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- [00:00]
A
When you buy your first rental, everyone gives you the same advice. Play it safe, get a long term tenant and collect the rent every month. But that same house run as an Airbnb can make two or three times the cash flow. So which one should your first deal actually be?
- [00:18]
B
And today, me and Ashley are going to settle it. And we're not pulling our highlight reel. We each grabbed one real property from our portfolio. Mine a short term, Ashley's a long term. And we're putting them head to head on three things that decide this for a rookie. The the money, the work, and the risk.
- [00:37]
A
This is the Real Estate Rookie podcast. I'm Ashley Kerr.
- [00:40]
B
And I'm Tony J. Robinson. And if my voice sounds a little bit different today, it's because I'm coming overcoming a cold.
- [00:45]
A
Oh, you guys, don't listen to him. We just got back from Vegas pool party.
- [00:50]
B
I did just come back from Vegas, but I also am overcoming a cold,
- [00:54]
A
which maybe I think they call it laryngitis from too much yelling and partying. Tony.
- [00:58]
B
Maybe a little bit of both. But it's still me. I'm still here. It's still Tony. So yeah, Ash and I today, we just want to talk about the difference between short term and long term. It's a question that a lot of rookie investors have. And each of us just wants to share our experience of what this looks like. And we both intentionally tried to pick a deal that wasn't like, you know, a bad deal because obviously we both had deals that we didn't enjoy or like our best deals or like home runs that maybe someone wouldn't be able to replicate. We just tried to pick these kind of middle of the road deals that are super attainable and reasonable for all of our. Ricky audience, who's listening? Okay, so before Ashley and I really started arguing about any of this, we just want to get some real numbers on the table. So I'll start with one of my properties. This is a tiny home that we own in Joshua Tree in California. We bought this a few years ago, I want to say maybe two and a half years ago, maybe three years ago at this point, but, but we've had it for a couple of years now. It's 390 square feet. So it's like a very small property. We bought it for just over $300,000. Our All in costs to, for down payment, closing costs. Got some seller credits in there as well. And like furnishing the place was about 50,000 bucks. Some 55 somewhere in that ballpark. I want to Say, and this deal for all of 2025, like net, net net cash flow was just under $12,000 for the year. So we're looking about, you know, for the cash we put into it, about a 20% cash on cash return. Now obviously, you know, over the years that we've owned it, we've had to, you know, replace things and, and add things, but all that's kind of included in those operating expenses. But for 2025, we netted on this deal just under 12,000 bucks. So again, not my best deal, not my worst deal. Just like a very middle of the pack, very reasonable purchase price for a lot of rookies that are listening. Three, you know, 300,000 bucks, 10% down payment, that's 30,000 bucks. Actually acquired this property. So very reasonable first deal. Ash, what about you? What property is going head to head with my 390 square foot property in Joshua Tree?
- [02:53]
A
Yeah, so this is a duplex that I purchased in a rural small town outside of Buffalo, New York. And I bought it for 37,000, which yes, I bought this in I think 2018. So you're probably going to pay more. But this was a cheaper duplex. Part of the reason was, was because it's in a small town, it wasn't actually a great area. It was kind of known for having a lot of drugs and some crime in the town. But it was great cash flow. So bought the property for 37,000. That's what it was listed for. And we ended up going to a bank and the bank offered us the financing on it. At first we didn't know how we were going to pay for it. And so we offered, or the bank offered to us to do a 90 day unsecured loan. So already this was a deal that was getting interesting for us. And we purchased it with cash from the bank and then we immediately went to the bank and refinanced with them and ended up appraising for $55,000. And all we had done was put a refrigerator in there for about $800. So when we were able to refinance, since it appraised for so much, we actually got to refinance for more than we bought it for, also pay for our fridge from that money. And we each of my partner and I got about $2,000 to walk away with and own the property. So the cash flow wasn't super great. Like I'm, you know, we're not talking thousand dollars a month here, but it was enough that we were $0 into this deal and walked away with $2,000 each. But this property, and we'll talk about this more, did not, you know, wasn't a home run deal for sure, but that's how we. And it was just on the mls, so that's how we found it and financed it.
