Is Buying a Vacation Rental Property a Good Investment? (2022)

Summary: In this article, we will answer the question: is buying a vacation rental property a good investment? Topics also include, things to consider before buying a vacation home, and the pros and cons of owning a vacation rental property.

Introduction

Imagine that you just came back from a much needed summer vacation and can’t get that beach house out of your head. You keep thinking about how peaceful you felt and how great it would be to have a vacation home.

Your mind begins to wander and you consider, what if I bought a vacation property of my own? Or maybe you ask yourself, is buying a vacation rental property a good investment? Now is the time to stop daydreaming about owning a vacation home and figure out if it’s right for you.

Today, we’ll start out by listing the key things to consider before buying a vacation home. Then we will weigh out the pros and cons of owning a vacation rental property. Finally, we will answer, is buying a vacation rental property a good investment.

Buying a Vacation Home: Things to Consider

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There are a lot of things to consider before buying a vacation home, as with any big investment. In the following sections, we’ll talk about factors that should impact your decision to take the plunge on a vacation home or not.

Consider Your Stage of Life

Are you raising a young family? How often do you travel? How much money, on average, do you spend on a family vacation? Are your kids grown and you want to provide a gathering place for everyone?

Considering your stage of life will help determine exactly why you want to buy a vacation home and if the timing is right.

Second Mortgage

“Second home loans generally require more money down and a better credit score than owner-occupied home loans,” explains John Lazenby, a real estate agent and president of Orlando Regional Realtor Association.

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In order to secure a second mortgage, generally you must be able to prove that you can cover both your primary and secondary mortgage for between two and five months.

In 2014, 30 percent of vacation home buyers paid cash, according to the Realtors’ association.

Deciding to take out a second mortgage for a vacation home is a big decision that shouldn’t be taken lightly. If you’re planning to get a mortgage to finance your second home, run the numbers to ensure it makes sense.

Insurance

Calculate insurance costs for the vacation properties you are looking to buy. If you are planning on renting it out, you will want rental home insurance, not general homeowners. The good news is, if it’s used as a rental, insurance may be considered tax deductible.

Would You Rent It?

Deciding to rent your vacation property or not will have a huge impact on out of pocket costs. Rentals offer tons of tax deductions on expenses like, mortgage interest, insurance, maintenance, and repairs. Renting out the home can also produce cash flow to help offset the costs associated with owning it.

Location

When looking at where to buy vacation property, choose your location carefully. If you are planning to rent out your vacation home when you’re not using it, it’s important to consider future tenants. The rental should not only attract you, it should attract the renters as well.

A good place to start is places you’ve been to on vacation before and you’re somewhat familiar with. Pick a vacation rental property that’s easy to get to and will attract guests. Because this is your vacation home, also consider travel time and proximity to your primary residence. Choosing a good location for a vacation home has the power to make or break your experience and investment.

Pay Attention to Seasons

When deciding where to buy a vacation home, pay attention to the seasons. If you are renting it out, understand when the “high season” months are, and when you can expect less demand.

For example, if you buy a property in a beach setting, the high season will be during the warmest months. These high season or high demand months should produce the most consistent rental income. On the other hand, during “off seasons,” expect less consistent rental income and be prepared for the lulls throughout the year.

Laws and Regulations

Because laws and regulations vary depending on location, check to make sure the vacation property you are looking to buy is in an area where rentals are allowed. Worst case scenario is you fail to look into local laws and find out after purchase that you aren’t permitted to rent out your property. There are steep penalties for renting out a property where it’s not permitted. Certain cities also have a limit on how many days you can rent out a property.

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Additionally, look at the regulations for short-term rentals in the area. It would be wise to avoid these areas, especially if you are going to rent out the property now or in the future.

Maintenance Costs

How are you going to maintain your vacation property? If your rental isn’t in close enough proximity to take care of it yourself, consider hiring a property management company. A tip from rental experts is to set aside at least 1 to 2 percent of the value of the house per year, for maintenance and repair costs.

Even if you are close enough to your property to tend to all the maintenance, ask yourself if you want to take on that responsibility. Especially in the case of an emergency, a property management company may be worth it. You may also be able to deduct the cost of a management company on your taxes if it qualifies as a rental property.

