Real estate is an expansive industry with several avenues and strategies you can apply to turn a profit. One of such ways that have recently been gaining traction is purchasing a property for the sole purpose of leasing it to guests on vacation.
But before you start looking up vacation rental investment tips and commit, let's find out if the hype is worth it.
If you're considering adding a vacation rental to your portfolio, read until the end of this article to find out if it's a worthwhile investment.
● Earning extra income
The most apparent benefit of investing in a vacation rental is the extra income you can earn. When compared to other rental types, they have a significantly higher reward profile. By listing your property on popular vacation rental platforms like Airbnb, you could earn hundreds to thousands of dollars a month.
Of course, that figure is dependent on other factors like what amenities you have in place, whether the property is located in a tourist hotspot, and how good your marketing is. One thing you should keep in mind is that your value correlates with your ROI.
● Applying tax deductions
If you operate a house as a rental for longer than two weeks, you're mandated to list it for business taxation purposes. While that sounds like a pain because of the extra paperwork and fees, it could be a blessing in disguise.
Using all the available tax deductions applicable to your property could prevent taxes significantly eating into your profits. Speak to a financial advisor to know what expenses you can write off on your vacation rental. You might find that you can write off the most burdensome bills like utilities, hosting fees, and cleaning costs.
● Having a multi-purpose property
Another great benefit of owning a vacation rental is that you can also use it for self-serving purposes. When you don't have guests, it could be the perfect place to get away for some alone time or on a family trip. If you live within the exact geographical location, you could also drive up for a change of scenery and host birthdays, barbecues, and other social events.
You could also use it as part of your retirement plan, either by relocating to the house yourself or selling it off to move somewhere else.
● Having a high tendency to appreciate
Real estate is well known for its ability to stay ahead of the curve despite inflation. So while vacation rentals are typically for short-term tenants, there's no reason they can't be profitable in the long run. Moreso, vacation rentals in prime locations have a higher tendency to appreciate faster as the neighborhood grows. If you ever decide to sell, you're more than likely to make a handsome return.
However, you don't necessarily have to sell to cash in on the benefit of your property appreciating over time. You could use it as an opportunity to earn even more income by increasing your rent when the value of the property increases.
● Keeping up with maintenance
Before you start gearing up to enter the vacation rental industry, there are some crucial drawbacks to keep in mind. The most apparent one, which applies to owning any rental property, is keeping up with maintenance. As a landlord, no matter how short a stay is, you should ensure your house is habitable.
Moreso, because vacation rentals see more of a tenant turnover, you have to spend money on cleaning and perhaps even minor cosmetic changes between guests.
● Adhering to strict policies
Another downside to vacation rentals is the regulations that govern them. In some jurisdictions, they have different rules than other types of rentals. Some municipalities don't even allow them at all, and others have restrictions on the frequency of leasing. Although not every city makes having a vacation rental a headache, some are hands-off, while others require that you pay for a special license, and then you can go about your business.
Whatever the case may be, ensure you do your research on rental policies before financing a property.
● Ensuring income offsets costs
Finally, you have to work to ensure your income stays ahead of your costs. If you thought these rentals would only be a bother during vacation season, think again.
All year-round, you have to weigh expenses such as higher mortgage rates, advertising costs, cleaning services, and more against your rent. If you don't stay abreast of your finances, you could wind up turning a loss.
There's no one size fits all answer to whether vacation rentals are a good investment. Yes, these types of short-term rentals can be a great way to earn some extra cash while serving some beneficial multi-purpose uses, but they also have their downsides. Higher mortgage rates, regular maintenance, and particular policies in specific locations can skew the odds against you.
Before you get into the vacation rental industry, do your research, be sure you're willing to bear the risk, and enlist professional services, such as a property management company, to help you lighten the load and maximize your profit.