Pros and Cons of Investing in a Vacation Rental Property

Vacation rentals have grown in popularity greatly over the past decade, and with good reason. Vacation rentals allow for more privacy, more space, full kitchens, and are often more affordable than hotels for longer stays. This surge makes vacation rentals a very attractive investment for property owners looking to diversify their portfolios. Of course, with any investment comes perks and downsides, so it is always important to do the research to ensure you’re making a sound purchase.

Advantages

Tax Benefits

Tax advantages come with owning a vacation rental since it is considered a business venture, so there are many expenses that you will be able to write off. In many states, the mortgage interest of a vacation rental property can be deducted just the same as your primary home. More deductions could include restocking household items, housekeeping, utilities, and even the cost of your property management company. Every state’s taxing system varies so be sure to educate yourself on which short-term rental tax deductions apply to each property, especially if you have multiple properties in different states.

Rental Income

Of course, the reason you are investing in a vacation rental property is the income that comes with it! The demand for short-term rental vacation stays has increased over the years as they offer more personal space and privacy, and they feel a little more immersive than a hotel. Depending on where your vacation rental is located, you could be looking at steady year-round positive cash flow.

Opportunity for Real Estate Appreciation

Depending on where you choose to invest in property, many cities are experiencing appreciation in home value as long as you are keeping it up-to-date and in good shape. Appreciation is especially likely in high-demand areas like the beach and mountains. Take a look at the historical trends in housing appreciation over the past years so that you can get a good idea of what is to come.

You Have Access to It

A major perk to owning a vacation rental property is that you can utilize it whenever it isn’t booked. Not only are you earning money from this second home but you are guaranteed a vacation whenever you’d like!

Disadvantages

Unexpected Expenses

Accidents happen, items go missing, appliances wear out, in other words, stuff happens. You should always be prepared by setting aside an emergency fund for those unforeseen costs. Having this money set aside will feel like less of a blow to your wallet should any unplanned expenses pop up.

Constant marketing

Unlike a rental home property, the marketing doesn’t stop after you’ve found one booking. In order for someone to book your vacation rental, they have to find it first, which requires an online presence. This is where online marketplaces and booking sites like VRBO and Air BnB come into play. You’ll also want to invest in professional photos of the home that are eye-catching and inviting.

Property upkeep (time)

If you plan on managing your vacation rental on your own, be prepared for the responsibility and time it requires. You are responsible for cleaning, restocking, maintenance, answering guests’ questions, and marketing. This isn’t to say it can’t be done! But if you own multiple properties or live in a different city or state from your vacation rental, you will likely require a vacation rental management company to step in and help.

Higher insurance and taxes

In addition to local, state, and property taxes, you will be required to pay federal taxes on rental income if you rent out your property for more than 14 days out of the year. It is also possible that insurance is more expensive depending on the location. Properties on the beach have much steeper insurance due to the possibility of flooding or other adverse conditions caused by natural disasters.