Have you been thinking about a vacation rental investment? Whether you have visions of relaxing with the family, building a side income, or a bit of both, vacation rental ownership requires smart planning for success.
Before your next move, read our vacation rental ownership guide, so you can make decisions that align with your financial goals and lifestyle.
Are Vacation Homes a Good Investment?
As you contemplate a vacation home investment, you might have concerns about keeping your rental booked consistently. You may also wonder if maintenance and management will be troublesome and expensive. And then there’s the big, underlying question — are vacation rentals a good investment?
Those are valid points. However, with the growing popularity of property rental websites like Airbnb and VRBO, you have more options than ever to market your home successfully. Not only that, many Americans are seeking a unique vacation experience rather than a cookie-cutter hotel environment.
These trends set the stage for a good investment. But let’s talk more specifically about the benefits of buying a vacation home.
Most people who consider purchasing a vacation home are attracted to the idea because they can spend their own vacations there and rent it to guests for the rest of the year.
When you rent out your vacation home, the money you make from bookings can help pay the mortgage and other expenses (property tax, insurance, and maintenance). Depending on your booking fee, this income could become profit, especially once you own the home.
Home equity is the current market value of your vacation house, minus what you still owe to your mortgage lender. You can convert that equity into cash for covering major expenses through a home equity loan or line of credit.
Real estate generally gains value over time. If you decide to sell your vacation home in the future, you could make a profit. By keeping up with maintenance and making small upgrades, you can increase your home’s value.
Just like your primary home, there are certain tax deductions that you can take as a homeowner. It’s smart to talk to a real estate attorney or professional accountant to make sure you’re getting all the tax breaks possible to offset the cost of owning a vacation rental property.
Introduction to Real Estate Investing
Buying a vacation home to rent is an excellent entry point into the world of real estate investment. It’s often less stressful than other strategies, such as becoming a full-time landlord or flipping houses.
How to Find a Vacation Rental Property
When purchasing a vacation rental property, you have to balance your own preferences with solid research on its potential investment value. For example, your family may want a beach bungalow in Florida. But when you investigate the options, you find that condos command a higher price and are less vulnerable to hurricane damage. Here’s how to buy a vacation home that’s a perfect compromise.
Choose a Location
Your vacation investment property should be in a popular destination, so you can guarantee consistent bookings and set a rental fee that fits your budget. Consider severe weather and seasonal downtimes. Are you okay with slower bookings for part of the year or is it essential that your vacation home is always occupied when you’re not there?
And of course, your family’s preferences should be a high priority. Is it close enough that you’ll be able to visit regularly (or as much as you’d like)? Is it a vacation spot you’ve enjoyed before? If not, be sure it’s what you have in mind. Talk to tourists or friends who have been there.
Research the Area
First, get to know the area by visiting the city/town’s website, tourism board, chamber of commerce, and transportation options. Is the area well managed and maintained? Does it look like a growing community? How many visitors do they get each year? What are the popular vacation spots and tourist attractions?
Then, check out vacation rentals in the area to see their rates, amenities, and proximity to gathering places like beaches, parks, or downtown areas. See if these competitors are solidly booked and if their rates match what you were hoping to charge.
Use a Real Estate Agent
Even with the best research, you may not know all the right questions to ask. That’s where a real estate agent can help. They can speed up the process by showing you homes that meet your criteria. Agents can also let you know if the house is well priced and if the neighborhood will hold its value.
With their inside knowledge about the real estate market in that specific area, you can feel more confident about your decisions. Contact a BHHS Fox & Roach agent to get more tips for buying a vacation home and start your search.
What Are the Costs of a Vacation Home?
It’s important to assess the total costs of making a vacation rental investment, so you know if it will be financially feasible. Let’s go through potential expenses.
Vacation Rental Property Taxes & Insurance
Like your personal residence, you’ll need to maintain homeowners insurance on the property. However, check with your insurance agent to make sure the policy is appropriate for the unique coverage needs of a vacation rental home.
When it comes to federal taxes, you can deduct rental expenses, but you must prorate them according to the amount of personal and rental use. Some states collect sales tax and others charge hotel taxes. We recommend talking to an accountant familiar with vacation rental properties, so you can estimate the tax implications of your purchase.
Maintenance and Utility Fees
See if you can get the utility bills from the previous owner, so you can gauge what your monthly expenses will be. Just be sure they’ve been using the residence year-round either as a personal residence or vacation investment property so it’s an accurate estimate.
Maintenance falls into two categories:
- Repairs and upkeep of the home
- Cleaning and replenishing supplies between guests
Depending on how long your rental guests stay and how far you live from your property, you may want to hire a property management company to handle these tasks. You could ask your real estate agent for recommendations and get several quotes to manage the cost.
Naturally, there’s the cost of the home itself and any fees during the closing process. But if you’re unable to purchase your vacation home in cash, you should also factor in the down payment, private mortgage insurance (if the down payment is less than 20%), and interest you’ll pay during the term of your mortgage.
Do Vacation Homes Pay for Themselves?
Owning a vacation property isn’t an automatic ticket to a steady income. But there are some steps you can take to increase the odds that you’ll have a profitable vacation rental home.
Decorating & prepping a rental property
If you’ve spent any time browsing vacation rental websites, you know how important it is to have a welcoming, attractive decor. Fortunately, you don’t have to break the bank to design an enticing property. Websites like Dwell and Lodgify offer plenty of tips like mixing new items with secondhand and choosing a theme to keep you on track. Take photos and consider your vacation home’s appeal like a potential renter would.
Marketing & renting out your new vacation home
To keep your rental income flowing steadily, be sure to market your vacation home year-round. Airbnb and VRBO make it easier to get more eyes on your property through search and ads. Don’t forget to play up any amenities in your description. Consumers often search for certain luxuries specifically. You should also take care to make necessary improvements over time, so your home doesn’t appear out of date compared to other options.
Minimizing Maintenance and Repair Costs
As you’re evaluating a vacation rental property, keep the potential maintenance costs in mind. For example, you’ll have less ongoing costs with a condo versus a home on a large lot. You might also decide to make some upfront purchases to reduce repairs or utility costs down the road, such as replacing an old water heater or putting in energy-saving windows.
Is Buying a Vacation Home Worth It?
So, is buying a vacation home worth it? There are too many variables to answer that question with a simple yes or no. Hopefully, this vacation rental ownership guide has given you a better understanding of how you can tip the scales in your favor. If you do your research, manage costs, and market effectively, there’s no reason buying a vacation home can’t be a profitable endeavor.