8 Things You Should Know About Owning Short-term Rental Properties

8 Things You Should Know About Owning Short-term Rental Properties

Buying a second home and turning it into a vacation rental property is a big decision. It requires research and being informed on things you might encounter as a new GM of a mini hotel. Before we get into some pros and cons of owning a vacation rental, here are some stats to help aid in understanding more about this specific rental market.
The year 2021 was the best on record for short-term rental performance according to AirDNA. On average, U.S. short-term rentals achieved 62% occupancy, which is up 5% compared with 2020 and a full 10% higher than in 2019. U.S. short-term rentals are earning an average of 39% more annually than they were prior to the pandemic, benefiting from significantly higher average daily rates (ADRs) and occupancy, as well as fewer competitive listings in many areas.
So now that we know the numbers, here is a list of pros and cons to consider when purchasing short-term rentals.

Pro: You’ll Earn Extra Income

This is most likely the main reason you’re considering owning a vacation rental property in the first place. Who doesn’t want extra income plus a vacation home they can retreat to whenever they need to get away? Your rental income will depend on which city you buy in, what neighborhood, the type of home you have, and much more. We recommend checking out some listings on Airbnb and Vrbo in your desired town. Look at the nightly rate that other owners are charging and see how the rates and availability change depending on peak season and offseason. AirDNA is also a great resource on the “success” of your potential market.
Most recently, as the travel industry has faced a surge of vacation cancellations due to the pandemic, many travelers have opted to stay in vacation rentals over hotels due to their ability to easily social distance. This has been a huge bounce back for the home-sharing industry, as well as a more permanent shift in accommodation preferences as travel begins to resume again.

Con: There May Be Some Unexpected Expenses

Just like at your primary residence, things in a vacation home can break or just stop working at any time. When this happens, you as the owner are responsible for paying to fix it. You can plan for certain costs, like utilities, restocking, taxes, and regular maintenance, but you can’t plan for your air conditioner breaking or a pipe bursting. We recommend setting aside a certain amount of money each year, like 1% of the home’s purchase price, for unexpected repairs and maintenance.

Pro: The Home May Increase in Value

When you purchase a home, the hope is that it will appreciate in value so you can make money off it when you sell. A vacation rental home is no different. Your property will hopefully increase in value year over year. This is true especially if you buy in a high-demand area. Before making a purchase, take a look at past and current trends in the market you’re hoping to buy in–and if you don’t know how to do that, let us know and we will connect you to one of our trusted partners.

Con: Your Down Payment Might Be Higher Than You Think

If you’re buying a primary residence, you can sometimes get a loan with a 3-5% down payment. The rules are different for vacation rental properties. When you’re buying a second home that you don’t plan to live in full-time, expect to put down 20-30%. Your credit score requirements also might be higher for this vacation home because you’ll be taking on more debt.

Pros: You Can Deduct Business-related Expenses

Don’t forget about tax deductions! This is a business for you, meaning if you’re paying taxes based on your rental income, you can deduct any business-related expenses. Deductions you might be able to claim include housekeeping, restocking, and the cost of your property management company. Just remember to keep each and every receipt. We recommend getting a business credit card to pay for any expenses related to your rental so you can see everything you paid for in one place.
You also might be able to deduct your mortgage interest, property taxes, and insurance. To figure out exactly which deductions you can claim each year, talk to a tax professional specifically in the area in which you are looking to purchase this rental investment.

Con: You’ll Have to Pay More Taxes and Fees

You won’t have to pay taxes on rental income if you rent your home out for less than 14 days each year. But if you’re renting out your property for more than 14 days, you will need to pay federal taxes on that additional income. There are ways to set up businesses in holding those rentals to help save in taxes–again talk to a CPA to find the best situation that works for you. Other taxes you’ll pay include state, local, and property taxes. Depending on your local tax laws, you may need to get a business license, pay sales tax, or hotel taxes too. When it comes to fees, you’ll most likely need to pay a booking fee for the websites you use to market your home–though this is an expense to write off.

Pro: You’ll Have a Vacation Home to Use Whenever You Want

Do you need a vacation? Well when you own a rental property, you always have a place you can go to. To maximize your revenue, we recommend heading to your vacation home in the off-season. You’ll also have a place that friends and family can stay in (whether you make them pay the full price, a reduced rate or nothing is up to you). And while retirement may be a long way off for you, a vacation home is the perfect place to retire to when you decide that you’re ready for it.

Con: The Upkeep Can Be Time-consuming

There is a lot of upkeep involved with owning a vacation rental property. You’ll have to keep up with regular maintenance and repairs, but you’ll also have a lot to do for each guest’s stay. This includes housekeeping (whether you hire someone or do it yourself), restocking, and answering the guest’s questions and concerns.
If you buy a vacation rental property in a different town than your primary residence, you also need to think about the time and costs for traveling back and forth between your two homes when you need to take care of something at the rental property.
There’s also the marketing aspect. You’ll need to create listings for sites across the internet, like Vrbo, Airbnb, and Expedia. With these listings, owners should always be answering potential guest’s questions, responding to reviews, and updating the nightly rate/calendar for their property.

Rental Properties Are Easier to Manage With Help

If all of the upkeep above sounds like a lot, there are people who can help – which is a major pro especially if you are not close to the property you just purchased. Top vacation property managers can do everything for you–marketing, manage guest inquiries, housekeeping, maintenance, and ensure that prior to each new tenant the rental is in tip top shape so you don’t have to spend every spare hour dealing with your rental home.

Learn More About Owning a Vacation Rental Home

If you still have questions about what it’s like to be a property owner for a vacation home, let’s set up a time to chat. We can talk to you about the life of a rental property owner and are happy to be of service anytime!

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