Vacation rental properties have skyrocketed in popularity over the last decade and are often seen as an attractive investment. However, investing in vacation rental properties comes with hours of hard work and some challenges to overcome. If you’re on the fence about purchasing a vacation rental, we’ve compiled a list of pros and cons of investing in these properties.
Pros of Investing in Vacation Rental Properties
Rental properties, whether leased short-term or long-term, are a great source of passive income. Of course, this is dependent on you buying at the right price and managing the property effectively. You don’t need to own a luxurious oceanfront bungalow or cozy ski cabin to get into the vacation rental industry. When you take the time to do your “homework” and learn the ropes, rental properties offer a time-tested strategy for earning passive income.
Rental property comes with some great tax benefits. Since owning vacation rental property is considered to be a business venture, there are significant tax advantages and you can write off most rental expenses.
All relevant expenses are deductible of course, including mortgage interest. You can even deduct some paper expenses that don’t cost you cash, such as depreciation. Best of all, those deductions come off your rental profits and don’t require you to itemize your deductions. You can make use of them on top of your standard deductions.
That being said, each state has different tax regulations, so it’s important that you look into which short term rental tax deductions apply to your vacation rental property.
Real Estate Appreciation
Whether or not you use your property as a vacation home, the hope is that the property will appreciate in value so that you can turn a profit when the time comes to sell. Ideally, a vacation rental property will increase in value over time, especially if it receives continuous changes and renovations to keep it up-to-date. Appreciation is more likely if you purchase a property in a high-demand area, so be sure to closely analyze market trends to get an educated idea of what will happen with your property’s value over time.
Although it shouldn’t be your main reason for buying a vacation rental property, appreciation usually provides additional profit when it comes time to sell. Even as your property rises in value, your renters pay down your mortgage, leaving an ever-expanding equity gap between what you owe and the property’s value.
Lower Risk of Rent Defaults
Long-term tenants can prove troublesome— from not bothering to pay the rent on time or damaging your property, dealing with bad tenants often drive landlords to sell and never look back. Fortunately, as a vacation rental owner, you can collect the rent upfront; if their payment fails, so does their booking!
Cons of Investing in Vacation Rental Properties
You’re on the Hook for Promotion
Unfortunately, you can’t operate under the “if you build it, they will come” mindset in this situation. If you want your property to stay consistently booked, you’ll need a promotion plan. Action items like posting to social media accounts, taking high-quality photographs, and giving detailed descriptions definitely help to draw-in vacationers. You’ll also want to invest in quality furniture as well. Remember, the goal is to offer people the experience of being on vacation in a home away from home.
Just as you would be cautious with your personal home, you have to be cautious with a potential vacation rental property. As the owner, you’re on the hook for paying to fix any damages. Of course, property insurance will cover the costs of more extensive damage, but it won’t cover small things like broken HVAC system or a burst pipe. To help with this, consider setting aside a certain amount of money each year for these unexpected expenses.
More Labor Required Than Long-Term Rentals
Even if you can automate the check-in and check-out process, it’s reasonable to expect more property management labor than a typical long-term rental property. Of course, you can outsource this labor to a property management company if you don’t want to spend the time doing it yourself. It’s a labor expense regardless of who is doing the labor!
Short-term vacation rental properties can be an excellent source of passive income, tax benefits, and long-term appreciation, but they can also cost you dearly if you fail to analyze the cash flow and regulatory requirements, or if you manage them poorly. Be especially cautious to avoid getting sucked into the idea of owning a vacation rental, and buying because you’re excited about it, rather than because the fiscal numbers make sense. This property is an investment first! Run the numbers carefully, approach your property like a business and protect yourself vigilantly!
RCN Capital: Short-Term Vacation Rental Loans
Put RCN Capital’s financing to work for your next short-term vacation rental. RCN offers 30-year loans with rates starting at 3.49% for short-term rental properties. Whether you’re trying to purchase the vacation property of everyone’s dreams or are looking for better terms for an existing vacation rental, RCN has you covered. Reach out to RCN Capital to discuss our short-term rental financing options.