We all love to go away on vacation. When embarking on a trip, you typically spend a decent amount of time (and money) deciding where to stay physically. If you opt out of lodging in an expensive hotel room, you may rent someone’s personal property for your expedition.
But what if you didn’t have to book a hotel room and could instead stay at your vacation property? To take it a step further, what if you could make money off of this vacation home and rent it out whenever you don’t stay there? Many Americans buy vacation rental properties to supplement their income and have a guaranteed place to stay on their trips.
Depending on where you purchase the vacation rental and the overall size and quality of the unit, you can charge several hundred or thousand dollars a night. This appealing idea motivates many people to take the leap and purchase their own vacation homes. However, with low housing inventory in the wake of the pandemic, you may need to embrace your competitive nature to secure this money-making opportunity. Buying a vacation rental property is similar to purchasing a standard investment property. You want it to have good bones, be in a safe and appealing area, and serve as a welcoming abode for vacationers.
Continue reading to learn more about the current vacation rental market and how you can best approach the process.
Pros and cons of owning a vacation rental property
When deciding whether or not to purchase a vacation rental property, there are several factors to consider. While the property can serve as a source of income, there are various expenses and costs you may have to front. Below are some other pros and cons of owning a vacation rental.
Pros
- Provides supplemental income and offsets the cost of the property (and your vacation!). When you deduct expenses and continue to rent out the property, you can eventually break even and then continue to make money.
- You can enjoy the property as your own. Since you control when other people rent the unit, you can decide to stay there anytime you like.
- The property will likely appreciate. Just like real estate in general, the value of your rental will increase over time, generating profit should you decide to sell later on.
- You can also claim your rental as a business. When you rent out your home for more than two weeks a year, you can claim it as a business and therefore deduct the cost of repairs, maintenance, etc.
- The home can turn into a valuable asset in the future. Should you decide to retire at the location where your property resides, you can stop renting the unit and instead move into it full-time. Or, you can sell the property and use the profit to fund part of your retirement.
Cons
- Advertising can be costly and time-consuming. Since your guests will likely only occupy the vacation rental for a short period of time, you might need to consistently advertise to find new guests. Most advertising platforms charge a fee to list your property. Then you must engage with renters. If you do this on your own, prepare to spend time every day engaging with potential inquiries.
- You’ll have to check and abide by local HOA rules and regulations. Every neighborhood has its own set of rules which you must follow. Check to ensure that you abide by these rules to avoid unnecessary fees.
- Vacation rentals tend not to do well during financially challenging times. Just like we saw at the start of the COVID-19 pandemic, many people stopped going on vacations. Therefore, owners could not make money off of their rental units.
- There may be peak and off-peak seasons, depending on where your property lies. For example, if you own a property near a ski resort, it is unlikely that you will see large profits in the warm weather months. You must ensure that the profits you receive during peak season can keep you afloat for the entire year
- You may also need to pay someone to manage the property. Suppose you don’t have the time to keep up with your property’s daily maintenance, or maybe you’re just too far away from your vacation rental. In this case, you should hire someone to do what you cannot complete. The costs can quickly add up if you don’t budget accordingly.
Overall, financing a vacation rental property can be costly. If done correctly, you can turn the property into a sizeable source of income and your vacation destination that pays for itself.
Tips for investing in vacation rental properties
If you’ve decided to invest in a vacation rental property, you’ll want to consider the following to ensure you make an intelligent purchase.
Location
Location is as, if not more, important for your vacation property than it is when you purchase your own home! You could buy a piece of property close to your primary residence or spring for a high-traffic tourist destination. With both approaches, you should research the volume of tourists which come through each year to determine if the cost you put into the unit is worth the potential rewards.
Some appealing tourist destinations in the United States include:
- Maui, Hawaii. Many travelers increasingly visit Maui as they can experience a tropical environment while avoiding the pandemic’s residual international flight restrictions. If purchasing here, make sure to register for the General Excise Tax License, as all rental income in Hawaii gets taxed at 4.166%.
- Las Vegas, Nevada. Should you decide to purchase in Las Vegas, you must receive approval from the Department of Planning. To qualify for the short-term rental license, you must purchase an owner-occupied property that is more than 660 feet away from any other short-term rental, has no more than three bedrooms, and resides in an approved neighborhood.
- New Orleans, Louisiana. When purchasing in New Orleans, you must apply for a Short Term Rental permit. New Orleans witnessed increased housing demand in 2020 and 2021. In 2022, the demand has slightly cooled but continues to prove prosperous for rental property owners. Owners bring in an average of $3,268 each month.