- [04:51]
B
Got it. And after you refinanced, Ash, do you remember what the ballpark cash flow was?
- [04:56]
A
I think it was around like $200 a month, I think, which think is pretty good for just a $37,000 investment. Plus, we didn't use any of our own money. So it was a very standard, typical deal. It wasn't a loser, but also wasn't, you know, a grand slam, per se.
- [05:14]
B
So, Ash, my deal cash flow is again, about, you know, 12,000 bucks a year on this tiny house in Joshua Tree. Yours is a couple hundred bucks, but you got into it with literally no money left in the deal. So for a rookie that's looking at both of those two paths, what should they be thinking about as they try and make that decision?
- [05:32]
A
Yeah. So I think this is a great example and question to ask about any deal you're looking at because it is so hard to compare somebody's cash flow to somebody else's. Like, most of the time it's not apples to apples. So, like Tony, you look at Tony and Zel and be like, wow, 11 grand is way better than, you know, a couple thousand dollars that Ashley's making off this. I want Tony's deal. He's making a lot more money. But as we learned, we both put different amounts of money into the deal. So Tony has money sitting in there that he's not going to get back out right away. I have no money sitting in the deal and I'm making some money. So there's things that you have to compare for yourself as, first of all, can you afford to leave the money into a deal and let it sit there? Do you need to do the cash out refinance to pull that money back out? Because you need to pay off a hard money lender or a private money lender or that was literally your life savings, and you need to put that back in your savings to have some comfort and security for your family. But really you need to look at the cash on cash return. So this is comparing how much you invest into the deal compared to how much you actually make off the deal. And this can actually give you a better comparison. When you find out how much money somebody invested into that, you go on Instagram and you look and see like, oh, Tony just posted you know, he makes 10 grand a month on this property in cash flow. How come Ashley doesn't make that on her properties? She must suck as an investor. What we don't see behind the scenes is that some investors pay all cash and they don't have any mortgage payment and that's why their cash flow is so high. Where if I'm going and I'm taking a loan that's, you know, 80% of the purchase price, I have that mortgage payment. So my, some of my cash flow is going towards that, but I also have less money tied up in the deal. So you have to go back to the very, very beginning and compare what is more important to you and why are you investing in real estate in the first place? Do you have the money to leave into the deal? Or maybe you have money that you continuously invest in the stock market and let's sit in the stock market and now you're deciding you want it to like sit in equity in a property or maybe you don't have a ton of cash. So like to kind of propel yourself and get started, you need to use as little money as possible with still being cautious of not over leveraging yourself. Or maybe you don't need the cash flow now and this is an appreciation play for you for down the road that you want the property to appreciate. So I think looking at the cash on cash return to really compare and also what do you need to get out of the deal to make it work for the life that you're trying to build? And what your goals are out of real estate investing are more important than just like comparing the cash flow 100%.
- [08:25]
B
And I think that takes us into the next big point is just like the actual cash that it takes to get into either a long term versus a short term. And I think one of the biggest mistakes that new short term rental investors make, aside from picking a city just because they like to vacation there, I think that's probably the biggest mistake I see new investors make. But the second biggest mistake I see people make is that they take all of their available capital and they, they use it on the acquisition of the property. So their down payment, their closing cost, and then when it comes time to actually set up the Airbnb and turn it into a short term rental, they're like pinching pennies and like doing everything super diy. And then they're upset that the property doesn't perform, but it's because they didn't invest the necessary capital to actually get the deal up and running. So I, I think that is one of the biggest decision points you have to make is how much capital do I have access to and if I do want to buy a short term rental, do I have enough to both acquire the property and effectively set it up to compete at a high level within that market? And if not, if your budget is maybe more limited, then maybe going after a long term rental does make more sense. Even if the cash flow is maybe reduced, maybe it does make more sense because all you have to worry about with a traditional long term rental is the acquisition side. And obviously with both these properties there's maybe some like minor repairs and maintenance we'll have to do as we're getting into the deal. But you know, assuming for the most part that we're talking about relatively turnkey properties, then most of your work as a long term rental stops once you actually acquire the property in terms of cash you have to spend. So it, it's just an important point to consider. So if you've got like $30,000 saved up, and maybe that does work for you to go into a, a less expensive market as a long term rental. But um, but for me there's probably no market where just $30,000 is enough to go and put forward a really strong short term rental. I typically tell folks that like whatever your pile of money is, however big it is, ideally you don't want to spend more than like 40 at most maybe 50% of that on the actual acquisition. That way the other half or 60% is left over for the actual setup. So 40, for example, if you have $100,000 to go invest, I'd want you to spend maybe 40,000 of that acquiring the property. So that's like a, you know, a $350,000 property and a 10% down payment with another 2 or 3% in closing costs, you're somewhere around $40,000 to acquire the place and you can spend the other $60,000 on the actual setup of the property. So just having those numbers in the back of your mind is important as you, as you try and make that distinction between how much cash do I have in which, between short term and long term makes more sense.
