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Are Vacation Rental Properties a Good Investment?

November 12, 2021 / by Hignell Property Management Team

hand holding model of home in front of beach

A vacation rental property has become a popular investment vehicle because many people see it as a good investment strategy for the modern real estate marketplace and a great fit with the 21st century’s gig or sharing economy.

Like most real estate investments, vacation rental properties offer both benefits and concerns as an investment. But the exponential growth of vacation rental hosting platforms like Airbnb & VRBO speaks volumes about the vacation rental market’s potential growth and profit.

The Benefits of Owning Vacation Rental Properties

The digital real estate market has created tremendous possibilities in terms of vacation rental property investment options. These are the benefits of investing in a vacation rental property.

They Generate Extra Income

Perhaps the most appealing part of investing in a vacation rental property is that it offers a viable income-producing investment strategy. An analysis by Priceonomics.com shows that the average monthly income for Airbnb hosts tops the list of gigs, at $924, with many locations easily generating four or five times the average.

Expenses Can Be Deducted From Earned Income

As an investor, if you rent your vacation rental for more than 14 days during the year, the property would be viewed as a ‘business’ for income tax purposes [See IRS Topic No. 415]. While this means the net income is taxable, it also means that ordinary & necessary expenses -required to maintain/repair the property - can be written off against the gross rent, thereby reducing the required tax obligation. The following offers a partial list of typical costs required to manage a vacation rental property appropriately:

  • Hosting Fees
  • Cleaning & Supply Costs
  • Occupancy Taxes
  • Insurance Premiums
  • Interest on outstanding mortgages or collateralized loans
  • Utility Fees
  • Lawn & Maintenance Fees
  • Property Management Fees

Vacation Rentals Double as a Nest Egg & Home in Which to Retire

Like most real estate, a vacation rental property appreciates over time, which offers rental property owners an intelligent way to build equity that can be used in retirement. At a later date, the owner can choose to use the property as a retirement home or sell it to cover living, medical and travel expenses in their retirement years.

The Cons of Owning Vacation Rental Properties

Financing Costs & Required Down Payments Are Generally Higher

Mortgage lenders typically add a premium to interest rates for investment properties to compensate for the additional risk investment property mortgages hold. In addition, lenders usually require at least 25% down on a purchase.

Vacation Investment Properties Face Rental Restrictions in Certain Locations

Investors should be mindful of the restrictions that may be set forth by a city, municipality, or even a homeowner’s association. Many have rental restrictions, with short-term rentals often highly regulated. Some even prohibit renting on a short-term basis, while others may dictate the required rental terms. And certain jurisdictions may even require a license to comply with local guidelines.

A Vacation Rental Must Be Proactively Managed

Vacation rentals are primarily hands-on investments, which ultimately means they require maintenance and repairs year-round. Short-term rentals require cleaning and restocking of the property between each guest’s visit. And if the property attracts many guests, this is likely to generate additional wear & tear and serious amounts of work.  

Many rental investors choose to hire a professional property manager, especially if the property is located far from its owner. The typical responsibilities of a property manager may include repairs, turnover issues, and the management of rent and expenses, among others. A property manager’s fees are tax-deductible.

A property manager offers the skills required to market the property to find interested guests to fill vacancies. Marketing a vacation rental requires a well-thought-out strategy that includes:

  • The listing of the property on the leading rental platforms & websites
  • A well-written listing that appeals to the target audience
  • A rental price that is realistic for its market placement
  • A well-appointed rental that offers function, convenience, and comfort, among others

In addition, a professional property manager is adept at knowing when to run discounts or promotions to fill vacancies during slow months, as they are typically familiar with calendar market cycles.

The Take-Away

Vacation rentals offer a solid investment vehicle for those who wish to build their future wealth while earning consistent income today. However, vacation rentals require proactive management if they are to generate maximum revenue.

A property manager is also a wealth of information regarding the market in which the property is located, which may have rental regulations that limit or prohibit short-term rentals.

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Topics: Investment Property, Vacation Rentals