3 Types of Residential Real Estate Investments
Residential real estate is a popular investment option for many investors looking to diversify. While the initial capital needed can be more than, say investing in the stock market, having a physical asset that can hold its value and even appreciate over time is perceived to be more risk-averse by some.
There are several different types of investments that can be made within the residential real estate market. We explore three of the most common types of residential real estate investments below.
Short-term vacation rentals
Short-term vacation rentals refer to properties that are rented out for a period of fewer than 30 days at a time, typically through websites like Airbnb and VRBO. These types of rentals are often found in popular vacation destinations, like San Luis Obispo County with its beaches and wineries. Most often buyers choose to purchase a vacation home and then rent it out to others when they are not using it.
However, many cities have implemented restrictions on these rentals. For example, at the time of this post, San Luis Obispo city doesn’t allow short-term rentals, whereas Paso Robles will allow short-term rentals with the proper permit (of which there is a very long wait list right now) and Avila Beach allows short term rentals but with restrictions.
Each portion of the county, and unincorporated San Luis Obispo county, has its own rules so it’s important to look into the details before making an investment. Some HOAs may also have additional restrictions on short-term rentals. Sometimes if a property is already a vacation rental, the permit may be transferable. However, this is also taken into account when determining the property value and these homes often sell for much more
Pros:
Potential for high rental income
The ability to use it personally for part of the time
Cons:
Can be difficult to find a property that can be rented short-term
Finding reliable service providers for property management, check-in/out cleaning and maintenance can be a challenge
May require a significant upfront investment in furniture and decor
Local laws may change frequently
Long-term rentals
Long-term rentals, on the other hand, refer to properties that are rented out to tenants for a period of one year or more. These types of rentals are often unrestricted by most municipalities or HOAs. They can be anything from a small apartment to a large single-family home offering options depending on your budget. In San Luis Obispo city, there are a large number of long-term rentals that offer housing for Cal Poly students.
Pros:
Stability of rental income
Property management fees are often less than short-term rentals
Cons:
Finding and vetting tenants and handling maintenance remotely can be a challenge
Some homes may have rent control restrictions that limit the growth of your return over time
Mid-term rentals
Mid-term rentals are the less common of the three, it's a rental type that falls in between short-term and long-term rental, typically it's a furnished rental that lasts from 30 days to 6 months. This type of rental is very popular in areas where there's a high demand for temporary housing.
In San Luis Obispo County, mid-term rentals are popular among travel nurses, military personnel, temporary PG&E employees, people initially relocating to the area and looking to buy, and even families that may be remodeling or building a home. This may be a great option if you also want to use your home for some portion of the year.
Pros:
Higher returns than long-term rentals without the high level of turnover that comes with short-term rentals
May be able to use the property for personal use a bit each year too
Less management overhead than short-term rentals
Cons:
May require a significant upfront investment in furniture and decor
Finding and vetting tenants
As you can see, each type of residential real estate investment has its own set of benefits and challenges. Before making any investment decisions, it's essential to consider the location, property condition, and overall investment goals.
As your local real estate advisor, we are here to help guide you through this assessment and answer questions along the way. In fact, we are real estate investors ourselves and have wrestled with many of these same concerns. Reach out and let’s chat!
