More and more Americans are making vacation rental investments and becoming hosts full-time. And for good reason! Despite experiencing a pandemic, Statista shows that revenue in the vacation rental industry is expected to have an annual growth rate of 11.08% from 2021 to 2025. While there have undoubtedly been many struggles along the way for rental owners, these facts prove to us is that the industry is much more resistant than anyone thought was possible.
However, there’s a big population that is still undecided whether investing in rental properties is a smart move or not. We frequently come across people asking questions like “Are vacation rentals profitable?” and “Are vacation rentals a good investment?”, so we wanted to answer your doubts right here and now.
We’ve put together a thorough article that will guide you through vacation rental investments – the pros and cons, the best areas to invest in, and some common mistakes that people make along the way. With this information, we hope that you’ll be able to make an informed decision that results in a thriving business!
Vacation Rental Investment: Worth It or Not?
If you’re thinking about entering the vacation rental industry with a property you already own, the initial costs could add up – as you may need to remodel, refurbish, and redecorate your home. You’ll also need to include community expenditures, licenses you need to start in this business, paid marketing campaigns you wish to carry out, and more.
Buying a property and converting it into a vacation rental is a completely different ball game. In addition to the previously mentioned costs, you’ll need to make a return on your investment, and also, make the right decisions for your business’s future.
Of course, there are risks involved when investing in something as expensive as a second property, and laws have yet to fully adapt to the needs of this new type of business. On the other hand, there’s also a multitude of benefits and perks that come with owning a vacation rental.
Pros & Cons of Investing in Vacation Rental Properties
Do you want the good news or the bad news first? You’ll be happy to know that there aren’t many cons so let’s start with the good stuff first.
Pro: You can generate stable income
Wondering whether you can make money with a vacation rental business? The answer is yes! Many people enter the industry to rent out their property as a side hustle and end up making it their full-time job. While income varies depending on your property, location, and amenities, Airbnb has created a calculator to help you find out how much you can earn with your vacation rental.
Con: Managing a rental property can be really hard work
The secret’s out. Managing a vacation rental property can be a whirlwind of responsibilities and tasks if you don’t know what you’re doing or lack efficiency. That’s where vacation rental software comes in handy and quite literally “saves the stay”.
Whether you’re looking for property management software for a bed & breakfast, cabin, or villa, these tools will help you save time and double your bookings. Build your own bookable vacation rental website, automate guest communication, and make your business your own.
A channel manager feature allows you to sync your calendars, rates, and bookings from your website and the top listing sites onto a single platform. So if the reason you’re not investing in a rental property is that you fear the stress of managing it, you can ease up knowing that there are great alternatives.
Pro: You can depreciate your rental property
Once your property is available for guests to rent, you can begin the depreciation process. This is a way to recover the cost of purchasing and improving your property over its useful life, which is usually 27.5 years.
Want to calculate your potential depreciation before investing? Check out this free vacation rental depreciation calculator.
Con: You might have to pay a hefty down payment
The down payment required for a primary residence is usually around 15 to 25 percent and around 20 to 30 percent for a vacation rental property. In order to avoid paying private mortgage insurance on your loan, we recommend putting down at least 20 percent.
Pro: You can deduct some expenses and taxes
Most people thinking about investing in vacation rental property aren’t aware of all the expenses that can be deducted on a yearly basis. If you’re planning on renting out your property for more than 14 days out of the year, it’s actually considered a business and therefore the tax returns are different.
As a business, you can deduct expenses like repair fees, transportation for managing the property, insurance, marketing and advertising, accounting fees, and more. Check out this article for more information on vacation rental tax rules and deductions.
How to Make a Vacation Rental Pay for Itself
One of the best parts of investing in rental property is that once the business is up and running, it can usually pay for itself. All you have to do is:
- Choose the perfect location: If the property you’re investing in is located in a prime tourist destination or a popular place for those looking to get away from crowds, you’re setting yourself up for success. This doesn’t mean that you can’t invest in properties off the beaten path, but you will have to keep in mind that it’ll take more marketing and advertising efforts to bring in guests.
- Get your pricing right: Hitting that sweet spot is a must if you want your vacation rental to pay for itself. Learn about dynamic pricing and increase your profit margins.
- Stay on top of your finances: While this can be intimidating for first-timers, there are plenty of resources and professionals that can help you manage your expenses at all times. Vacation rental software makes life easier by providing hosts with tools for accounting and generating reports.
- Focus on either short or long-term stays: Learn about the advantages of renting out your property both short-term and long-term to decide which works best for you. By having a clear vision before starting your rental business, you’ll be able to successfully target specific guests.
- Invest in your marketing strategy: Once you’ve invested in a property, you should write out a marketing plan. If you don’t know where to start, read over marketing guides and tips from experts around the world.
Best Areas for Vacation Rental Investments
Back in 2020, AirDNA released a report on the best places to invest in vacation rentals. Factors that affected this report due to the pandemic included the demand for rural areas, a drop in urban business travel, fewer hosts, and an increase in remote work.
AirDNA’s analysis involves revenue growth, rental demand, and investability to create an overall “investor score”. Let’s take a quick look at how each factor is calculated:
- Rental demand refers to a combination of annual occupancy and listing growth rates.
- Revenue growth analyzes whether a property owner has earned more in a specific month as they did a year ago. It’s calculated by analyzing the year-over-year RevPAR for properties that were booked during these times.
- Investability is calculated by comparing the cost of homes (based on Zillow’s home value data) to the average income on full-time listings found on Airbnb and Vrbo.
