Is Buying a Vacation Rental Property a Good Investment?

Is-Buying-a-Vacation-Rental-Property-a-Good-Investment

Is-Buying-a-Vacation-Rental-Property-a-Good-InvestmentSummary: In this article, we will answer the question: is buying a vacation rental property a good investment? Topics also include, things to consider before buying a vacation home, and the pros and cons of owning a vacation rental property.

Introduction

Imagine that you just came back from a much needed summer vacation and can’t get that beach house out of your head. You keep thinking about how peaceful you felt and how great it would be to have a vacation home.  

Your mind begins to wander and you consider, what if I bought a vacation property of my own? Or maybe you ask yourself, is buying a vacation rental property a good investment? Now is the time to stop daydreaming about owning a vacation home and figure out if it’s right for you.  

Today, we’ll start out by listing the key things to consider before buying a vacation home. Then we will weigh out the pros and cons of owning a vacation rental property. Finally, we will answer, is buying a vacation rental property a good investment.


Buying a Vacation Home: Things to Consider

There are a lot of things to consider before buying a vacation home, as with any big investment. In the following sections, we’ll talk about factors that should impact your decision to take the plunge on a vacation home or not.Buying-a-Vacation-Home-Things-to-Consider-image

Consider Your Stage of Life  

Are you raising a young family? How often do you travel? How much money, on average, do you spend on a family vacation? Are your kids grown and you want to provide a gathering place for everyone?

Considering your stage of life will help determine exactly why you want to buy a vacation home and if the timing is right.  

Second Mortgage

“Second home loans generally require more money down and a better credit score than owner-occupied home loans,” explains John Lazenby, a real estate agent and president of Orlando Regional Realtor Association.

In order to secure a second mortgage, generally you must be able to prove that you can cover both your primary and secondary mortgage for between two and five months.

In 2014, 30 percent of vacation home buyers paid cash, according to the Realtors’ association.

Deciding to take out a second mortgage for a vacation home is a big decision that shouldn’t be taken lightly. If you’re planning to get a mortgage to finance your second home, run the numbers to ensure it makes sense.

Insurance

Calculate insurance costs for the vacation properties you are looking to buy. If you are planning on renting it out, you will want rental home insurance, not general homeowners. The good news is, if it’s used as a rental, insurance may be considered tax deductible.

Would You Rent It?

Deciding to rent your vacation property or not will have a huge impact on out of pocket costs. Rentals offer tons of tax deductions on expenses like, mortgage interest, insurance, maintenance, and repairs. Renting out the home can also produce cash flow to help offset the costs associated with owning it.

Location

When looking at where to buy vacation property, choose your location carefully. If you are planning to rent out your vacation home when you’re not using it, it’s important to consider future tenants. The rental should not only attract you, it should attract the renters as well.

A good place to start is places you’ve been to on vacation before and you’re somewhat familiar with. Pick a vacation rental property that’s easy to get to and will attract guests. Because this is your vacation home, also consider travel time and proximity to your primary residence. Choosing a good location for a vacation home has the power to make or break your experience and investment.

Pay Attention to Seasons

When deciding where to buy a vacation home, pay attention to the seasons. If you are renting it out, understand when the “high season” months are, and when you can expect less demand.  

For example, if you buy a property in a beach setting, the high season will be during the warmest months. These high season or high demand months should produce the most consistent rental income. On the other hand, during “off seasons,” expect less consistent rental income and be prepared for the lulls throughout the year.

Laws and Regulations

Because laws and regulations vary depending on location, check to make sure the vacation property you are looking to buy is in an area where rentals are allowed. Worst case scenario is you fail to look into local laws and find out after purchase that you aren’t permitted to rent out your property. There are steep penalties for renting out a property where it’s not permitted. Certain cities also have a limit on how many days you can rent out a property.

Additionally, look at the regulations for short-term rentals in the area. It would be wise to avoid these areas, especially if you are going to rent out the property now or in the future.

Maintenance Costs

How are you going to maintain your vacation property? If your rental isn’t in close enough proximity to take care of it yourself, consider hiring a property management company. A tip from rental experts is to set aside at least 1 to 2 percent of the value of the house per year, for maintenance and repair costs.

Even if you are close enough to your property to tend to all the maintenance, ask yourself if you want to take on that responsibility. Especially in the case of an emergency, a property management company may be worth it. You may also be able to deduct the cost of a management company on your taxes if it qualifies as a rental property.

Marketing Strategies

One of the biggest “what if’s” for a vacation rental property is the issue of vacancy. Assuming you want to earn rental income when you aren’t using the vacation home, you need to figure out how to attract guests.

Before closing on the deal, consider how you want to market your vacation rental home. Will you market the property yourself? If so, how? There are a number of vacation rental websites where you can list your home. Decide whether you want to go the Airbnb or VRBO route, advertise through social media, or hire a property manager to handle all the day-to-day details.

There are a number of marketing strategies to increase the likelihood of keeping your vacation rental filled. Once again, depending on how hands on or off you want to be, a property manager may be a great option.


Pros and Cons of Owning Vacation Rental Property

I’ve come up with a list of the pros and cons of owning a vacation rental property. While this list isn’t necessarily all-inclusive, it hits on the key advantages and disadvantages. As we go, I’d suggest putting together a unique list for yourself.

6 Pros of Owning Vacation Rental Property

Pro #1: Rental Income

The big advantage to buying a vacation rental property is the potential rental income you could make by renting out your investment property. Rental property websites like, Airbnb, VRBO, and HomeAway have changed how people vacation.

