Ready to dip into the real estate scene? Consider starting out with a vacation rental. Beyond getting you familiar with how estate investments play out on the grand scene, your short-term rental can always double as a place for you and your family to relax when you want to get away.

On the side though, rental properties don’t come without their hassles. As such, you should get familiar with the merits and the possible cons ahead of you before getting involved. We’ve outlined some guides below to get you familiar with how to buy vacation rentals.

While buying a rental vacation property in a location you like might be great, you must pay more attention to how renters will access and enjoy the property too. Renters tend to prefer properties situated close to beaches, casinos, lakes, or mountains.

  • Estimate Income and Expenses

You certainly know how it goes with houses. Apart from fixed expenses on utilities, maintenance, or even lawn costs, you have to take care of other extras that constantly pop up. 

It’s quite much the same with vacation rentals. The disturbing extra? Your cash flow may get severely affected if you’ve neglected to layout your groundwork properly.

A way to forestall this would be to get in touch with property managers or real estate agents around your region of choice. They would be able to help work out your expected monthly financing and operational costs.

Your expected income then would simply be:

Potential Income = Expected Revenue – Possible Expenses (that is, mortgage + taxes + insurance)

Expenses on Vacation Rental Property

To run a profitable vacation rental, besides maintenance expenses, you’d need to take into account your taxes, insurance, utilities, and booking charges for your rentals. Advertising costs to alert renters of your property availability could also cost you extra.

Taxes

Taxes you might have to consider include:

  • Property taxes
  • Rental Income taxes
  • Occupancy taxes

Property Insurance

Depending on how regularly you plan on renting out to how often you intend on using it yourself, your insurance type might either be a homeowner’s or a landlord’s insurance policy. You shouldn’t trifle with this; an improper choice may be inadequate if a renter gets hurt or damages a piece of property.

Utilities

Remember to factor in expenses for your heating, electricity, and cooling bills. A great way to get an idea is to meet with the local utility companies around your region of choice.

Property Manager Fees

Given its unpredictable income flux, property managers tend to charge higher on vacation rentals compared with long-term. Due to the regular renter turnover, managers have more work to do and as such, they incur higher expenses. 

  • Finance the Rental Operation

Here’s where you decide how you get to finance the purchase. Fortunately, you’ve got quite a few options to select from. Most real estate investors tend to prefer the conforming loan. But you could likewise go with the multifamily loan, portfolio loan, or bridge loan.

  • Hire Operational Services

After you might have bought the rental property, you either oversee its maintenance yourself or you get a manager to handle operations for you. Property managers have all the requisite contacts. They’re in touch with lawn care maintenance and cleaners, pool cleaners, etcetera to help maintain your vacation property.

Finally! You’ve taken care of the most important aspects and all you need now is to make prospective renters aware of your offering. For this, you simply list the property on the available short-term rental platforms.

Remember to strike off the days you intend to have the property to yourself to not raise conflicts with renters.  On the flip side, if you live far away from the property, your best bet at keeping up with maintenance might be to hire a management company to manage it for you.

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Pros and Cons of Investing in a Vacation Rental Property

Like any other investment, alongside the merits, there are risks inherent in owning a vacation rental. 

We took a look at some of those below.

Pros of Investing in Vacation Rental Property

The biggest upside to the vacation rental property economy is the passive income you get to make on the side. You could make upwards of a thousand dollars in a month if you listed on a rental platform like Airbnb.

Play your cards right, list on more than a single website and you could be in for a windfall.

  • Fixed Investment and Future Home

Similar to other real estate investments, vacation rentals appreciate over time. You could think of them as short term rental long term wealth. Whenever you want, you can sell your investment or retain it as a retirement home. 

Under US real estate legislation, renting out a piece of property for more than two weeks a year qualifies it as a business. As such, you wouldn’t need to pay taxes on utilities or maintenance costs as your business would then be tax-exempt.

Cons of Investing in Vacation Rental Property

Your income would mostly be irregular. Renters are seasonal and they pull in inconsistent incomes.

Occupied or not, you’d need to keep up with maintenance expenses on your home. Coupled with sporadic income, you could have negative cash flow on your hands.

  • Limited Regions of Operation

There have been way too many stories of real estate investors who bought property to only discover later on that their chosen municipality bans short-term rentals completely. Thus, consider doing your research before deciding on any neighborhood.

Bottom Line

Whoever coined the phrase “short term rental long term wealth”, certainly did a great one. Vacation rentals are a great way to diversify your investment portfolio. Besides, you could always bank on the unique tax exemption benefits intrinsic to them to offset some of your maintenance expenses.

Even at that, they’re not without their risks and drawbacks. For best results, study up on local regulations in your region of choice, and don’t forget to work with a real estate agent.