Should You Invest in Vacation Rentals?

Rental properties are emerging as the smartest way to invest in real estate and secure a financial future. Since the rise of the economy and the introduction of the private accommodation sector have made it significantly easier for families to take more vacations on their own, vacation rentals have come into vogue. As a result, many real estate investors are considering buying a vacation rental. Vacation rentals provide the ideal balance of comfort, affordability, and convenience. They benefit the local economy by giving homeowners a second source of income and increasing employment opportunities in the hospitality sector. They are also revolutionising how people travel and providing guests with a more intimate and customisable vacation experience than they would find in a cramped hotel room, making it a preferable alternative to traditional hotels. To secure a profitable end, however, investing in vacation rentals involves considerable thought and due diligence, just as with any other type of investment. Therefore, investors should weigh all the pros and cons and carefully analyse the location, amenities, and prospective rental revenue before making a judgement.

What are Vacation Rentals?

Vacation rentals or short-term homes are lodgings that travellers can hire for a limited time. These accommodations can include homes, condos, villas, apartments, tents, yurts, boats, high-end luxury properties, and spare bedrooms in other people’s apartments. Some vacation rental facilities provide full service, akin to hotels, while others provide guests with complete independence. According to a report, traffic and searches for vacation rentals were 235% in 2021 (Arrived, 2022), and 82% of travellers plan to book vacation rentals in 2023 (evolve, 2023). 

What are the Benefits?

Vacation rentals offer various advantages to investors, travellers, and the community, which are discussed as follows. 

Passive Income

Vacation rentals generate a consistent stream of money from guests. Vacation rental property websites like Airbnb, VRBO, and HomeAway have transformed how people vacation. Instead of generic hotel rooms, travellers are now ready to pay a premium for vacation rentals that provide an experience, especially during peak season. The value of a vacation rental depends on its location, size, and amenities. Investors can make extra income by renting out property for birthdays, parties, and family get-togethers. The generated income can be utilised for property maintenance and upgradation, which can further increase its rent rates and value. According to research, vacation rentals are responsible for an average of 130% more revenue than traditional rentals (Arrived, 2022). 

Multiple Uses

A vacation rental can serve as either an investment or a vacation property for a brief break. Days or weeks that the owner intend to utilise the property as a second home can readily be walled off as unavailable, allowing the investor to profit from the real estate market while also owning a holiday house. Moreover, a vacation rental, as opposed to a long-term rental held by a renter on a 12-month lease, is often rented for 30 days or less, allowing the investor to access and utilise the property flexibly. 

Appreciates Overtime

Real estate has historically appreciated quicker than inflation, providing both the opportunity for long-term profit and a buffer against inflation. A vacation rental not only offers passive income in the form of short-term rent payments but also grows in value over time. The appreciation would provide a significant return on investment if the property were to be sold. In desirable areas, the short-term rental market typically exhibits a faster growth trajectory and greater rates of return over time. 

Economic and Tax Benefits for the Community

The rental income from vacation homes contributes to the growth of local economies by creating jobs, attracting new enterprises, and providing services and amenities. Budgets from vacation rentals can also aid municipal budgets.  Sales, lodging, and occupancy taxes are all payable by the hosts. The local government can use these levies to finance public services and infrastructure projects and to generate a sizeable cash stream. Additionally, local governments can use the fees to fund efforts to promote local tourism, which could increase local revenue. Vacation rentals can assist towns economically and tax-wise with the correct rules in place. 

Generates Employment

Vacation rentals generate employment, and attract tourists from worldwide, making it a powerful economic engine. Using services like cleaning, gardening, property managers, contractors, and property upkeep, homeowners with vacation rentals help create jobs in their community. Travellers visiting the area also frequently want amenities like food, entertainment, and transportation, which local business owners can offer, enabling local establishments to flourish and hire personnel, creating even more job possibilities.

Diverse Market Opportunity

Buyers can find vacation rental homes with profit potential in a wide range of markets, unlike long-term renting, which typically needs a purchase close to a big metro region.
Investors have a plethora of options for vacation rental investment properties because popular tourist destinations are spread out from coast to coast, including beachfront rentals, lakeside rentals, a mountainous ski lodge, or a cosy cabin.

What are the Detriments?

The drawbacks of investing in vacation rentals are as follows.

Inconsistencies in Vacancies and Income

There will be times when the place is vacant during the off-season, particularly if the rental is seasonal. The substantial revenues generated on the days when the property is occupied frequently make up for the days when it is empty. Cash flow, however, may be impacted if a property is empty for a significant portion of the year. 

Added Expenses and Tasks

The costs might pile up due to the nature of a vacation rental, where a home needs to be cleaned, and amenities need to be replenished and examined after each stay. The costs of using a property management company may potentially reduce the rental income. Other costs include some of the everyday tasks such as managing cleaning and maintenance, getting the place ready, stocking up on necessities, marketing, scheduling bookings, replying to visitors and tenants, and setting up check-ins and check-outs. 

Associated Investment Risks

Two main hazards associated with vacation rentals are financial risk and the possibility of natural calamities. The financial risk is the likelihood of a plunge in the real estate market and a decline in property values. Additionally, while owning and renting waterfront vacation houses might be very profitable, there is always a risk of natural calamities. Insurance is a must to protect vacation property during those times; however, bear in mind that flooding and storm damage are typically not covered by conventional homeowner’s insurance, which might result in the need for additional coverage.

Continuous Advertising

Before guests can make a reservation, they must locate the vacation home. That calls for marketing. Starting from the ground up, this entails capturing appealing property images, creating listing descriptions that sell, furnishing the space with all the amenities and decorations that complement the location and appeal to contemporary visitors, and listing the vacation rental on all the big online travel agencies. Owners need to continuously update their rates and calendars, reply to inquiries, and optimise their vacation rental listing to appeal to the widest audience possible. Owners might hire a full-service property manager to handle all of these marketing duties, which adds more to the expenses.

Conclusion

The choice of property is crucial in creating a vacation rental investment property that will continue to provide cash flow and value. Purchasing a vacation rental as an investment property can provide several benefits over time in addition to rental revenue if the owner acquires the right home and maintains it properly. However, a complete business plan is required to ensure everything runs smoothly and the investor develops a pleasant and profitable firm.

This article is written by Haneen Gul. Haneen is a Research Analyst at the Iqbal Institute of Policy Studies (IIPS).

References

Arrived. (2022, August 17). Why Should You Invest in Vacation Rentals? Retrieved from https://arrived.com/blog/why-should-you-invest-in-vacation-rentals/

evolve. (2023, March 24). 6 Buyer Benefits From Investing in Vacation Rentals. Retrieved from The Evolve Team: https://evolve.com/blog/homeowner-tips/the-benefits-of-buying-a-vacation-rental-home-as-a-real-estate-investment