- [10:59]
A
Along with that, I also think in some circumstances that it's easier to actually get financing on long term rentals than short term rentals. And I say that just because long term rentals have been more popular, have been more established, and have more proof of consistent income by showing a lease agreement that this property, you know, has had consistent rent every single month coming into the property where on the short term rental side it has taken like Tony even think about when you first started, like how different financing for short term rentals has even evolved over the last several years. But still you are at such an advantage going to a bank and getting financing on a long term rental. Like I just talked to a credit union the other day and they don't do any kind of financing on short term rentals at all. Like it's just not something that they're, it's in their wheelhouse or they're willing to adapt as this. Not that short term rentals are new, but I would say the the banking industry, most people who are on VRBO and rented out their homes and things like that probably just most commonly got second home loans on them to rent them out. But things have definitely changed a lot as far as rules and regulations on that and everything. But I think as far as when you have the capital and financing and funding a deal, it is easier to fund a long term rental than a short term rental to start out.
- [12:34]
B
All right, so the money makes short term rentals kind of look like an easy winner. But there's one number that never shows up in the spreadsheets and it's the one that makes most people quit. And that's your time. So we'll get into that right after a quick word from our show sponsors.
- [12:47]
C
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- [15:10]
B
All right, so on paper the money says that Airbnbs kind of make more sense.
- [15:14]
D
But let's talk about what it actually
- [15:15]
B
costs you to earn that money because this is where these two strategies start looking nothing alike. All right, so I just want to kind of paint the picture of what running an Airbnb typically looks like. Now first I will say there are lots of tools and automation that allow you to automate a lot of what it means to be an Airbnb host. And generally speaking, if you've got one or two Airbnbs and you've got all the tools set up correctly, an hour to a week on average is, is pretty reasonable for you to, to, to, to spend managing your short term rental, right? Some of that's going to go to the actual guest, you know, communicating with your guests, answering their questions. Some of that's going to go toward kind of the, the, the back of house operation. So you know, dealing with maintenance tasks, you know, managing your pricing. And then some of that's going to go toward maybe like admin type related things, right, that you're probably gonna do as a real estate investor regardless. But like the, the front of house and the back of house are like the two things that are probably more so unique to, to short term rentals. But it is definitely not passive. And I try and communicate that to anyone who's thinking about buying an Airbnb is that if you want A truly passive income don't buy a short term rental, right? Like, like if you want a truly passive investment, you need to go invest in someone else's syndication, you need to go buy a reit. You need to be maybe a private money lender. Like those are really the only avenues that are truly, truly passive where you're just kind of get like mailbox money on a regular basis in real estate investing. But, but on the spectrum of passiveness, short term rentals are probably on the less passive side. Now that said, I know a lot of short term rental investors, I've coached a lot of short term rental investors who are able to do this while working full time jobs, while having family commitments, while having commitments to their community, to their church, whatever it may be, who are still able to successfully manage the short term rental without it turning into a full time job. But big caveat here is that it is still more work probably than a traditional, traditional long term rental. And like, I'll, I'll just give you guys like, like a really quick example of some things that have happened to us this past week. We had a pool pump go out at one of our properties and you know, in the middle of summer people want to use the pool. So that's not necessarily something we can kind of drag our feet on. And people book our properties oftentimes because we have pools in the middle of the summer and it's super hot. So we got to jump on that and make it happen. Memorial Day we had a bunch of cleaners call off and you know, it's one of the biggest weekends of the year. So like scrambling to find backup cleaners to make sure that we can get coverage across the properties. Right. So some weeks are busier than others, some weeks are lighter than others. But again, I'd say about an hour or two on average across a normal week is pretty reasonable if you've got a, got a small portfolio. What about on the, on the long term rental side, Ash, like what, what kind of time investment should people be thinking about as they're, as they're doing this?
