One of the hottest investment markets to emerge out of the COVID-19 crisis is the vacation rental market. This includes platforms like Airbnb, VRBO, and Homestay.
After over a year of social distancing and mask mandates, U.S. business and recreational travelers are marking their territories. Eighty-six percent of leisure travelers globally say they are more likely to travel domestically if they receive the COVID vaccine. Thirty-four percent of U.S. travelers planned to take at least three domestic trips this year, according to a TripAdvisor survey conducted in January. CNBC reported that the current trend in U.S. travel is more road trips, domestic travel, mixing business travel with leisure, and vacation rentals. All of these took root during the pandemic.
Any way you look at it, travel is on the rise again. But people are still socially distancing, which means private accommodations are gaining in popularity. And remote work allows employees the luxury of taking a family vacation without sacrificing work, family, or privacy.
Vacation Rentals Offer Private Real Estate Investors Great Opportunities
The average monthly Airbnb rental income is between $1,249 and $5,780 for the top 50 Airbnb markets. In 2017, the top VRBO owners raked in more than $110,000 per year. But there is a difference between the two sites, and it pays to know what they are.
With VRBO, property owners rent out their entire facility, which can be a single-family residence, a condominium, an apartment unit, a cabin, or a studio. Airbnb property owners can rent out single rooms or an entire house. They can also rent shared rooms, which makes it easy to market to college students who typically operate on a strict living budget. Airbnb also hosts a variety of different property types, such as basements, lofts, barns, castles, and boats.
Other sites, such as Hipcamp, offer unique short-term rentals involving campsites, organic farms, treehouses, and beachfront bungalows.
The bottom line on vacation rentals is that it is a growing sector for real estate investors looking for ongoing passive income. From raw land to luxury apartments, landlords are increasing their earning power through short-term rentals of properties they already own as well as new properties they finance.
Pros and Cons of Vacation Rental Investments
Like with any investment, vacation rentals have some pros and cons. There are certain advantages to owning and renting out a home, or rooms in a home, at a hot vacation spot. Platforms like Airbnb and VRBO make it easy and more accessible to serious real estate investors. Some of the pros to owning vacation rentals include:
- Passive income – Vacation rentals mean investors can receive passive income for owning real estate, especially during vacation seasons. However, those differ based on geography and climate. Florida beaches, for instance, are hot vacation spots in the summer while Park City, Utah is well known for its ski resorts and winter vacation amenities. Other locations, such as Civil War battlefields, may be enjoyed any time of year.
- Higher rents – Because vacationers tend to stay in rental facilities for short durations, landlords can charge higher rents to make up for days lost when units are not rented out.
- Tax write-offs – If you rent your home, a basement, or a room in your home, you’ll have to pay taxes on your rental income, but you can also claim expenses for anything related to that rental unit. That includes all maintenance and repairs as well as fees charged by Airbnb and VRBO.
- A cozier retirement – Many vacation rental owners use the income from their properties to pay for their retirement.
- Diversification of tenants – Your tenant base will be more diversified, which means that cancellations are less likely to eat away at profits than a nonpaying long-term tenant on a traditional rent property.
- Your vacation getaway – If you own a vacation property, you can use it yourself, especially during the off-season when it’s less likely to be rented by vacationers.
Let’s look at some of the drawbacks to owning vacation rentals:
- Vacancies – If the unit isn’t rented out, you won’t make any money. It can be more challenging to keep a vacation rental occupied. For one thing, there’s more competition. Secondly, because tenants stay short-term, you’ve got to ensure that you can keep your unit on the market all the time.
- Property management – Will you manage your rental property yourself? It can be difficult to do so at a distance. If you hire a management company to run it for you, it will cost you, but the cost of doing so is also a tax write-off.
- Restrictions – Vacation homes are often located in geographical areas with strict restrictions and regulations. They may also be members of HOAs, which often have strict restrictions on the use of the property.
- Financing – Vacation rental properties are often more expensive than single-family residences and financing is often more expensive than for other types of property. Again, interest and other fees are also tax write-offs. And, another bright side, is there are more options today for financing than ever before thanks to private lending and marketplace lending platforms like Sharestates.
- Success is gradual – Developing a vacation rental reputation on platforms like Airbnb and VRBO is based on reputation. That means you’ll have to wait for a period before you see regular occupancy.
While there are some drawbacks to owning vacation rental properties, some of those drawbacks are also associated with some positives. The result is a net benefit to the vacation rental owner.
Should You Finance Your VRBO or Airbnb Rental Property?
Whether you finance your vacation rental is up to you, but you should base your decision on some simple math. How much will it cost you to finance your vacation rental property, and how much can you stand to earn by renting it? Some metrics that will help make that decision include:
- The monthly cost of ownership – When it comes to financing, terms are everything. What’s it going to cost you to finance your rental property on an ongoing monthly basis?
- Average daily rents geographically – You’ll have to do some research into the local area you plan to own your rental property. What are the average daily rents in that area for vacation rentals?
- Break-even point – How many days will your vacation rental unit need to be rented for you to break even on your monthly expenses? Expenses include your financing terms plus expected repair and maintenance costs as well as Airbnb and VRBO fees. Configure three different scenarios (a best-case, a worst-case, and a realistic scenario) based on potential daily rents for the area. For instance, if average daily vacation rental rents in the area you plan to own a vacation rental are between $800 and $1,200, figure your break-even points based on $800, $1,200, and $1,000 daily rents.
Many banks won’t touch a vacation rental property. Private lenders will charge higher interest rates but will often loan money on vacation properties with fewer hurdles for the borrower. A marketplace lending platform allows you to finance your vacation rentals with a diversified investor base on reasonable terms. If you are considering investing in a VRBO or Airbnb rental property, consider financing your property through Sharestates.