To Invest in Vacation Rentals or Not – that is the question!
So, you’re considering investing in real estate and want to know if purchasing a vacation home is a good investment or not.
There are many factors to consider when making this decision, and there is no easy answer. However, in general, if you purchase a vacation home in a desirable location and rent it out when you’re not using it, it can be a good investment. According to AirDNA, a company that analyzes the performance of over 10 million Airbnb and Vrbo rentals, the average annual revenue of short-term vacation rentals reached the highest level ever recorded at $56,000 at the end of 2021. In addition, the same study forecasts that demand will grow another 14.1% in 2022 over levels seen in 2021.
Of course, there are also risks associated with vacation rental properties. For example, if the market for vacation rentals in your area diminishes, you may have trouble finding renters and may even end up losing money on the property.
Before making a decision, it’s important to do your research and weigh all the potential risks and rewards. In addition, consult with a vacation rental management company to see how they can mitigate risks and maximize rewards.
The Pros: Benefits of Investing in Vacation Rentals
First, let’s cover the potential benefits of investing in a vacation rental property.
The most obvious benefit of owning a vacation rental is the extra income it can generate. If you purchase a property in a popular vacation destination and rent it out when you’re not using it, you can cover the cost of the property and even make a profit.
Another benefit of using your home as a rental is the tax breaks for which you may be eligible. For example, in the United States, you can deduct mortgage interest and property taxes on your vacation rental. But, one thing to take note of, however, is that those tax deductions are subject to the 14-day rule, which is a statute in tax law that limits the amount of time you as an owner can spend in your vacation property while still claiming it as a rental property.
Another potential benefit of investing in vacation rentals is appreciation. Just like any other type of real estate, vacation rentals can increase in value over time. That is especially true if you’re investing in a property in which the market demand is growing. If you purchase a property in an area with strong future growth prospects, you could see a significant return on your investment when you sell the property down the road.
Less Risk During Recessions
For a number of reasons, house rentals in domestic leisure destinations have historically done well during recessions. During a recession, drive-to leisure pursuits near major cities benefit as travelers choose more affordable family travel and provide a budget-friendly alternative to overseas travel.
The Cons: Risks of Investing in Vacation Rentals (and Some Solutions!)
Now that we’ve covered the potential benefits of investing in vacation rentals, let’s take a look at some of the risks.
One of the biggest risks of investing in vacation rentals is the up-front cost. Not only do you have to come up with a down payment on the property, but you also have to pay for any necessary repairs or renovations. In addition, if you’re planning on furnishing the property, that will add to your up-front costs.
And, if you’re not paying cash for the property, you’ll also have to factor in mortgage payments. All of these costs can add up quickly and put a strain on your finances.
Potential Solutions to Offset Risks Associated with Up-front Costs
- Some vacation rental management companies, like Meredith Lodging, offer sign-on bonuses that mitigate the financial strain of getting your home vacation-rental-ready.
- Look into different kinds of loans, like rehab loans, that can help you make the necessary upgrades to your property without breaking the bank.
- Research government grants and tax breaks that may be available to you as a vacation rental owner.
- If you are looking at purchasing a vacation rental, look for homes that are existing rental history and already come furnished.
Upkeep and maintenance
One of the biggest risks of owning a vacation rental property is the responsibility for upkeep and maintenance. Unlike traditional rental properties, which are typically leased to long-term tenants, vacation rentals are often rented out for short periods of time. That means you need to do more frequent cleanings and repairs between renters.
Here is a list of the expenses associated with running a vacation rental:
- Lawn care
- Extra linens and towels (Meredith Lodging offers a linen program)
- Hosting fees (for OTAs, such as Airbnb and Vrbo)
Additionally, if something breaks while a renter is staying on your property, you may be responsible for the repair costs.
If you don’t have the time to keep up with the maintenance of your property, or if you live far away from your rental, you may want to consider hiring a professional vacation rental management company. A good vacation rental management company will take care of all the details for you, including marketing, bookings, housekeeping, and repairs.
Potential Solutions to Risks Associated with Upkeep and Maintenance
- Hire a professional vacation rental management company
- Take advantage of preventive maintenance
- Enroll in a home warranty program
Another risk to consider when investing in vacation rentals is the potential for legal issues. There are a number of regulations and laws that vacation rental owners need to be aware of, including zoning laws, occupancy limits, noise ordinances, and tax laws. If you’re not familiar with the laws in your area, you could find yourself in violation of them and facing costly fines.
Potential Solutions to Risks Associated with Legal Issues
- Research the vacation rental laws in your area
- Purchase liability insurance
- Ensure that your property is up to code
Seasonality of Vacation
Another risk to consider is seasonality. In many cases, demand for vacation rentals is highest during specific times of the year. That means you may have trouble finding renters during the off-season. As a result, you may need to lower your rates or offer incentives to attract renters during those slower months.
Additionally, if your property is located in an area with extreme weather conditions (e.g., cold winters or hurricanes), that could also deter potential renters and lead to vacancy periods throughout the year.