- [18:02]
A
Yeah, a lot of stuff for long term rentals, like say you have everything rented out. You can spend a couple hours a week or even sometimes just a couple hours a month as you set one day aside. And this is when you're going to see if there's any lease renewals you need to do confirm everybody paid their rent. There's little things that may pop up on the daily, such as a maintenance request or communication with a tenant or clarification on something when you have a vacancy. Coordinating contractors for the turnover in New York State you have to do offer a tenant a pre inspection inspection when they're moving out. So two weeks before their move out date, you go in, tell them all the things they would be charged for and they get two weeks to correct it. Then when they move out, you do another inspection and then I think it's 14 days. Within 14 days you have to mail back their security deposit to them. So definitely when there is a turnover, there is a lot more management and activity you need to do, but definitely way less if you just have to tenants in place. There's way less to do than a short term rental. Like you have my short term rentals. The same questions get asked over and over again, which even if we put them in our guidebook, even if we have a sign in there like it's still new people coming into a property or even before they even get to the property asking like when we had the our A frame, when we had the pictures taken, we hadn't put a TV in there yet. I cannot tell you how many people are concerned about going to a cabin in the woods and they're not being a TV and confirming that there is a TV in there. But there is, but it's not in the actual like expensive, nice listing photos we got. So like we had, you know, added that in specifically to our description. Like yes, there is a tv but we'll still get the question. So luckily like Hospitable has like an AI agent that actually responds to all these. So that definitely has limited for the short term rentals. For the long term rentals, I don't have any kind of AI yet that responds to my tenants for the long term rentals. But I do have a maintenance AI. So when someone submits a maintenance request, the AI actually chats with them to get more information. I literally would get a text that says like water leak or faucet leak like in. No, like that would be. The maintenance request is like is it the bathroom? Is it the kitchen? Like is it like gushing water? Is it just a little tiny drip? Like so the AI maintenance follows up with that. So property management has definitely come a long way. But even if you have property management in place, there's still asset management. You still have to quote out your insurance every year. You know, if you want to save money, you still have to do your lease renewals. There's still a lot you have to do to actively manage. But if you it is less work. I would say than you know, the
- [21:02]
B
short term rentals and you know this is kind of like my hot take where I really do think like in the next five to 10 years probably a lot of the property management is probably going to be done by AI anyway. From the things I've seen in the last couple of years and the advancements that I've seen in the AI space specifically as it relates to property management, I wouldn't be surprised if every single one of us has like an, a personal AI agent managing at least our, our kind of client facing, guest facing tenant facing communication and like maintenance requests in the next five to 10 years. So maybe this becomes a moot point anyway by the time that it takes because we're going to have agents doing all this for us anyway. All right, but for a rookie who still has a full time job, which one of these honestly fits into the life that's maybe already full. So the short term or, or do long term guys, again I'll say that as a short term rental operator, you know, we've got 26 single family homes in the portfolio right now that are active. We've got a 13 room hotel and if I were to like look across all the guests who are checking out, we're recording this on a Wednesday. If I were to look at all the guests who checked out today on this, on this Wednesday, I'd say like maybe, I don't know, say we have like 15 people checking out. I maybe had to actually talk to like two or three of those people and the other 12, 13, they're just going back and forth with all of the automations that we set up and then they check out and they leave a five star review and they talk about how communicative, you know, Tony and his team were. So it is, it is a very common thing for us to not actually have to communicate to a guest. Now we have set our properties up the right way, right. We invested a lot of time to make sure that guests have the right information when they need it, you know, inside the property, you know, through messages, guidebooks, you know, QR codes, all those different things. So we've, we've really optimized a lot of what our properties can do. So I think that's why we're able to do that. But if you have a full time job it is 100% possible assuming you set it up the right way to do this while, while working full time. Now I will say the people who really hate being short term rental hosts and who are just like banging Their heads against the wall when it comes to management are the people who haven't spent enough time automating and building the proper systems. But honestly I think that's true for any form of investing. And Ash, I'm sure you'd probably echo that as well. Is like even as a long term rental investor, if you're not spending the time to actually build the right systems and processes that can also turn in, you know, easily into a full time job as well.