Areas that stand out as up-and-coming markets (with around 25 and 100 active rental properties) are the Appalachian mountains, northern California, Minnesotan lakes, and upstate New York. The cities with the top investor scores are:
- Castroville, California
- Slade, Kentucky
- Cherry Log, Georgia
- Shenandoah, Virginia
- Athens, New York
Another great option for investors is the mid-sized market (with around 100 and 1,000 active rental properties). The mid-sized markets with the best investors scores are:
- Yucca Valley, California
- Ridgedale, Missouri
- Fairplay, Colorado
- Orderville, Utah
- Luray, Virginia
Last but not least, the large markets. These markets have over 1,000 active rental properties and have been top destinations for vacation rental investments for quite some time. Here are the ones with the highest investor score:
- Palm Springs, California
- La Quinta, California
- Sevierville, Tennesse
- South Lake Tahoe, California
- Gatlinburg, Tennesse
Common Mistakes When Investing in a Vacation Rental
While making mistakes in any business is a huge pain, it’s actually a very vital part of improvement. However, this doesn’t mean that you have to make every mistake in the book. Instead, you can learn about the challenges other people have faced in order to avoid going through the same situation.
To help you out, we’ve put together these eight errors vacation rental homeowners have previously made.
1. You’re not sure if it’s worth investing
In order to know whether it’s a good idea to invest in a vacation rental for tourists, you’ll need to have a financial plan first, and then calculate an actual budget after. Can you afford all the expenses? Experts recommend not taking out a loan higher than 30% of your income, and to expect the unexpected. That means you should leave room (financially) for any problems that could occur or things that you didn’t calculate before.
It’s also better not to expect reservations immediately and to put aside a sum of your budget in case the business takes a few months to take off.
2. You’re unaware of the additional costs
Investing in a second home for a short-term rental does not only entail paying the price of the property. There are also additional costs that mount up. These consist of insurance, accounting expenses, devaluation, supplies, furniture, taxes, repairs, maintenance, etc. In addition to this, you also need to take into account any licenses, taxes, and other community expenses.
The region in which you’re investing can also affect these purchase-related expenses, so make sure to do some research before making a decision.
3. You don’t know the area
Having a good understanding of where your property is situated in terms of price and value for money will allow you to make strategic moves. Ask yourself some questions, such as, why is your potential property three times cheaper than the neighbors’ houses?
If you have an idea of the demand in your area and are aware of the competition, you can make an informed and correct decision. Perhaps you’ll be interested in buying in a different district, or in building a swimming pool at the property in order to stand out from your future competitors. Additionally, you’ll need to be aware of the trends in the vacation rental industry and what guests want, so you’ll know exactly what to offer them.
4. You don’t know how to calculate the value of the property
There are many factors that determine the value of your property. Give yourself time and figure out by analyzing all the different factors. With regards to the value, this does not only refer to the price but also other factors that make the property more valuable. For example, the location, how close it is to public transport or point of interests, how old or the new facilities are, the potential it may have and the possibilities to improve it, the crime rate (which is also something you’ll need to look at) and so on.
After comparing the different buying options and analyzing them all, you could lose a sense of what is expensive or cheap. Always compare the asking price to similar homes in the area.
5. You don’t consult an expert or a notary beforehand
If you aren’t an expert in the tourism and real estate industry or are unsure what the prices and mortgages in the area are, or what kind of price you should offer, seek someone’s opinion who can help you during the whole process. Having an understanding of the subject will ensure that no aspect – no matter how small – is overlooked, and will advise you on the decisions you make. It will also help you negotiate, tell you what you can ask for and how far you can counteroffer.
On the other hand, a notary is another expert opinion you’ll want to count on to avoid unpleasant legal surprises later on. You should bear in mind that investing in a second home for touristic purposes isn’t the same as buying a first home.
6. You go with emotions and forget about numbers
Many homeowners fall in love with a property or a specific area and forget about what it’s going to take. What’s the point in buying the biggest house on the street if in a few years you’ll close the business? You have to make sure that it’s the right decision for the future.
But this is not only the case with this type of investment; don’t make the mistake of investing irrationally. Be brave and recognize your possibilities and limitations, and make the most of what you can afford. Don’t take risks that can end up costing you a lot of money.
7. You think you won’t be able to manage a property long distance
Many property owners decide to invest in an area close to their home, even though it may mean less demand and fewer visitors in the area. This can be a huge error!
Nowadays, it is perfectly fine to run a property long distance and to succeed – a lot of property managers already do it! With automated check-ins, such as WIFI door locks and other solutions and tools on the market, you don’t need to be present to get into this business. This way, you can invest in a property in an area with more interest and more potential profits. Not just in the next state – it could even be abroad!
8. You think you have to buy during the low-season
When you are considering buying a home and converting it into a vacation rental, you might think it’s a good idea to purchase during the low-season to have it ready for the high season. Although it makes sense, it’s also important to have an idea of what the high season entails in the area you’d like to invest in.
If you research and buy during the high season, you’ll have a better understanding of what your vacation rental can bring, and you’ll have a clearer calculation of the return on investment. Also, you can observe competition in the area and see how much demand there actually is.
Once you have invested in a property, you should avoid other common errors, such as not taking out a specific insurance policy or not marketing it to the right type of guests.
Make sure you take these points into consideration when investing in a vacation rental in order to make the most well-informed decisions for your business! What’s clear is that there are many factors that can influence whether a vacation rental investment is profitable or not. Do your research, ask fellow property owners, and make a very clear plan before diving in headfirst. Any questions? Feel free to ask us in the comments section below!