Is a Vacation Rental Property a Worthwhile Investment?

August 4, 2021
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We’ve been talking about the costs, benefits and planning options for short-term vacation rental properties. Ultimately, one big question remains:

Is a vacation rental property worth your time, money and effort?

This is a loaded question because it will depend on a variety of factors. There is no doubt that real estate is almost always a solid long-term investment and rental income properties can provide a consistent cash flow if managed well.

Why Vacation Rentals Are Different

It’s important to point out that short-term vacation rentals are a much different animal than residential rentals. As long as you keep your residential rental property occupied, it will provide a steady flow of income. Even if you aren’t making huge profit from month to month, the earnings add up. You will also benefit from the long-term appreciation of the property that will allow you to raise rent prices over time and/or sell the property for a tidy profit when the market timing is right.

Short-term rentals are all the rage thanks to booking sites that make the process much easier than it used to be. It’s very simple to post your rental listing on AirBnB. Then, you benefit from the added exposure, marketing, reservation and customer service capabilities these platforms offer. Though it does take much less effort than it did in the past, there is still a lot of work involved with running a vacation rental property that has much more turnover than a long-term unit.

Location, Demand and Pricing

The success of a short-term vacation rental will depend largely on the location of the property. A beachfront house or mountain cabin will attract seasonal visitors and allow you to maximize your booking prices during peak times. This is generally the most appealing benefit of a vacation rental investment. You can use variable pricing models to increase your profits, even if the property isn’t being rented out all the time. One weekend rental during peak season may earn as much as you can charge for an entire month of an annual lease.

A variable pricing model is absolutely essential. At the same time, you still must research and pay attention to occupancy rates. Extended vacancy periods eat into your profitability.

Time and Effort

You must also consider the work involved when there is more turnover. The good news is that maintenance and repairs are usually less expensive on a vacation rental, and you can include cleaning fees in your booking prices. The constant turnover can be a headache for some rental property owners to deal with. A vacation rental sounds like a good idea, but it does take plenty of effort to refresh the space in between each guest. You can hire a property management company to deal with the daily grind, but that’s more money out of your pocket.

Personal Use

Lastly, how you intend to use the property personally may be a very important factor to keep in mind. If you want to use it yourself during certain parts of the year and don’t mind others sharing your space when you are not there, then running it as a vacation rental is a good way to make a few extra bucks. Obviously, you won’t want to rent out your house to a full-time tenant if you want to use it part-time for yourself. A vacation rental allows you to use it when you want and rent it out when you don’t.

However, you should think about when you plan to use the property. It is a vacation home and you want to take your vacations there, most likely in the prime seasons. Let’s say you own a beach house and you want to use it during the nicest times of year. This is potentially eating into your profits because you aren’t able to collect rent during the peak rental periods. You might find yourself in a conundrum. Either you are only using the property it’s less in demand, which may not be as personally enjoyable. Or, you sacrifice significant profitability by using it when you’d otherwise be able to rent it out for the highest possible price.

Developing Your Rental Investment Plan

Ultimately, you have to understand the property and how to best utilize it as either a short-term or long-term rental. Do your research and develop a solid investment plan that covers every detail and runs all the necessary projections. You’ll need to understand your ownership and operating costs, your variable price model, occupancy demand, time commitment and numerous other factors. Then, you can set a budget and decide if a short-term vacation rental property makes sense for you.

For help in managing all your investments—including real estate holdings and rental properties—contact Illumination Wealth today for a thorough financial review.