Marketing Strategies

One of the biggest “what if’s” for a vacation rental property is the issue of vacancy. Assuming you want to earn rental income when you aren’t using the vacation home, you need to figure out how to attract guests.

Before closing on the deal, consider how you want to market your vacation rental home. Will you market the property yourself? If so, how? There are a number of vacation rental websites where you can list your home. Decide whether you want to go the Airbnb or VRBO route, advertise through social media, or hire a property manager to handle all the day-to-day details.

There are a number of marketing strategies to increase the likelihood of keeping your vacation rental filled. Once again, depending on how hands on or off you want to be, a property manager may be a great option.

Pros and Cons of Owning Vacation Rental Property

I’ve come up with a list of the pros and cons of owning a vacation rental property. While this list isn’t necessarily all-inclusive, it hits on the key advantages and disadvantages. As we go, I’d suggest putting together a unique list for yourself.

6 Pros of Owning Vacation Rental Property

Pro #1: Rental Income

The big advantage to buying a vacation rental property is the potential rental income you could make by renting out your investment property. Rental property websites like, Airbnb, VRBO, and HomeAway have changed how people vacation.

Travelers are staying at hotels much less than they have in the past, and instead opting for vacation homes listed on these websites. The main reason for this is, it’s usually more bang for your buck. Rather than paying $100+ per night to stay at a hotel for a week, vacation rental properties listed on Airbnb, are typically a better deal. Not only that, access to an entire home is appealing, especially with children.

Pro #2: Property Appreciation
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As with owning any real estate property, you will most likely see an increase in equity or appreciation. To put it simply, real estate values rise with inflation. Due to continuing inflation in the U.S., vacation rental property owners should expect to see the value of their property rise over time. In short, holding onto your rental property long-term is a great investment strategy.

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Pro #3: Tax Benefits

A vacation rental property is considered a business. Which means, there are substantial tax benefits and you are allowed to write off most of the expenses. Just as I mentioned above, rental property owners can deduct mortgage interest, maintenance and repair costs, property management fees, money spent marketing, etc.

Remember, every state has different tax laws, so make sure you are familiar with your states’ laws and plan accordingly.

Pro #4: Enjoyment

I think it’s a safe assumption that most people buying a vacation rental property enjoy visiting that location. Sometimes, the return on investment on a vacation home is less than one might hope. But the main motivation for owning a vacation property may have more to do with enjoyment and unlimited access, rather than financial gains.

Pro #5: Family and Friends

Many people buying a vacation rental property look at it as a personal investment, not necessarily a financial one. Investing in quality time with family and friends may be just as important to you as financial investments.

Pro #6: Familiarity and Convenience

When I was in junior high school, I remember my dad clearing off the table and laying out a set of blueprints. We leaned over the blueprints and he walked me through his plans for his dream cabin in the mountains along the Idaho side of the Tetons. I began to paint a picture in my head as he excitedly went over our future vacation home. Little did I know, his plans demanded that we, as a family, do a lot of the work ourselves. Needless to say, it took almost 10 years of hard work to see our cabin come to fruition.

Before I get too nostalgic and trail off into my love for that cabin and the incredible view of the Teton mountain range, I’ll get to the point. Arguably, one of the best parts of owning a vacation home is that it’s your home. Most of my immediate family leaves personal items up at the cabin, which makes packing super quick and easy. The familiarity and convenience is a major selling point for many vacation home buyers.

5 Cons of Owning Vacation Rental Property

Con #1: Expenses
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One of the most difficult tasks as a vacation home owner is accurately projecting expenses. Even if you have accounted for expenses such as utilities, mortgage payments, insurance, taxes, management fees etc., there will inevitably be unplanned costs.

Whether it’s additional maintenance or repair of damaged goods, you should always expect the unexpected and make sure you’re prepared.

Con #2: Higher Renovation and Repair Costs

Short-term rentals innately have more maintenance costs for damages or repairs. This is in large part because it’s usually harder to keep an eye on short-term rentals. There are more people coming and going and visitors have no attachment to the property, as they would in a long-term rental. Turnover rate of a short-term rental will inevitably require higher renovation and repair costs.

