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Vacation Homes Can Be Income-Producing Rental Properties

04 April, 2017

Vacation Homes Can Be Income-Producing Rental Properties

Owning a vacation home can offer much more than just a fantastic place to spend time away from the stress of everyday life. Buying real estate that provides a fantastic getaway option for friends and family can also provide immediate return on investment – sometimes even a great rental income – simply by renting the property out when you’re not using it.

“An estimated 1.13 million vacation homes were sold in the U.S. last year, the highest number since the National Association of Realtors (NAR) began collecting the data,” wrote U.S. News & World Report

Owning a second home might make great sense logistically – even financially, if you are buying property in one of the world’s most popular vacation destinations where you can benefit from a booming vacation home rental market.

“The value of vacation homes in more popular destinations may grow more quickly, so it’s important to research historical price appreciation in any market you’re considering,” wrote CNBC.

The Time is Now

Considering interest rates are likely to continue rising and inventory is always tightening, the window of opportunity for buying a vacation home at a great price may be closing soon. This reality is helping to fuel the recent boom in vacation home investment property sales – especially among baby boomers and investors who are looking for alternative asset classes that can provide a better return on investment than traditional stocks and bonds. 

Vacation Homes Can Be Income-Producing Rental Properties

“Demand is particularly high among baby boomers who are prepositioning for retirement,” wrote CNBC. “Vacation home sales rose 57 percent in 2014 according to NAR.” 

Consider 3 Things Before Buying a Vacation Home Rental Property:

  1. Always buy from a position of strength – don’t compromise other financial goals. 
  1. Unseen costs can add up – understand the tax rules, maintenance fees, etc.
  1. Research the market very carefully before buying – how popular is the locale?

“With interest rates still historically low, buyers who can afford the costs of owning a rental property may be wise to act now before rates and prices head higher,” stated CFP Sophia Bera, founder of Gen Y Planning, in a CNBC interview.

Successfully Managing Vacation Home Rentals

We’ve already established that buying a vacation home to use as an income-producing rental property can be a good way to increase your portfolio’s overall return on investment, since brick-and-mortar real estate is not tied to standard investment markets like traditional stocks and bonds. 

Still, tax rules differ when buying rental properties and vacation home rentals located abroad. There are also typically a variety of maintenance and marketing costs associated with keeping the property looking its best and attracting a steady stream of travelers throughout the year. In today’s competitive market, this means more than just changing the sheets, taking out the trash and placing a vacation home up for rent on Airbnb

Vacation Homes Can Be Income-Producing Rental Properties

“You don’t just list your unit and then money starts to come in,” wrote LearnAirbnb.com, a Best Practices website. “It takes time to chat with potential guests who ask questions before they’re willing to book with you. It takes time and effort to earn great reviews. It takes time to check guests in and check guests out.” 

To mitigate the time and energy required to successfully rent out a vacation home, consider buying a unit that is part of a mixed-use development or innovative new condo-hotel. Many of these properties have an experienced property manager on site and contain a variety of residential and vacation home rental units, creating a “No Worries No Hassles” ownership plan. Be sure to consider maintenance, marketing and booking/reservations, as well as how payments will be received and documented.

Also, ask the following questions before buying a vacation rental property:

  1. Is the property close to local attractions?
  2. Will the property be available for rent seasonally or year-round?
  3. What makes the vacation home marketable?
  4. Is there a property manager on-site?
  5. Is rental income guaranteed, or can you obtain a solid income estimate?

If rental income is an important part of your reasons for buying a vacation home, be sure to purchase a property that can be rented at a frequency that is great enough to cover all expenses and then some.

“This means choosing a community that allows vacation rentals and then making sure you’re set up to take advantage of the rental potential, from furnishing the unit to having a plan for advertising and handling tenants,” wrote U.S. News & World Report.

The bottom line? Owning a vacation home rental can be a great alternative investment option, provided you do plenty of homework and research the best places to buy. Don’t just rush into buying a property because you love it – take your immediate return on investment into account, and be sure to look at a variety of investment properties in your destination of choice before making a decision.

Do you have any other questions about vacation rentals? Let us know in the comment section below!

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