“Should I buy a vacation rental property?”
This question is the start of a grand journey. Once you’re on the other side, you look back and realize that this question was the catalyst that led you to an “aha” moment and changed everything you thought you knew about real estate investing.
Whether you’ve never heard of vacation rentals or if you’re on the fence trying to decide, this post will help you understand the benefits of investing in short-term rental properties and arm you with the knowledge you need to make educated investment decision.
Should You Buy a Vacation Rental?
The short answer is, absolutely!
But any investment decision is a big decision, especially when it comes to real estate. So it’s important to conduct due diligence and approach the matter with a sound plan in mind.
Educating yourself about the broader industry of vacation rentals is a good place to start. Learning about their history and how recent events have influenced their rise as a popular investment vehicle will instill a level of confidence in you that will be useful if and when you decide to purchase a vacation home.
There are plenty of advantages to buying a short-term rental but, as with all investments, there are also some downsides to be aware of.
When we help new owners and investors get started with vacation rental investment properties, we often make an analogy to theme parks…
A successful vacation rental property is like a rollercoaster. It has a lot of ups and downs. Sometimes it goes slow, and sometimes it goes extremely fast. External variables may affect it, like the weather (or a global pandemic).
When the ride is really good, people will line up and wait for a long time for a chance to enjoy it. And if they really enjoyed it, they’ll come back again and again. Preventative maintenance and periodic repairs are required but ultimately increase the longevity of the ride.
The best part is, if you hire someone to operate it for you, you get to sit on the sidelines with a bag of popcorn (or cotton candy) and watch the whole show go down without having to lift a finger.
You hear some people scream and others laugh. In the end, when you see them get off the ride with big smiles on their faces, you realize that you were a part of making these memories that they’ll cherish the rest of their lives.
Now let’s take a look at some of the reasons you’d want to buy the roller coaster that is a vacation rental property.
Overall, buying a vacation rental property generally yields higher return than many other types of investments. One could also argue that it’s a slightly safer investment, too!
A lot of investment vehicles with similar rates of return (i.e. the stock market) are mostly outside your circle of influence. Meaning, you don’t have much control in determining how high the highs are and how low the lows are. These factors are highly dependent on external variables that are outside of your control.
With vacation rentals, it’s a bit different: you have a lot more control in determining the success of your investment. You’re able to influence dozens of variables that will either increase or decrease your returns. And while there are external factors (like the weather or a global pandemic), they are fewer and further between.
Let’s look at some of the financial advantages that lead to high returns on your investment.
As with most real estate investment assets, the money you put into it is basically still yours. It’s just that you’re “locking” the value of your money in a hard, physical asset instead of leaving it to live on a company server somewhere in the form of 1s and 0s.
Every month, when you pay the mortgage, you’re paying down a debt and subsequently “move” your money from a savings account to an equity stake in the business that is your vacation rental property. Unlike consumer expenses like clothes or gas or groceries, these payments help you build long-term wealth.
The caveat, however, is that the cost of doing business is going to be a bit higher than other investments. With newer apps like Robinhood or Fundrise, for example, you can start investing with trivial amounts of cash.
Buying a vacation rental property has a much higher barrier to entry, though. Especially in today’s real estate market, you have to pay (more) to play in the world of short-term rentals.
There’s also the upside of increased value over time, known as appreciation. This advantage is common amongst real estate investments and is a pretty reliable variable to count on when analyzing a potential purchase.
The counter balance to appreciation, however, is the taxes that you’ll have to pay if and when you sell the property. Commonly known as a Capital Gains Tax, this is when Uncle Sam claims his slice of the pie. There are definitely some strategies to navigate this but it all depends on what your personal financial goals are.
One of the biggest advantages of buying a vacation rental property is the cash flow that it produces. Cash flow is one of the biggest differentiators for short-term rental properties; it’s what really sets them apart and forces investors to consider them as part of their portfolio strategy.
For a traditional investment property renting to long-term tenants, you’d earn somewhere in the ballpark of $200-$500 per month (depending on the market). With a short-term rental property, you can add an extra 0 to those numbers.