Con #3: More Risks

There are a couple of risks associated with owning a vacation rental property. First, there is always some financial risk when investing in anything. However, vacation homes tend to be more sensitive to economic downturns, which further increases their risk.

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Another risk to consider is a natural disaster occurring in the area. The demand for beach or waterfront vacation homes is high. But keep in mind that houses close to water come with a higher risk of flooding, hurricanes, etc. No matter where you decide to buy, make sure your insurance covers everything.

Con #4: Unexpected Costs

We know that a vacation home comes with lots of expenses. On top of those “expected” expenses, you should also plan for unexpected costs (especially with high tenant turnover). A good rule of thumb is to put 10 percent of your monthly rental income in an emergency fund to cover unexpected costs.

Con #5: Lack of Flexibility

Many owners of a vacation property may start to feel a constant pull to visit their second home, simply to justify their investment. Because you are likely putting a large amount of money into the home, it’s harder to justify traveling somewhere else, even if you want to. Five or 10 years down the road, you may be tired of visiting the same location and get the itch to explore different places.

Additionally, investment properties are not liquid assets. Which means, if you decide to sell, it could take months or even a year or two to get the price you want.

Is Buying a Vacation Rental Property a Good Investment?

Finally, we’ll address whether a vacation rental property is a good investment. Because everyone’s financial situation is unique, I can’t definitively say it’s a good or bad investment. Having said that, predicting rental property income is difficult, and predicting vacation rental income is ever harder.

So my advice to you is this: Since you won’t know how much rental income you may earn or what expenses are deductible, only buy a vacation rental property if you can afford it, regardless of these numbers.

Conclusion

I hope after reading this article you have been able to make your own list of vacation rental pros and cons, as well as things to consider. I think the better question would be, is buying a vacation rental property a good investment for you. At the end of the day, if you find a great property and the numbers make sense, it could be a great long-term investment.

For more details and information, check out one of my recent articles about the tax rules for vacation rental property.

Sources:

Owning a rental property is a great way to begin accumulating long-term wealth. Learn these tips for buying your first rental property at FortuneBuilders.

Not every quality property you look at will make a good rental property.. If you have been interested in owning a rental, but weren’t sure what steps to take, here are some suggestions on buying first rental property assets.. Perhaps even more importantly, rental properties allow investors to make money passively if they hire a good third-party property manager.. Buying first rental property assets isn’t the only way to invest.. As rewarding as a rental property can be, they can also engulf your business if you get involved in a bad property.. In fact, those who hire property managers will find that their time is actually better spent on more valuable things than “being a landlord.” In particular, those who hire property managers can add more assets to their rental property portfolios without adding more work to their daily schedules.. There is no reason investors can’t have debt when they buy their first rental property.. Therefore, it’s a good idea to get finances in order before buying a rental property.. Nothing is more critical to buying first rental property assets than their location.. The location in which a property is located will determine many factors, not the least of which may dictate how the property is run.. Adding landlord insurance can protect against property damage, lost rental income, and liability protection.. Owning and operating a rental property can be overwhelming for investors who have never served as a landlord.. Buying first rental property assets is a big step on the way to operating a cash flowing rental portfolio.. With several properties producing rental income, investors may collect rent passively, but it all starts with buying your first rental property.

In this post, Mashvisor share advanced real estate data analytics to determine the most profitable places to invest in a vacation rental in the US.

