Residential housing demand is growing at a high rate in the United States, and Scottsdale real estate rentals are in high demand. The demand for single-family rentals has increased by over 30 percent in the last three years. Please note, because I work in the Scottsdale area I mention it throughout this post, but this information is pertinent to any area.
As we already know, short-term rental, or vacation, rentals have become extremely popular in Scottsdale, as more travelers are turning to this type of accommodation to save money and to be able to stay in a place that feels more like home vs. a hotel or apartment building. This has resulted in an increase in short-term rentals.
Today, with a shortage in housing, more housing providers are looking to rent their homes to short-term tenants to increase their profits when compared to leasing their properties to long-term tenants. Companies like and Vrbo have become household words and are growing exponentially.
In this next post, we will explore the differences between these two investment strategies and the benefits and limitations of each. This may help in deciding which strategy works best for your Scottsdale real estate investment portfolio.
5 Reasons to Invest in a Scottsdale Real Estate Rental Property
Before we talk about the two different kinds of Scottsdale real estate rental opportunities, let's answer the question of why you would want to do this to begin with?
Scottsdale Real Estate Property Appreciation
Appreciation is a way of measuring how much more money the property has gained in value than it cost. It is the equity created during your ownership. We can all see the difference in Scottsdale home values over the years. Because the Phoenix area and Scottsdale have been attracting new residents from all over the world, an investment in Scottsdale real estate to rent and hold can give you returns on investment that you couldn't get in other investment vehicles.
The real estate market's ability to generate the needed profit to pay a borrower's mortgages, taxes, and regular maintenance and repair costs is one of the major benefits of investing in real estate in Scottsdale. The benefits of investing in real estate may involve earning money for your own living expenses, as well as helping you contribute to a growing portfolio.
A rental property purchase is a good deal because of its ability to increase the net worth of the investment. When you add each rent payment to your loan, you will be adding to your mortgage in a manner that allows you to save for your investment down payment. Because your rental revenue can be paid by your tenants, you don't have to be concerned about your investment's value, and you can earn income plus equity at the same time.
Creating Cash Flow
You can use the rental income to pay off the mortgage on the Scottsdale property for rent and also to keep up with normal repairs and maintenance. Depending on the rent you charge compared with your total mortgage, HOA payments, and utilities, you might even have money left over to save for your next investment property.
Inflation or the rise of prices of goods and services occurs throughout our lifetimes. If all you do with your extra cash is keep it in a savings account, the interest you earn won't help you hedge against rising prices.
Do you know that Scottsdale real estate has never lost value during "normal" past recessions? The only time prices dropped was when the real estate bubble burst, and that was a real estate-related situation that most blame on the big banks and Wall Street.
I purchased my first house for $18,300! It was a starter home that was a handyman special, but we made it so cute that people's jaws dropped when they entered what looked like a little red schoolhouse from the outside. We eventually painted it a cream color. In 3 short years, we almost tripled that value! The interest on our savings would have never competed with the equity that was developed in such a short time period.
I always said I would never pay more for a car than what I paid for my first house. Well, I guess I'd be driving around in an older make and model if I had kept that mantra up.
Using Leverage to Your Benefit
Leverage refers to the use of borrowed funds to increase the potential return of an investment. In property, it involves putting a small amount of down payment on a property. Then you use the mortgage on the entire purchase price to finance the rest of the investment, which when sold, can provide you with a greater profit on the cash you actually used.
Enjoying Tax Breaks
Some tax advantages of real estate investing are available even if you’re a small investor, and not just through tax breaks, but the benefits. These include depreciation, tax deductions, exemptions, and other write-offs.
I think you can see why you might want to jump into a Scottsdale real estate rental investment. Benefits include capital appreciation, tax benefits, and the ability to borrow against your home. When we are talking about real estate as an investment, it means that you are buying an asset.
Which Scottsdale real estate rental type would work best for you?
If most people would like to own their own rental property, they see buying a home as being the main reason they would want to own property, although owning a rental property also offers many benefits. When one understands why and how an investor might choose to own a rental property, it then makes sense that one would want to buy Scottsdale real estate to create income and build equity.
In fact, an investor can invest his or her money in rental properties while the tenants use their own furniture, hopefully, perform everyday upkeep, and sometimes pay their own utilities. Your costs would be making repairs and fees for a management company if you decide to hire one.
