What Warflation Costs You and Whether a Short-Term Rental Beats Investing Your Home Sale Proceeds

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14:59Sean Pyles:Today's episode is sponsored by Shopify. I remember years ago when I started the Smart Money podcast, I had no idea if it was going to be a success. Now, years later, the show is, if I can say, a huge success, and I'm so glad that I believed in myself when I launched this podcast. Now, I do know I was right in believing in myself launching this show, despite all of my fears and hesitations. But it also helps when you have a partner like Shopify on your side to help.

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16:17Sean Pyles:We're back and answering your money questions to help you make smarter financial decisions. This episode's question comes from Becca, who emailed us their question. Hi, Sean and Elizabeth. My boyfriend and I are selling our condo in California to move to Texas. I think I prefer to rent when we move to Texas, and my boyfriend and I have been discussing what to do with the net proceeds from selling our California home. He likes the idea of buying land in Utah, I love the mountains, and building a mountain chalet that we can visit throughout the year and have as an investment property when we are not using it, Airbnb style.

16:49Sean Pyles:He is excited about the idea of designing and constructing, but I have hesitations about the cost to build, as well as the complications of managing the property from several states away. The alternative we are evaluating is simply to invest the proceeds from our California home sale. Our question for you is, would you consider having real estate and a short-term rental a strong diversification of my portfolio, or is it more of a risk? Thank you, Becca.

17:14Elizabeth Ayoola:Becca and partner, welcome in advance to Texas, where I am now located. Now, to help us answer Becca's question on this episode of the podcast, we are joined by our go-to nerd whenever we talk about managing rental properties, Lisa Green. Welcome back to Smart Money, Lisa. Well, thank you, Elizabeth. I'm so glad to be here.

17:34Sean Pyles:Hey, Lisa, good to talk with you again. I want to start by talking about how much cash Becca and their boyfriend might net from selling their condo. And the truth is that we just don't know what those numbers are, because we don't know how much they bought their condo for that we don't know how much they might sell their condo for. But there is some good news when it comes to selling property, which is that you can likely pocket your gains, you might be able to keep up to$250 ,000 in capital gains tax free. That's$500 ,000. If you are married filing jointly, which is pretty nice. But here's the thing about condos.

18:04Sean Pyles:They have a reputation for accruing value more slowly than something like a single family home. So Becca and their boyfriend's first step should be to see how much they might be working with after selling their house. And then they can think about how much they would really be playing with when it comes to either investing or buying or building something. Now, assuming they do have some cash to work with, let's explore these different options that Becca is presenting. First, buying land in a different state and building a mountain chalet, which sounds frankly, extremely fabulous, although very complicated, and maybe expensive.

18:37Sean Pyles:And then again, the other option is simply investing the proceeds from their sale. And I assume they just mean investing in the stock market here. I get the impression that Becca and their boyfriend are first time landlords, which is also something to consider. So Lisa, what's your take on this entire situation and the potential options that they're proposing?

18:55Elizabeth Ayoola:You know, Utah is just such a beautiful state. I love visiting there. And I understand the appeal of wanting to have a chalet there. That would be awesome. I am also generally a fan of real estate investing. I've been doing it for more than 20 years. However, in this case, I would suggest approaching it with some caution. You need the right real estate investments to make it work for you. And at a distance, it can be very, very important to have a good property manager who lives in that area and could take care of the property while you're not there. As Sean was reading the question, it took me back to a couple years ago when I was leaving Florida.

19:38Elizabeth Ayoola:I was renting a condo and the landlord wanted to get rid of it and they wanted to sell it to me. And as I was doing my research, because I was like, maybe this is a good opportunity for me to get into real estate and rent it out. Exactly what you said, Sean, the value can appreciate pretty slowly. So that was a risk that I wasn't willing to take. Lisa, what would you say are some risks that you see with this option that Becca wants to take, one of the options? Well, Elizabeth, I would say one big risk is the possibility of negative cash flow, which means that you're just not getting enough rent coming in to cover the expenses going out.

20:17Elizabeth Ayoola:And so you end up having to pay some of those expenses out of your own pocket during those times. So are you able to dig into your pocket to cover those costs if you have some unexpected large expenses or if your occupancy is lower than what you had hoped?