Investing in vacation rentals has become a popular real estate trend in recent years.. The location also has to be where both the demand for short-term rentals and rental income are high without breaking the bank to buy the property.. There are many ways to define the top locations to own a short-term vacation rental.. For those of you who might be relatively new to the real estate investing world, cap rate – short for capitalization rate – is a real estate metric that is calculated by dividing the net operating income of a rental property by the current market value of the property.. The cap rate is a relatively simple real estate profitability metric that allows investors to compare different housing markets and decide which offers the best opportunities to make money.. The rising CAP rates clearly demonstrate this… Overall, it’s anticipated that CAP rates will rise to 6.5% by 2022, according to GlobeSt.com .. Coming out of the peak season, many investors find that the fall is the best time to buy up and invest in short-term rental real estate.. Low CAP rates around 1 to 2% could still be profitable, but they’re typically found in highly saturated areas like bigger cities with a well-established short-term rental market.. Manhattan’s CAP rate came in at 3.9%, while just a stone’s throw away in Queens, the CAP rate is 5.03%.. Much like Gatlinburg, Kissimmee is extremely well located.. Another Florida favorite is Fort Myers.. Choosing between Raleigh or Durham for top vacation rental investments is much like choosing between beach or mountain holidays: impossible!. This city is up-and-coming for investors looking to start a short-term rental business.. Any good vacation rental business needs property management software.

Thinking about buying a vacation rental in Europe? We've got the top ten locations for European short-term rental investments for 2022. Check it out!

With many cities to love like Rome, Paris, Berlin, and Barcelona – is it any wonder that investors are flocking to Europe to purchase vacation rental property?. Beyond its idyllic experiences, investing in European vacation rental properties just makes sense.. There are many reasons why vacation rentals are good investments , but demand sits at the top.. While beach vacation rentals are a good investment, investors must be wary of their seasonality.. The culmination of reasonable interest rates and home prices following the 2008 crisis recovery and the urge of many travelers to return to travel after the height of COVID-19 makes for a booming vacation rental market.. If you’ve been eyeing out a vacation rental investment in Europe but you’re unsure where we’ve got the top ten locations perfect for you.. MarketRental Tax RateMedian Home PriceVacation Rental Occupancy Rate Funchal, Portugal15%$380,14046%Shanklin, EnglandBracketed$412,73054%Marseille, France14.2%$518,89865%Formentera, Spain24%$1,384,28563.3%Gierle, BelgiumBracketed$333,61064%Ballstad, Norway22%$564,82554.4%Andorra la Vella, Andorra10%$443,00060%Sardinia, Italy17.25%$760,00059%Sylt, Germany5.5% minimum$2,800,00076.3%Crete, Greece15 to 45%$799,76044% Situated in the heart of Madeira, one of Portugal’s most popular surf spots, Funchal is making waves in the property investment field.. Portugal, at large, is a widely popular vacation rental investment location due to its foreigner-friendly investment laws and extremely reasonable tax rates.. Instead, taxes are based on earned income brackets, so if you’re planning to purchase a vacation rental that you only rent out occasionally, this might be a fabulous location for you.. Beyond its natural wonder, Crete is also an excellent option for newcomers to the vacation rental investment industry.. If Europe has been high on your wish list for a vacation rental investment, then consider one of these top ten destinations.. Finding a balance between a beautiful location and competitive pricing, you’ll find that any one of these ten towns will make you some serious vacation rental profits.. Once you make the jump to buying a vacation rental property in Europe, you’ll need software to run your business.

Are condos a good investment? Whether you plan to live in it yourself or use it as a rental property, we’ll help you figure out if a condo is worth your effort.

Don’t get us wrong: Buying a condo is still one of the most expensive purchases you could ever make.. But, if you’re trying to decide between a condo or a house , keep in mind that a single-family home is usually going to grow in value faster than a condo will.. Okay, so let’s say you’re buying a condo as your first home.. So, make sure you sort through what makes them different before you decide to live in one.. So what is an HOA ?. Cons: A condo’s HOA could go one of two ways: It could be so poorly managed that big repairs (like rooftops, siding and parking) get neglected for so long that the HOA board suddenly tags each unit with a huge bill to make up for HOA fees that were too low.. Ask questions about the HOA, like what the rules are and how well it’s managed.. For example, we don’t recommend for you to invest in a condo unless you’ve already paid off your own home and pay for the investment property with 100% cash.. Make sure there are more owners than renters .. Ask about the current “owner-occupancy rate,” which is just a fancy way of saying how many owners live there as opposed to renters.. If over 50% of the occupants are owners, the condo is probably a good investment.. So, learn as much as you can about the condo’s HOA before you buy one as a rental property.. Let’s say you want to buy a condo near a favorite vacation spot.

