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If you’re starting to plan your next real estate investment, a vacation rental property can be a great option. Not only can rental properties help you develop the skills for finding, maintaining, and financing an investment property, but they can also give you a nice place for rest and relaxation if you so choose.
That being said, owning a vacation property isn’t always a piece of cake. If you’re considering investing in a vacation home to rent out for extra cash, take some time to consider the pros and cons.
Pro: Extra Income
The most obvious benefit of owning a vacation rental property is simple: you earn money on a consistent basis! There’s numerous vacation rental websites, which allow you to earn even more if you play your cards right. Here’s a few vacation rental platforms to consider:
- Airbnb
- Booking.com
- Flipkey
- VRBO
Pro: There’s some expenses that you can write off
If you are able to rent out the property for more than 14 days a year, it’s considered a business for tax purposes. While that means you will have to pay taxes on the income it brings in, you can also write off many of the expenses you’ll encounter when repairing and maintaining the property. You’ll be able to deduct many of the ordinary and necessary costs of doing business too. Here’s some items you may be able to write off as a rental investor:
- Property management fees
- Mortgage interest
- Hosting fees
- Insurance premiums
- Utility costs
Note: this list is not extensive, so feel free to reach out to an accountant to maximize your deductions.
Con: Managing the Property
Compared to other investment options, vacation rentals require upkeep. They’re one of the most hands-on investments you can get yourself into.At minimum, you’ll have to clean, prep, and restock the property between every stay, unless you are willing to hire someone to do this for you. However, hiring a professional company to address the necessary maintenance can become quite costly.
Con: Marketing is a unique skill set
Vacation rental success depends on a strong marketing strategy. At the very least, you’ll need to take the time to list your property on rental platforms, optimize the listings to cater towards the right audience, furnish the home with comfortable furniture, and price the property appropriately for the market. Marketing isn’t everyone’s forte, so this issue does tend to drive away some investors.
Sometimes a Challenge: Getting Approved for Financing Vacation Rentals
Compared to loans for primary residencies, second home mortgages can be a bit harder to acquire. However, there are steps you can take to increase your chances of getting approved for a vacation rental property mortgage. Here are some things to consider:
- Strong credit score: When it comes to financing a vacation home, having a strong credit score is very important for approval. A strong credit score and a good available balance lets a lender know you are less likely to default on the mortgage payment.
- Low debt-to-income ratio: This ratio compares an individual’s monthly gross income and their debt payment. Most lenders require a DTI below 45% before financing a vacation home.
- Higher Down Payment: The down payment for vacation rentals is usually between 20-30%. Lenders like to see these funds in an account for at least two months.
- Reserve funds: In addition to having funds available for the down payment, lenders like to see reserve funds before financing a vacation home.
It’s important to note that financing options vary from lender to lender, so be sure to research what type of financing fits your needs, and then discuss your options with reputable lenders.
Looking to Purchase a Property for Rental Income?
Here at RCN Capital, we have flexible options that are suited to your needs. Our short-term loan program offers a 24-month term, with a 12-month extension available, ensuring that our customers have rental property financing that goes the distance. Reach out today to learn more about our financing options.