There are many different ways you can allocate your investment funds to maximize gains and contain risks. Real estate is widely known as one of the most lucrative investment vehicles that you can choose to contribute funds to, and you may be thinking about investing in a new property soon. While traditional rentals with long-term leases have been popular for decades or longer, many people are taking a closer look at vacation homes as a source of financial gains. With a vacation rental, you may lease out a fully furnished private residence for a few days, a week or much longer in some cases, but you may also have a great vacation home to enjoy yourself. If you are thinking about investing in a vacation rental, consider these important points as you examine this investment option more closely.
Think About the Desirability of the Market
With a vacation rental, you have to lease the property out long enough each year to cover your overhead and to turn a profit. However, unlike with a long-term lease situation, a vacation rental requires you to fill the property with dozens of tenants or more each year. The market will be a major deciding factor in demand for your property and in how profitable your investment may be. In most cases, the greatest return will be in major vacation destinations, such as near theme parks, beaches, mountains and other hot spots. While the location should be desirable for others, it likely will also be a place that you and your family want to return to repeatedly for your own travel plans. Therefore, you may find that there are only a handful of destinations that meet these criteria.
Consider the Cost of Real Estate
In many of the most coveted vacation destinations, the cost of real estate can be expensive. This is not true in all markets, however, so you will need to carefully examine the markets you are most interested in to find one that is affordable and appealing in various ways. Keep in mind that the cost of real estate will impact your initial down payment as well as your ongoing mortgage payments. Your mortgage payments will likely be one of the largest expenses in your budget. When estimating your down payment needs, remember the expense associated with furnishing and outfitting the property for tenants.
Focus on Net Income Potential
Your next task when deciding whether to invest in a vacation rental property requires you to dig deeper into the numbers. You must carefully examine the rental market to determine what nightly or weekly rate you can feasibly charge for a property you are interested in. More than that, research other similar properties to determine their occupancy rates. By doing so, you can estimate the gross income you may expect to receive each year when accounting for slow periods during the off-season. Then, estimate operating expenses, such as make-ready costs, utilities, property management fees, repairs, taxes and insurance and more. You can determine if you may generate enough income to accomplish your investment goals by crunching the numbers.
Take Advantage of Tax Benefits
There are considerable tax benefits associated with any type of rental real estate property. For example, all expenses associated with the rental activities, such as make-ready costs, property management and more are tax deductible. This provides you with the great opportunity to directly offset the tax liability that created through the rental income. You can also write off depreciation on the property for a more significant gain. Real estate investments are one of the few types of investments that offer these tax benefits.
Remember You Have a Vacation Home to Enjoy
While your vacation rental property should be largely viewed as an investment or even as a business, you should also remember that you will have a vacation home to enjoy with family and friends. This can dramatically improve your quality of life in various ways. It can also give you a beautiful and comfortable place to stay without the hassle of making reservations or dealing with crowded resorts when you are on vacation. You simply have to ensure that you do not lease the home for the time when you plan to use it yourself.
Sell the Home for a Profit
Rental property can increase or decrease in value over the short-term, but most properties tend to increase in value over the long-term. This assumes that you maintain the property in good condition. More than that, your rental payments will be used to make your mortgage payment for you, adding to your equity. You may choose to sell the property at a later date for a sizable profit. Because the home is already furnished for its rental activities, it will be beautifully staged for the sales process.
Use the Home for Retirement
While some people will sell the home for a profit, others will use the home strategically for retirement purposes. They may generate a great profit over the years running it as a rental property, but they may take the home entirely out of commission and use it for their own purposes in their retired years. Some will benefit from having a property owned free and clear once they reach retirement age, and this is a home in a highly coveted location close to great attractions. Others may use the home for a portion of the year during retirement, and they may lease it out for the remainder of the year while they travel.
The decision to invest in a vacation rental is significant, and it requires careful scrutiny of your current and future investment goals and income needs, your desire for a vacation or retirement home, your tolerance for risk associated with your investment property and more. You may consider examining the vacation rental market more closely in some of the destinations that you are most interested in as a first step. This can help you to more closely determine the risk and profitability associated with buying a vacation rental property in these areas.