20:40Sean Pyles:Something I'm thinking about as well is, again, we don't know how much Becca and their boyfriend might net from this condo sale, but it's not like they're going to be able, or maybe they shouldn't be using all of the proceeds to construct the chalet or to buy a rental property or just invest it. They should likely be pocketing some just for savings for a rainy day, especially if they're going the rental route.

21:00Elizabeth Ayoola:Very good point. Another risk I see is just wear and tear. there are very few renters who would take care of your property the way you would take care of it if you were living there yourself. Can I count myself as one of those renters? Minus aisle.

21:18Sean Pyles:Yeah, you and your son are tearing apart your apartment. We know that.

21:21Elizabeth Ayoola:The blinds, I find scissor cuts in them. I don't know how that happened, but I will be having to replace the blinds.

21:27Sean Pyles:Say goodbye to your security deposit.

21:29Elizabeth Ayoola:No. Well, with a short-term rental, wear and tear doesn't just affect like the building the property itself when you have a short-term rental you also have furnishings in it you have furniture appliances linens glassware all these things that you provide for your guests and so those things experience wear and tear as well you know some of those furnishings might just accidentally make their way into a tenant's suitcase and walk right out the door with them. Or again, they don't necessarily treat your home the way you would treat it. We once had a renter who like checked out and left and left water running in a stopped up bathroom sink.

22:17Elizabeth Ayoola:It was like very fortunate that we caught it in time because that could have really caused a big disaster.

22:24Sean Pyles:Yeah. It's important to think about who might be staying at your rental property and what their intent would be. If it's a long-term renter, that's going to be their home. They want a cozy place to stay. If it's an Airbnb, that could just be a party pad and they might not really care about what they do or how they leave the place at the end.

22:40Elizabeth Ayoola:And then another issue I think that particularly applies to short-term rentals is local ordinances. Some communities have had what they consider negative experiences with Airbnb type rentals. And so they've started to restrict those rentals because neighbors have complained about the noise or the traffic, whatever. And so this is true in the area where I live. It's also true in the area where my son lives several states away. So it may be somewhat widespread. And so if you already are set up and renting your house on a short-term basis before these ordinances go into place, you might be able to continue.

23:24Elizabeth Ayoola:They might let you continue since you were already set up, but they might not. So I think it's worth considering what would you do if you were no longer allowed to use your property that way?

23:37Sean Pyles:And it's really on the person owning the property to be aware of all these various ordinances. You need to be proactive because a city doesn't care if you didn't know about a rule and violated it, they're still going to charge you. There was just an issue in the Portland area where a number of Airbnb type renters didn't know they were violating various ordinances. And I heard about one man who was charged$20 ,000 because he violated an ordinance that he wasn't aware of. And this was an older gentleman. He didn't have a lot of money and it's putting a lot of strain on people. There's been, of course, some backlash to this, but you can really get into trouble if you don't follow the rules to the letter.

24:12Elizabeth Ayoola:And I'm just curious, since you all are both property owners and renting out, where do you find or stay up to date on those kind of resources? Well, where I live, there are some associations of folks who do this type of real estate investing. And so you can hear a lot there, or you can follow the local news. Sometimes it's in the local news when the city is about to change an ordinance. If you are actively registered as a short-term property rental owner, then the city itself might send you notifications when things happen.

24:49Sean Pyles:And for me, I'm not doing short term rentals. So I just read up on my local city's ordinances for having a long term rental. And I trust my property manager to ensure that we're all in accordance to that. And yeah, it's pretty straightforward for me, fortunately.

25:04Elizabeth Ayoola:Now, here's the big thing that you need to keep in mind when you're deciding between real estate investing and also stock market investing. Now, investing in the stock market is so much more straightforward. With investing in the stock market, you choose the account you want to invest in, you can choose your investment, and then hopefully you can watch your money grow over time. Now, I want to put out there, of course, there are plenty of risks when it comes to investing in the stock market. If you have looked at your portfolio lately, then you will be able to relate to that. But it can be a less hands-on affair than building and managing a property.