- [23:17]
A
I think really the biggest thing you need to do is to have a boots on the ground. Especially if you are, you know, long distance. But even if you live like next door to your property but you're working full time, or maybe you're not even working full time, but you're on a vacation or something. But having either a maintenance purpose person, a cleaner, like the batteries are about to die in your code lock and need to be, you know, changed out, having somebody that can run miscellaneous stuff and do that for you I think has been like the big game changer for me as far as making my life easier. And also because like software can only do so much. But if you truly want to not have to worry and panic because you have a meeting that you have to be on, but your guest is saying that the, you know, the lock isn't working and you know, they something broke or they don't. Like I had one time somebody complained because there was no cookie pan to cook cookies in there, no, no cookie sheet or whatever. Like I don't know if somebody stole it or what, what happened to it, but like that we were able to just like instacart them one. So like I think just like thinking of all the things, what would actually disrupt your W2 job and how can you already have a plan in place to take care of that? And the easiest thing is you can find somebody super trustworthy that's going to go over there. Even if they're not somebody that can fix the problem, they're just somebody who can go there, show up, show that you're being proactive. This is especially good for long term rentals. Like show your tenant, you hear them, you're listening, this is an issue and you have somebody that's coming over right now to look at it, to help them take care of it and then they can go in, you know, either report back to you what they think should be done or go ahead and just like call the plumber, whatever needs to be done. So I think having that boots on the ground person is really important. But putting that plan in place as to what happens if I'm not available, how does that process work and who do I turn to? So short term earns more but can eat into more of your life. But before you pick a side, there is a silver lining that can sink either bet overnight and one more tax move that can hand a high earner a giant check. That is next. We'll be right back.
- [25:41]
D
If I had to hire someone to join the BiggerPockets team, I wouldn't just go looking for someone who checks a
- [25:46]
B
few boxes on a resume.
- [25:47]
D
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- [27:03]
C
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- [28:31]
E
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- [29:32]
A
All right, so we've covered the money and the work. Now the part nobody likes to think about until it happens, what can go wrong and how a rookie should actually choose. So let's go over the nightmares. Tony what is the risk that keeps a short term rental investor up at night?
- [29:51]
B
Yeah, I think I'll talk about the risk that people assume keeps me up at night that it actually doesn't a whole lot. And honestly actually like the two things I hear from aspiring short term rental investors, it kind of stops them. One is the remote management which we just talked about. It's like hey how do I manage this thing remotely? But again, my first year being was 3,000 miles away from our house and we figured it out. Most of the people that I work with also invest remotely as well. So remote management is one. But we talked about how to optimize most of that. But the other big thing is like the regulatory risk and the regulatory landscape and people are like well what happens if they ban short term rentals? It's true that the regulatory landscape for short term rentals has changed a ton, especially post Covid, but that's only because it's still such A new industry that a lot of cities just simply hadn't figured out how they were going to handle short term rentals. So a lot of the big headlines we see where people just, or cities or local jurisdictions, municipalities reacting to the sudden surge in short term rentals in their neighborhood. So the way that I approach it, guys, and the way that I try and reduce the regulatory risk is in one of two ways. Number one is my first option is to choose a market that is economically dependent on the revenue generated by short term rentals. And what that means in practice is if I go into a city and I do not see, you know, like, like a large business headquarters or multiple business headquarters, or I don't see like a, you know, a large university, or I don't see, you know, like a large international airport or shipping ports or all these different things, like, you know, lots of sports teams, like these things that drive inherently a lot of revenue. And really the only thing that's driving that revenue are people coming in, booking