Why Should You Invest in Vacation Rentals?

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In the realm of real estate investments, people often consider long-term rentals as secondary assets. But owning a secondary property in a favorite city for occasional visits, while also earning short-term rental income when it’s unoccupied, shouldn’t be overlooked. This can even apply to a promising investment in a holiday resort you’re considering for retirement but not ready to settle down in yet.

Vacation rentals offer a unique opportunity for income generation alongside personal use, which has become increasingly popular since the launch of Airbnb in 2008 and the rebranding of Vrbo in 2019. Travelers who prefer a more personalized and exclusive stay over conventional hotels have embraced this concept. In fact, 19% of first-time users booked vacation rentals from March 2020 to April 2021.

So, what exactly are vacation rentals? They are furnished apartments, houses, or professionally-managed resorts rented out as alternatives to hotels, often to tourists. These short-term rental properties offer basic amenities for stays typically up to 30 days.

In recent years, short-term vacation rentals have gained popularity. According to the Vacation Rental Search Report by Vacasa, traffic and searches for vacation rentals more than doubled year on year. As of Spring 2021, searches were up 235%, and user numbers increased by 116%. For investors, vacation rental income can be a significant source of earnings. Data from Vrbo/Homeaway shows that vacation rental income makes up 24% of an average owner’s annual earnings.

Investing in vacation rentals can be highly rewarding, especially in sought-after locations that attract attention on social media. In October 2020, Airbnb hosts globally earned over $100 billion in rental income. However, it’s important to note that the vacation rental market operates differently from long-term rental housing and requires more maintenance and care.

Here are some factors to consider when deciding to invest in a vacation rental:

Positive aspects include rental income, dual-use property, tax benefits, property appreciation, and resilience during recessions. Platforms like Airbnb, VRBO, and HomeAway have reshaped how people travel, and travelers are increasingly willing to pay more for unique and immersive vacation properties. Owning a home in the right spot can be highly rewarding, particularly during peak seasons. Additionally, a vacation rental can function as both an investment and a personal holiday retreat. There are substantial potential tax deductions and benefits for owning a primarily investment-focused vacation rental. Furthermore, as the real estate market appreciates over time, so does the value of the property, resulting in a high return on investment if sold, in addition to the monthly income it yields.

On the downside, expect vacancies and inconsistent income. There will be times when the property stays vacant, especially during the off-peak season. While high income on occupied days often offsets the vacant ones, prolonged vacancies can affect cash flow. Also, expenses can be high, including frequent cleaning, restocking, property management fees, maintenance, utilities, and supply costs. Lastly, managing a short-term vacation property requires more time and effort than a long-term rental, with daily tasks including overseeing maintenance, preparing the property, booking management, and guest communication.

When investing in vacation rental properties, choosing the right location is crucial. Consider booming markets with promising returns like the Appalachian Mountains, northern California, lakes in Minnesota, and upstate New York. Top-ranking cities for investors include Maui (Hawaii), Kenai Peninsula (Arkansas), Chattanooga (Tennessee), and cities in Mississippi, Louisiana, Florida, California, South Carolina, Illinois, and Maine. Assess the property’s seasonality and rental demand to determine occupancy rates and feasibility. Calculate recurring expenses like cleaning, restocking, hosting fees, property management fees, and marketing. Keep in mind the tax implications of vacation rentals as investment properties. Vacation rentals offer low entry barriers, tax benefits, and potential cash flow and property appreciation. Explore available properties with Foothold to start your investment journey.

Understanding Article Disclaimer and Opinions

Please note that the opinions expressed in this article are for general informational purposes only and do not provide specific advice or recommendations for any individual or specific security or investment product. The views reflected in the commentary are subject to change at any time without notice. For more information, please consult Foothold’s disclaimers.

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