Have you ever thought about investing in a vacation home to use a short-term rental? We asked Daniela Andreevska at Mashvisor to share some insight on why real estate investors are wise to consider this avenue as they get started with their first real estate investments.
Looking for the best way to make money outside your 9-to-5 job? How about real estate investing?
It can be intimidating to dive headfirst into the world of real estate investment, but buying a vacation rental home is one avenue that’s gaining a lot of popularity. We think it might just be the best way to enter the real estate business and become a property investor.
There are many benefits to buying a vacation rental and we have put together a list of the top reasons that we think you should consider this as your first step in real estate investment.
1. Own a Dual-Purpose Property
If you’re a first-time real estate investor, you are probably considering all the options and thinking about what’s best for you.
Buying a vacation rental home has one clear advantage: It can serve dual purposes. You can use it as a second home and spend your own vacations there with your family, and then rent it out to guests the rest of the year.
Buying an investment property for the sole purpose of renting it out long-term does not give you this option.
2. Generate Rental Income
One of the major advantages of real estate investing in general, and investing in rental properties in particular, is the fact that you gain a source of steady income.
How? Through rental income.
The idea is that you will be renting out your second home to guests when you aren’t using it. You’ll be making money without having to necessarily buy an “investment” property. After all, your vacation home is your second home. It just happens to make money on the side.
When you buy a vacation home and use it as a short-term rental, the money you make from bookings actually helps you pay the mortgage and other expenses (property tax, insurance, maintenance, and repairs) for the place where you spend your vacations.
3. Build Value through Appreciation
In addition to making money in the short run, a vacation rental home also makes money – potentially a lot of it – in the long term.
A second home is a real estate property, and real estate generally appreciates in value over time. When you are ready to sell your vacation rental property, you can usually sell it at a higher price and cash in on the profit. The best part is that you don’t have to do anything to enjoy this benefit. Natural real estate appreciation will take care of it.
If you want to make even more money when selling your property, you can make modifications and improvements to push up the market value of your vacation rental (known as forced appreciation).
4. Earn Tax Deductions
Similar to your primary home or an investment property, a second home also provides tax deductions. These apply to mortgage payments, property tax, rental income, insurance premium, utilities, and other rental expenses.
However, the situation with a vacation rental can get somewhat complicated depending on the number of days you live in your property and the number of days you rent it out to guests. So, if you decide to buy a vacation rental, we recommend that you work with a professional accountant and/or a real estate attorney to assure that you are taking maximum advantage of tax deductions without breaking any tax laws.
5. Take on Less Risk
Investing in vacation rental exposes you to lower risk than other types of real estate investment. First, vacation homes are in top tourist destinations, so you can attract lots of guests, reach high occupancy rates, and charge a high nightly rate.
The combined effect is high rental income. And rental income is how investors make money from their rental properties.
One way to reduce your risk even further is to choose a location and a property that works as either a traditional, long-term rental or as a short-term rental. If you find that you have a low occupancy rate, low rental income, and negative cash flow, you have the option to switch strategies and become a traditional landlord.
And in the worst case scenario, if a long-term rental strategy also fails to bring you a positive cash flow, you still have a second home to use with your family. This will save you the cost of renting hotels or other people’s vacation homes until your property has appreciated enough in value to sell it. After all, if your vacation rental is located in a popular destination, appreciation should not take more than a few years to kick in.
6. Learn About Real Estate
No matter how many real estate books you read or how many real estate classes you attend, you will not become an expert real estate investor until you actually buy an income property and start managing it.
Buying a vacation rental home provides you with an easy entry into the world of real estate investment because it’s often less stressful than other real estate investment strategies, such as becoming a full-time landlord, fix-and-flip, wholesaling, etc.
7. They’re Easy to Manage
While some people take on vacation rental management as a full-time job, you don’t have to do this in order to start making money in real estate. It’s feasible to make owning a vacation rental a part-time job that doesn’t take up too much of your time, especially if you use a vacation rental management service.
Management is a major concern for inexperienced investors, and it can potentially turn into a real nightmare for first-time vacation rental owners. Imagine having to clean your property, change the sheets, wash the towels, and refill the toiletries between each guest – sometimes multiple times a week – all the while working your 9-to-5 job.
Most owners don’t have time for that. Instead of handling it themselves, they’re hiring property managers or vacation rental management services to take over those time-consuming duties. Then they are free to oversee the aspects of vacation rental management they want, like talking to guests, making recommendations, and collecting rental income.
You’re interested – now what?
Investing in a vacation rental home is an easy entry point to real estate investment that provides endless opportunities to learn and carries lower risk than other options. But if you are a beginner real estate investor, you might be wondering how to go about the whole process of buying a vacation home as an investment property.
Here’s a list of the main factors you need to consider as you look for vacation rental properties:
Choose a popular location
Experts say that “location, location, and location” are the three most important factors in a successful real estate investment, and they are not mistaken. When buying a vacation rental home, choose places where other travelers – besides you and your family and friends – would enjoy. To check out some of the best places to buy a vacation home to start investing in real estate in 2018 based on data from Mashvisor, click here.
Learn local short-term rentals legislation
Regulations on short-term rentals have been tightening in many places around the U.S., so once you’ve chosen a location for buying your second home, make sure you will be allowed to use the property as a short-term rental and make sure you won’t be taxed too heavily for it.
Conduct comparative market analysis
Before buying your income property, conduct some real estate market analysis to make sure you’re not overpaying for your second home. Real estate comps are the only way to assure you can get positive cash flow from renting out your vacation home on a short-term basis.
Perform investment property analysis
Compare the rental property you’re considering buying with other vacation rentals around the area to see how you can stay competitive while making money in real estate. Predictive analytics can also help.
Mashvisor’s rental income calculator allows you to conduct all the necessary analyses you need in order to make the best real estate investment decisions quickly and easily.
More people are buying vacation rentals as their first real estate investments because it’s a sound financial decision. The demand for vacation rentals is at an all-time high and continues to grow. There’s low risk, because at the end of the day, you have a second home where you can vacation for free. And with new cost-effective vacation rental management systems, you have access to the help you maximize the return on your investment.
Daniela Andreevska is the Content Marketing Director at Mashvisor. Mashvisor helps real estate investors quickly find traditional and Airbnb investment properties.