Challenges of a Vacation Rental
As with any type of investment, there are several challenges to consider including costs, obstacles, and stumbling blocks when it comes to vacation rental properties. All of which deserve much consideration before investing in a vacation rental property:
- Property Management: While having your own vacation property is convenient, it also comes with the task of managing the property. Vacation rental properties can be the most time-consuming investments you’ll have. For every new guest, it is your responsibility to clean, stock, and maintain the property almost year-round, as your property grows in popularity. At the cost of up to 35% of your income, you could hire a property management company to do all this work for you.
- Finding Guests: It goes without saying that marketing is a key part of profiting from your vacation rental property. Even if you choose to hire a property management team, finding renters can be a difficult and daunting task especially for new investors. It may take time for your property to get noticed and gain repeat renters. You will need to make your property attractive to renters and provide comfortable and attractive furnishings while also appealing to your target audience. Next, you will need to list your property with platforms, such as Airbnb and VRBO. Finally, you will set desirable pricing that will also make you money in the end. Offering special promotions and discounts during slower seasons can help your property stay rented and gain exposure for the busy season.
- Restrictions & Regulations: Some cities and HOAs have several restrictions and regulations when it comes to short-term vacation rentals. Be sure to consult local rental policies once you have an idea of where to invest.
- Monthly Payments & Expenses: Vacation rental investments may add an extra mortgage payment as well as extra expenses that come with owning a home including maintenance, repairs, and utilities. Be sure to consider all factors of your finances in order to avoid any extra stresses in managing your investment.
- Extra Financing: Probably the biggest downside is that you will have to pay more to finance your vacation rental investment. It is common for investment property loans to have higher interest rates than usual mortgages. In turn, you will have a higher monthly payment and interest throughout the lifespan of the loan. Lenders will also usually require a larger down payment averaging around 25% more.
Benefits of a Vacation Rental
There are several benefits in owning a vacation rental property. In recent years, Airbnb and VRBO continue to grow as more and more people are looking at different options for lodging when traveling The convenience of these apps make finding and marketing vacation rentals really easy which has made the interest in vacation rental investments skyrocket. Here are a few of the benefits of vacation rental investments:
- More Income: The obvious and most attractive benefit of vacation rental investments is the return on investment or more income. An Airbnb host can earn an average of $900 a month. If you have vacation rental investments in a desired travel location, that income can multiply exponentially.
- Having Your Own Getaway: Investing in vacation rental properties allows you to have your own personal getaway. You can use the property for any special events you have such as birthdays, parties, or family get-togethers. Try investing in an area you want to visit again and again. The convenience speaks for itself.
- Tax Write-Offs: Renting a property for more than two weeks is considered a business. This is extremely useful for tax purposes. While you must pay taxes on the income it brings in, it also lets you write off many of the expenses for maintaining, repairing, and improving the property. You can even write off hosting fees charged by Airbnb and VRBO. These write-offs include but are not limited to cleaning, supplies, insurance premiums, mortgage interest, and property management fees.
- Ensure Finances & Retirement Home: Investing in vacation rentals is a great way to cover future expenses for healthcare, future travel plans, emergencies, etc. You may even consider keeping it as a retirement home. Either way, investing in vacation rentals can be a reliable asset for the future.
Is Owning A Vacation Rental A Good Investment?
When investors follow the appropriate steps to buying a vacation rental property, they are more than likely to reap the many benefits this investment offers. The biggest payoff vacation rentals have is increased cash flow. Vacation rental platforms (like Airbnb or VRBO) are a great way to generate income from a short term lease, and if your property is in high demand, you will see even greater profits.
The tax benefits associated with vacation rentals are also available to take advantage of. Your vacation home is considered a business if it is rented out for at least 2 weeks per year or more for tax purposes. This means that the rental’s income will be taxed, but you are also able to write off many of your rental property’s expenses. There are many items you can deduct from your taxes including utility costs, property management fees, occupancy taxes, mortgage interest, and more.
Not only can you generate income by leasing out your rental property, but also you have the benefit of vacationing there yourself. If you ever decide to take a getaway, your vacation rental can be made available for your own personal use. You can even hold on to your vacation home to use as a future retirement home.
Can I Qualify for a Loan for my investment?
A mortgage is a loan that a bank or mortgage lender gives you to help you buy property. Unless you have enough money stashed to pay solely in cash and upfront (which not many people do), getting a mortgage is a key step to buying a house.
Get pre-approved
The lender thoroughly examines your finances and explains how much they’re willing to lend you and at what rates. They’ll give you this information in writing, and once you start looking for a home, the pre-approval letter indicates to sellers that you’re serious. Having it can give you a leg up on someone else that’s interested in the same house you have your heart set on.
