Earn passive income and protect your wealth without doling out thousands

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MoneyWise

Em Norton

Published Jan 16, 2023  •  Last updated 20 hours ago  •  2 minute read

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If you came across a four bedroom, 3.5 bathroom home listed for sale recently on a quiet cul-de-sac in Cedar Rapids, Iowa, you might not think twice about the online listing. It included typical real estate descriptions like “ideal for entertaining” and “ample space for relaxation.”

But JJ Johannes, the realtor for the home, created the description in less than five seconds by typing a few keywords into ChatGPT, a viral new AI chatbot tool that can generate elaborate responses to user prompts. It’s a task, he said, that would otherwise have taken him an hour or more to write on his own.

“It saved me so much time,” Johannes told CNN, noting he made a few tweaks and edits to ChatGPT’s work before publishing it. “It’s not perfect but it was a great starting point. My background is in technology and writing something eloquent takes time. This made it so much easier.”

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Johannes is among the real estate agents experimenting with ChatGPT since it was released publicly in late November. Some residential and commercial agents told CNN it has already changed the way they work, from writing listings and social media posts to drafting legal documents. It could also be used to automate repetitive tasks such as answering frequently asked questions and doing complex calculations.

ChatGPT is trained on vast amounts of online data in order to generate responses to user prompts. It has written original essays, stories, song lyrics and research paper abstracts that fooled some scientists. Some CEOs have used it to write emails or do accounting work. It even passed an exam at an Ivy League school. (It has, however, raised concerns among some for its potential to enable cheating and for its inaccuracies.)

Miami real estate broker Andres Asion.

In less than two months, ChatGPT has sparked discussions around its potential to disrupt various industries, from publishing to law. But it’s already having a tangible impact on how a number of real estate agents around the country do their jobs – where much of the written work can be formulaic and time consuming – to the extent that some can no longer imagine working without it.

“I’ve been using it for more than a month, and I can’t remember the last time something has wowed me this much,” said Andres Asion, a broker from the Miami Real Estate Group.

‘As soon as I tried it out, I was sold”

Recently, a client reached out to Asion with a problem: the woman had moved into a pre-construction home and couldn’t open her windows. She had attempted to contact the developer for months with no response. Asion ran a copy of one of her emails through ChatGPT, asking it to rewrite it with an emphasis on the liability implications.

“ChatGPT wrote it as a legal issue and all of a sudden, the developer showed up at her house,” he said.

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Asion has also used the tool to draft legally binding addendums and other documents, and sent them to lawyers for approval. “I fine-tune all kinds of drafts with ChatGPT,” he said. “Sometimes I’ll tell it to make it shorter or funnier, and it gives you so many samples to pick and edit from.”

ChatGPT is free for now, but OpenAI, the company behind it, is reportedly considering a monthly charge of $42. Asion said “it’s not even a question” he would pay for access. “I would easily pay $100 or $200 a year for something like this,” he said. “I’d be crazy not to.”

Frank Trelles, a commercial real estate agent at State Street Realty in Miami, said he’d also pay to keep using the tool, which has already impacted the way he does business. “As soon as I tried it out, I was sold,” he said. “I went to sign up for a package, thinking it would be at least $100 a month, and was blown away that it was free. Nothing in this world is free though – and that made me a bit nervous.”

Trelles said he uses ChatGPT to look up the permitted uses for certain land and zones in Miami-Dade County, and calculate what mortgage payments or return on investment might be for a client, which typically involve formulas and mortgage calculators.

“I can be in a car with a client when they ask me what their mortgage payments might be,” said Trelles. “I can ask ChatGPT what a mortgage payment would be on a $14 million purchase at a 7.2% interest rate advertised over 25 years with two origination points at closing, and in two seconds, it gives me that information. It also explains how it got the answer. It’s amazing.”

Lots of potential, and some limitations

There are some limitations, however. The tool has, for example, struggled with some basic math before. Trelles said it’s helpful for approximations on the go, not for exact numbers.

Serge Reda, a commercial real estate executive and adjunct professor at the Fordham Real Estate Institute, said some use cases for ChatGPT are better than others. ChatGPT may help save brokers time when writing listings or responses, but automating client responses may not be the best tactic because generating leads and closing transactions typically requires a personalized approach.

OpenAI logo displayed on a phone screen and ChatGPT website displayed on a laptop screen are seen in this illustration photo taken in Krakow, Poland on December 5, 2022. (Photo by Jakub Porzycki/NurPhoto via Getty Images)

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“It’s accessible to everyone right now because it’s free and they can get a taste of how this powerful tool can work. But there are definitely significant limitations,” he said.

While ChatGPT has generated a wave of interest among realtors, incorporating artificial intelligence in the real estate market isn’t entirely new. Listing site Zillow, for example, has used AI for 3D mapping, creating automatic floor plans and for its Zestimate tool, which can scan pictures to see if a home has hardwood floors or stainless steel appliances so its price estimation better reflects market conditions. Earlier this week, Zillow rolled out an AI-feature that lets potential buyers conduct searches in a more natural language (something that’s long been mastered by Google).

