Costs and Benefits of a Vacation Rental

Real estate is almost always a sound long-term investment. Within the larger field of real estate investing, vacation properties are a unique subset. What you choose to do with your vacation home may determine how lucrative an investment it can be. It’s surely not a “get rich quick” scheme, but a well-managed vacation rental can be an excellent income generator.

Let’s take a look at some of the specific costs and benefits of a vacation rental.

How Are You Using the Vacation Home?

The first issue you have to address is how much you plan to use the vacation property yourself. If you intend spend a lot of time there and rent it out only sparingly—or maybe not at all—your primary financial benefit will come in the form of appreciation. This is perfectly fine if you expect the property to gain value over time and your time spent there is worthwhile.

What can happen for many vacation homeowners is that they spend quite a bit of time there early on, but then it slowly dwindles. After awhile, you have to wonder if you are getting your money’s worth when the property sits vacant more often than not.

Short-Term Vacation Rental Income

This is where short-term vacation rental strategies can really pay off. Whether you utilize the property part-time as a second home or it is a full-time rental property, it can be a very lucrative investment if you are earning significant rental income. The average second home owner who rents it out full-time earns an average of $33,000 in rental revenue per year. This revenue adds up quickly over several years and the property can more than pay for itself as time goes on.

Of course, every vacation homeowner is different and each property/location is unique. Each investment requires a custom rental management strategy to be successful. It is important to develop a plan and set proper expectations. If you use the home yourself during the peak season and then rent it out during the offseason, you can’t expect to earn as much as if you did the opposite. And of course, your income potential won’t ever be as high if you use it part of the time compared to if you rent it out full-time.

Target Rental Revenue

Vacation rental investment experts say that you should target an annual rental income of $10,000-$12,000 per every $100,000 spent on purchasing the home. If it costs you $400,000, then your ideal rental revenue should be somewhere in the range of $40,000 to $48,000 per year if it is a full-time rental property that has tenants most of the year. If it is only a part-time or seasonal rental, then you’ll want to adjust your revenue goals accordingly—based on the percentage of the year it’s being rented.

Let’s say that same $400,000 vacation home being rented only three months of the year (25%), then your income goal may be more in the $10,000 to $12,000 range. When it is being rented will also make a difference. A peak season rental that’s marketed well may bring more than an AirBnB that’s rented only in the offseason months.

Location and Desirability

Naturally, the location of your rental and the desirability of the property will also have an effect on its income potential. Short-term vacation rentals in highly sought-after markets can generate excellent cash flow. A nice 5-bedroom home right on the beach in La Jolla will pull in a lot more as a summer weekend rental than a small 1-bedroom condo in downtown Oceanside. However, it may also be harder to rent out because the price will be higher and the target market is smaller.

When planning your vacation rental strategy, you will want to look at several key factors:

• Location
• Property Cost
• Property Desirability as a Short-Term Rental
• Projected Daily Rental Rates (variable by season)
• Projected Occupancy Rates
• Ownership Expenses (mortgage, maintenance, utilities, taxes, insurance, etc.)
• Property Management Costs

Tapping into Vacation Rental Potential

Whether you choose to use your vacation home as a full-time income generator or only part-time, there is so much investment potential in the vacation rental market. What’s important is that you must make a solid plan and understand the costs and benefits before you buy any property.

We will be continuing our discussion of vacation rentals this month on the Illumination Wealth Blog, so stay tuned for more articles in this series. We’re just getting started!

If you need help planning your real estate investments or managing your entire financial portfolio, contact Illumination Wealth today for an introductory consultation with one of our trusted wealth advisors.