Are vacation rentals a good investment?
In a word, yes. But you don’t need to take our word for it.
Leisure travel accounted for 80% of all U.S. domestic travel in 2018.
Millennials are predicted to spend $1.4 trillion on travel each year by 2020.
Vacation rental income comprises 24% of the average owner’s annual income.
Why are vacation rentals a good investment?
The rise of the sharing economy and the development of online marketplaces have reset the travel industry. (We can thank Millennials for this growth.) Staying in someone else’s home has become desirable and normal. Travelers are extending business travel for pleasure. Plus, they have new standards for affordable, beautiful accommodations. As their economic power continues to grow, it’s expected the vacation rental industry will continue to grow, too.
Gauging your expected vacation rental investment returns
Your potential for your return on investment (ROI) depends on a handful of factors.
6 benefits of investing in vacation rentals
1. Income generation
A good vacation rental investment can pay for itself. A great vacation rental investment has the potential to turn you a profit. Here’s what separates the good from the great:
- Location and seasonality: How many people travel to your home’s area, and when? How can your vacation home meet that demand?
- Personal use: Is this a home you plan to visit? Or, will you forgo personal use and maximize profits by only opening the home to paying guests?
- Optimization: What upgrades and amenities can maximize ROI and earn five-star reviews?
Learn More: Revamping a vacation rental to maximize ROI
2. Home appreciation
Over time, the right vacation rental investment in the right location can significantly increase in value. When you compare vacation rental real estate to residential real estate, vacation rental property can increase in value relatively quickly, too.
Meanwhile, investing in upgrades to the home can make for happier guests (and more compelling guest reviews). Plus, these types of investments and updates can help with value and appreciation.
3. Tax benefits
When it comes to tax benefits, a vacation rental investment is a lot like a primary residence. You may enjoy tax deductions related to mortgage payments, property taxes, rental income, insurance premiums, and so on. But, how you use your property, and how often you use it, can impact what expenses you can write off.
For instance, if you rent out your second home for more than 14 days a year, you may be eligible to write off some, or all, of your rental expenses. A certified public accountant (CPA) can help you understand the vacation rental investment tax codes and tax deduction eligibilities for your state and your situation. (We recommend you consult with your CPA for all of your potential tax obligations and advantages. We’re not CPAs.)
4. Dual-use property
Let’s get back to basics for a minute. One of the greatest benefits of owning a vacation rental investment property is that you can use it for business and for pleasure. Visit your vacation rental investment for a little “me time.” Get away for a romantic weekend. Host lively events for family and friends. With a vacation home, you can make money and make memories. You don’t have to choose.
That said, if you do think of your vacation home primarily as an investment, you’ll want to minimize personal use (or save it for the shoulder season) and prioritize guest access.
5. Hands-off home ownership
Many homeowners live miles from their vacation property, making self-management impossible. Other homeowners who live close by think self-management is the way to go… until a guest gets locked out in the middle of the night, bookings drop off, or repairs add up after a cluster of storms.
With a local, full-service team managing your property, you can enjoy all the benefits of a vacation rental investment—with none of the hassles.
A vacation rental investment in the right location can generate valuable income, even during a recession. We know, based on the lessons from the 2009 recession, that people don’t stop taking vacations when the economy slows down. Travelers simply plan shorter trips, share expenses with larger groups of family or friends, and book vacation rentals closer to home.4
6 factors that impact how much you can make on a vacation rental investment
1. Income triggers
- What was the home sale price and down payment amount?
- What is your break-even point?
- What will you write off in tax deductions?
- What cash flow can you expect?
2. Operating expenses
- How much do you pay in property taxes, utilities, HOA fees, and insurance?
- What fees do you need to pay to meet local regulations?
- What, if any, property management fees will you incur?
- What will you spend on discretionary repairs, upgrades, and general wear and tear?
3. Rental demand
- How popular is your location? How many people visit, for how long, and how often?
- What are the views like? Do you have beachfront or ski-in/ski-out access?
- How close is the property to amenities like the airport, beach, or ski slopes?
- What are the attractions in the region? How close are you to hiking, dining, or other entertainment?
- What are the off-season draws?
4. Revenue levers
- How well, and where, is the property marketed?
- How easy is it to book? How supportive and engaged is customer service?
- Are guest experiences captured in positive online reviews? How responsive can you be to any negative reviews?
- How many people can you comfortably host?
- Is your home pet-friendly?
- Does your home have a hot tub, pool table, or other recreational amenities?
- Is the home ADA accessible?
- How well have you stocked your kitchen?
- How thoughtful or inspired is the interior design?
- Are you limiting your own personal use (especially during the high season)?
5. Home appreciation
- What is happening to home values in your local vacation destination?
- What is happening to home values in nearby metropolitan areas?
Over time, homes increase in value. In many markets, vacation rental real estate can also increase in value higher and faster than residential real estate. (This is, in part, due to supply scarcity and buyer demand.) So, if you decide to sell, home appreciation trends can work in your favor.6
6. Historic business value
- How well can you demonstrate historic short-term rental income and cash flow?
- Can you offer a turnkey home, with everything from furniture to property management?
- Can you sell your home with the value of pre-booked guests?
Again, if you ever decide to sell your vacation rental, your big-picture ROI is impacted by how well you can demonstrate the historic and potential business value of your property.