Matt Kreamer, a spokesperson for Zillow, said the real estate industry has been slower to innovate, but “I think we’ll be seeing much bigger strides very soon.” He said Zillow sees no clear concerns with agents using ChatGPT to help streamline the work they already do and save time.

“We aren’t promoting or weary of ChatGPT but are interested in how it’s being used and watching it,” he said.

Although it’s too early to say if the tool will become a mainstay in real estate, realtor Johannes believes AI in general will transform his industry and others.

“It may not be with ChatGPT,” he said, “but I believe some form of artificial intelligence like this will become a big part of how we work and live our lives.”

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Despite the volatility and uncertainty of the housing market over the past three years, real estate remains a valuable part of an investor’s portfolio.

Potential owners are understandably left uneasy as mortgage rates are sharply higher and home prices have slowly declined after a decadelong advance. However, over the long run, we’ve shown that real estate returns tend to fare well. Ideally, your investment portfolio should allocate between 5% and 20% to real estate, but the best avenue for reaching that exposure depends on your situation.

Below, we showcase a continuum of real estate investments by the degree of personal involvement and responsibilities. And here, we break down the benefits and drawbacks of each.

Pros and Cons of Investing in REITs

REITs can be a good choice because:

• Buying and selling REIT shares is easier than it is with a physical property.
• They obviate the need for market-specific knowledge and property management while making it easier to diversify your real estate portfolio. Instead of owning one concentrated position, you own a fraction of tens, hundreds, or thousands.
• They won’t require you to start a mortgage on an investment property and make investing in out-of-state real estate easier.

Finally, the issue of taxes. REITs enjoy favourable tax treatment, avoiding them entirely if they pass along an adequate share of earnings directly to investors.

However, this typically means REITs have large dividend yields, and dividends are unfavorably taxed relative to capital gains for high-income investors. For those in higher tax brackets, this could be unpalatable. In contrast, direct real estate ownership provides exceptional tax benefits if managed carefully.

Pros and Cons of Investing Directly in Real Estate

On the other hand, if you prioritize agency in an asset by limiting intermediaries, then directly purchasing a property could be right for you.

When you own, manage, and eventually sell an investment property, there are advantages in the tax department related to expense deductions and capital cost allowances. There’s also a wider range of potential outcomes, depending on your property’s type and location, relative to diversified REITs.

Directly investing in real estate can be financially rewarding, but it usually requires significant cash, due-diligence work, and time. Some may rely on a property manager, but this comes at the cost of profit margins. If you need cash, selling a property can take months and be costly, especially if you are not reinvesting the proceeds in another rental property. This investment strategy may be appropriate if you have extra time and cash.

Should I Invest in Real Estate Directly or Indirectly?

Unraveling the nuances of the housing market can be confusing. Below, we leverage different personas to guide investors toward the right choice.

A successful and busy professional: Property ownership could be costly or infeasible if you don’t have time to deal with tenants or maintenance, so passively investing is likely the right choice, as REITs minimize time and effort while improving risk-adjusted returns in a mixed-asset portfolio.

Sophisticated or wealthy investors could consider becoming a silent partner to an active investor, which could generate higher returns but comes with substantial risk.

A flexible professional: Early careerists or those with flexible jobs may consider making real estate into a part-time job or hobby. Risk appetite, liquidity needs, and your willingness to earn sweat equity will inform the appropriate choice.

Purchasing a rental property could make sense if you’ve already built a traditional investment nest egg and have excess savings. Your spare time and capital can be invested into a specific asset in the right market, and you can leverage real estate’s tax treatment to boost your aftertax returns. Choosing tenants and working with maintenance providers is the time cost of actively investing in real estate.

Active investors have a wide range of opportunities to pursue. For example, if an investor has an appetite for remodeling, a fixer-upper could be an option. Between the tax benefits and leveraged nature of housing, this approach can compound returns quickly.

However, purchasing an illiquid asset could be a costly mistake if you don’t have an adequate financial cushion or suddenly need cash. On the other hand, buying shares of a diversified REIT at the right price could provide the diversification benefits you’re looking for without limiting portfolio liquidity.

Retired or self-employed: Professionals planning for retirement or without guaranteed income may lean toward real estate for steady income. Depending on the investor’s willingness to get hands-on, either a traditional investment or a REIT may be appropriate.

Empty nesters who plan to downsize or those who want to relocate may benefit from turning their current home into a rental property, especially if property prices are soft. If you purchase a home with a low interest rate and transition it into a rental, your investment property retains this perk and increases your positive cash flow. In addition, since a rental property is not treated as earned income, it is exempt from self-employment tax, or FICA tax. If time is a factor, then hiring a property manager for day-to-day decision-making could be right for you but will offset returns and may still take some of your time.

Shifting your investment strategy to REITs might be appropriate if free time is important to you but you desire a steady income. Perhaps you already have a passive income stream or a sizable investment portfolio. Taking advantage of diversified REITs is a strong choice for keeping your real estate assets liquid and easily investing in properties in various markets.

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