Thinking of Buying a Rental Property? Consider These Five Proven Alternatives
Dalton Brewster
5 min read
One of the most tried and true ways to build wealth is by investing in real estate. Real estate can be an effective investment to hedge inflation, provide tax benefits and pass down wealth to heirs. Having a rental property can provide monthly cash flow, and the home’s value may appreciate over time.
Rental properties aren’t a perfect solution, especially since real estate costs are skyrocketing. Some alternative, more affordable investments to rental properties include using short-term rentals sites like Airbnb Inc. (NASDAQ: ABNB), real estate investment trusts (REITs), renting out vehicles or tiny homes and selling call options.
Short Term Rentals Airbnb/VRBO
Short-term rental sites like VRBO and Airbnb provide unique opportunities since properties listed there can be rented at higher rates than typical long-term rentals. In some tourist areas, nightly fees can be especially high during peak periods.
One way to start making passive income with these sites is to find a long-term rental and list it on these sites. If you go this route, confirm that your lease and neighborhood rules allow subletting.
Another strategy to profit from short-term rentals is to join a vacation rental franchise. With a franchise, you have the opportunity to make money under a proven system. Franchises may provide training and support, shortening your learning curve. Budget in the cost of initiation fees and management’s cut of your profits.
REIT and REIT ETFs
Another way to invest in real estate without dealing with tenants, maintenance costs or large down payments is via REITs and REIT exchange-traded funds (ETFs). Both REITs and REIT ETFs offer access to diversified holdings of companies that invest in real estate.
REITs come in different varieties, including equity and debt REITs. Equity REITs earn revenue primarily from tenant rents while debt REITs profit by investing in mortgages and mortgage-backed securities. REIT and REIT ETFs can also specialize in certain sub-niches like office buildings, healthcare and mobile homes.
Not all REITs trade on public stock exchanges, but REIT ETFs do. REIT ETFs trade like stocks, and because their prices change intraday, they can be bought on margin and sold short. Many REIT ETFs mimic popular benchmarks like the MSCI U.S. REIT Index. As a result, they can have expense ratios as low as 0.12%, which can save you thousands of dollars over the long run.
Renting Out Vans
Real estate isn’t the only physical asset that can be rented and sold for profit. With the rise of van life, vans and other vehicles are promising options.
Van lifers remodel vans into liveable apartments on wheels. Van life costs can start at $5,000 and go over $100,000. Start-up costs vary based on van make, model and interior amenities. Some van lifers add mini kitchens, running water and heaters within their vans.
A potential way to make passive income with vehicles is to rent van-life vans on a site like Outdoorsy. This site is similar to Airbnb or VRBO since you can set your own rates and use online transactions. Prices also vary based on the area, amenities and spikes in demand around special events.
Tiny Homes
With traditional homes becoming more expensive, people are looking for alternatives like tiny homes. Tiny homes are houses that are between 100 and 400 square feet. These homes usually come with standard appliances and kitchens and can be transported with a trailer.
Prices range from $30,000 to $60,000 depending on amenities, home type and materials. It could be easier to buy and rent these homes since they cost much less than a typical home. It’s also possible to get financing for a tiny home, provided that they conform to minimum lending requirements. Most lenders have minimum loan value requirements to ensure profitability before they offer financing.
Another option to profit from tiny homes to rent one and list it for more than your monthly rent payment on vacation rental sites. If you go this route, you could also hire a manager to deal with tenants and maintenance for a fraction of a traditional rental property firm.
Real Estate Crowdfunding
Buying rental properties used to be the simplest and most affordable option for investing in real estate. However, the growing number of real estate crowdfunding sites are providing several new ways for retail investors to reap the benefits of real estate investing without having to own a physical property.
Real estate crowdfunding allows investors to pool their money with other individuals to purchase or develop a property. The asset is managed by the deal sponsor while the investors simply collect passive income from the rent and hopefully realize a gain when the property eventually sells. You can browse current real estate crowdfunding offerings through all of the top platforms and sponsors on Benzinga’s Alternative Investment Hub.
Bottom Line
Owning and renting real estate is one of the oldest and most effective ways to create multiple streams of income. It can be especially profitable since it offers many tax breaks, can be inherited and may be sold for sizable profits.
Rental real estate isn’t perfect, especially since even average homes in many markets are worth $1,000,000 or more. Short-term rental sites like Airbnb, REITs, vehicle rental platforms, tiny homes and selling covered calls can be more affordable alternatives to create multiple income streams.