- Key West, Florida. Consistently warm and fair-weathered, owners in Key West can make income off of their property at all times of the year. You can own either a transient or monthly rental, influencing how long renters can stay at your property.
- San Diego, California. San Diego serves as a hot spot for vacations, meaning most travelers will stay at your property in the peak season of summer. With an influx of vacationers coming from Canada, you can expect tourists to stay for longer periods of time during the warm months, as they want to maximize their time out of the country.
- Nashville, Tennessee. When purchasing vacation rental property in Nashville, you will want to pay attention to the neighborhoods, as they vary in ease of walkability, which is crucial to the tourist experience. Tourists come to Nashville for most of the year as well, as destinations and activities are not weather dependent.
- Sedona, Arizona. To rent a unit in Sedona, you must acquire a Transaction Privilege License. With nearly three million visitors each year, there are ample opportunities to generate income.
- Charleston, South Carolina. Abundant with beautiful beaches, many tourists decide to visit Charleston on their vacations. However, some areas like Sullivan’s Island do not permit vacation rentals, so make sure to research each area’s regulations before purchasing a property.
- Chicago, Illinois. You must acquire a Small Business License to rent out vacation property in Chicago. As both a popular vacation and business location, there are a variety of demographics to target all year round.
- New York City, New York. While popular, it is quite difficult to list a vacation rental property here. According to a law passed in 2010, landlords must own every unit in their building to legally rent out units for less than 30 days.
Property Type
Decide which type of property you would like to purchase for the vacation home. There are various options between single-family homes, condominiums, townhouses, and apartment units.
The available units in your purchasing area may directly influence this decision, or you may try to approach the situation from a competitive mindset. You can research available vacation rentals in your target area and potentially decide to fill a gap in the market by purchasing a different property type.
Quality and Amenities
Since you are purchasing a home that many clients will potentially live in, you want to ensure that the property is competitive and appealing to renters. You should consider the amenities you enjoy in a vacation home and consider what other renters might also enjoy. For example, if going after a home in a warm location, you might consider purchasing a home with a pool or ample outdoor space so that renters stay at your property over competitors.
Advertise your Property
To make income on your property, you will have to rent it out to vacationers. Since most people do not go on vacation for long durations, you may consistently work on the renting process. Various tools and sites help you rent your short-term rental property.
Additional options include hiring a management company, relying on word of mouth in your community, or creating a website.
Vacation Rental Shift During COVID-19
While popular short-term rental property sites and property owners experienced a significant drop in revenue during the height of the pandemic in 2020, most were able to recoup their loss as the vacation industry shifted. As vacation destinations began to open up slowly, travelers did not want to stay in large hotels with an abundance of people and instead booked private listings from individual owners. Many property owners witnessed the shift and decided to jump on board, increasing the number of vacation rentals in many popular destinations.
Simultaneously, many travelers ditched heading to conventional locations, taking trips to see family and friends they had not seen for a while. Therefore, vacation rentals in smaller communities also increased, providing more opportunities for owners to invest in various areas.
Since there are now many popular areas to list a vacation rental, you may have more leeway when deciding where to purchase your vacation home.
Filing Taxes for your Vacation Rental Property
Like a standard rental property, you will have to file income taxes on your vacation rental. Refer to our rental income and expenses information to learn more about how to file accurately.
As long as you rent out your property for more than fourteen days a year, the IRS will treat it as a rental property. Additionally, you must occupy the property for less than fourteen days or less than 10% of the days you rent it out to vacationers to file and claim deductions.
When calculating your expenses, you must split your costs between rental and personal use. To arrive at a final number, you can multiply your total number of expenses by a fraction. The numerator is the total number of days rented at a fair rental price, and the denominator is the total number of days you and the renters use the unit.
By filing your taxes and deducting expenses, you can recoup a portion of the money you pay during the year to maintain the rental. While you will have to pay income tax on your property, you can maximize your savings by keeping organized records of your expenses to ensure you list everything during tax season.
Some types of expenses you can claim on your vacation rental include:
- Advertising
- Cleaning and maintenance
- Insurance
- Management fees
- Repairs
- Taxes
- Utilities
Learn more about filing taxes on your vacation rental: IRS Topic No. 415
Final Thoughts
If you’re thinking of owning a vacation rental property of your own, conduct your research about the area and consider which types of opportunities are already available to travelers. Diversify yourself in the vacation rental market by offering something other properties do not have, price accordingly, and start advertising.
Keep organized records of your income and expenses so you are ready for tax season. Then, get ready to welcome renters to your property and enjoy the place on your own time!
