Having a second home in an exotic location is a dream many people have. You can achieve this AND start making money in real estate by investing in vacation rentals. Owning vacation rental property is one of the best strategies to start investing in real estate.
There are many advantages when it comes to owning vacation rental property, but there can also be some drawbacks. In this blog, we will talk in detail about owning a vacation rental- pros and cons.
The Experts of Possessing Vacation Rental Property
The main advantage of owning a vacation rental is the rental income you can make by renting out your investment property on sites like Airbnb, VRBO, and HomeAway.
The latest hype of Airbnb rentals is attracting many vacationers away from hotels. So, owning vacation rental property in a fantastic location can provide steady positive cash flow, especially during the peak season.
A vacation rental property will most likely experience equity gain due to real estate appreciation — if the market permits. This generally means that as a real estate investor, the longer you hold on to the vacation rental, the higher the property value is going to be.
Since owning vacation rentals is regarded as a business, there are drastic tax advantages and you can write off many rental expenses. For example, owning vacation rental property allows you to deduct your mortgage interest the same way you would from your first home.
Each state has a different taxation system so you will need to have a look at which short term rental tax deductions apply to your vacation rental.
Dual use of property
The main reason that drives real estate investors to have a vacation rental property is the fact that they can use it themselves. Being able to use and enjoy the property during the year or during the off season is a great perk of investing in vacation homes as you’ll not only make money when Airbnb guests occupy the rental property but you will save money on your vacations!
Various management options
Vacation rental property management can be overwhelming for novice real estate investors. However, owning vacation rental property can be made easier with the help of vacation rental management services that will take care of the property and take over time consuming duties. This allows you to buy a vacation rental property out of state and maintain a high Airbnb occupancy rate.
Finding guests is easy
Thanks to the growth of the vacation rental business, supported by platforms such as Airbnb, VRBO, and HomeAway, it has never been easier to find tenants for your vacation rental property.
Not only will you get access to thousands of guests using these platforms, but managing your listing is also simplified. For example, being an Airbnb host allows you to choose which dates you want to rent out your rental property and market it to target vacationers.
Learn about the real estate business
Owning vacation rental property provides you room to learn about real estate investing while enjoying the perks of owning vacation rentals. By gradually learning how to make the most out of your short term rental property, you can then expand your property business and earn more.
The Disadvantages of Owning Vacation Rental Property
Property costs associated with owning vacation rental property lead the list of the cons. Not to discourage you from investing in vacation homes, but the latter comes with several expenses that you will need to get prepared for. Factoring in your vacation home expenses from the beginning can help you accurately estimate your net operating income and return on investment.
The vacation rental income calculator from Mashvisor allows you to include all costs associated with owning vacation rental property. Such expenses include property management fees, utilities, property tax, property insurance, mortgage payments, and other various Airbnb expenses. This way, you can make sure the costs won’t damage your ROI and manage them efficiently.
Short term rental regulations
In recent years, many cities and states have started regulating short term rental properties. In the most Airbnb friendly cities, there are no limitations or heavy regulations when it comes to operating a short term rental property.
However, in other locations, a real estate investor may face strict laws that impede the full earning capacity of the investment property. Since vacation rental properties are mainly rented out as short term rentals, you should avoid investing in cities where that can be a problem.
When it comes to owning vacation rental property, there are two major risks that you need to consider. First, there is the financial risk of the real estate market taking a hit and property values dropping as a result. Truly, vacation homes are particularly sensitive to economic downturns, which could leave the real estate investor financially vulnerable.
A second risk associated with owning vacation rental property is the incidence of natural disasters. There is a high demand for waterfront vacation homes, for example, and you may want to tap into this market. But having an investment property by a beach includes the risk of adverse weather conditions like hurricanes and flooding. Therefore, it would make sense to get insurance that covers any losses resulting from these conditions.
Owning vacation rental property includes a great deal of expenses and on top of that, you will always have to deal with unplanned costs due to the high tenant turnover. Setting aside 10% of your monthly rental income will serve as an emergency fund that covers unplanned costs.