Purchasing a second home and using it as a vacation rental property is a huge decision. And sometimes making large decisions, similar to this one, requires sitting down, doing the research, and making a pro/con list of owning a vacation rental to help guide you.
The good news is that we have done the hard work for you. Our team at LSI Vacation Rentals are experts in vacation rentals and understand all of the pros and cons for owners and potential owners just like you. Here are few tips that can help you with your decision.
Pro: You’ll earn extra income.
This is probably the main reason you are considering owning a vacation rental property in the first place. Who doesn’t want extra income plus a vacation home they can retreat to whenever they have to get away?
Your rental income will depend on which city you purchase in, what neighborhood, the sort of home you have, and much more. We recommend checking out some listings on Airbnb and VRBO in your town. Look at the nightly rate that other owners are charging and determine the rates and availability change depending on peak season and offseason.
Most recently, as the travel industry has faced a surge of vacation cancellations because of COVID-19, many travelers have opted to stay in vacation rentals over hotels because of their ability to easily social distance. This could mean a massive bounce back for the home-sharing industry, as well as a more permanent shift in accommodation preferences as travel starts to resume again.
Con: There may be some unexpected expenses.
Just like at your primary residence, things in a vacation home can break or just stop working at any moment. When this happens, you as the owner are responsible for paying to fix it.
You can plan for certain costs, like utilities, restocking, taxes, and regular maintenance, but you can’t plan for your air conditioner breaking or a pipe bursting. We recommend setting aside a certain amount of money each year, like 1% of the home’s purchase price, for unexpected repairs and maintenance.
Pro: The home may increase in value.
When you purchase a home, the expectation is that will appreciate in value so that you can make more money off it when you’re selling. A vacation rental home is no different. Your property will hopefully increase in value year over year.
This is true especially if you buy in a high-demand area. Before making a purchase, take a look at past and current trends in the market you’re hoping to purchase in.
Con: Your down payment might be higher than you think.
If you’re purchasing a primary residence, you can sometimes get a loan with a 3-5% down payment. The rules are different for vacation rental properties. When you’re buying a second home that you don’t plan to stay in full time, expect to put down 20-30%. Your credit score requirements also might be higher for this vacation home because you’ll be taking on more debt.
Pros: You can deduct business-related expenses.
Don’t forget about tax deductions! This is a business for you, meaning if you are paying taxes based on your rental income, you can deduct any business-related expenses.
Deductions you may be able to claim include housekeeping, restocking, and the price of your property management company. Just make sure you keep each and every receipt. We recommend getting a business credit card to pay for any expenses related to your rental so you can see everything you paid for in one place.
You also may be able to deduct your mortgage interest, property taxes, and insurance. To figure out exactly which deductions you can claim each year, talk to a tax professional in your area.
Con: You’ll have to pay more taxes and fees.
You won’t have to pay taxes on rental income if you rent your home out for less than 14 days each year. But if you are renting out your property for more than 14 days, you will need to pay federal taxes on that additional income.
Other taxes you’ll pay include state, local, and property taxes. Depending on your local tax laws, you may need to get a business license, pay sales tax, or resort taxes too. When it comes to fees, you will probably have to pay a booking fee for the websites you use to market your home.
Pro: You’ll have a vacation home to use whenever you want
Do you need a vacation? When you have a rental property, you always have a place you can visit. To maximize your earnings, we recommend heading to a vacation home in the off-season.
You will also have a place that friends and family can stay in (whether you make them pay the full price, a reduced rate, or nothing is left up to you). And while retirement may be a long way off for you, a vacation home is the perfect place to retire to when you decide that you’re ready for it.
Con: The care can be time-consuming.
There is a lot of upkeep involved with owning a vacation rental property. You’re going to have to keep up with regular maintenance and repairs, but you will also have a lot to do for each guest’s stay. This includes housekeeping (whether you hire someone or do it yourself), restocking, and answering the guest’s questions and concerns.
If you get a vacation rental property in a different town than your primary residence, you also need to think about the time and costs for traveling back and forth between both homes when you will need to take care of something at the rental property.
There’s also the marketing aspect. You Will Need to create listings for sites across the internet, such as HomeAway/VRBO, Airbnb, and Expedia. With these listings, owners must always be answering potential guest’s questions, responding to reviews, and updating the nightly rate/calendar for their property.
Rental properties are easier to manage with help.
If all of the maintenance above sounds like a lot, there are people who can help — that is a major pro. Vacation rental property managers like TurnKey can do everything for you, so you don’t have to spend every spare hour dealing with your rental home.
When it comes to marketing, a great property manager will expertly craft a listing on all of the major sites travelers use. They’ll use professional photography and an expert copywriter to make certain that your home stands out among the thousands of others that may come up in a search.
Another way a good property manager will be able to help you manage your rental is by being there for guests. For example, TurnKey has a guest team that’s staffed 24/7 to immediately answer any question a guest might have. You can also rely on your property manager to handle housekeeping and regular maintenance.
TurnKey will take care of the housekeeping and any minor maintenance tasks such as changing light bulbs, replacing batteries, etc. to make certain your home is always perfect for guests — we even give cleaning companies a checklist to follow while they’re housekeeping, and we always do photograph comparisons to ensure your home is staged properly. Additionally, a property manager will walk through the rental before any guests arrive.