Wait! Before You Buy That Vacation Rental, Take a Look at the Pros & Cons
I am currently spending the week with my family at a beach house we bought on the panhandle of Florida two years ago. As I sit on the back deck writing this article, it occurs to me that I’ve learned a lot about owning a vacation rental over the last two years and thought it would be worth sharing my experience with the BiggerPockets community.
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Let me first start by saying that I don't for one second regret buying this property. I was lucky enough to find one of the last low-priced, bank-owned properties along this popular stretch of South Walton County. This particular area of Florida was hit hard by the downturn, but values have since come roaring back over the last 2-3 years. As such, I've been lucky enough to experience some quick equity gain in my property as a result. In addition, this house is managed by a local property management company and has been rented for most of the peak rental weeks throughout the year.
However, even with a very favorable cost basis in this property and a high demand for weekly rentals, this endeavor has not been without its challenges. With a little bit of experience under my belt, here's my perspective on the pros and cons of owning a vacation rental.
5 Pros of Vacation Rentals
1. They provide enjoyment!
I would venture to say that most people buy a vacation rental because it’s a location that they enjoy going to. In many cases, a vacation rental will not end up having the stellar ROI that many people hope. Being able to use the property throughout the year ends up being the primary motivation rather than possible financial gain. For us, we love having the ability to go to the beach on a whim and have our own place to stay.
2. They can facilitate time with family and friends.
Along the same lines, we’ve enjoyed having the vacation rental because it’s an opportunity to invest in something (arguably) equally as important as financial investments—and that’s family and friends.
Sometimes an asset needs to be looked at through the lens of personal investment rather than a financial one. For us, we’ve been able to spend lots of quality time with family, as well as bless friends and family with the use of the property.
3. They often have a good likelihood of appreciating.
OK, it’s not all about family and friends. We bought this property for multiple reasons, but the biggest decision factor for us was the potential appreciation we could achieve from this investment. Yes, it was calculated speculation that the real estate market in this area would appreciate over the coming years, and luckily for us, it has paid off so far.
It has been my observation that vacation areas like the panhandle of Florida tend to have big swings in home values (often based on what’s happening in the economy). If you buy as values are climbing, you can experience quick equity gain—but of course, you can also find yourself on the wrong end of a price swing.
4. They can provide rental income.
While there are some vacation rentals where the income produced covers all of the expenses associated with the property, this is definitely not the norm. If you are strictly looking to buy an investment property to create cash-flow, buying a vacation rental is not the way to go. You are much better off buying a traditional rental property. That said, depending on what and where you buy, you can at the very least offset a good portion of your expenses by renting the property.
5. They can give you a nice tax write-off.
Since this property is technically a business, you can write off most of the expenses associated with trips to your property. When we are at our beach house, I'm almost always fixing something, meeting with the property manager, talking to vendors, etc. As such, I keep receipts from restaurants, gas stations, etc. because they are expenses associated with the "business."
3 Cons of Vacation Rentals
1. They might be more expensive than you think.
I’ve learned the expenses associated with a vacation rental will almost always exceed your projections. Even after you’ve factored in your property management fees, utilities, mortgage payments, taxes, insurance, etc., there will inevitably be unplanned repairs, lost and damaged goods, unplanned maintenance issues, and more. Even if it pencils out on paper, producing enough income to cover all of the potential expenses associated with a vacation rental is simply harder than you might think.
2. They could pose a fair amount of risk.
There are a number of risks associated with a vacation rental that a homeowner needs to be mindful of. In many beach locations, you have the risk of adverse weather (hurricanes, flooding, etc.) affecting the condition of the property. You’ve also got potential liability exposure with a new set of strangers living in the property from week to week.
I would say the biggest risk, however, is the possible financial loss if the market crashes, values drop significantly and rental demand drops off. I know here in Florida it feels a little like playing the market. Right now, this market is on the upswing and we are enjoying the value increases and high rental demand. However, at some point in time we will have to make the decision to “cash-out” before the real estate cycle heads in the other direction.
3. They might have unforeseen issues.
Ask my wife about the cons of owning a beach house and she’ll tell you all about the broken furniture, stolen pack-n-play, ruined linens, etc. Renting a property that you also consider your second home can be frustrating. I’m in contact with my property manager on a monthly basis discussing items that need to be fixed or replaced. From rusted vents to faulty electrical circuits, we are always dealing with an issue or crisis that needs to be addressed (and that inevitably costs money).
The choice to buy a vacation rental is one that should not be taken lightly. While there is the potential to make money on an investment like this, there is just as much potential to lose money. Careful consideration should be given to determine if the investment is one that is more focused on the non-financial benefits of owning a second home or whether the objective is strictly for future profits. Either way, it’s important to understand and to be prepared for all of the time and expense associated with this type of investment.
What about you? How many of you have bought vacation rentals and what has been your experience?
Be sure to leave me a comment below!