Yes. But you don’t need to take our word for it. If you’re looking to break into real estate investing, the growing vacation rental industry can be a great place to start—in fact, 19% of travelers who booked a vacation rental between March 2020 and April 2021 were doing so for the first time.
A good vacation rental investment can pay for itself. A great vacation rental investment has the potential to turn you a profit. Here’s what separates the good from the great:
Over time, the right investment property in the right location can significantly increase in value. In addition to passive appreciation, you can improve your home’s appreciation further by investing in upgrades. (Even better? The same updates that can grow your home’s value can make for happier vacation rental guests—and better guest reviews—too.)
When it comes to tax benefits, a vacation rental investment is a lot like a primary residence. You may enjoy tax deductions related to mortgage payments, property taxes, rental income, insurance premiums, and so on. But, how you use your property, and how often you use it, can impact what expenses you can write off.
For instance, if you rent out your second home for more than 14 days a year, you may be eligible to write off some, or all, of your rental expenses. A certified public accountant (CPA) can help you understand the vacation rental investment tax codes and tax deduction eligibility for your state and your situation. (We recommend you consult with your CPA for all of your potential tax obligations and advantages. We’re not CPAs.)
One of the greatest benefits of owning a vacation rental property is that you can use it for business and for pleasure. Visit your vacation home for a little “me time.” Get away for a romantic weekend. Host lively events for family and friends. With a vacation home, you can make money and make memories. You don’t have to choose.
That said, if you do think of your vacation home primarily as an investment, you’ll want to minimize personal use (or save it for the shoulder season) and prioritize guest access.
Today’s full-service vacation rental managers make it possible to own a home that practically takes care of itself. Whether you’re buying a vacation rental property that’s miles away from where you live, or you simply prefer to have someone else oversee the day-to-day details, the right partner will be your eyes, ears, and boots on the ground. Guests locked out in the middle of the night? Handled. Need to bring your patio furniture indoors before a big storm? No problem.
With a local, full-service team watching over your home and your guests, you can enjoy all the benefits of a vacation rental investment property—with none of the hassles.
A vacation rental investment in the right location can generate valuable income, even during a recession. We know, based on the lessons from the 2009 recession, that people don’t stop taking vacations when the economy slows down. Travelers simply plan shorter trips, share expenses with larger groups of family or friends, and book vacation rentals closer to home.
And during the COVID-19 pandemic, vacation rentals showed their staying power. According to a 10 Stars consumer survey, 92% of travelers were satisfied with their experience at a vacation rental during the pandemic (citing benefits like cleanliness and privacy), and 52% would choose a vacation home over a hotel moving forward.
Over time, homes increase in value. In many markets, vacation rental real estate can also increase in value higher and faster than residential real estate. (This is, in part, due to supply scarcity and buyer demand.) So, if you decide to sell, home appreciation trends can work in your favor.6
Again, if you ever decide to sell your vacation rental, your big-picture ROI is impacted by how well you can demonstrate the historic and potential business value of your property.
Location is the number one factor that influences your potential profitability, and every location has unique short-term rental regulations. So, before you start evaluating individual properties, it’s a good idea to identify the location that meets your goals. Start your search in a location that interests you, or explore the top vacation rental investment locations in the U.S. But, keep in mind that your search may not end where it started.
If you’re not planning to make a vacation rental investment with cash, you’ll want to get pre-approved by a lender familiar with vacation rental lending. Once you’re clear on your budget, you can also double down on a location (or pivot to a higher- or lower-value market). In popular vacation destinations, a pre-approval puts you in a position of strength because you can move on a property quickly. It also lets sellers know your offer is one they can trust.
Note: It’s a best practice to work on steps 1 and 2 simultaneously. Start your search and your conversation with a lender at the same time.
As you find vacation homes you like, it’s a good idea to calculate their potential return on investment (ROI). At 10 Stars, we can give you customized reports based on your home’s unique location and features. Plus, we can customize your reports based on upgrades and revenue levers like if your home is pet-friendly or if you are adding a hot tub. Look for in-depth reports with monthly cash flow estimates, operating expense estimates, and net income potential.
As with most real estate, cash makes for a compelling offer. If you are offering cash, some sellers may request as much as 10% in earnest money. But, if you plan to finance, expect to put 1–2% of the offered price down as earnest money. Depending on your loan and local regulations, you may be able to put down as little as 10%. The more common down payment scenarios run from 20% to 60% down.
If you already own a second home, you may leverage a 1031 exchange, too.
Once your offer is in play, your negotiations can hinge on your agent’s expertise. Without helpful insights into the local vacation rental landscape, you may be offering too much or too little. Accurate estimates on the home’s vacation rental investment potential are also key to making a strong offer.
When the sale is complete and you’re ready to start renting, find a vacation rental manager who will give your home top treatment.
Here are some questions to consider, whether you’re switching management companies or hiring one for the first time:
The rise of the sharing economy and the development of online marketplaces have reset the travel industry. (We can thank Millennials for this growth.) Staying in someone else’s home has become desirable and normal. Travelers are extending business travel for pleasure. Plus, they have new standards for affordable, beautiful accommodations. As their economic power continues to grow, it’s expected the vacation rental industry will continue to grow, too.
That’s the billion-dollar question. There are a couple of ways to choose a location for your vacation rental investment. But, once you decide on a location, your search gets a lot easier. Your decision-making process can become easier, too. The first—and perhaps best—way is to buy in a top vacation rental investment market. Another way to think about your investment is to buy where you want to vacation or retire. If you love it there, there’s a pretty good chance other people love it there, too. That said, it’s important to work with a local agent with expertise in vacation rental real estate. Their relationships, insights, and experience can help guide you toward the right homes for your goals and budget. They can also help you navigate the local regulatory climate. Most expert agents can also connect you with lenders who are friendly to vacation rental investments.
If you’ve yet to partner with a vacation rental property management company or you are planning on changing property managers, here are some key questions to ask during your screening process:
You’ll mainly want to look at capitalization rate (“cap rate” for short), which is the rate of return on a real estate investment. Cap rate is calculated as your net income minus expenses, divided by the purchase price. Learn more about cap rate calculations >
Yes, from what we’ve seen. Not only is the industry growing, but according to data from Vrbo/Homeaway, vacation rental income makes up 24% of the average owner’s annual income.