Is Investing in Vacation Rentals a Good Idea?
Real estate has always been considered a good long-term investment regardless of whether you’re purchasing a home to live in or rent out. But what about vacation homes? Is there the same return on investment for these properties? Although the idea of purchasing a vacation rental may seem promising, is it really a good investment? To help answer that question, we’ve put together a comprehensive guide to investing in vacation so you can make an educated decision about your future finances.
Benefits of Investing in a Vacation Rental Property
Investing in a vacation home isn’t like investing in traditional real estate. There will be ebbs and flows in cash flow, as you may experience weeks or months out of the year where your property is vacant and not generating an income. Still, is it a good investment opportunity? It depends. Let’s review some of the following advantages if you’re on the fence about buying a vacation rental to use as an investment property.
Secure a Long-Term Vacation Home
Have you always wanted a vacation home but never thought you could afford the additional mortgage payments and property taxes? Investing in vacation rental properties allows you to offset the cost of ownership, making it more affordable to buy a second home. Then, if you ever decide to leave the vacation rental business, you have a long-term vacation home that’s been partially paid for by those who’ve enjoyed it over the years.
Reduce the Financial Burden of a Holiday
Going on a holiday can be expensive in this day and age. Short-term rental properties give you the flexibility to travel without paying for additional housing costs. As the owner, you can block off time throughout the year to use your vacation rental with your friends or family, significantly reducing the price of a trip. Of course, the more you use the property, the less vacation rental revenue you’ll accrue.
Enjoy Short-Term Rental Income
Today, vacation rental investment properties yield some of the highest potential for profit. Unlike traditional investments in metropolitan areas, vacation rentals are often rented out for short bursts of time. This means the rental caps are higher than a long-term rental, as they’re more heavily influenced by the changing demand and seasonality.
According to recent studies, the return on investment can reach anywhere between 10% and 20%, depending on factors such as location, size, and property demand. This will depend on your costs and expenses vs. the rental revenue, so it’s worth estimating before making a big purchase.
However, the US holds the highest earnings in the vacation rental market worldwide, with hosts for short-term vacation rentals making an average of $44,235 nationwide. Of course, some states, like Hawaii, have much higher earnings, and some may fall below this average.
Property Appreciation
When purchasing a vacation rental property, you can expect the market value to increase over the years. Of course, this appreciation can fluctuate with the market, but real estate investing tends to have upward trends, especially in good or highly sought-after locations. In fact, real estate appreciation has historically been faster than the rising inflation rate, which could make buying a vacation rental property a great way to secure a strong financial future.
Benefit from Tax Write-Offs
Owning a vacation rental can also help you receive substantial tax deductions and benefits. As long as the property is rented out for 14 days or more each tax year, you can claim write-offs and expenses. These can include things like your vacation rental’s maintenance and repair costs, marketing costs, mortgage interest and property taxes, property management fees, and more. For detailed information about these tax benefits, see this guide: IRS Topic No. 45 Renting Residential and Vacation Property.
Enjoy Recession-Resistant Income
Historically, vacation rental income has performed well during recessions, making it a stress-free investment that can continue to be advantageous regardless of what’s happening in the world. In fact, the vacation rental industry may even see more business during recessions as families opt to take shorter trips closer to home rather than flying somewhere out of state or internationally.
Lock In Your Retirement Home
Finally, if you find a vacation rental in a town you’d be happy to retire in, the investment doubles as retirement planning. You can rent it out and earn revenue for years. Then, when you’re ready to enjoy your golden years, simply take it off the market.
Some Potential Downsides to Vacation Rental Investments
While the benefits of investing in a vacation rental can be enticing, it’s also important to consider the potential downsides. Investing in vacation rentals has challenges, and understanding them can help you make a more informed decision.
Finding Reliable or Trustworthy Guests
One of the most significant challenges vacation rental owners face is finding reliable and trustworthy guests. Unlike long-term rentals, where you can vet tenants through a thorough screening process, vacation rentals often attract a revolving door of guests. While many guests will treat your property with respect, there’s always the risk of encountering those who don’t. Issues like property damage, noise complaints, and even theft can occur, leading to unexpected expenses and headaches.
Competition in Popular Short-Term Rental Markets
The popularity of vacation rentals has surged in recent years, leading to increased competition in many markets. If you’re investing in a property in a sought-after location, you may find yourself competing with numerous other rentals, including those managed by well-established companies with significant marketing budgets. This competition can drive down rental rates and occupancy levels, making it harder to achieve the returns you initially projected. It’s an important factor to consider before buying a vacation rental.
Property Management
Managing a vacation rental can be time-consuming and stressful, especially if you don’t live near the property. From handling bookings and guest inquiries to overseeing cleaning and maintenance, the responsibilities can quickly add up. Some owners choose to hire a property management company to handle these tasks, but this comes at a cost—typically 20-30% of the rental income.
Certain Restrictions and Regulations
The vacation rental industry has seen a surge in regulations and restrictions in many areas, particularly in popular tourist destinations. Local governments have begun implementing strict zoning laws, licensing requirements, and occupancy limits to address concerns about noise, overcrowding, and the impact on housing availability for locals.
Choosing the Right Vacation Rental Investment Strategy
Once you’ve weighed the pros and cons of investing in vacation rentals, it’s time to choose the right property for your portfolio. This is an extremely important step, and if possible, we recommend working with a real estate agent to help ensure you know all the details before locking in your investment. Some things that you’ll need to do to choose the right property include:
- Be Diligent About Research — Try to find vacation rentals in good locations, look at property types, and understand past market trends.
- Conduct a Market Analysis — Analyze the local market to understand the demand for vacation rentals, pricing, and competition.
- Consider Seasonality — Think about how the time of year affects rental demand and whether you can afford vacancies during the low season.
- Calculate Expenses vs. Income — Take the time to create a detailed projected income vs. expenses report to better understand your potential ROI.
- Understand How to Advertise — Develop a strategy to market your property and increase bookings through popular sites like Airbnb, VRBO, and even Booking.
- Find a Property Management Company — Meet with property management companies to discuss potential costs and weigh your options for a stress-free investment.
- Partner with a Real Estate Agent — Work with a seasoned real estate agent to help you understand the market value, find a local property, and ensure you have a vacation rental home you love.
If you’re interested in investing in vacation rentals or need a property manager to help cover existing properties, turn to the team at First Star Realty. First Star Realty has several residential and commercial listings for potential buyers and real estate investors. We also have land for sale if you want to start from scratch. Plus, as an experienced property management company, we can help you save time, resources, and energy. First Star Realty always puts our client’s needs first, and we’re committed to maintaining ongoing communication so you can make informed real estate investment decisions. To learn more about our different property management services, contact us today.
