Imagine that you’ve just returned from a much-needed summer vacation and that beach house is all you can think about. You keep reflecting on the tranquilly you experienced and how wonderful it would be to own a vacation home.
You start to daydream and wonder, “What if I bought a vacation home of my own?” Or perhaps you contemplate if it would be wise to invest in a vacation rental home. Stop daydreaming and decide if purchasing a vacation property is the correct choice for you right now.
Today, we’ll begin by outlining the important factors to consider prior to purchasing a vacation property. Next, we will compare the advantages and disadvantages (also known as a short-term rental or STR) of having a holiday rental property. The question of whether purchasing a holiday rental property is a wise investment will be addressed last.
BUYING A VACATION HOME: THINGS TO CONSIDER
As with any significant investment, there are numerous factors to think about. We’ll cover the elements that should influence whether you decide to purchase a vacation property in the sections that follow.
Think About Where You Are in Life
Are your children grown, and you wish to offer a space for everyone to congregate? Have you recently started a family? You travel how frequently? How much do you typically spend on family vacations?
You can decide whether the time is perfect to buy a vacation house by considering your stage of life.
Today, a lot of real estate investors are considering buying a vacation rental to take advantage of the post-pandemic travel boom and the rising demand trend for holiday rentals. It’s simple to comprehend why when looking at the figures.
With more than 1.2 million vacation rental listings anticipated by the end of this year, the average yearly earnings from investments in vacation rentals will hit $56,000 for the first time ever in 2021. In fact, according to Realtor.com, in some of the most popular vacation rental locations, typical vacation rental income has climbed by 70% or more year over year.
Benefits of investing in vacation rentals aka short-term rentals or STR
To assess whether holiday rentals are a smart investment, let’s start by going over the potential advantages of buying a vacation rental, as well as disadvantages to consider.
Extra income
According to AirDNA, a company that examines performance information from 10 million Airbnb and Vrbo rentals, the average annual revenue for short-term vacation rentals reached the highest level ever recorded at $56,000 at the end of 2021. Cash-on-cash returns typically average close to 10% annually in some of the best short-term rental markets.
Massive Market
From small towns and villages with a few thousand residents to major metro areas, vacation homes are available almost everywhere in the United States. Over 1.1 million vacation rentals are available right now in the United States, and by the end of 2022, it’s expected that number will rise by 20.5%.
Appreciation
Real estate has a history of appreciating faster than inflation, providing a buffer against inflation as well as the chance to profit from a long-term increase in equity. Even during a pandemic, the housing market did better in 2021 than it had in the previous 15 years, according to a recent analysis from the National Association of Realtors (NAR).
Variable usage
A vacation rental is often leased for 30 days or less, as opposed to a long-term rental that is held by a renter under a 12-month lease. Families on vacation, couples searching for a weekend getaway, and businesspeople staying in town for a few days each week may all be potential tenants. Traveling Nurses for example, are new tenant sources, known as a Mid-term Renters.
Tax advantages
Given that the property is rented out for at least 14 days per tax year, holiday rentals are likewise qualified for the same tax deductions and write-offs as real estate investors. Investors can sign up for a free account with Stessa to automatically track and divide spending between rental and personal usage, and the IRS Topic No. 45 Renting Residential and Vacation Property outlines some of the tax regulations in detail.
Recession-resistant
Due to several factors, vacation rentals in domestic tourist areas typically perform well during recessions. Drive-to leisure destinations close to major cities profit as tourists choose more economical family vacations and provide a more cost-effective option for domestic travel than for international travel in a downturn.
Drawbacks to consider
There are some drawbacks to consider before making an investment in a vacation rental, while the problems may be reduced by getting a decent short-term rental in the ideal location and working with a local property management company:
- Due to the frequent guest turnover, managing a holiday rental can be time-consuming.
- Due to seasonality and higher competition compared to owning a home rented to a long-term renter, income from a holiday rental may be unpredictable.
- Despite the possibility of increased occupancy rates, vacation rental property managers typically charge a portion of the rental income.
- It’s necessary to publish a vacation rental on the best websites for short-term rentals, coordinate bookings and visitors, equip the house with supplies, and furnish it completely.
- Before making an investment, it’s crucial to understand the regulations because local governments and HOAs may place restrictions on or outright ban the use of a home as a vacation rental.
How to make a wise investment in a Short-term Rental
Before investing in the holiday rental industry, there are several metrics to take into account that could make some vacation rental properties more profitable than others:
Location
We all know that in real estate, location, location, location is everything, and this also holds true for vacation rentals. Just as crucial as the cost to buy the property is the ability to draw a steady stream of visitors. Business travelers might do best with short-term rentals in cities, while leisure travelers might do better with vacation rentals in smaller tourist destinations.
Demand
Demand for vacation rentals in small and midsize cities, resort towns, and rural areas increased between 8% and 67% during the course of the two years between April 2019 and April 2021. A vacation rental needs to be desirable enough to draw both new and returning visitors, unlike a standard investment property with a tenant on a 12-month lease.
Seasonality
Locations with high and low seasons and varying levels of demand throughout the year are frequent locations for vacation rental units. For instance, a beachfront property would experience a spike in summer bookings, but year-round demand from both pleasure and business travelers might be seen at a short-term rental in a major city.
Occupancy
The occupancy rate for a vacation rental is determined by dividing the number of nights reserved by the total number of nights available. Investors may keep a vacation rental’s occupancy level high by considering elements including the home’s size, amenities, number of bedrooms and bathrooms, and accessibility to natural attractions.
ROI
Property management fees, maintenance and repair costs, taxes, and insurance can all be included in vacation rental costs. However, there are also additional expenses to take into account, such as furnishing and decorating a vacation rental, higher cleaning costs because of frequent guest turnover, replacing linens and supplies, and paying fees to a hosting platform for online reservations.