25:37Elizabeth Ayoola:Now, in Becca's case, They're asking whether real estate would provide good diversification for their investments or if it's more of a risk. And the answer is, Becca, yes, possibly. Real estate could provide good diversification. Of course, we don't know the exact makeup of their portfolio, and there are plenty of risks that come with that. But Lisa, can you speak to how you view your real estate investments in the broader context of your portfolio? And then how do you compare their risk to that of your stock investments? Yeah, I think with the stock market, you typically make a choice. You're either investing for growth, like the appreciation of the value of your stock over time, and you don't really realize that growth until you sell the investment.

26:24Elizabeth Ayoola:Or you're investing for income, where it throws off cash that you can spend as you go along. And you make a choice. With real estate, I think that you have the potential to do both at once because you can get growth as your real estate increases in value. And if you have invested for positive cash flow, you can also get an income stream when the rent that you are receiving exceeds your expenses as you go along. And that's like a great situation to be in. Also, your real estate doesn't necessarily move in tandem with stocks. So when the stock market falls, your real estate might still be doing fine and vice versa.

27:16Elizabeth Ayoola:So in that sense, I do think it can be good diversification. Now, in my own case, my real estate investments over the years have pretty typically outperformed the stock market. but I used a really different style of real estate investing for the most part than what Becca is considering. I bought fixer uppers or foreclosures, properties that essentially gave me immediate equity in them. And then on top of that, we did a lot of the physical work on them ourselves in order to save money and make them a little bit more profitable, especially in the early years. So, you know, that was helpful in our generating better returns.

28:04Elizabeth Ayoola:Becca is talking about something a little different.

28:06Sean Pyles:Yeah, they're talking about potentially building a chalet from scratch. How does that change the calculus about whether this could be a risky or potentially lucrative venture for them?

28:16Elizabeth Ayoola:I mean, I think that's something really important to consider. The outcome could be different for new construction. Building materials are really expensive these days. Labor costs are really high. So, you know, I'll kind of go back to something that you mentioned earlier, Sean. This may not be an all or nothing decision for choosing between stocks or real estate. You could potentially do some of both. You could use part of your cash toward a property in Utah and then get a mortgage for the rest of the cost of that property. then you still have part of your cash for other uses. That could be stock market investments.

28:58Elizabeth Ayoola:It could be having cash reserves to help cover any unexpected expenses. Now, there is a caveat around taking a mortgage for this property. This will make cash flow a bigger challenge because you're going to have a mortgage payment to make. But it does help you diversify. And it also prevents you from having a lot of what we call trapped equity in a paid off property. Because if you have this property that's sitting there completely paid off, and you're in a financial bind and you need access to some of that value of that property, stocks are more liquid than real estate. It would be easier to tap the money that you need by selling stocks than by trying to go out and sell the property or get a mortgage on the property after the fact.

29:52Sean Pyles:Right. I want to go back to your note about cash flow being an issue, because if they do have a mortgage on their potential chalet, I assume they would also be paying rent in Texas too. So that's a good amount of money each month going towards covering housing expenses. And one would be a place that they're not even living. So they'd have to be really clear on how much money they have coming in, again, beefing up their savings, hopefully, and just being confident that they do have enough liquidity on an ongoing basis to cover all the myriad expenses from their rental property they'd be living in and a chalet states away from where they are.

30:23Sean Pyles:Another thing I'm thinking about is whether real estate is a good investment for Becca and their partner right now is going to come down to a lot of personal factors, like what their lifestyle is like and whether they have sufficient cash and access to capital to cover these building costs. And I assume some semi-frequent trips from Texas to Utah. Lisa, can you speak to the lifestyle and time commitments of managing rental properties?

30:45Elizabeth Ayoola:Yes. You know, lifestyle is a big factor here. Becca and her boyfriend love Utah and they want to spend time there. So this is not purely an investment decision for them. So while you are analyzing the best financial move, you're also thinking about what will give you the life that you want to live. And I have faced a decision like this twice, and I made opposite decisions each time. The first time was when my son moved thousands of miles away to a beautiful location where we knew we would want to visit a lot. So we considered doing something very similar to what Becca is considering. We thought about buying a house there and using it as a short-term rental when we were not there.

