeles. View completed deals.

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