With the rise of short-term rental platforms like Airbnb and Vrbo, it’s easier than ever to rent out your investment property — or even part of your own home — to travelers.
But the demand may not be as strong as some had hoped.
Just ask hosts in the Phoenix area. Since Phoenix was hosting Super Bowl LVII, one might expect properties in the area to be fully booked for the weekend.
But that wasn’t the case.
According to data from short-term rental analytics site AirDNA reported by The New York Times, only around 51% of properties on Vrbo were booked leading up to the Super Bowl weekend.
Of course, if you’ve been following the vacation rental market, empty rooms should not be a surprise.
A tweet that says “The Airbnbust is upon us” and contains screenshots of a Facebook post about declining bookings on Airbnb went viral in October 2022 and has since amassed more than 52,000 likes.
A new influx of supply could be the reason behind the vacancy.
In November 2022, Time reported — also using AirDNA data — that the number of available short-term rental listings in America shot up 23.2% in September 2022 from a year ago to 1.38 million.
It doesn’t matter if you are an Airbnb host or a long-term landlord, vacancy is not a good thing for real estate investors — especially in a time of rising mortgage rates.
But these days, you don’t necessarily need to buy a property to start making money in real estate. Here’s a look at three approaches.
Invest in REITs
REITs stands for real estate investment trusts, which are companies that own income-producing real estate like apartment buildings, shopping centers, and office towers.
You can think of a REIT as a giant landlord: It owns a large number of properties, collects rent from tenants, and passes that rent to shareholders in the form of regular dividend payments.
Of course, REITs can still experience rough times. During the pandemic-induced recession in early 2020, several REITs cut back on their dividends. Their share prices also tumbled in the market sell-off.
Some REITs, on the other hand, manage to dish out reliable dividends through thick and thin. Realty Income, for instance, pays monthly dividends and has delivered 118 dividend increases since it went public in 1994.
It’s easy to invest in REITs because they’re publicly traded.
Unlike buying a house — where transactions can take weeks and even months to close — you can buy or sell shares in a REIT anytime you want throughout the trading day. That makes REITs one of the most liquid real estate investment options available.
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Invest in an online crowdfunding platform
Crowdfunding refers to the practice of funding a project by raising small amounts of money from a large number of people.
These days, many crowdfunding investing platforms allow you to own a percentage of physical real estate — from rental properties to commercial buildings to parcels of land.
Some options are targeted at accredited investors, sometimes with higher minimum investments that can reach tens of thousands of dollars.
To be an accredited investor, you need to have a net worth of over $1 million or an earned income exceeding $200,000 (or $300,000 together with a spouse) in the past two years.
If you are not an accredited investor, many platforms let you invest small sums if you like — even $100.
Such platforms make real estate investing more accessible to the general public by simplifying the process and lowering the barrier to entry.
Some crowdfunding platforms also pool money from investors to fund development projects. These deals typically require longer commitments from investors and offer a different set of risk-reward profiles compared to buying shares in established income-producing rental properties.
For instance, the development could get delayed and you won’t earn rental income in your expected time frame.
Sponsors of crowdfunded real estate deals usually charge fees to investors — typically in the range of 0.5% to 2.5% of whatever you’ve invested.
Invest in ETFs
Picking the right REIT or crowdfunded deal requires due diligence on your part. If you are looking for an easier, more diversified way to invest in real estate, consider exchange-traded funds.
You can think of an ETF as a portfolio of stocks. And as the name suggests, ETFs trade on major exchanges, making them convenient to buy and sell.
Investors use ETFs to gain access to a diversified portfolio. You don’t need to worry about which stocks to buy and sell. Some ETFs passively track an index, while others are actively managed. They all charge a fee — referred to as the management expense ratio — in exchange for managing the fund.
The Vanguard Real Estate ETF (VNQ), for example, provides investors with broad exposure to U.S. REITs. The fund holds 167 stocks with total net assets of $63.2 billion. Over the past 10 years, VNQ has delivered an average annual return of 7.1%. Its management expense ratio is 0.12%.
You can also check out the Real Estate Select Sector SPDR Fund (XLRE), which aims to replicate the real estate sector of the S&P 500 Index. It currently has 30 holdings and an expense ratio of 0.10%. Since the fund’s inception in October 2015, it has delivered an average annual return of 7.9% before tax.
Both of these ETFs pay quarterly distributions.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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