The downside to long-term rentals is that your tenant might run into difficulty with making their lease payments. You now have to work something out with them or pay to have them legally evicted. Even a good-paying tenant can cause damage to your rental property.
I had a woman who tried to sell her Scottsdale townhouse because she got married but she had to get a certain amount and the market didn't justify the price she needed. She ended up renting it to a doctor. She called me back to list it again when the doctor's lease was up and the place was a mess! There was even some damage caused to the bathroom tile and the living room was packed with high rows of boxes holding the doctor's paperwork.
Did you know that large real estate investment companies are purchasing a lot of homes in Scottsdale and turning them into long-term rentals? These are not flip and sell firms or iBuyers. They are seeing the demand for rental properties in this popular city and they're taking advantage of it. And much of their holdings are single-family Scottsdale homes. Their large investment portfolio in the city is one of the reasons sales inventory is dwindling and some buyers are being priced out of the market.
Another reality to consider is the fact that once you have an accepted lease signed by all parties, that rent will remain steady for the entire term of the lease agreement. If rental prices soar up during that time, you'll have to wait for the lease to expire before you can raise the price.
Although I've heard both sides, according to data from Mashvisor, short-term rentals produced significantly higher rental income than long-term rentals in the 10 hottest areas. However, I've also read about short-term rental property owners who had more vacancies throughout the year than they had planned for.
Scottsdale Vacation Rental Market - Short-term
Short-term rentals are also known as vacation rentals, and the term has been growing for the last few years. In fact, according to Wells Fargo, they're steadily growing and may account for as much as 21 percent of the global market by 2020.
Travelers have many options, including short-term rentals. A short-term vacation or rental is just the opposite of the traditional extended stay, a stay that lasts from one week to one year. Rental can be a hassle, but it can also produce a windfall. Instead of purchasing a vacation or second home, you can rent it for a short-term while you are gone. In most top vacation destinations, there is a steady demand for such a service.
The downsides of short-term rentals are that they require greater day-to-day property management, they require owners to provide maintenance and upkeep, and to pay for utilities. Many short-term rental property owners charge a cleaning fee on top of their daily rates, but there could be wear and tear and damages to a higher degree than a long-term rental will have.
It will be more difficult to handle a short-term rental if you live in a different state. You would most likely have to hire a local property management company.
We all know that it is super hot in Scottsdale in the summer. We have our "snowbird" season that usually begins somewhere from October through April. Some residents of Scottsdale have 2nd homes in cooler areas for the summer. So you'll need to plan on few, if any, short-term rentals in the summer.
As a result of short-term rentals becoming more popular over the past year, there have been variations in the laws governing these rental properties throughout the United States. That makes it important to understand the limits and restrictions applicable in each of these locations in which you'd like to invest.
I hear more and more Scottsdale residents complaining about the short-term party houses, where young people come and invite a lot of guests to attend a long-going party. There can be arrests made and there has been damage reported to neighboring Scottsdale homes. Some of these rental properties are pushing residents out of their neighborhoods.
Areas of the country that are in the middle of urban centers are more likely to adopt a “yes” vote for any short-term rental laws being passed in the near future. Those in more rural areas are more likely to “pass” laws that may be detrimental to the short-term rental industry. Your best options will be areas that are more accustomed to seeing travelers rather than residential communities.
Which investment strategy is the best for you?
The first step in choosing between these two real estate investment options is to make sure that you understand their similarities and differences. For this, it’s helpful to first clarify your investment goals.
It is the case that if you have the goal of generating a steady, reliable income from property, that you should be more comfortable staying in a property for an extended length of time. Long-term rentals also allow you to avoid the risks associated with owning short-term rental properties. They can also offer more stable returns than short-term rentals.
In contrast, if your aim is to buy a vacation or second home and you want to pay for that, then a short-term rental may be a good option for you. A short-term rental also might be the best choice if you are willing to accept greater volatility in the income and the risk of loss. This might be a better option if you'd like to create some kind of income from a 2nd home you vacation at. Rent it out to others while you're in your home state.
If you are considering purchasing a traditional or retirement home, you may want to think carefully about which type of investment will fit your goals. Both long-and short-term rentals may be appropriate options. However, there are some other factors that you should take into consideration, like your risk tolerance.
We'll help you with your decision
Still wondering which rental option would be best for you? We can help. We would always suggest consulting with a financial advisor for such an investment of money, time, and potential downfalls, and to see if you're financially stable enough to handle either kind of Scottsdale real estate rental property.Posted by Judy Orr on