Airbnb investing vs long term rental (and multifamily) investing

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What's up guys, it's James here. And in today's video, I'm going to be talking about the differences and the different advantages and pros and cons to investing in single family homes homes for traditional long term rental, versus investing in multifamily residential real estate for long term rental, versus investing in short term rental properties. So that will be single family homes again, but specifically for the use of short term rental properties. And to do this, I really want to kind of paint a fair picture of the differences because in my mind, not one of these Well, I do see one of these as being a specifically inferior method to investor or asset to invest in. But there's two of them that I actually see as being very neck and neck. And it just coming down to what your preferences what your kind of priority is. So I'm going to break that all down. And I want to to before we jump into it, just to remind you that there is a link in the description down below, where you can check out our free training on how to invest successfully in short term rental properties. So if you want to start buying short term rental properties, if after you watch this video, you go, Okay, actually, I want to start investing in these, it makes a lot of sense, this would align with my goals, then just check it out, it's a link in the description down below. The training, again, is completely free. And we're going to give you our analysis spreadsheet that is a totally free tool that we will give to you, again, just to help you and analyze properties and find the best possible deals. So with all that being said, let's go ahead and jump right into it. Now, let's analyze, I'm going to analyze it on a few key metrics. So one is going to be analyzing it on a metric of risk. And so what we want to look at is there's kind of two different main risks when it comes to investing in your in your properties. One is going to be a risk of non payment for the tenant. And another is going to be a vacancy risk. Now, this isn't this is really just kind of the the areas where there are differences between short term rentals or major differences between short term rentals and long term rentals. I'm not by any means saying that these are the only risks with investing in real estate. But these these are the two areas of risk where there's quite a substantial difference between short term rentals and long term rentals. So that's really what I'm going to be focusing on in this video is the points of differentiation. So the one is going to be a risk of non payment by the tenant. So that's the event where your tenant just doesn't pay. Now with a single family home that you're renting as a long term rental, you're going to have a high risk of tenant non payment, because all it takes is for one single tenant to stop paying you. And then you're not getting paid, right. And so there's a lengthy eviction process, you then have to go through in most areas depending on where you're investing. And so there's a pretty high risk of non payment, obviously, you can do things to mitigate this risk, like selecting the right tenant having a diligence screening process, things like that. But at the end of the day, that risk is still quite high. Now it becomes a medium, medium low risk with a multifamily unit, because obviously your likelihood of having all 10 tenants pay and let's say a 10 unit building, just having all not pay is pretty low. Assuming that you're doing a good job of selecting good tenants, it's a very low likelihood, there's a much lower probability that you're going to experience substantial losses due to tenants not paying. Now, it is still relatively likely that you're going to have some tenant pay, but just not that all your tenants are suddenly not going to pay the same way that it is with a single family home where it's really just if one tenant goes then all your tenants aren't paying because you only have one tenant. Now, the risk is pretty much eliminated in this respect with short term rental properties. Because if a guest doesn't pay, then you just you know, don't allow them to stay your property because they're paying in advance of staying. Now there is a slight risk, they will get a refund for one reason or another. But the likelihood of that happening over an entire month is very, very low, let alone having that happen over multiple months or a year. And so the risk is very, very low. So if you're comparing kind of keeping score, the lowest risk here is going to be a short term rental with the highest risk being a single family home and then a medium kind of somewhere in between risks going to a multifamily residential, that's going to be a long term rental property. Now the next area where there's going to be a differentiation and the risk is going to be in your vacancy risk, meaning that the property just sits vacant, not the tenant not fails to pay the rent, but then you just have the property sitting vacant. And so with a long term rental, single family or multifamily your risk there is pretty low, it's pretty easy to predict and project, what level of vacancy you are going to have. And there's not a lot of fluctuations, assuming that you're investing in the right type of real estate, you can really minimize this risk quite a bit. It may sit vacant for let's say 5% of the time, meaning that for every couple years, you have your property up and available. It's vacant for a month while you try to you know you do some some fixing up or you're looking for a replacement tenant, but it's very predictable and the vacancy rate is going to be quite low.