a short term rental and then spending money at the local businesses and seeing, you know, some of the, some of the local attractions. That is a sign to me that there's strong economic dependence on that city, on the revenue generated by short term rentals. Like I was on a call for one of the cities I invest in and like they were just kind of giving like an update about the city that they want all these short term rental operators to be on. And they were going through the city's revenue generators. And the number one highest revenue generator for the city was the transient occupancy taxes being paid by short term rental guests and operators. That was their single largest line item. Their second largest line item was property taxes, which you have to assume was probably also a good percentage of those were short term rental owners as well. And then the third line item was sales tax from local businesses. And you got to imagine the people walking into those shops and spending money in those local businesses are probably the majority short term rental guests as well. So short term rentals were very clearly the number one revenue driver and had a big impact on number two. And number three, that is a city that has a very strong economic incentive to still regulate short term rentals. So it's safe and respectful to the neighborhood, but would probably never outright ban short term rentals because of the economic dependence that it has. So that is the thing that I focus on when I talk about reducing the regulatory risk. And if I can't get that, if I can't find a market that is heavily Economically dependent on short term rentals. Well then I want to make sure that maybe I do have a backup option of something like a midterm or a long term for that market. But that's, that's how I go about reducing the risk for myself. Ash, what about you? What are some of the risks on the, on the long term side?
- [33:16]
A
Yeah, I would say that mine has also significantly changed over the years. When I bought my first property, I was, you know, scared of being sued. I was scared of the roof, you know, flying off and you know, not being able to pay for a new roof. Having the money and I think learning about having proper insurance in place has really eased my mind a lot on the liability things. Also having a really good attorney and then also having, you know, a cushiony reserves account where if a new roof does need to replace. Well, that's why I invite invested in real estate to, you know, keep up on my properties and maintain them so that one day I can exit and you know, there'll be a great property to sell. So I've had to get really comfortable with spending money on my properties and when things happen and like, that's just the core course of business. So I'd have to say like right now the, the biggest nightmare that I have is probably not being able to like figure out a maintenance request and the tenant stopped paying and the, you know, the tenant moving out because we can't figure out what the maintenance issue is. So right now the good part, I would say about having, you know, a lot of units is that if somebody does stop paying your other units, cash flow can cover that payment. So I, unless like a lot of people stop paying rent, like that is a huge benefit that I used to have that fear that if somebody stopped paying. Now the, the second thing, besides like not being able to problem solve or figure out a solution for a property and it just sitting because we can't figure out this maintenance issue. The second thing is to a slow eviction due to New York state laws. And I've gone through one of them where it took over a year to evict this person. And then even after that we went to small claims court and it was just like a long time and a lot of legal fees and it was just like that was actually something that really kept me up at night and I had to keep reminding myself that this property had performed so well. This is one bump in the road and, and I've had a new tenant in there for over a year now and it's been wonderful Again and great again. And I just had to, you know, frame my mindset. But that is a huge fear of having to go through that process again of just like having to deal with someone and get them out of my property. I would say is the, the biggest risk right now to me.
- [35:51]
B
Well, Ash, I want to pull my, my, my trump card here. Not, not related to the, the, the current president, but the, in the old sense, my, my trump card and explain why I think for high income earning individuals, short term rentals right now are probably the best asset class for those folks specifically to invest into because of the tax benefits associated with short term rentals.
- [36:18]
A
I mean technically I guess you could you say the trump card was the trump card because Trump did give, bring it back.
- [36:25]
B
He did bring back 100 bonus appreciation.
