Vacation rental property investing has made huge waves over the last decade. With the rise of vacation rental booking sites like Airbnb, TripAdvisor, FlipKey, VRBO and others, vacation rental revenues hovered at around $13.05 billion in 2018 alone.
It appears that real estate investors everywhere have jumped in the ocean, feet first, to claim their piece of the multi-billion-dollar pie.
In fact, in 2018, the National Association of Realtors noted that 45 percent of investors purchased a vacation or short-term rental property, compared to 49 percent of homebuyers who purchased their vacation home as a retreat.
Still, while vacation rental property investing looks like its all palm trees and pina coladas, we should take a closer look at the pros and the cons of this fast-growing real estate investment strategy.
Benefits of Vacation Rental Property Investing
Let’s start by discussing some of the perks of vacation rental property investing.
You make money
Making money is the number one motivation for renting out vacation rental properties. Airbnb estimated that hosts earn over $900 per month, on average, while hosts in high-demand locations earn up to four times that and more. And remember, you can list your property on dozens of other platforms to keep your property booked up as much as you wish throughout the year.
Your own family retreat
Let’s not forget that when you own a vacation rental property, you get to use it too! This could be the perfect spot for annual family vacations, graduation parties, girl getaways, and summer vacation. Just be sure that you buy in the absolute best place you’ll want to revisit again and again.
One of the most notorious ways wealthy people have hid and protected their money for centuries is through real estate investments. The tax advantages carry through with vacation property rental investing as well.
For example, you can deduct costs of doing business that are ‘ordinary and necessary.’ You can deduct mortgage interest, cleaning costs, property management fees, lawn care, occupancy taxes, insurance premiums, hosting fees (from Airbnb, etc.), utilities and more. You should chat with your accountant or CPA for a more complete list.
Cons of Vacation Rental Property Investments
Let’s face it, vacation rental properties take a beating when you host guests – making it a hands-on endeavor to maintain.
Someone will need to clean, prep, and get the property rental-ready after every use. The more usage of your property, the more wear and tear will result.
You may hire a property management company to take care of the repairs and maintenance activities of the property, but you can expect to pay a hefty 15% to 40% of your income. That amount could be your entire profit margin!
Buying an investment property is different than buying a home you will occupy. Investment property loans usually come with higher interest rates and much higher down payments.
There are other things you’ll need to consider too, like whether the HOA of the neighborhood your investment lies within allows vacation rental investing. Some HOAs don’t allow homes within their neighborhoods to be rented out as such.
You also need to consider the fact that you’ll be marketing your property all the time, to maintain your desired occupancy rate.
As you can see, vacation rental property investing has just as many drawbacks as it has advantages. You have to crunch the numbers twice to determine whether this is a good investment move for you and your family.
For some vocation rental property owners, it’s worth it to provide a vacation retreat for their family, even if they made zero dollars. For these folks, the money they make from the vacation home is pure icing on the cake, even if they only break even at the end of the year.