Have you ever thought about investing in a vacation home to use a short-term rental? Looking for the best way to make money outside your 9-to-5 job? How about real estate investing?
It can be intimidating to dive headfirst into the world of real estate investment, but buying a vacation rental home is one avenue that’s gaining a great deal of popularity. We think it might just be the best way to enter the real estate business and become a property investor.
There are many benefits to purchasing a vacation rental and we have put together a list of the top reasons that we believe you should think about this as your first step in real estate investment.
Own a Dual-Purpose Property
If you’re a first-time real estate investor, you are probably considering all the options and thinking about what’s best for you.
Purchasing a vacation rental home has one clear advantage: It can serve dual purposes. You can use it as a second home and spend your own vacations there with your family, and then rent it out to guests the rest of the year.
Purchasing an investment property for the sole purpose of renting it out long-term does not give you this option.
Generate Rental Income
One of the major advantages of real estate investing in general, and investing in rental properties in particular, is the fact that you gain a source of steady income.
How? Through rental income.
The idea is that you will be renting out your second home to guests when you aren’t using it. You’ll be making money without having to necessarily buy an”investment” property. After all, your vacation home is your next home. It just happens to make money on the side.
When you buy a vacation home and use it as a short-term rental, the money you make from bookings actually makes it possible to pay the mortgage and other expenses (property tax, insurance, maintenance, and repairs) for the place where you spend your vacations.
Build Value through Appreciation
In addition to making money in the short run, a vacation rental home also makes money — potentially a great deal of it — in the long term.
A second home is a real estate property, and real estate generally appreciates in value over time.
When you are ready to sell your vacation rental property, you can usually sell it at a higher price and cash in on the profit. The best part is that you don’t have to do anything to enjoy this benefit. Natural real estate appreciation will take care of it.
If you want to make even more money when selling your property, you can make modifications and improvements to push the market value of your vacation rental (known as forced appreciation).
Earn Tax Deductions
Similar to your primary home or an investment property, a second home also provides tax deductions. These apply to mortgage payments, property tax, rental income, insurance premium, utilities, and other rental expenses.
However, the situation with a vacation rental can get somewhat complicated depending on the number of days you live on your property and the amount of days you rent it out to guests. So, if you choose to buy a vacation rental, we suggest that you work with a professional accountant and/or a real estate attorney to assure that you are taking maximum advantage of tax deductions without breaking any tax laws.
Take On Less Risk
Investing in vacation rental exposes you to lower risk than other kinds of real estate investment. First, vacation homes are in prime tourist destinations, so you can attract a great deal of guests, reach high occupancy rates, and charge a high rate.
The combined effect is high rental income. And rental income is the way investors make money from their rental properties.
One way to reduce your risk even further is to pick a location and a property that works as either a traditional, long-term rental or as a short-term rental. If you find that you have a low occupancy rate, low rental income, and negative cash flow, you have the option to switch strategies and become a traditional landlord.
And in the worst case scenario, if a long-term rental strategy also fails to bring you a positive cash flow, you have a second home to use with your family.
This will save you the expense of renting hotels or other people’s vacation homes until your property has appreciated enough in value to sell it. After all, if your vacation rental is located in a popular destination, appreciation shouldn’t take more than a few years to kick .
Learn About Real Estate
No matter how many real estate books you read or how many real estate classes you attend, you will not become an expert real estate investor until you actually buy an income property and start managing it.
Buying a vacation rental home provides you with an easy entry into the world of real estate investment because it’s often less stressful than other real estate investment strategies, such as getting a full-time landlord, fix-and-flip, wholesaling, etc..
They’re Easy to Manage
While some people take on vacation rental management as a full-time job, you don’t have to do this in order to start making money in real estate. It’s feasible to make owning a vacation rental a part-time occupation that doesn’t take up much of your time, especially if you use a vacation rental management service.
Management is a major concern for inexperienced investors, and it can potentially turn into a real nightmare for first-time vacation rental owners. Imagine having to clean your property, change the sheets, wash the towels, and refill the toiletries between each guest — sometimes multiple times a week — all the while working your 9-to-5 job.
Most owners don’t have time for that. Instead of handling it themselves, they’re hiring property managers or vacation rental management services to take over those duties.
Then they are free to manage the aspects of vacation rental management they want, such as talking to guests, making recommendations, and collecting rental income.
You Are Interested — Now What?
Investing in a vacation rental home is an easy entry point to real estate investment that provides endless opportunities to learn and carries lower risk than other choices. However, if you are a beginner real estate investor, you might be wondering how to go about the whole process of buying a vacation home as an investment property.
Here’s a list of the main factors you need to consider as you look for vacation rental properties:
Choose a Popular Location
Experts say that “location, location, and location” are the three most important factors in a successful real estate investment, and they are not mistaken. When buying a vacation rental home, choose places where other travelers — besides you and your family and friends — would like.
Learn Local Short-term Rentals Legislation
Regulations on short-term rentals have been tightening in many places around the U.S., so as soon as you’ve chosen a location for buying your next home, make sure you will be allowed to use the property as a short-term rental and make sure that you won’t be taxed too heavily for it.
Conduct Comparative Market Analysis
Prior to purchasing your income property, conduct some real estate market analysis to make sure you’re not overpaying for your second home. Real estate comps are the only way to assure you can get positive cash flow from renting out your vacation home on a short-term basis.