In the Market For a Vacation Rental? First, Take a Look at the Pros & Cons!

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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.

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.

Related: 8 Factors to Investigate Before Purchasing a Vacation Property

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Pros

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.

Friends and Family

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.

Appreciation

Okay, 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.

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.

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.”

Cons

Expenses

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.

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.

Related: 3 Alternative Ways to Enjoy a Vacation Property Without Owning One

Unplanned Problems

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!

About Author

Ken Corsini

Ken Corsini G+ is the host of the Deal Farm Podcast (on iTunes) and has 10 years of full-time real estate investing experience. His company, Georgia Residential Partners buys and sells an average of 100 deals per year and has helped hundreds of investors around the country make great investments in the Atlanta market. Ken has a business degree from the University of Georgia and a Master Degree in Building Construction from Georgia Tech. He currently resides in Woodstock, Georgia with his wife and 3 children.

9 Comments

  1. Edward Briley

    I flip houses here and there, and I myself have considered buying a vacation rental. I am not someone that desires to be a landlord, and for this very reason is why I bought (are you ready?) a timeshare. I bought it at least 15 years ago, and of course I have heard the backlash from my wife over time, however after paying it off, within 5 years of owning it, believe it or not turned out to be a decent investment. The good is that you surely cannot rent a room for a week from where it is located for the cost of the maintenance fees. The bad is that it will never return a profit, or maybe should I say if it did, I would be surprised. The profit I get from it is using it and sharing it with my friends etc… I could easily rent it or trade it, but that is not necessary with the time share company I am with. I would definitely profit from it for $600 or more a year if I did rent it, over the cost of the maintenance fees.
    Now I like I posted in the beginning of this, I am always looking for a deal on a Condo, in the southeast and when the right deal comes along, I may buy it, enjoy it, and rent it. Rehab is not a problem for me, and I do them 100% correct.
    Now maybe I can give you a little insight. First we know that consumables are just that, the price of those will be dictated by the renter. Now, when I flip a home, and I do not rent them myself, I do it so that if an investor would buy the property that everything can be replaced cheaply, and/or brand new. It cost a little more but, it is a good selling feature, I do things most would not think of. I have the cabinets custom built, and use cheap pressed wood for the doors on the cabinets. It looks just like real wood, however, if a cabinet door would need to be replaced, they can be produced for $25. I have found that the price of having the cabinets built is just as cost effective of putting in box cabinets. The main reason is counter tops. Yes, I use Formica counter-tops that the cabinet maker produces. Toilets in the bathrooms, I use water efficient toilets from Home Depot or Lowe’s. The vanity in the bathrooms complete with tops are on the low end as well. (Of course you have to judge this on the resale value of the home. However, for a rental home, the $29.95 vanities are sufficient). I use a standard steel bathtub. I also put ceramic tiles on the floors in the bath (tub surround) and in the kitchen, and I forgo carpet. Laminate is a good choice if the home does not have hardwood.
    For a rental property that I was renting, I would use laminate on the floor, rather than carpet, and keep extra in case it needed repairs. I would buy washable rugs for the renters to use if needed. You may think the laminate is expensive, but renting a place out weekly, it would pay for itself in a year or so.
    Now, all of the plumbing fixtures in the place would be easily replaceable or easily repairable as well. I would install a brand new heating and a/c system, split system if possible, and make sure it stays under warranty. After 10 years I would add that cost to my budget to have it replaced. I would also supply air filters for the unit and make sure the people that are doing the management change them no less than every 60 days, every 30 days would be better. Another thing I would look at is even the air registers on the floor if you have central HVAC. Make sure they are a standard size that you can get from Home Depot for like $6.00 a piece. If they are not, have them fitted so they can be when the new HVAC unit is installed.
    I would also change all of the lighting in the house with florescent bulbs, and also any down lighting with LED fixtures. (Kitchen and baths).
    Now you are thinking that I never have had a vacation home and not sure that they want one? Yes that is the truth, nothing more than a timeshare, however, my mom and dad ran motels on the ocean front from the time I was 13 until I was 18. The first motel had 3 cottages that were rented on a weekly basis in the summer. It also had 130 rooms, and that latter only had 60. Who do you think did a lot of the maintenance? Yes, I was part time maintenance man, part time maid, full time pool man and have shoveled many tons of sand. I am also a retired maintenance person that has worked in apartment complexes, malls, shopping centers and a hospital. My mom and dad also bought a vacation home later in life, and once again, I was the maintenance person. So I think I am pretty much qualified to give advice, and pretty much be able to tell someone what their cost would be if they owned a vacation rental. So, the bottom line is that I own a timeshare, with no expectations of profit. No work and all play. I think that most would be satisfied by going that route. A true vacation always cost money, you can only control the cost of one in a few ways. And working? I don’t think so.

  2. Michael Buffington

    Hi Ken,

    You hit the mark on the pro and cons.

    I still consider myself new to the vacation rental market. We own a place on the Outer Banks in North Carolina and we are now in our third season of renters during the peak season.

    After staying there for years we bought when the market was still down, but things appeared to be pointing north. We decided to be a little different in the market and so far it has paid off. Our summer months have been completely full for the last three years and now our shoulder and off seasons are filling. Here are of some of the things we have been doing a little different from most of the rentals in the area and places we have stayed in before.

    – We went soundfront instead of beachfront. Not only did it make the property more affordable, but we have our own private beach without the crowds. I actually had one property management company tell me they would not consider our property because it was on the wrong side of the road from the beach.

