Pros And Cons Of Investing In Vacation Rentals

May
3
2019

The weather is finally starting to change and there are some signs that summer is on the way. This means beaches, barbecues and vacations. In fact, you may have your favorite summer spot already lined up and are just counting the days until you get away. If you are a real estate investor, there is a good change you at least thought out buying a vacation rental.

You see how much you pay on vacation and want to turn the tables. All it takes is one prime vacation rental to immediately boost your overall portfolio. As great as this sounds on paper, there are some other items to consider. For as many pros associated with vacation rentals there are also some definite cons. Prior to making an impulse buy during a vacation you should know exactly what you are getting into. Here are a few pros and cons with buying a vacation rental property.

Pros

  • Increased Returns: You don’t need to be in real estate to understand the upside of a quality vacation rental property. With the right property, in the right location your rate or return can be double compared to what you will find in your local investing market. This alone makes the thought of a vacation rental very attractive. You will often generate more income in the peak vacation months than you would during the rest of the year. This works the same whether you are looking at a beach property or a home near a ski resort. As long as you find an area with high demand for tenants you can expect your ROI to be much greater than any other property niche.
  • Increased Appreciation Potential:  You should never buy any property based on future value. These are the assumptions that got many investors in trouble at the end of the last decade. However, you can’t ignore the potential of some properties. Vacation rentals come with a larger purchase price tag, but also come with increased appreciation potential. Nobody is certain where the real estate market will be in five to ten years, but in the right area you can project values to increase. There are some drawbacks with selling these properties, but the demand often greatly dwarfs any selling issues. Your potential appreciation can be far greater than your average local single-family property.
  • Demand/Return Tenants: If you find a vacation area that you and your family enjoy there is a good chance you will want to return. Most families go to the same vacation spot every year. With that vacation rentals are in high demand and have many return tenants. This makes finding tenants much easier than you would think.  In the chaotic summer months, it is assuring not to have to fill say 16 weeks. You can go into every summer knowing you have a handful of those weeks already filled.

Cons

  • Management:  Owning a busy vacation rental does not come with some downside. Managing a prime vacation rental at its peak requires dedicated property management. For starters, there is a good chance that you do not live in the vacation market. You are probably at least a few hours a way and can’t simply drive to the property every time there is an issue. You need to find a property management company that can turn the property over on a weekly basis in the summer. This means you need to factor in a large management fee when running your numbers. A property manager will have to take care of payments, security, cleaning, parking and a slew of other property issues. Finding the right company won’t come without some trial and error but is essential for any vacation property.
  • Financing:  One of the biggest drawbacks for vacation properties is with financing. For starters, these properties often have an increased price tag. Owners know the kind of revenue they produce and don’t comp them to other properties. Because it is a non-owner-occupied property you will be required to put down at least 25% and have excellent credit and low debt to income. You also need to consider the cost of flood insurance, if near the water, and other appraisal concerns. As we stated, a vacation rental is different than other homes in the area. This can make the appraisal and inspection more difficult.
  • Seasonal Decline:  It is easy to think of all the money the property generates during the peak rental market. However, you need to consider the other side of the coin. How does the property do in off-peak months? Most summer dominant areas are ghost towns during the winter. People live in the area, but few are rushing to rent a property. Unless the peak times greatly compensate for the off-peak months, the property may not be as financially strong as you think. Always look at a twelve-month rental history when evaluating the property. There will be off peak dips, but make sure the dips aren’t anything you can’t handle.

Like any other property, the key with a vacation rental is the location. You will pay a premium for a prime location, but you will also get your money back over time. Make sure you have a strong management team in place and the numbers make sense. Going to a spot for a week out of the year is not the same as owning the property. Understand the pros and cons before doing anything.

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