Owning a vacation rental is a great investment decision. However, like other big decisions, there will be drawbacks, especially if you don’t plan well. It is essential to take your time when making big decisions to get all the information you need. Coming up with a pros and cons list helps you make a sound decision. Investments should not be guided by peer pressure but rather by facts. You have to be sure there is a higher chance of winning than losing when putting your money into something.
Here are some pros and cons of owning a vacation rental you should be aware of:
Pros of owning vacation rental property
It earns you an extra income
One of the significant benefits of owning a vacation rental is additional income. An extra income is a big plus, especially if you want to achieve a financial breakthrough. Also, you will have something to fall back on in case you lose your primary job. On the same note, if you want a break from the daily grind, owning a vacation rental property could be your first step to achieving this long-term goal. However, be careful when setting your nightly rates not to overcharge or undercharge. Check out the popular rental listing sites for an idea of pricing in your area.
Increase in property value
When buying property, the hope is that the value will go up and appreciate, which will help you in a big way when the time to sell comes. Every year the value should go up, especially if you purchase in a high-demand area. Before deciding on the best vacation rental property to buy, check out the past and current market trends to understand what the future holds in terms of property value.
A vacation rental property is a business just like any other. If you are paying taxes based on the income you are making from the property, then you can also deduct all business-related expenses you have incurred. Deductions can be payments made to property management companies, restocking, or even housekeeping. However, don’t forget to keep the receipts, or you could get yourself into hot water if ever audited.
Applying for a business credit card to pay the business-related expenses makes it easy for you to provide records when filing your taxes. You can also deduct your insurance, property taxes, and mortgage interest. A tax professional can do a better job of helping you get ahead of this. Make use of an accountant if you are unsure how to proceed because tax-related fraud is a big deal, even if it were committed by mistake.
You never have to pay for accommodation when going on vacation
Getting away from your everyday life once in a while is a great thing. It allows you to unplug and reset so that once you get back, you can be more productive. However, one of the reasons why most people don’t go on vacation is the high accommodation costs. With your vacation rental, you never have to worry about that. Go during the offseason so that you don’t miss out on rental income during the peak season.
You can also let your friends and family stay there while on vacation for free, half price, or full price. It’s all up to you.
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Various management options
Managing a vacation rental property is not easy, especially for first-timers. However, there are management services available that you can take advantage of to make your work easier. You can concentrate on more important things like marketing the property or even scouting for the next investment property by allowing a property management company to do all of the time-consuming duties.
Besides, it takes the pressure off the equation, especially for first-time vacation rental property owners. You can even buy a property out of state and be sure that the management will be hassle-free since local professionals will be taking care of your property. You won’t have to be traveling back and forth all the time to check out the rental property.
Easy to find guests
There are several sites where you can list the vacation rental property to find guests easily. You don’t even have to market it. After the first guest leaves a positive review, you’ll see people flocking the property, and your work will be easier. You have to work on getting that first review, and the rest is easy. You can also choose the dates you want to rent the property and block out dates for you, family, or friends to visit the home. If you were worried about not finding guests, it’s time you ditched that thought. As long as the property is up to standard and in a popular location, you can be sure that they will come.
You learn about real estate investment
There is so much you can do in real estate besides buying a vacation rental property. However, you will learn quicker hands-on than reading about other people’s experiences. The better part is that you get to learn while enjoying the perks of being a vacation rental property owner. You can then expand your business and earn more once you have learned the ropes.
Cons of owning vacation rental property
Unexpected expenses aren’t a surprise in a vacation rental property, just like at a primary residence. Whatever isn’t working or needs replacement is your responsibility. Expenses like utilities, regular maintenance taxes, and restocking can be expected. However, huge expenses like burst pipes or a broken air conditioner have considerable costs to replace or repair, and they may catch you off-guard. You need to set aside a certain amount yearly to cater for unexpected maintenance and repairs. You can estimate it at 1% of the total purchase price of the property.
High down payment
A primary residence may require just a 3-5% down payment. However, this won’t be the case when you are buying a vacation rental property. As long as you are not planning to live there, lenders will demand a 20-30% down payment which can be difficult to cough up. On the same note, the requirements on your credit score will be much higher since you are taking on more debt.
More fees and taxes
Some taxes that you may have to pay include property taxes, local and state taxes. Depending on the tax laws in your area, you may require a business license and also pay hotel and sales tax.
In matters to do with fees, you’ll have to pay a booking fee for the websites you’ll use to market your home. Looking back on what you have spent on taxes and fees for the vacation rental property, you may be shocked at how high the figure is. Most likely, the biggest fee that you pay is property management. For short-term rentals this can be anywhere between 15% and 30% of the gross rental. Thus, you need to monitor these expenses and ask yourself whether you are making losses or gaining anything by renting out the property. If you are not keeping track of your expenses, you may realize you are running the property at a loss.
The upkeep is time-consuming
Owning a vacation rental property is not as easy as posting it online and cashing the checks. You have to carry out regular maintenance and repairs and cater to the needs of the guests.
When the vacation rental property is not in the same area as your primary residence, it will be a great hustle to manage it if you don’t hire property management services. It takes a lot of time and money to travel back and forth to take care of business. On the same note, you will have to handle marketing if you don’t have anyone to help you. Responding to reviews and questions on time is essential to remain relevant, not forgetting to update the availability calendar and nightly rate.
It becomes easier with reliable property management services. Nevertheless, once you get several vacation rental properties, it is highly recommended you get property management services for a better outcome unless this becomes your primary job.
Danny Margagliano is a realtor in Santa Rosa Beach, Florida, with World Impact Real Estate. He has been specializing in helping out-of-town investors purchase vacation rental properties for over 12 years. He is a Certified Investment Agent Specialist as well as a Resort and Second-Home Specialist. Before selling real estate, Danny was a professional surfer and firefighter/paramedic.