    – We use our own cleaners. In exchange we receive a lower fee from our management company. Their cleaners do a good job, but they clean hundreds of houses. Our cleaners only take care of a few places and are good at taking care of the details that my wife expects. Plus, we communicate with them almost every week when our house is turning over.

    – We still market on our own. Our management company is great at marketing, but we like adding the little extra touch and it seems to help drive our reservations. Check out http://www.bellasoundobx.com. It is fun to watch when web traffic increases our bookings come in.

    – We offer extras most house don’t worry about. Kayaks, bicycles, beach chairs, books, movies, local information, garbage bags, towels, sheets, etc…

    – A welcome gift (currently coffee from a local roaster) and a personal note. We let the renters know they can contact us directly for any reason. This also helps remind guest they are staying in our home. Most of our renters reach out to us at some point just to say thank you.

    – Every December we send our renters from the previous year a custom calendar with beautiful photos from the area. My wife is photography nut so this is a task she enjoys doing. Great way to remind them they should come back to our place again all year long. Seems to work. Over half of our renters this year have stayed with us before.

    – We typically don’t allow more than eight weeks of renters before we make a personal visit to the property. Just to make sure everything is cleaned, fixed and put back in order. There is always something that needs done at that point.

    – Nothing is extremely high end, but the place is well furnished and very well taken care of. If it looks worn or like it needs replaced it goes. No exceptions.

    We are extremely happy we purchased our vacation rental, but it does not cash flow like my other rental properties. At this time after debt service the cash flow is slightly negative, but I just consider that a forced savings account paying the principal down since all the expenses plus some are paid for by our renters.

    We love spending time in the Outer Banks and this just gives us a good reason to be there. We personally don’t mind working when we are there. I actually find it relaxing in weird way, but I think you have to have a unique look on property management and maintenance to enjoy it even when you are getting away from the normal office work. Most times when I there I’m not on vacation. I’m just working remotely from my other businesses and properties.

    I would not encourage anyone to buy a vacation rental to truly vacation at. It is just impossible to get away when you are at your own property. We are now exploring the idea of exchanging time with other property owners. I’d be curious to know if anyone in BP community has had any luck with this.

    Take care,
    Mike

  3. Ken, no pie in the sky in your post. Great commentary. Edward, good counterpoint. MIchael, you really shortened the learning curve, when it came to maximizing the occupancy in your vacation rental.

    When the market died in Surf City, NC, I started buying sound front and ocean front lots at extreme discounts. I’ve built houses on some of the sound front lots, flipped some of the sound front lots, and I’m still sitting on four sound front lots (one is deep water). I also bought four ocean front lots, that I picked up for 25K a pop. I know that sounds crazy cheap, so let me qualify that. These are not full lots. They are the last four 40×16 staggered townhouse lots, that were left over from a failed 1994 subdivision. I’m going to build 1,600+ sf townhouses on the lots, and, for the first time, keep them as seasonal vacation rentals. I’ve got five year round sound front beach rentals, but I’ve never had weekly rentals.

    My questions for Ken and Michael are, can you ask your weekly tenants to bring their own towels and bedding? Do you have to furnish a washer/dryer? Are land lines still required, or is wi-fi enough?

    • Michael Buffington

      For linens you can have your renters bring their own, pay extra to have linens upon arrival or just provide them. Personally I think vacation rentals should include linens. We just put this cost into our weekly rental fee. Who wants to go on vacation and worry about linens, especially if travelling any distance with a packed vehicle. We take it a step further and make sure all the beds are made and towels are hanging in the bathrooms. Just like a hotel. It is all about the presentation. Renters like coming to a house that is ready to go. If you have been traveling all day and fighting traffic who wants to make a bed.

      I’m guessing there are some weekly rentals out there that don’t have a washer and dryer, but it wouldn’t fly in our rental market. One reason people rent homes for a week instead of a hotel is they want the conveniences of home for their family. I can tell you when traveling and renting homes we wouldn’t consider a place without a washer and dryer.

      The demand for a phone in a vacation rental is minimal anymore with cell phones, but I wouldn’t get rid of it totally. You can do away with a land line and use a VoIP phone over your internet. We use ooma.com. Best part is it free after buying the equipment, except for taxes and fees.

      Make your internet and electronic as easy to use as possible. At our vacation rental we have an internet service provider that provides 24/7 tech support and will send someone to our home if it cannot be resolved over the phone. We have never personally taken any calls over internet problems. Good internet is also a must any more.

      Hope this helps.

      • MIchael,

        My wife and I have flirted for a couple years with owning in NC. One question I have is with the outside cleaning service I assume they just have a cache of linens and towels on site that they wash and replace? Also, do you provide extra linens and towels within arms reach for the renters if needed?

  4. Bob Laskowski on

    Lots of great information here. I just purchased a three bedroom condo about two months ago in Windsor Hills just outside of Disney World. There is a lot that goes into owning a vacation rental I’m coming to find out. Let me tell you, if your in a high demand vacation market like Disney World, Outer Banks etc. it is very competitive. I thought this was going to be easy to rent and so far it is going slower than I expected. We are on VRBO, AIRbnb, Bookings.com and other sites as well as having a property management company. But so are the hundreds of other rentals in the area. Everyone is correct saying that you should NOT buy a vacation rental property if you are looking to make money from renting it.

  5. I really liked your statement about how an asset sometimes needs to be looked at through the lens of personal investment rather than a financial one. My wife loves going to the beach and a friend suggested that we look into finding some oceanfront rentals. Do most oceanfront rental properties have other perks that are not offered at just regular hotels? Finding a luxury oceanfront rental might be a good investment.

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