That’s right: it’s not uncommon to see vacation rental investments return $2,000 – $5,000 net profit in a single month (or even higher). In fact, some Savvy-managed properties consistently yield cash flows in the 5-digit range.
The downside, however, is that the income produced by a short-term rental property is often not as steady or predictable as that of a traditional investment. One month you might see a $8,000 hit your account, and the next month you’d see $1,000. This is the tradeoff: higher risk, higher reward.
There are more expenses, more variables (like seasonality, events, etc.), and more ups and downs with vacation rentals. At the end of the day, though, you’ll end up making a lot more if you do it right.
Clearly, vacation rental investment properties yield higher returns than a lot of other investments. But is it easy?
The short answer is no, it’s not easy at all. It can actually be pretty time-consuming and add a lot of stress to your life, especially if it’s your first time doing it. In fact, a lot of first-time STR investors quickly learn that investing in a vacation rentals is like a part-time job.
Remember, the success of your investment is highly dependent on you and what you put into it. So if you’re thinking about purchasing a vacation rental, you need to be prepared to not only make a sizable investment of money but also an investment of time.
That is, unless you hire some help.
Professional vacation rental management companies can lift a lot of weight off your shoulders and transform your investment from active to passive. When you partner with the right company, your only job is to sit back, relax, and collect a check each month while they take care of all the work.
So unless you’re eager to pick up a new side hustle, you’re going to want to put your short-term rental investment property in the hands of a trusted partner so that you can focus on other things.
When you buy a vacation rental property, you’re essentially buying a small business. It’s like a micro-hotel that you own and operate, and occasionally stay at yourself. As such, you get to reap the rewards of owning a business.
One of those rewards are tax deductions in the form of business expenses. Because you’re operating a business, you can claim many of the expenses related to your property as a business expense. Things like internet and cable, cleaning supplies, new furniture—all of these are related to your business.
The while there are some tax advantages for those purchasing a vacation rental property, there are also some disadvantages to consider, one of which is that the amount of income you earn could put you into a higher tax bracket overall which would spill over into your personal tax liabilities. To know what’s best for you, you’ll want to speak with your accountant to create a strategy that makes sense.
Disclaimer: Savvy is not a certified tax professional and does not offer tax advice.
Purchasing a short-term rental property requires an upfront investment but as you can see, it pays off very quickly. Not only do you get higher returns, and create a source of passive income, you also get to take advantage of the lifestyle that the investment property offers.
Are you buying a vacation rental property in the Florida panhandle, the Outer Banks, the California desert, the mountains of Colorado, or the Hawaiian Islands?
Each one of these places offer a unique lifestyle that become an ‘option’ for you to exercise whenever you want. Not only do you get to take family vacations there for free vacations every year, you also get to invite your friends to stay. You can offer your rental property as a place to host events or celebrate special occasions. The difference is, you’re getting paid to do so instead of being the one who has to pay!
The best part is, you don’t have to pick and choose—you can have it all! Once you see how easy it is to own a vacation rental, you won’t be able to buy your next one quick enough.
Did you know you can invest in a vacation rental property using your 401k or IRA?
In a sense, you could use your savings to start paying down debt and earn cashflow each month. Then you could use some (or all) of that cashflow to reinvest back into your retirement account and let the compound interest do its thing.
Whether or not it’s a good idea to do that will depend on each person’s unique situation but the fact remains that vacation rentals could very well be a part of your retirement plan.
If you already know where you want to retire, you could buy a vacation rental in that particular market. By the time you’re ready to retire, the home could very well be paid off and you will have likely made enough to fund another STR investment property that produces a source of passive income for you to live off of in your retirement years.
Even if you don’t fund your short-term rental investment using a retirement account, you can still make the property work to your long-term advantage.
Want Help from Industry Experts?
Being a Savvy Owner means working smart, not hard. It means using the resources at your disposal with the utmost intelligence and efficiency.
Contact us today to get professional guidance before you buy. We’ll help you create a plan for buying a vacation rental property and offer our best tips for making sure it’s a smashing success!