31:40Elizabeth Ayoola:Ultimately, we decided against it. Because we didn't want property maintenance to dominate every visit we made. When we go there to visit our son, we want to visit our son, enjoy the beautiful location, and not spend all of our time trying to deal with the deferred maintenance on this house that tenants have been in and possibly messed up.

32:08Sean Pyles:Yeah. Even though you could have possibly written off some of those trips, correct? If you were going there. That is true. That is true. Part for business.

32:14Elizabeth Ayoola:Yeah. Yeah. And we also did not want the hassle and the cost of maintaining a property long distance in a very expensive location. We would have had to hire the property manager. We would be paying for someone else to do all of this maintenance every month while we were not there, whether it was occupied or not. And so we ultimately decided to rent when we visited there. This has been the right decision for our lifestyle. And we think probably for our pocketbook as well, although we know that we did miss out on the gains we might have made from home appreciate, home values appreciating in that area.

33:00Elizabeth Ayoola:And of course, as you mentioned, Sean, on possible tax write-offs that we could have had from our trips there.

33:06Sean Pyles:Yeah. So with this first situation, do you think it was really more the lifestyle choice that won out over the dollars and cents opportunity that you just didn't want to fuss with having to manage a property and you said the money just isn't worth it?

33:18Elizabeth Ayoola:Exactly. It was more of a lifestyle decision because there are other options for investments. Yeah.

33:24Sean Pyles:And you want to go hang out with your son. You don't want to be worried about managing some property that's far, far away from where you're living or wherever you are.

33:31Elizabeth Ayoola:Yeah, it is very stressful to get that phone call that something has gone badly wrong with your property when you're thousands of miles away. And you've got to try to figure out how to deal with it at a distance. And we just really did not want that for ourselves.

33:46Sean Pyles:I live about three hours from my rental property, and I've been renting it out for just about a year now. And I still dread that inevitable call that I know is coming, which is why I continue to sock away a decent amount of money each month just to cover whatever is going to happen to my house.

34:02Elizabeth Ayoola:Lisa, tell us about the second time where you made the opposite decision. What did you decide that time around and what lifestyle choice influenced that decision? Yes. Well, the second time was when we left a home that we really loved. We needed to move to be closer to family members who needed help. But we were we owned this kind of unique property that we really loved. And we thought that we might want to move back into it someday. so we didn't want to sell it. We knew it would be difficult to replace if we sold it, so we turned that one into a short-term rental. Now, again, this was not a purely financial decision.

34:45Elizabeth Ayoola:This is one of those situations where lifestyle plays a factor, and it may not have been a wise financial decision. We do not have positive cash flow from this property. We are losing money on it. The occupancy for short-term rental has been lower than we had hoped. We had to spend quite a bit of money on furnishings and linens and glassware, and the tenants have already damaged some of these things. And we do have local ordinances that restrict how we are allowed to market the property. But we do still own the house. We can move back into it whenever we want. It's only a half an hour away from where we're living right now, so it's easy to keep tabs on it.

35:39Elizabeth Ayoola:We can write off the losses against our other rental income. And we still will benefit from the appreciating home values. And we also preserve that sweet, sweet 2.75 % mortgage from a few years ago. I'm jealous. We can't replace that.

36:01Sean Pyles:No.

36:01Elizabeth Ayoola:So even though in this case we made the opposite decision, it appears to be right for our lifestyle. And I know we'll be very glad of it if we decide that we want to move back to that house.

36:12Sean Pyles:Yeah. Hearing that description, it sounds like the short term rental aspect is kind of a drag on your lifestyle because of just the various pains around like marketing restrictions and fixing glasses and buying random things for the house. Do you think you would ever convert that to a longer term rental? Or do you just like having one short term rental in your mix?

36:31Elizabeth Ayoola:In our personal experience, I found long-term rentals to be easier to manage and easier to use. Now, in Becca's situation, a long-term rental doesn't really accomplish her lifestyle goals because they want to be able to go and stay in that property for a vacation home. So if someone's living there full-time, you not really have the opportunity to say, hey, can you like go somewhere else for a week because we want to stay in this property that we own? And in this particular case with the house that we decided to use as a short-term rental, it just was that particular property was not well suited for a long-term rental or else that's probably what we would have chosen instead.

