There are a thousand different ways to invest in real estate. While single-family properties have and continue to be at the forefront, they are far from the only way to invest. Multifamily properties, commercial real estate, land, wholesaling, and yes...vacation homes.
The summer vacation rental has been around for a long time. It’s a strategy that seems like it’s best left to the experts, and, in many ways, that’s true. Vacation rentals aren’t for the faint of heart. I'll be very clear on the front end of this article and say that vacation homes are not our forte.
Kent Sr. owns several short-term, vacation rentals and as a company we have certainly explored them as an alternative investment for clients. So in our research and with Kent Sr.'s experience, we have a few thoughts.
While you might have pictures in your head of sipping a mojito on the beach while the money pours in, that’s not reality. Like any investment property, vacation rentals come with their own unique risks and challenges.
Due diligence is required—and it’s best to know just what you’re getting into. Here are some of the pros and cons to owning a vacation rental.
Weighing the Worth of a Summer Vacation Rental
Vacation rentals offer a premium experience for tenants, so naturally, they come with a higher price tag than a regular rental would! The daily or weekly rates that you can charge in certain markets, in the right locations, might surprise you, especially in the peak seasons. It takes luck to find just the right property—but you may find yourself earning a high volume of rental income during the summer months.
That said, you’ll find that the cost of owning and operating a rental property usually exceeds that of a regular rental property, and the off-season won’t provide the same great rates.
One of the biggest perks of a vacation rental is that it’s much more like a second home that a typical rental property. Want to take a vacation? Block off a week, pack up the family, and go. You’ll always have a free place to stay! There’s a lot you can get out of a vacation rental that you can’t get out of a single-family property in terms of personal use, simply because people rent them weekly instead of by the yearly leases. This, more than the prospect of financial gain, is one of the big reasons investors decide to invest in vacation homes.
Vacation homes tend to rest in desirable markets. They are in places that people want to be in—and while the market can still fluctuate wildly depending on the overall economy, the appreciation of a vacation home can be a major benefit. Be careful, though—in some markets, you may find yourself on the depreciating side of things.
Because summer vacation homes are niche, your markets are going to have to be niche, too. You can’t have a vacation rental just anywhere, and you can bet the competition is going to be steep. You have to find the right rentals that are the right size, at the right distance from amenities, in good neighborhoods, at good prices. You’re probably going to have to throw some elbows. The prices might be high. There are fewer places to look and a longer list of a criteria to meet, so finding the perfect vacation rental is going to take a lot of time and patience.
Peak Seasons & Vacancy Rates
Vacation rentals come in lots of shapes, sizes, and markets, but they all have one thing in common—they have peak seasons and they have to battle high vacancies in the off season. Summer rentals, near beaches and in tropical climates, obviously do well in warmer months. You can charge higher rates when demand is high. Colder months? Not so much! You may struggle to find renters. It’s important to pay attention to local events so that you can effectively advertise year-round to get tenants, even on the off-season.
When you have different tenants each week, risk naturally goes up. You don’t get to run background checks, you don’t get to trust your tenants. Sure, you can impose rules and fees. But you still take the risk of having property stolen or damaged, linens ruined, and all the unexpected risks of having a revolving door of people coming in and out of your property week after week.
On top of that, you have the risks that can be associated with location—summer rentals are often near beaches and bodies of water, which come with flood and hurricane risks (and the associated insurance costs!).
Vacation rentals are not big money makers. Repairs, replacements, maintenance, and every expense typically associated with owning and operating a rental property will almost always exceed your expectations. And when you’re dealing with a rental that can have unpredictable income, it’s probably not the best idea to put all your eggs in that basket.
Vacation rentals are not meant to be the linchpin of your rental portfolio. They can be fun additions with some personal benefits: but they’re not your bread and butter!
If you want reliable investments that generate passive income, turnkey real estate is the way to go. Our advisers can help you get started today.