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pros and cons of investing in vacation rental properties

Julie and her husband were more than a little excited when they told me about their plans for investing in a vacation rental property. They believed it would not only pay for itself, but generate a handsome profit, too. The growing popularity of websites for short-term rentals like VRBO and Airbnb are making that possibility a reality for many of today’s real estate investors, opening up new income opportunities in popular vacation spots and resorts. I never like to be the bearer of bad news, but it’s a little more complicated than that—and for some, it may not be worth the effort.

Vacation Rental Properties: An Immature Investor Market

Short-term vacation rental websites were originally created to provide tools for property owners seeking to rent out spare bedrooms to travelers. Some even rent out their entire house while the family is on vacation. The concept of turning your home’s extra space into an income-producing rental property is clearly appealing because it transforms nearly any property into a potential asset. The notion of paying off a mortgage with high-profit, short-term rentals has more recently gained popularity amongst a new wave of real estate investors.

The trend of investors taking over the vacation home market is exemplified by recent research on vacation and investment homes from the National Association of REALTORS®. While both vacation and investment buyers were more likely to use their property as a short-term rental, the statistics show a significant divide between each group. For vacation buyers, sales were down by 21.4% and their share of sales dropped four percentage points to 12%. Investor buyers, however, bought 4.5% more properties, while their share of sales remained the same. The upshot is that investors appear to be taking over the vacation home market for the purpose of renting their properties out short-term.

Investing in Vacation Rentals: A Good Idea or Not?

While it might be tempting to hop on the bandwagon with other investors, scooping up vacation properties to use as short-term rental homes, we need to be wary of the pros and cons. Let’s take a brief look at some of the major considerations.

PROS:

  • A good vacation rental property generally provides a healthy rental revenue, potentially covering the mortgage payments while also generating healthy additional profit. Even in Newark, for instance, where the average monthly rent for a two-bedroom is around $2460, using it as an Airbnb can bring in about $150 per night. This means that the per-night revenue for a short-term rental is about double what you could expect from a traditional rental property!
  • Using an online short-term rental service like Airbnb makes it convenient to manage your rental property. Their website interface makes pricing, marketing, and communication with potential guests quite straightforward and easy. In addition, Airbnb will oversee the billing process for you.
  • You may qualify for federal tax breaks and deductions related to your investment property. Everything from professional fees or commissions—including property management services—to cleaning and maintenance are potential tax write-offs.

CONS:

  • Vacation rentals can be costly to manage, both in terms of time and money. These properties may require seasonal upkeep and special maintenance considerations. A friend’s ski vacation rental in Breckenridge, Colorado, for instance, recently provided him with a costly surprise. He suffered a burst water pipe when the region had a sudden warming period that followed a particularly cold weekend. Unfortunately, the property was unattended at the time and the leaking water caused thousands of dollars in damage. So you may incur costs to maintain or monitor the property even when it’s not actively being utilized.
  • Vacation rental properties are particularly sensitive to seasonal fluctuations and economic downturns, which could leave you financially exposed if you suffer a lack of booking revenue. This is especially true when the investment property is located in popular beach areas that are prone to natural disasters like hurricanes or flooding. It can take the local economy—which is based on tourism—years to recover. And in the interim, you’re left holding a property with diminished value and little by way of monthly returns.
  • Many states and cities are cracking down on short-term rental services. New York, for example, passed one very strict law to penalize property owners who do not abide by limits that govern how frequently they can rent their home. In California, the fight has been primarily local, reaching a fever pitch in the San Francisco Bay Area. Increasingly, it appears that state and local municipalities are seeking to reign in short-term vacation rentals, which will put a damper on potential revenue from these properties.
  • You may experience higher renovation and repair cost on a short-term rental. Most travelers expect the latest appliances and furnishings, so you will have to update every few years. In addition, short-term renters are less apt to report any necessary repairs and guests are far less likely to treat the property with respect since there’s no sense of ownership or obligation.

A Window of Opportunity for Investing in Vacation Rental Properties

The financial incentive of short-term vacation rentals is clear just by looking at the price difference compared to ordinary residential rents. So far, ongoing controversy and murky laws surrounding short-term vacation rentals have kept most large institutional investors out of this burgeoning market. So, for the moment, at least, the bigger names in real estate investment appear to be largely avoiding this particular niche, but that could change quickly. In the meantime, the uncrowded marketplace is creating opportunities for individual investors who have the right combination of skills to profit in short-term vacation rentals.

Whether or not it is worth dipping your toes into this particular real estate investment niche is debatable and depends largely on your personal financial abilities and tolerance for risk. If you’ve decided to begin investing in real estate, contact HomeVestors® to get the best leads available nationwide.

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Photo Credit: Unsplash user Wenkui Xiao.

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