37:19Elizabeth Ayoola:And it was our first time to try short-term rentals. There are many people who say that they can make a lot more profit on a short-term rental than if they had the same property as a long-term rental. And I'm sure if the circumstances are right, that's probably true. But the circumstances have to be right. And in our particular case, I think they were not. That reminds me of, you know, I love a Facebook group. And I was poking around in one and someone had asked, like, you know, people who make over six figures, what do you do? And I was so intrigued to see so many travel nurses who had rental properties that they were renting out short term rentals and making tons of money from for nurse to other travel nurses who were coming to the city and only needed to stay for short periods.

38:04Elizabeth Ayoola:And they would make thousands of dollars off of those short term rentals. Now, obviously, I don't know, like you guys say, the losses they were facing or the challenges or the late night calls that they had. But I know that they did find it profitable.

38:16Sean Pyles:Yeah. Yeah, I think a lot of it comes down to knowing your market or maybe finding a niche in that case that you just described, Elizabeth.

38:22Elizabeth Ayoola:Yeah, but I think what I'm hearing you guys say mostly from this conversation is that, you know, just because it's profitable, it doesn't mean it's the right thing for you to do. So you really need to make sure that it also fits into your lifestyle and how you want to live your life. You know, it's not always about just making extra money.

38:39Sean Pyles:Yeah, and that really comes down to what Becca and their boyfriend's long term financial goals are. Do they want to maybe get a solid return through investing in the stock market? Do they want to be able to have access to a house in Utah? It seems like the Utah home is their greater priority than just returns or potential income from stocks. But there will be a lot more to sacrifice and other logistics to coordinate when it comes to actually building a chalet in Utah. Yeah. Okay. So, Lisa, if you could leave our listener, Becca, and everyone else listening with some advice in 30 seconds to do just maybe one thing, what would that be?

39:15Elizabeth Ayoola:Well, I would say the very first thing is to look closely at whether you can achieve your lifestyle goals by renting when you visit Utah rather than owning there. And then if you decide that owning is the path you want to take, then do your due diligence as you would for starting any business because that's essentially what you're doing. You're starting a business, and there are many, many questions to consider from the going rates for short-term rentals into the area. What's the demand like? Is it seasonal? If so, how much vacancy are you going to have in the off-season, and how are you going to cover the expenses of that?

40:04Elizabeth Ayoola:and during the prime season that's probably when you can get the most tenants but that may also be when you want to go yourself so how much of that prime time are you going to be using rather than renting and then and then of course all the other factors that we have already discussed like your ordinances your local ordinances the cost of the new construction again just like treat it as a business. Think of it as like writing your business plan. How is this going to work for you? And that can kind of help you make a decision.

40:38Sean Pyles:Yeah, it sounds like they have a lot of research to do before they start this venture. They are going to go the chalet route. Yeah. Okay. Well, Lisa, thank you so much for coming on and talking about rentals with us. It's always so fun to chat.

40:50Elizabeth Ayoola:Well, thank you for having me. I think that Becca is already asking smart questions. And so I wish them the very best of luck in whatever they decide.

41:00Sean Pyles:Likewise. And Becca, please let us know what you and your boyfriend decide. We'd love to hear from you. Okay. And that's all we have for this episode. Remember, listener, that we are here to answer your money questions. So send them our way. You can turn to the nerds and call or text us your questions at 901-730-6373. It's 901-730 nerd. You can also email us your questions to podcast at nerdballet.com or leave us a comment on Spotify or YouTube.

41:25Elizabeth Ayoola:Come hang out with us next time where we will go deep into Reddit. We love Reddit over here to see what people are sharing about their personal finances and also whether they're actually getting good advice. Follow Smart Money on your favorite podcast app that includes Spotify, Apple Podcasts and iHeartRadio to automatically download new episodes.

41:45Sean Pyles:Here's our brief disclaimer. We are not your financial or investment or rental advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.

41:56Elizabeth Ayoola:This episode is produced by Tess Vigland, Hilary Georgie help with editing, Nick Karisimi and Eve Krogman helm our audio and our video production. Huge, humongous, gigantic. Thank you to NerdWallet's editors for all their help.

42:10Sean Pyles:And with that said, until next time, turn to the nerds.

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