quite predictable assuming that you're again, investing in the right type of real estate. Obviously, if you invest into high end luxury real estate and there's a market crash, you're gonna have a lot higher risk there. But if you're investing in properties that are catered more towards, like blue collar workers who are always going to need housing, then you might need to decrease your rates a bit, but you're pretty well always gonna have a tenant in there, your vacancy risk is definitely higher with a short term rental. Again, there's tons of things you can do to mitigate this risk. Just by analyzing make sure you find the right deal, make sure you have the margin to support that. So you're never going to be cashflow negative on the property. And there's also a lot of predictability, a lot more predictability to this. I think a lot of people realize, I've talked about that in detail in other videos, where I explained how you could actually predict how well a property is going to do a project what the occupancy rates are going to be throughout the year. But there is certainly just a much higher risk with short term rental for comparing them and being honest, there's a much higher risk of your property being vacant, unexpectedly as a short term rental than that risk that exists as a long term rental property. Now the next area we want to consider and contrasting compare is the revenue upside, you know how much upside potential is there for you to increase rents and be able to bring in more revenue, you're going to be pretty much low, maybe you know, a bit better on a on a multifamily property. But for long term rentals, there's just not a lot of elasticity in the price. So your revenue upside just isn't that substantial there either one of those, that's a pretty basic and easy one. Now, obviously, the revenue upside potential, the profit potential on the upside is pretty much astronomical compared to these ones, these long term rentals when you compare a short term rental, and that's really the main advantage of a short term rental property is that you are going to be cash flowing much more heavily. So that's really the big plus for short term rentals. In my book, there's just a lot more price elasticity, there's a lot more that you can do to get upside out of your revenue. And generally speaking, even without going crazy and optimizing the heck out of the property, it's just going to perform better as a short term rental than it would as a long term rental. Now the next area of differentiation that we want to consider is going to be the potential for forced appreciation. So there's three main ways that you're going to make money in real estate, one is going to be through cash flow, another is going to be through principal pay down on the mortgage. And then the third is going to be through appreciation, whether that is market appreciation or forced appreciation. Now, with principal pay down again, it's gonna be pretty similar if we're comparing apples to apples in terms of the invested amount of money, your principal pay down is going to be pretty much the same on a short term rental versus long term rentals, single family, whatever, it's it doesn't really impact that principle pay down, your appreciation is also going to be pretty well the same, you get a little bit more leverage when you're investing in single family homes. So short term rentals and long term rentals that are single family get a little bit more of an advantage there because typically, you end up needing to put a higher down payment amount on a on a multifamily deal. Commercial Real Estate just tends to be around a 30% downpayment need to put down. But the main advantage and this is really where I think the cake ultimately goes to. To multifamily investing is if you're prioritizing instead of prioritizing cash flow, you're prioritizing forced appreciation. So that is the really main benefit, as far as I'm concerned with long term rental multifamily real estate investing is that one of the things that you have a really nice lever to pull on is that forced appreciation by with uniquely with multifamily properties. They're sold based on essentially a multiple of how much that property generates in monthly income. So the more that you can move that income up, the more your property is worth meaning that if you make renovations to a property or you do things to increase the rent roll, then ultimately that property is going to cashflow more, and it's going to be actually worth a multiple more of that additional cash flow when you go to sell the property. And you can obviously force appreciation on a single family home by doing strategic renovations. So that's something that we often do, and I've talked about on this channel. But those are more based on just a buyers perception of the value, you know, just a kitchen being nicer or a bathroom being nicer, it's not mathematically certain that you're going to basically be able to get a multiple more of the of the additional rent roll. You know, by increasing the performance of a short term rental, we're not necessarily right now, increasing the value of that property just by increasing performance, whereas with a long term rental, a multifamily specifically long term rental, you are doing exactly that. Now, it's not to say that's always going to be the case. I think that the more that people start to see short term rental properties as a legitimate business and start to see the certainty in them and we're already seeing the market trend here and I think honestly, a lot of this is going to be as there are more lending options available for short term rentals that treat them as businesses. That's when we're going to see these multiples on your noi the same way we do with with residential real estate long term rental real estate
I don't think the multiples are going to be the same, because obviously there's additional risk there. There's a different skill set there, there's more time being put in. So it doesn't make sense for the multiple to be the same. But I think they will sell on multiple and that will help to increase their value. But for right now, as things stand in the market, if you are investing for appreciation, not so much for cashflow, I think that the move is to go into multifamily residential. That being said, investing in multifamily and converting one or two of the units into short term rentals can also be a really good way or even medium term rentals can be a really good way to boost the cash flow even further. So you can kind of have the best of both worlds there. But really where I see the main advantage here for short term rentals is people who want to invest for cash flow. So anyone that's looking to, let's say, replace their nine to five income. Short term rentals are the obvious go because you actually get real cash flow, you can't use appreciation right now you just get to use it later on down the road. Once you either refinance, draw a loan against or sell the property, you don't actually get that money in your bank account. So if you're trying to replace an income and live off the money, short term rentals are the way to go. Me personally I don't, I'm not necessarily looking to replace my income. But I just really like cash flow. Cash flow is real, tangible, usable money that I can invest right now to help grow my portfolio, grow my wealth, use it in a real world scenario, it's just a lot more locked in it feels a lot more secure to me. And I know a lot of other people feel that way as well. So the preference tends to be towards cash flow. The other thing to consider is the barrier to entry. The barrier to entry with investing in single family homes is obviously a lot lower, because you need a lot less money for the down payment and the down payment as a percentage of the value of the property is lower with single family than with commercial real estate. So that's another big advantage if you only have a couple $100,000 set aside, getting into big multifamily residential is going to be more challenging. Whereas getting into short term rental property with you know, 7080 50,000 sometimes even is very, is really quite doable. So that's really kind of my pros and cons list. I'd love to hear your guys's thoughts in the comment section down below. Maybe there are things that I wasn't considering here. But I'd love to know your thoughts and again, there's a link in the description down below to our free training that'll help you to get started on the right path investing in short term rental properties if the direction you want to go. So all that being said, I hope you enjoyed the video. If you did and you got value from it, please give it a like hit that like button. And also make sure you subscribe to the channel to stay up to date. We post two new videos every single week. So I hope you have a great rest today. I'll see you in the next video.