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A vacation rental business can be significantly different from residential rental properties. Like the latter, you'll have to research the market demand, costs, and rental income potential, but you'll also have to factor in the fact that short-term rentals operate differently in various aspects.
What Are the Advantages of Buying a Vacation Rental?
Potential for High Income
Depending on the location of your vacation rental property, you have the potential to generate high cash flow. A vacation rental in Austin, TX can especially be lucrative given that it is one of the top tourist destinations in the US for being the Live Music Capital of the World. You have a huge market to tap into and the demand is often high.
Tax Benefits
A vacation rental comes with significant tax advantages such as deductions for mortgage interest and property taxes. Some of the expenses you can deduct include repairs, maintenance, cleaning, utilities, insurance, accounting fees, and reusable amenities you place in the rental. Several of these deductions are unique to vacation rentals such as the amenities.
Flexibility in Use
With a vacation home meant for short-term rentals, vacation rental owners have more opportunities to use it for personal stays or family and friends. You can rent it out whenever you want or need to generate income. It's even possible to make it a residential rental property if you choose to, as long as you do the necessary research to make the change.
Property Appreciation
If your vacation home is in a desirable location, you can expect the investment property to increase in value. Of course, you'll have to maintain the property and/or conduct renovations for that to happen. Allowing wear and tear over time will only drive costs up, which is why routine inspections are crucial.
What Are the Disadvantages of Buying a Vacation Rental?
Higher Mortgage Rate
The demand for vacation homes has plummeted drastically since 2021 with a 65% drop due to the increase in mortgage rates especially with second homes as opposed to a primary residence. The prices in the housing market aren't helping either, which means you would also need to pay a bigger down payment for your vacation rental investment.
Frequent Guest Turnover
Due to guest turnover happening more often with a vacation rental property, you'll be spending money on cleaning and maintenance more than usual. You will also have to screen more renters than usual, which can be tedious in the long run. If you do intend to buy a vacation property, you can benefit from hiring a property management company for guest screening.
Potential for Unstable Income
Owning any kind of rental property lets you earn passive income, given that you hire property managers to oversee your business in exchange for small property management fees. With a vacation rental property, however, you might only find renters during peak season when there are events in the area. That makes rental income for short-term vacation rentals more unstable.
Dependence on Location
A vacation rental can be profitable in the right conditions, but you'll end up struggling to find renters if the property is in a place without much going on. Be sure to research the rental market in the area first before even thinking about buying a vacation home or a rental property in general.
Vacation Home FAQs
Is a vacation home profitable?
It’ll be a matter of how you market your vacation rental investment. There are a lot of short-term rentals in Austin you need to compete with, and how you present your listing will be a deciding factor on whether tourists will rent your unit or not. You can consult marketing specialists or do your own research for the best practices to adopt.
How do I get the tax benefits?
Keep in mind that there are vacation rental tax rules you need to follow such as the 14-day rule. You need to have your property rented out for over 14 days in a year. Otherwise, the IRS won't consider it a second home and tax deduction won't apply. You also have to keep track of your personal stays.
Can I turn my vacation home into a residential rental property?
Acknowledge that marketing a vacation property is different due to the change in the target market, operations, and costs. Types of properties like a beach house, for instance, would fare better as a vacation rental than a residential property as they are seen more as domestic leisure destinations. Long-term rentals are preferably in proximity to amenities like grocery stores instead of tourist attractions.
How can I maximize my rental income?
With vacation properties, the best way to increase your income is to highlight which destination places are close to your property, as well as the events that people can attend where they will need a place to stay. Be sure to have a competitive rental price range to attract more potential renters.
What are the expected monthly mortgage payments?
That will depend on factors like the loan type, credit score, debt-to-income ratio, purchase price of the property, and projected revenue. Vacation home buyers tend to focus more on the projected revenue since it determines whether they can pay the loan off or not.
How can I market my vacation home?
You can hire professionals to do the marketing for you, or you can use readily available platforms like social media or traditional listing services like Airbnb, Vrbo, and Booking.com. Understand that your description and the photos you use will also influence the decision of potential renters.
Why You Should Consider Hiring a Property Management Company
You'll find that vacation homes need more upkeep than residential properties, given that you'll encounter different types of guests due to short-term stays, and you'll have to prepare the unit for the next guests more frequently. It can be a lot of work for a property owner even if it's your sole focus.
Austin Property Management offers services for various aspects of the rental business including marketing, tenant screening, rent collection, maintenance, accounting, and more. We can do all the work as you sit back and earn passive income.
The first step is to contact us and we can consult with you on how our company can maximize the value of your property.
