If you’re considering real estate investing, a vacation rental might be the perfect addition to your portfolio. Not only can you test-run an investment property and take some time for yourself on the side, but renting it out short term on Airbnb or VRBO also provides steady cash flow.
While investing in a vacation home can be an excellent way to generate income, there are also many things to consider before buying. Will you live in the property or is it just for rentals? Where should you invest? Do you have enough money saved up for expenses during the year?
There's no right answer and there are a full range of pros and cons to consider before taking the plunge. This blog post will outline some of the major considerations so that you can determine if a vacation rental is the right investment for you.
Owning a vacation home is often seen as the ultimate dream and while there may be some potential setbacks, the perks highly outweigh the negatives. These days, renting a vacation home has never been easier with apps such as Airbnb and VRBO. Pick your city, point out what you want in an apartment or house and find up front pricing perfect for your budget. As a result, investment in vacation rentals is increasing in popularity.
The Pros of Owning a Vacation Rental
- The income: First and foremost, the biggest advantage to owning a vacation home is the income earned from renting the home out to guests. Airbnb hosts are making upwards of $900 on average per month. If the property is located in a more populated city, you increase your potential cash flow. Location will be a huge factor in your potential earnings. On the coasts, homes can earn upwards of $100K a year. Rural areas will be lower in demand and typically produce less cash flow. Vacation home values are expected to continue appreciating at least as fast as other residential real estate according to Zillow. For example, Chattanooga, TN is forecasted for a 15% increase. Whether you're using your vacation home or renting it out on Airbnb--you're still making money! Now that's the American dream, right?
- The tax benefits: Another advantage of owning a vacation home is that you're able to write off various expenses on the property for maintenance, repairs, and improvements. Renting a property for more than 14 days is considered as operating a business which is extremely advantageous for tax purposes. Though you will be entitled to business related tax deductions, this also means you will be taxed on any income generated. Some of the items you can consider writing off include: mortgage interest, utilities, occupancy tax, home supplies, lawn care, cleaning costs, and fees such as Airbnb and VRBO hosting fees.
- Your own R+R getaway: Not only do you have the potential to make income but owning your own vacation home means you get to enjoy it too! Investing in a vacation property means you can have a getaway close by whenever you need it. Use the home for special events such as birthdays or parties, or even for some quiet relaxation time for yourself. When deciding on a retreat spot for your investment property, consider the area you’ll feel most at home. You can use it as a vacation haven for you and your family, or even as a retirement home to be utilized in the future. Invest in a vacation home that promises many benefits.
- Property appreciation: Rather than saving the home for future retirement, another beneficial option is to sell it after it appreciates in value. This will generate a high return on investment and also secure cash available for other family purposes. Investing in a vacation property will most likely result in equity gain depending on the economy conditions. As an investor, the longer your property stays in your portfolio, the higher its value will grow.
While what we just covered may have already convinced you to invest in a vacation home, as with any type of investment, there are several disadvantages that we need to go over such as costs and other challenges landlord have to face. These drawbacks are worth as much deliberation and consideration as the benefits have been.
The Cons of Owning a Vacation Rental
- The property expenses: On the top of the list is the costs and expenses of a vacation rental. Homeowners should be prepared for a litany of expenses that come with a vacation property. In order to properly calculate your net operating income and return on investment, it is important to account for all of the potential costs associated with owning this type of home. Some of the expenses to consider include property management fees, utilities, property tax, property insurance, mortgage payments, Airbnb expenses, maintenance and money set aside for repairs. Make sure that you have your finances in order before investing in a vacation home.
- The maintenance and management: Like anything else, owning a vacation home comes with work... a lot of work. There are many ways to invest in real estate but this is by far one of the most hands on investment ventures to pursue. You’ll be responsible for things like regular maintenance, housekeeping, restocking supplies such as towels and linens, repairing any broken items, answering all of your guests’ requests in a timely manner. One option is to hire a professional property management company to take these tasks off your hands but this comes with a cost. According to industry averages, this cost typically ranges from 10% to 15% on earnings, but may be higher depending on how much work it demands and what types of services are included.
- Unplanned expenses: We've covered the expected monthly expenses but owning and managing a vacation property also comes with unexpected expenses. Being prepared is important because let's be real, sh*t happens. Things break and things go missing. One good rule of thumb to consider when planning your expenses is to set aside 10% of your monthly income for an emergency fund that will cover unforeseen costs. Doing so will help you better manage your cash flow and ROI.
The Bottom Line
Investing in a vacation home is a great way to earn passive income but being prepared for the costs and challenges is key to making it a #winning investment. There are many reasons why investing in vacation properties has become such a burgeoning trend. The tax benefits, increased cash flow, asset value, and ability to vacation in your owned home are just some of the perks. With proper research of your local city rental restrictions, preparation for unforeseen expenses, and consideration of its management demands, an investment in a vacation home could be one that will reward you and your family for years and years to come.