Pre-approval also means that once you’ve qualified for a mortgage, you’ll know the price range you can afford. This information will save you the time and trouble of looking at homes that are too expensive—and save you the heartache of falling in love with a home that’s beyond your budget.
How Do I Qualify for a Loan?
A mortgage is a loan that a bank or mortgage lender gives you to help you buy property. Unless you have enough money stashed to pay solely in cash and upfront (which not many people do), getting a mortgage is a key step to buying a house.
Get pre-approved
The lender thoroughly examines your finances and explains how much they’re willing to lend you and at what rates. They’ll give you this information in writing, and once you start looking for a home, the pre-approval letter indicates to sellers that you’re serious. Having it can give you a leg up on someone else that’s interested in the same house you have your heart set on.
Pre-approval also means that once you’ve qualified for a mortgage, you’ll know the price range you can afford. This information will save you the time and trouble of looking at homes that are too expensive—and save you the heartache of falling in love with a home that’s beyond your budget.
What is the difference between a real estate agent and a real estate broker?
Most states require real estate sales professionals to be licensed by the state, so that they can control education and experience requirements and have a central authority to resolve consumer problems.
The terminology used to identify real estate professionals varies a little from state to state. Brokers are generally required to have more education and experience than real estate salespersons or agents.
The person you normally deal with is a real estate agent or salesperson. The salesperson is licensed by the state, but must work for a broker. All listings are placed in the broker’s name, not the salesperson’s.
A broker can deal directly with home buyers and sellers, or can have a staff of salespersons or agents working for him or her.
Why should I use a real estate salesperson?
A real estate salesperson is more than just a “sales person.” They act on your behalf as your agent, providing you with advice and guidance and doing a job – helping you buy or sell a home. While it is true they get paid for what they do, so do other professions that provide advice, guidance, and have a service to sell –such as Certified Public Accountants and Attorneys
The Internet has opened up a world of information that wasn’t previously available to homebuyers and seller. The data on listings available for sale is almost current – but not quite. There are times when you need the most current information about what has sold or is for sale, and the only way to get that is with an agent.
If you’re selling a home, you gain access to the most buyers by being listed in the Multiple Listing Service. Only a licensed real estate agent who is a member of your local MLS can get you listed there – which then gets you automatically listed on some of the major real estate web sites. If you’re buying or selling a home, the MLS is your agent’s best tool.
However, the role of an agent has changed in the last couple of years. In the past, agents were the only way home buyers and sellers could access information. Now agents are evolving. Because today’s home buyers and sellers are so much better informed than in the past, expertise and ability are becoming more important.
The real estate agent is becoming more of a “guide” than a “salesperson” — your personal representative in buying or selling a home.
I have a family friend who is a Realtor. I like her and she is a help but she gives me one price to sell my home for and I think it is too low. So I called another agent who suggested a price more in line with my expectations. Who do I choose?
You might want to consult a couple more Realtors on the market value of your home. Most of the estimates should be in the same ballpark.
It could be that your friend is being more honest with you about the value of your home and the other Realtor gave you a higher number because he already knew you expected it. This is called “Buying a Listing” and is the subject of an article on our web site.
Or it could simply be that your friend is a good friend, but not that great of a real estate agent.
Mixing business and friendships is always risky to the friendship. On the other hand, if your friend is truly competent and was providing wise advice, she may be offended if you ignore the advice and choose another agent.
I have to make a choice between an updated home in an older neighborhood or a newer home in a more modern neighborhood. The home in the older neighborhood has almost everything I want and is much larger, but which makes the most sense as an investment?
If your goal is to buy a home for it’s resale value and the one you are thinking of buying in the older neighborhood is at the upper end of values for that neighborhood, then it may not be the wisest choice. If it is similar or lower in price to the others, then there should be no problem, because pricing should be considered in relation to the local neighborhood and not compared to homes in other neighborhoods (for the most part)
Plus, is it a neighborhood on the decline, or are others going to be fixing things up, too, so that it is a neighborhood that is improving? It could turn out to be a very good deal as long as you don’t “overpay” because of the recent improvements.
Remember that you also buy a home for it’s value to you as a “home,” and that is something else you should consider. Which neighborhood would you AND your family feel most comfortable in?
When buying a new home, what upgrades should we go for? What holds the most value? Do we upgrade the lot? Pick more square footage in the house? Add an extra bedroom?, etc.
A lot depends on why you are buying the house. Are you buying it mostly as a home or mostly as an investment? There is a difference.
For the most part, upgrades are high-profit items for builders. They aren’t designed to enhance the value of the house, but make you happier with the house you do buy.
If you are looking at your home as an investment, then you buy from the smaller to medium size in the tract and spend only a minimal amount on upgrades. If you are looking at your purchase as a home, then you select upgrades that will enhance your quality of living.
One rule of thumb is to always upgrade the carpet and padding.