5 Reasons Investing in Vacation Rentals is a Bad Idea… and why you should do it anyway
Owning a vacation rental sounds like a good idea, but many people fear the potential pitfalls of owning one. It can be difficult to focus on the positives when there is so much risk.
It is important to know that there is no wrong decision – owning a vacation rental, or VR, is specific to your situation, resources and capabilities. Below are my 10 vacation rental investment insights that will either ease your fears or send you running for the hills.
5 Reasons Investing in Vacation Rentals is a Bad Idea…
1) Vacation rentals DO NOT cash flow well
It’s true – compared to conventional rentals, vacation rentals do not cash flow very well. The main reason for that is VR owners are stuck flipping the bill for EVERYTHING. Cable, electricity, gas, landscaping, internet and the like. Most VRs operate in the 60-80% operating expense range. Ouch!
2) Predicting revenue is difficult at best
With a conventional rental it’s easy, you can use a variety of tools like Rent-O-Meter, Zilpy or even Zillow to estimate what your rent will be for the next year. With VRs, there are no real handy tools because rental rates are so subjective to other underlying factors such as vacation seasonality, rental theme (e.g. family, luxury), and how many beds you can squeeze into it.
You can use a service like BeyondPricing and AirDNA which might help; however, they deal mainly with AirBNB data, which for us is only about 5% of our rental income. Therefore, the due diligence involved is much more in-depth than a conventional rental and needs to be thoroughly vetted before making an investment.
Be sure to try Clik2Flip for your high level analysis as you are scouting vacation rental properties, it will certainly help narrow down your list quickly and efficiently.
3) You will not get to use it as much as you think
The IRS only allows you 14 days of personal use per year on your vacation rental to still receive the good write-offs from the property (**PLEASE CONSULT YOUR TAX ADVISER FOR SPECIFICS**). Therefore, if you want to maximize the tax benefits of your vacation rental you need to play by the rules of the IRS. On top of that, you will not want to use your rental on the peak holiday weeks because you would be essentially giving away free money on those guaranteed dates.
4) High Cost of Entry
If you are looking at vacation rental, you are likely seeking one in a highly-desired region or neighborhood; otherwise, why would anyone want to vacation there right!? My VR cost 30% more than my primary residence (To be fair, I live in California where real estate is goofy).
You should also note that setting up a VR at the beginning is a lot of work and potential expense. After all you may have to furnish an entire home including pictures, lamps, alarm clocks, etc. We purchased a turnkey for our first VR and we still had more than a month of setup to do before sending it to the world to enjoy.
5) You can’t fall in love with your VR
You will want to love your new vacation rental and treat it like your new prize possession, but if you want to survive the first year of rentals, you need to remember it is an investment and business. Your guests are not likely to treat your new baby the same way you would or expect them to, and each time you come to check on your beautiful place your heart will slowly be crushed by other’s lack of respect for your personal property. This negative nuance to owning a vacation rental was really more intense to my wife and I then we ever expected!
And 5 reasons why you should do it anyway!
1) Principal Pay Down and Tax Benefits
While a VR may not pay the same dividends as a conventional rental, it still pays down your principal, and if you play by the IRS rules and have a standard mortgage going on, you should be able to write off all of the income you make on the property throughout the year. You should have a completely, or close-to, free vacation home from a finance perspective as long as you did your due diligence beforehand!
And guess what? Even if you are a little negative cash flow for the year, you can still offset that with any equity paid down AND by dividing the loss by the number of nights you stayed, you will see that you were actually able to enjoy a place you love for next to nothing!
2) 14 days is actually a lot of time
Being limited by the amount of time you can actually use your property may sound like a bummer, but the reality is that two full weeks in a single-season resort would be awesome! In my case, our property is in a dual-season region so we can enjoy one full week in the summer and winter! Not to mention, you can take as many “maintenance trips” as needed to manage your property (**PLEASE CONSULT YOUR TAX ADVISER FOR SPECIFICS**). While you may do some minor work or simply check in on the property from time to time, you still get to enjoy the home and the area while you are there!
3) Learn to run a business
A conventional rental is technically a business, but not to the extent (in my opinion) that a vacation rental is. With a vacation rental, you are chasing more moving targets (much like a business) such as an advertising budget, payment processing fees, scheduling calendars, coordinating with outside vendors, providing supplies, customer engagement and retention strategies. Depending upon your level of involvement, you are essentially running a micro-hotel, which is really cool! Because you get to see the fruits of your labors in the bottom line when you can expand your margin based on sound decisions you made for your business.
4) Brag to your friends and family
Sure it’s a little vain and shallow, but it’s fun to be able to tell your friends and family about your vacation house on the beach or up at the lake! Even better, it’s great to be able to bring your friends and family up to enjoy it with you!
5) Leverage your rental
The first few months we had our rental, I decided to take my wife to the ocean for her birthday and rent a house on the water. After I reserved it, I thought to myself, “Maybe the owner would like to visit our property as well?” So, I nonchalantly threw it out to him (along with a link to our property) that we also owned a vacation rental, and asked if he had any interest in a trade. Low and behold, he was interested and our entire weekend at his beach house was free and his nightly rental was higher than ours! When you have a vacation rental, you can leverage it for more than just money. Be creative and you will be surprised what it can do for you beyond just rental income!
What’s your decision?
Do you own a vacation rental or are you considering it? Did the blog above help? Share your feedback with me in the comments below or subscribe to my email list to get updates.