The Pros and Cons of Investing in Vacation Rentals
11 Jan 2022
5 min read
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Thanks to sites like HomeAway and Airbnb, vacation rentals have only grown in popularity and demand – revenue in the U.S. is expected to show an annual growth of 10.55%. For investors, this becomes yet another appealing opportunity to either enter the world of real estate investment for the first time or expand an already growing portfolio.
But is it the right choice for you?
There are both pros and cons to owning a vacation rental property; ultimately, it’s dependent upon what your long-term goals are and then making an informed decision on whether a vacation rental property can get you there.
The upsides to owning a vacation rental
Extra, passive income – First thing’s first. A vacation rental can be a fantastic source of additional income, especially if situated in a place that’s a popular vacation destination. Airbnb hosts can potentially make hundreds of dollars per month (and that’s just Airbnb, but there are numerous other short-term rental sites. Think VRBO, Booking.com, and FlipKey, just to name a few).
Tax benefits – Some expenses, like property management fees, occupancy taxes, utility costs, and supplies (think coffee, bathroom necessities, etc.), can be written off as business expenses. Any property rented out for more than 14 days is considered a business, and as such, investors might encounter more opportunities to earn tax benefits.
Property appreciation – In most cases—and especially if your rental is located in a hot vacation destination—your property will appreciate in value and increase in equity, making it an ideal way to diversify your portfolio and create a very real future nest egg.
Personal flexibility – Less of a business incentive and more of a personal one, owning a vacation rental can offer you a space you yourself can frequent with family or friends whenever you want. Since you can dictate when there is availability to rent out, you can also decide when to block off the property for yourself. It’s the best of both worlds: owning a vacation destination while also making money from it.
The downsides to owning a vacation rental
Financial projections and accuracy – It may seem easy to do. Put the house on a rental website and watch the money come in, but there is much homework that needs to be done prior to even purchasing a property. Projecting expenses to ensure you’re cash flow positive can be stressful and overwhelming. Things to consider when number crunching are mortgage payments, management fees, as well as insurance and taxes.
Overall costs – Property maintenance can feel never ending when you have a steady stream of people walking into and out of the property. Unlike long-term rentals where background searches and renters’ patterns and habits are identified, there is less predictability with vacationers, meaning there is a good chance you’ll encounter guests whose stays result in damages and repairs.
Investment vulnerability – All investments are risky but it’s important to note that vacation rentals are more vulnerable to market downturns, seasonal swings, and shifting trends in their respective locations.
Time consuming – The goal for most is to turn any vacation rental into a state of passive income, however if you plan to manage the property yourself, that’s more active and less passive. Learning how to run a short-term rental can be a long road filled with trial and error. There needs to be a level of patience and an inevitable period of learning when going into the investment fully.
The opportunities may seem limitless—and they can be with a little research!—but if you are considering adding a vacation rental to your portfolio, make sure you do your part to start off on the right foot. Choose a thriving location with a good influx of visitors. Research the local market. Learn about the local legislation and laws as they pertain to short-term rentals.
If you are ready to discuss your vacation rental investment, Temple View Capital Funding, LP (“Temple View”) now offers long-term financing on short-term vacation rentals. Contact Temple View today to learn more.