Where should you invest in a vacation rental property?
The first—and perhaps best—way is to buy in a top vacation rental investment market like Palm Springs.
Another way to think about your investment is to buy where you want to vacation or retire. If you love it there, there’s a pretty good chance other people love it there, too.
That said, it’s important to work with a local agent with expertise in vacation rental real estate. Their relationships, insights, and experience can help guide you toward the right homes for your goals and budget. They can also help you navigate the local regulatory climate. Most expert agents can also connect you with lenders who are friendly to vacation rental investments.
Before you start the process of buying a vacation rental investment, you need to define what kind of buyer you are. Are you looking for a vacation home that helps pay for itself between your many visits? Are you looking for a home you hope to retire in, or leave to a loved one? Or, are you looking to buy a vacation home that’s a revenue-generating machine? It’s rare, but not impossible, to find a vacation rental that can be all three.
Once you know what kind of buyer you are, there are a dozen or so steps to follow as you prepare to make your vacation rental investment.
Steps to buying a vacation rental investment
1. Find your location, then search properties
Location is the number one factor that influences your potential profitability, and every location has unique short-term rental regulations. So, before you start evaluating individual properties, it’s a good idea to identify the location that meets your goals. You can start your search in a location that interests you. Or, you can explore the top vacation rental investment locations in the U.S. But, keep in mind that your search may not end where it started.
2. Get pre-approved for a vacation rental investment
If you’re not planning to make a vacation rental investment with cash, you’ll want to get pre-approved by a lender familiar with vacation rental lending. Once you’re clear on your budget, you can also double down on a location (or pivot to a higher- or lower-value market). In hot vacation destinations, a pre-approval puts you in a position of strength because you can move on a property quickly. It also lets sellers know your offer is one they can trust.
Note: It’s a best practice to work on steps 1 and 2 simultaneously. Start your search and your conversation with a lender at the same time.
3. Run your numbers and calculate ROI
As you find vacation homes you like, it’s a good idea to calculate their potential return on investment (ROI). We can give you customized reports based on your home’s unique location and features. Plus, we can customize your reports based on upgrades and revenue levers like pet-friendliness. An in-depth report goes beyond gross income projections. Look for in-depth reports with monthly cash flow estimates, operating expense estimates, and net income potential.
4. Make your offer
As with most real estate, cash makes for a compelling offer. If you are offering cash, some sellers may request as much as 10% in earnest money. But, if you plan to finance, expect to put 1–2% of the offered price down as earnest money. Depending on your loan and local regulations, you may be able to put down as little as 10%. The more common down payment scenarios run from 20% to 60% down. If you already own a second home, you may leverage a 1031 exchange, too.
5. Negotiate the sale
Once your offer is in play, your negotiations can hinge on your agent’s expertise. Without helpful insights into the local vacation rental landscape, you may be offering too much or too little. Accurate estimates on the home’s vacation rental investment potential are also key to making a strong offer.
Stay in your vacation rental investment first
Whether you plan to self-manage or you’ve already got a property management team in mind, it’s a good idea to stay in your vacation rental investment for a few nights. Be your own guest. You can better prepare for your guests and beat out the competition when you understand a guest’s needs firsthand.
- If you bought the home as a turnkey vacation rental investment, what repairs and upgrades are still needed? Do the knives need sharpening? Do the linens need to be replaced? Do the blinds in the master bedroom work?
- If you’re the first to make it a vacation rental investment, what changes would make the property more beautiful, comfortable, and profitable? Should you offer a high chair, a pack-and-play, or baby gates? How can you arrange the furniture to take full advantage of the views? Would extra parking be appropriate?
If you can stay at the home before you even make an offer, that can be advantageous, too. Understanding and being responsive to these details can really make a difference for your guests’ experiences and your ROI potential.
Learn More: Explore Palm Springs vacation homes
Choose the right property manager for your vacation rental investment
If you bought your home as a turnkey business solution, you want to think through the pros and cons of the current property management partnership.
- Are you guaranteed a certain rental income?
- Do they offer world-class marketing services and dynamic booking rates?
- Does the management fee cover all marketing, booking, guest services, maintenance, and housekeeping?
- What sorts of limits are in place for owner use?
If you’re not satisfied with their answers, it may be time to consider changing property managers. It’s important you feel empowered to rent with ease and earn the highest profit possible.
Property manager interview questions
If you’ve yet to partner with a vacation rental property management team, here are some key questions to ask during your screening process:
- What upfront, monthly, and other “hidden” fees (booking channel fee, management fee, credit card fee, etc.) do you charge?
- Can you guarantee I’ll make more money on my vacation home than I did last year?
- Do you charge for house visits?
- Do I have to sign a long-term contract?
- What is your marketing strategy for my short-term rental?
- Do you have any owner usage restrictions?
You and your vacation rental investment deserve top treatment. As you search, look for a company that takes care of every detail you can imagine and offers you the option to cancel at any time.
It takes a team of dedicated experts to help you find the right property and optimize it for your goals. It’s absolutely okay to stick to your standards. After all, you’re hiring a real estate team that can help you find the right property. Plus, as savvy vacation rental owners know, you deserve a full-service property management team that’s here to help protect your investment, save you time, and help you make a healthy profit.