Interested in figuring out your rental property operating expenses? This guide will help new and experienced investors keep your expenses and cash flow tight!

So, if the property costs you $200,000, you need $2000 for maintenance costs per year.. Your rental property is liable for property taxes.. These costs are not included in operating expenses.. The Operating Expense Ratio (OER) is the measurement of the cost to operate your property compared to the income it generates (in this case, rent).. Working out your operating expenses and total expenses is a great way to judge a property investment opportunity.

While selecting a great investment property is difficult enough, how do you go about financing it?

Still, home prices are continuing to rise, and with mortgage rates soaring recently, it’s more difficult for investors and would-be homeowners to finance their investment property.. Here are five tips to finance investment property:. Make a sizable down payment Be a “strong borrower” Turn to a local bank Ask for owner financing Tap your home equity. Since mortgage insurance won’t cover investment properties, you’ll generally need to put at least 20 percent down to secure traditional financing from a lender.. Although many factors — among them the loan-to-value ratio and the policies of the lender you’re dealing with — can influence the terms of a loan on an investment property, you’ll want to check your credit score before attempting a deal.. If you have a significant amount of equity in your primary residence or other investment property, you can use it as a form of financing.. HELOCs can have interest rates lower than home equity loans, but the interest rates on most are variable.. You can then use that cash to finance your investment properties.. Fortunately, there are several other available options to finance your investment property.. While both are a convenient form of financing, personal loans often have high interest rates, as do credit cards after any introductory offers.. Margin loans are a line of credit that can be used to finance a property and are backed by a borrower’s investments.. The property can also increase in value, so when it comes time to sell or even invest in another property, there’s equity that can be tapped.. When financing property, make sure you can afford the payments when you take out the loan.

Investing in a new Airbnb property should be smart and consistent. Read how to buy the best Airbnb property for growing your short-term rental business!

Property owners can charge a higher nightly rate than traditional renting, meaning Airbnb income can be higher than rent from a long-term rental Vacation rental software allows property owners to automate their vacation rental management Easy and low-cost advertising through listing on Airbnb.. Consequently, before you make your final decision on a housing market for your vacation rental, you should research the local Airbnb rules and regulations governing short-term rentals.. Of course, there are also financing options available to help real estate investors purchase a property.. Hiring a real estate agent can help you find a good property for your Airbnb rental business.. The next step in your real estate analysis is to analyze the properties themselves.. Also, you can learn more about how to start a short-term rental business and invest in Airbnb property by listening to Real Estate 101’s Airbnb Investing Deep Dive episode .. If you’re looking for a profitable Airbnb rental property to buy, check out, a real estate data analytics platform that helps investors find lucrative rental properties in a matter of minutes.

Buying investment property can be confusing for beginners. Thankfully, the experts at FortuneBuilders have everything you need to know about how to buy investment property in 2022.

It’s more than just putting a For Rent sign in the yard and collecting monthly checks from the people that move in.. When buying an investment home, you often have to put down more money than if you were buying your own home.. Perhaps the most important decision you will make is where to buy property .. Marketing your property to the right crowd ensures you always have tenants and that you are always making money off your properties.. With real estate crowdfunding, you can pool your money with a group of investors and make larger investments than you would if you only used your own money.. If you don’t want to manage rental properties in the long term, you can buy them, turn them into ready-to-market rentals, and then sell them to investors.. Purchasing rental properties: Rental real estate might be the best choice if you want monthly cash flow.. These things are very important to know before moving forward with a deal, as you don’t want any surprises after the deal has closed.. You should never buy a home before you have seen it.. Before jumping into investing and getting a rental property, you need to make sure that investment properties are right for you.. You always have to deal with housing market fluctuations. Real estate markets can be very different depending on what part of the country you’re in, and learning how to buy investment property can be daunting for beginners.. Whether you’re brand new to investing or have closed a few deals, our new online real estate class will cover everything you need to know to help you get started with real estate investing.

Videos

1. Buying Vacation Rental Investments and Beach Condo Financing
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6. Buying a Beach Vacation Rental Property: 5 Things You Need to Know | MELANIE ❤️ TAMPA BAY
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