With the emergence and rocketship-like growth of platforms like Airbnb, VRBO, and others, buying a short-term vacation rental may seem like the perfect way for someone interested in real estate investing to get started.
While short-term rental ownership may feel like the ideal way to pocket some extra cash and diversify your portfolio, it isn’t without risks. Truth is, investing in short-term vacation rentals comes with both advantages and drawbacks.
If you’re considering entering the short-term rental market, read on to learn more about the benefits & risks involved:
6 reasons you should buy a short-term vacation rental
1. The market is growing
According to global market research company Technavio, the vacation rental market size is projected to grow by over $62 billion between 2020 and 2024. Redfin also reported a 100% increase in demand for second homes last year.
It’s no surprise, either. With travelers becoming more accustomed to the idea of staying in someone else’s home while on vacation, they’re opting for cheaper prices (especially for larger groups) and more home-like amenities provided by short-term rental homes – and not hotels.
2. Extra Income
The biggest pro to owning a short-term rental home is obvious: money. More travelers are checking listings on Airbnb or VRBO before even considering a hotel booking, meaning more earning potential for short-term rental property owners.
Airbnb hosts made an average of $924/month last year – with many hosts in highly desirable areas earning several times that.
3. You get a vacation home & a retirement home
Owning a short-term rental home means you get a place to vacation too. Whether it’s a long weekend or summer vacation, you get to enjoy the benefits of owning a vacation home that puts money in your pocket instead of the other way around.
In addition to using your rental as a vacation home, it’s also a great way to grow your retirement nest egg by allowing you to sell it and use the cash to cover your living costs, or holding on to it and enjoying a relaxing retirement in a beautiful location.
4. Tax write offs
This is one benefit that many prospective buyers aren’t as familiar with. If you rent your vacation home out for more than 14 days in a year, it becomes a business for tax purposes. This means two things: (1) You have to pay taxes on the rental income you bring in, and (2) you get to write off several of the expenses incurred by maintaining and running your property.
The basic rule of thumb says that you can deduct expenses that are “ordinary and necessary” to doing business. This would include things like:
- Cleaning costs
- Maintenance expenses
- Home supplies
- Mortgage interest
- Insurance premiums
- Property management fees
5. Diversify your investment portfolio
If your current investments do not include real estate, short-term rental ownership is a great way to diversify and get your foot in the door of a new investment industry. Diversifying your assets helps protect your investment portfolio from market volatility and adds another source of revenue to your income stream.
6. Innovation in short-term rental homeownership
Continuous innovation in the short-term rental space is making the more tedious tasks – like marketing & property management – more affordable and less time consuming.
Topkey is one company leading the innovation charge, sending detailed revenue quotes from pre-vetted property managers directly to the property owner’s inbox – for free.
It’s not without risk
Of course, buying a short-term rental home isn’t without risk. Knowing the potential downsides to entering the short-term rental market can save you from making a bad investment. Here are just a few drawbacks homeowners can experience:
1. Seasonality & unforeseen events can hurt your cash flow
Many of the top locations for short-term rental homes suffer from seasonal bookings. Understand that your rental income will likely be irregular due to differences in bookings between the peak and low seasons.
2. Adds another payment you’re responsible
Unless you’re paying for your vacation rental in cash, investing in one means an extra mortgage payment, which can cause additional financial stress for you and your family. It’s important to note here that lenders will usually require a larger down payment and charge higher interest rates on investment property loans as compared to a standard mortgage.
You should also consider the other expenses that owning a rental property brings, things like general maintenance costs, utilities, and unforeseen repairs.
The bottom line
Short-term rental ownership may be the perfect way for you to secure some additional income and diversify your assets. But it’s not for everyone. Just like any investment, do your homework to know what you’re getting yourself into before pulling the trigger.
The better prepared you are, the more success you’ll see as a rental property owner.