Owning a vacation rental is an excellent way to get a feel for real estate investing. Not only can it help you learn the ropes, but it can also generate extra income that you can use for your own vacations! If you’re thinking of purchasing a vacation home, we’ve compiled the benefits of owning one, as well as the costs you should consider before diving in.
The Advantages of Owning a Vacation Rental
#1 High Rental Income
According to a 2019 survey, 60% of leisure travelers prefer rental platforms such as Airbnb, VRBO, and Homestay more than hotels. An increasing number of vacationers are choosing to stay in vacation rentals because it offers more privacy and allows individuals to experience life as a local. There’s no doubt that owning a vacation rental can bring in a steady stream of income especially during the peak season from June to August. Vacation properties can generate around $900 each month — if your property is located in a tourist destination, you can expect to make four times more!
#2 Tax Deductions
A vacation property is considered a business, which means you’ll have to pay tax for the income that it generates. The good thing is that you can enjoy several tax benefits by writing off the expenses that you incur in repairing and maintaining the unit. As a vacation rental investor, you can deduct the following from your tax:
- Supplies (e.g. toilet paper, toothbrushes, etc.)
- Utility costs
- Mortgage interest
- Hosting fees
- Insurance premiums
- Professional cleaning services
- Property management fees
- …and many more.
#3 Dual Purpose Property
Many real estate investors aim to own a vacation rental property for its dual purpose. When you’re not occupying the property, you can use it to generate money by renting it out. When you decide to retire, you can convert it into a relaxing retirement home. And when you need a place to get away, you can use the property for some well-deserved R&R.
#4 Easy to Find Guests
Because you’re not dealing with long-term tenants, finding guests is a lot easier. You don’t have to go through the meticulous process of conducting background checks on everyone that stays on your property. Thanks to the popularity of vacation rental platforms such as Airbnb, VRBO, and HomeToGo, you have access to thousands of vacationers who are looking for a place to stay. You’ll also receive real-time ratings and reviews from your guests, boosting your visibility and credibility on these platforms.
#5 Great Starting Point
Owning a vacation rental is less tedious than owning a residential or commercial rental property. If you’re thinking of becoming a real estate investor, you may want to start with vacation rentals. This offers you a glimpse into the demands of property ownership while letting you enjoy the benefits of owning a vacation home. You can gradually learn about property management and expand to other types of properties once you’re more confident.
Costs Involved in Owning a Vacation Rental Property
#1 Homeowners Association (HOA) Fees
If your vacation rental property is a unit within a condominium or a home in a community, you may have to pay homeowners association (HOA) fees, which can range from $100 to $700 per month, but this depends on the quality of services and amenities available for residents. The plus side is that you won’t have to pay for certain maintenance fees such as garbage collection since these are covered under the HOA fee.
#2 Utility Costs
Unlike residential property tenants, your guests aren’t obligated to cover the utility expenses. In the United States, the average cost for utilities per month is around $398.24. However, this figure depends on several factors such as the consumption per guest, occupancies per month, amenities provided, and more. If you have guests who never turn off the lights, you could be paying as much as $100 a month on electricity alone.
#3 Mortgage Payments
If you purchased your vacation rental property through a loan, you’ll have monthly mortgage costs to think about. The average mortgage payment in the United States is $1,275 per month, but you can expect this number to double or triple for luxury homes in prime locations such as Miami and Palm Beach County. Mortgage rates in expensive destinations are typically 35% higher than the national average.
#4 Property Taxes
Some states impose additional taxes for vacation rentals especially for properties located around bodies of water. Additionally, since vacation homes are usually luxury properties such as waterfront villas, taxes will be significantly higher. In Florida, short-term rentals (occupancies of six months or less) are subject to a lodging tax, which is added to your guest’s bill. Your guests will cover the tax, but you’re responsible for remitting it to the proper tax authorities.
How Much Profit Can You Earn From a Vacation Rental?
To determine how much money you can make from a vacation rental, you need to first find out how much rental income it generates each year.
Ask the previous owner about their nightly or weekly rate, as well as the approximate number of reservations they booked each month. You could also look at the current rates of similar vacation rentals in the area by visiting popular websites like Airbnb and HomeAway. If you’re working with a property management company, they can help you estimate the annual income of your vacation rental, taking into consideration off-seasons and peak seasons.
Once you’ve estimated your annual income and expenses, you can now determine whether or not you can maximize your vacation rental — or if it will just drain your bank account. Simply subtract the expenses from the income, and you’ll arrive at your estimated profit.
Vacation rentals are a great way to earn consistent cash flow while having a property that you can convert for personal use at any time. Before purchasing a vacation rental property, you should research the local market, including local regulations on short-term rentals. Remember, even if you buy the most stunning vacation home, it won’t be worth your money if vacationers aren’t interested in staying there.
Hiring Luxury Property Care can give you the confidence to turn your investment into success. Our property managers are experts at managing vacation rental properties. Let us take care of bookings and reservations so that you go on vacation while waiting for your profits to roll in.