- [36:27]
A
I guess it could work this way,
- [36:29]
B
could work both ways. But you know, Ash and I are not, not getting political or advocating for one side or the other. But that is the, the current state right now. But there, there's one of the biggest benefits of investing in real estate are the tax benefits associated with buying real estate. And both short term rentals and long term rentals have the ability to produce these big paper losses, right? Where basically that even though the property's producing cash flow, appreciating in value, the real estate or the irs, I'm sorry, allows us to depreciate real estate, right, because eventually you have to replace things. Like Asha said, the roof, your flooring, your appliances and all these different parts of the home need to be replaced over time. So even as the value goes up, you as a homeowner still have to maintain that property. And certain things wear and tear over time. So because of that, the IRS allows us to depreciate real estate. And when you depreciate real estate, you get this big, big tax benefit. And you know, I'm not a cpa actually not a cpa. Go talk to your CPA and I'll try and keep this kind of like as, as, as quick and, and efficient as possible. But whether it's a short term rental or a long term rental, you can do what's called a, a cost segregation study, which basically is like a, a fancy word for an engineering study that allows you to accelerate the depreciation of real estate. If it's traditional single family home, the usual depreciation schedule, as check me if I'm wrong here, it's 27 and a half years, right. I think is the normal depreciation schedule. If it's commercial, I think it's like 39.5 years, but 27 and a half years like the normal depreciation schedule for, for real estate. But with this cost segregation study, you can actually bucket different parts of the house into different depreciation schedules. And then what Ashley and I were talking about is this thing called 100% bonus depreciation where you can front load a lot of that depreciation in year one. So basically you buy a property and the very first year that you own it, you can front load a bunch of this depreciation that otherwise would have taken you 27 and a half years to realize. Now, the difference between short term and long term is that with a long term rental, the only way that you can apply those paper losses against your other forms of active income, that is your job, right? So if you're a high income earning individual, let's say you get like a $50,000 tax benefit from this property that you purchased. The only way that you can take that $50,000 and apply it against your W2 income is if you qualify for what's called rep status or real estate professional. And the bar is effectively impossible to meet if you work a full time job, because you have to show that you work more hours in your real estate than you work in your full time job. So if you're working 40 hours a week, you've got to prove that you're consistently working 41 hours a week in real estate, which is just not reasonable for most people with short term rentals. There's something called the short term rental tax loophole that allows you to qualify for what's called material participation. And the bar for material participation is significantly lower than working 41 hours a week in real estate. You have to. There's a few different ways you can do it, but one way is that you work at least 500 hours over the entire year, right on your short term rental. Or you work at least 100 hours and no one else combined works more than that 100 hours on your property yourself. So those are typically the two paths most folks take to, to qualify for material participation. But once you meet that threshold, you can then take all of those paper losses from the short term rental and apply them against your W2 income. And that folks, is how a lot of people who are high income earning individuals are significantly reducing or sometimes even eliminating legally their tax bill through what's called the short term rental tax loophole. So everything else that we've said so far, guys, and you know, whether short term or long term, I think it's really, it can kind of cut either way. But I have a very strong conviction that if you're a high income earning W2 individual short term rentals have a very, very unique positioning in the eyes of the IRS that can give you a really, really strong benefit when it comes time to file your taxes. So if you're tired of paying big tax bills and you want to legally and ethically reduce those tax bills, buy a short term rental.
- [40:31]
A
Yeah, I mean how can I debate that? Well, if you maybe are already self and maybe you already show, you know, a loss on your taxes, maybe you already own property that already has depreciation depreciation on it that you can report that you don't have a high income W2 that you need to offset with long term rentals. You can still depreciate, get the depreciation, but you can get the 100% bonus depreciation if you qualify for real estate professional status. So there is some benefit to that. But basically you have to there set rules and limits as to how many hours you have to put towards real estate investing. And if you have a full time job, it typically won't make sense for you. And that's why a lot of spouses take one spouse and have them quit their W2 job and they become the real estate professional status and and then they get the bonus depreciation and it actually they end up saving enough money in taxes to be able to offset what they would have made in their W2 income too. So there are still benefits to long term rentals on the the tax side of things. Okay, so you guys decide based on what we have told you. There's no way that only short term rentals could be perfect for everyone or no way that long term rentals could be perfect perfect for everyone. You need to decide. So let us know in the comments if you're watching on YouTube, what strategy is perfect for you and why? Because this isn't a one size fits all for each of these strategies. These are specific to what you want out of life. And remember that is why we get into real estate investing. Because we all have goals we want to reach, we all have a lifestyle that we want and real estate is supposed to help us build that. We're not supposed to build our life around real estate. I'm Ashley, he's Tony. And thank you guys so much for joining us today. And we'll see you on the next episode of Real Estate Rookie.