Table Of Contents
Andrew Carnegie is well known for saying that “Ninety percent of all millionaires become so through owning real estate.” Real estate is a high-value, appreciable asset, and a foremost strategy for building lasting wealth. One approach to building wealth through real estate is with short term rentals.
Read on to learn how.
Want trusted advice from a real estate accounting expert? As you seek to leverage strategies for building wealth, real estate investing will be part of the play. We can help you maximize tax savings and streamline your approach with every available resource. Learn more about our advisory services here.
8 Ways Short Term Rentals Build Wealth
No matter what happens in the economy, the wealthiest people in the world have real estate holdings to fall back on. When it comes to short term rentals, there are some unique advantages that not only provide long-term security but short-term benefits.
There are eight ways that short term rentals can build wealth.
1. Cash Flow
A first way short term rentals build wealth is through cash flow. This is an immediate outcome of having a short term rental property: the money the property generates for you is typically superior to a long-term rental or other kind of real estate holding. It’s money in your pocket right now. Cash flow builds wealth because you can accumulate money to buy more properties, as well as replacing other forms of income, which is number two.
2. Financial Freedom
As your income from short term rentals grows, you may find that it replaces your need to work at all. Real estate assets appreciate, and as you strategically use the capital earned from a short term rental property to buy more properties, your revenues grow. When your income from STRs gets to a certain level, you are looking at total financial and lifestyle freedom, which is appealing to anyone anywhere.
3. Principal = Down; Equity = Up
Most people finance a short term rental property with a loan. Over time, the income you get from tenets or guests will pay down that loan for you. Part of your monthly payments will go toward principal. As the principle goes down, equity goes up. This accelerates the financial benefits for you, as you get equity not just from appreciation but also in the form of principal paydown.
4. Leverage
There is no asset that compares to real estate in ease of leverage. You can collateralize your debt. For example, say you’re buying a $500k property. That property may increase in price by 10%. You’re getting 100% of the appreciation but only putting in a fraction of the actual equity. Pure cash.
This is not something that can be done with other assets, and why real estate is part of the financial growth strategy of every high net worth individual in the country.
Have questions about STRs in general? Check out our article on Short Term Rental Frequently Asked Questions
5. Tax Benefits
The tax benefits for short term rentals are substantial. You can use the STR tax loophole, which results in major tax savings. Even if you aren’t eligible for the STR loophole, you can generally cover cash flow using depreciation. When you’re ready to sell, there may be ways to exit rental properties in a tax free manner using a 1031 exchange, acquiring other properties, through installment sales, etc.
Many growth-minded individuals who qualify for the STR loophole take the loss to offset taxes, then put that money toward a downpayment on another property, compounding the benefits and building wealth.
6. Appreciation
Real estate investors can often force appreciation. This is achieved by renovating a property, building additions, or using other tactics to force the market value up. You may buy a property that’s under market, then put money into it to get it to market standards. Then, you can sell it for a profit or simply have a higher value property that fetches better rental rates.
7. Generational wealth
Just like any other type of real estate or asset, the fair market value of your property is passed to your heirs at the time of your death. This means that your children can inherit the property, sell it, and have no capital gain taxes.
8. Enduring
Real estate is a reliable, enduring approach to building wealth. Regardless of market volatility or technological innovation, people always need somewhere to live and somewhere to go on vacation. There is a limited amount of real estate, and more “land” can be created. This creates a powerful dynamic: as the population grows, so will the value of real estate properties.
The sooner you buy, the sooner you activate an investment in your future.
Short Term Rentals & Building Wealth
All of this sounds great (and it is), but where to begin? Whether you have no real estate, some real estate, or massive holdings, you can benefit from strategic, market-savvy decisions every step of the way.
For a primer, read our Guide to Short Term Rentals.
Need to reach out about advisory services from a qualified real estate accountant? Learn how to work with us.