Travelers are staying at hotels much less than they have in the past, and instead opting for vacation homes listed on these websites. The main reason for this is, it’s usually more bang for your buck. Rather than paying $100+ per night to stay at a hotel for a week, vacation rental properties listed on Airbnb, are typically a better deal. Not only that, access to an entire home is appealing, especially with children.

Pro #2: Property Appreciation6-Pros-of-Owning-a-Vacation-Rental-Property-image

As with owning any real estate property, you will most likely see an increase in equity or appreciation. To put it simply, real estate values rise with inflation. Due to continuing inflation in the U.S., vacation rental property owners should expect to see the value of their property rise over time. In short, holding onto your rental property long-term is a great investment strategy.

Pro #3: Tax Benefits

A vacation rental property is considered a business. Which means, there are substantial tax benefits and you are allowed to write off most of the expenses. Just as I mentioned above, rental property owners can deduct mortgage interest, maintenance and repair costs, property management fees, money spent marketing, etc.

Remember, every state has different tax laws, so make sure you are familiar with your states’ laws and plan accordingly.

Pro #4: Enjoyment

I think it’s a safe assumption that most people buying a vacation rental property enjoy visiting that location. Sometimes, the return on investment on a vacation home is less than one might hope. But the main motivation for owning a vacation property may have more to do with enjoyment and unlimited access, rather than financial gains.

Pro #5: Family and Friends

Many people buying a vacation rental property look at it as a personal investment, not necessarily a financial one. Investing in quality time with family and friends may be just as important to you as financial investments.

Pro #6: Familiarity and Convenience

When I was in junior high school, I remember my dad clearing off the table and laying out a set of blueprints. We leaned over the blueprints and he walked me through his plans for his dream cabin in the mountains along the Idaho side of the Tetons. I began to paint a picture in my head as he excitedly went over our future vacation home. Little did I know, his plans demanded that we, as a family, do a lot of the work ourselves. Needless to say, it took almost 10 years of hard work to see our cabin come to fruition.

Before I get too nostalgic and trail off into my love for that cabin and the incredible view of the Teton mountain range, I’ll get to the point. Arguably, one of the best parts of owning a vacation home is that it’s your home. Most of my immediate family leaves personal items up at the cabin, which makes packing super quick and easy. The familiarity and convenience is a major selling point for many vacation home buyers.


5 Cons of Owning Vacation Rental Property

Con #1: Expenses5-Cons-of-Owning-Vacation-Rental-Property-image

One of the most difficult tasks as a vacation home owner is accurately projecting expenses. Even if you have accounted for expenses such as utilities, mortgage payments, insurance, taxes, management fees etc., there will inevitably be unplanned costs. 

Whether it’s additional maintenance or repair of damaged goods, you should always expect the unexpected and make sure you’re prepared.

Con #2: Higher Renovation and Repair Costs

Short-term rentals innately have more maintenance costs for damages or repairs. This is in large part because it’s usually harder to keep an eye on short-term rentals. There are more people coming and going and visitors have no attachment to the property, as they would in a long-term rental. Turnover rate of a short-term rental will inevitably require higher renovation and repair costs.

Con #3: More Risks

There are a couple of risks associated with owning a vacation rental property. First, there is always some financial risk when investing in anything. However, vacation homes tend to be more sensitive to economic downturns, which further increases their risk.

Another risk to consider is a natural disaster occurring in the area. The demand for beach or waterfront vacation homes is high. But keep in mind that houses close to water come with a higher risk of flooding, hurricanes, etc. No matter where you decide to buy, make sure your insurance covers everything.

Con #4: Unexpected Costs

We know that a vacation home comes with lots of expenses. On top of those “expected” expenses, you should also plan for unexpected costs (especially with high tenant turnover). A good rule of thumb is to put 10 percent of your monthly rental income in an emergency fund to cover unexpected costs.

Con #5: Lack of Flexibility

Many owners of a vacation property may start to feel a constant pull to visit their second home, simply to justify their investment. Because you are likely putting a large amount of money into the home, it’s harder to justify traveling somewhere else, even if you want to. Five or 10 years down the road, you may be tired of visiting the same location and get the itch to explore different places.

Additionally, investment properties are not liquid assets. Which means, if you decide to sell, it could take months or even a year or two to get the price you want.


Is Buying a Vacation Rental Property a Good Investment?

Finally, we’ll address whether a vacation rental property is a good investment. Because everyone’s financial situation is unique, I can’t definitively say it’s a good or bad investment. Having said that, predicting rental property income is difficult, and predicting vacation rental income is ever harder.

So my advice to you is this: Since you won’t know how much rental income you may earn or what expenses are deductible, only buy a vacation rental property if you can afford it, regardless of these numbers.


Conclusion

I hope after reading this article you have been able to make your own list of vacation rental pros and cons, as well as things to consider. I think the better question would be, is buying a vacation rental property a good investment for you. At the end of the day, if you find a great property and the numbers make sense, it could be a great long-term investment.

For more details and information, check out one of my recent articles about the tax rules for vacation rental property.



Sources:

https://loans.usnews.com
https://www.mashvisor.com
https://www.mashvisor.com
https://www.biggerpockets.com
https://blog.turnkeyvr.com
https://www.moneycrashers.com
https://www.mashvisor.com
https://fitsmallbusiness.com
https://www.financialsamurai.com
https://www.investopedia.com

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