Potential Solutions to Seasonality Issues
- Offer discounts and incentives during the off-season
- Price your rental competitively
- Look into getting a property management company to help with marketing and pricing
Another risk to consider is liability. If someone is injured on your property, you could be held liable. That’s why it’s important to have adequate insurance coverage for your vacation rental. You may also want to consider adding an “accident waiver” to your rental agreement. This will release you from liability in the event that someone is injured while staying at your property.
Potential Solutions to Limit Your Liability Exposure
- Purchase adequate insurance coverage for your vacation rental
- Consider adding an accident waiver to your rental agreement
As you can see, there are a few risks to consider before investing in a vacation rental property. But, with the right planning and preparation, you can offset those risks and enjoy the many potential benefits.
7 Things to Get Right When Investing in a Vacation Rental
Ok, so far, we’ve been discussing whether vacation rentals are a good investment or not, but we haven’t discussed how you can find a good vacation rental investment that works for you. Obviously, with what we already know, there are good and bad investments. How can you ensure that your investment will be a good one? What things should be considered when making such an investment? Well, there are a few things you can do to increase your chances of success. Here are the most important things to consider as you’re making your decision.
1) Location, Location, Location
3 of the biggest factors to consider when purchasing a vacation rental property are location, location, location. If you buy a property in a popular vacation destination, there’s a good chance you’ll be able to find renters year-round. But if you purchase a vacation rental in an area that’s not as well-known, you may have trouble finding tenants during the off-season.
Some things to consider when choosing a location for your vacation rental property include:
- Proximity to popular tourist attractions
- The quality of the local amenities (e.g., restaurants, shopping, activities, etc.)
- The climate
- The safety of the area
- The overall appeal of the destination
2) The Type of Property
Another important factor to consider is the type of property you want to purchase. There are many different types of vacation rental properties, from apartments and condos to houses and villas. And each type of property has its own set of pros and cons.
For example, if you purchase an apartment or condo, you may have access to on-site amenities like a swimming pool or fitness center. But you may also have to deal with strict rules and regulations from the homeowners association.
On the other hand, if you purchase a house or villa, you’ll have more freedom to personalize your property and set your own rules. But you’ll also be responsible for maintaining the property, which can be costly.
Some things to consider when choosing types of vacation rental properties include:
- The size of the property
- The number of bedrooms and bathrooms
- The amenities offered
- The amount of maintenance required
- The rules and regulations of the community
3) The Rental Market
Before you purchase a vacation rental property, it’s important to do your research and understand the local rental market. Things to consider include:
- The average rental rate for similar properties in the area
- The seasonality of the rental market
- The demand for vacation rentals in the area
- The length of the rental season
4) Financing Your Vacation Rental Investment
Another important factor to consider is your financing options. When you’re purchasing a vacation rental property, you may be able to finance it with a mortgage. But there are a few things to keep in mind, like the fact that vacation rental mortgages typically have higher interest rates than traditional mortgages.
You should also consider the fact that you may not be able to rent out your property year-round, which can make it difficult to make mortgage payments. And if you’re unable to make mortgage payments, you could lose your property.
So, if you’re thinking about financing your vacation rental property with a mortgage, it’s important to speak with a lender and understand all of the risks involved.
5) Operating Expenses for Your Vacation Rental Business
In addition to your mortgage payments, you’ll also need to factor in the cost of operating your vacation rental property. These costs can include:
- Property taxes
- Maintenance and repairs
- Furnishings and décor
- Marketing and advertising
6) Taxes on Properties
When you own a vacation rental property, you’ll need to pay taxes on your income from the rental. It’s important to speak with a tax professional to understand the tax implications of owning a vacation rental property.
7) Property Management
If you’re considering using your investment strictly as a business, then we recommend that you hire a competent vacation property management company – and, start your research before you buy. To maximize your investment, property management can play a huge role in how much ROI your rental can bring in.
Let Us Help You Make the Most of Your Investment Property
At Meredith Lodging, we mitigate risks by helping you with all potential issues you may run into as a vacation rental homeowner. This includes a full-time housekeeping team and 24/7 maintenance support. Plus, we have an in-house marketing and Design team that ensures your property is rented as much as possible—at the highest possible rate. And our revenue management system adjusts pricing in real-time to ensure you’re getting the most out of every booking
This is how we would mitigate the risks we’ve discussed
- We provide a sign-on bonus that can be used to update your home to be better suited for your guests. We do this to help with up-front costs.
- We provide maintenance and cleaning services by professional, local teams.
- As a partner, we strictly follow local and Federal laws to prevent legal issues. And you also have access to our legal teams.
- We continually revise and refine our rental agreements to minimize liability.
- We list your home across all the major booking sites and run seasonal deals to offset low seasons and low occupancy.
- Our dynamic pricing algorithms ensure your vacation rental will be booked at the highest possible rate.
- We provide our expertise in your market to ensure you’re getting the most out of your investment.