Pros and Cons of Buying a Vacation Property for Short-Term Rental

Finance456® has an advertising the property, screening tenants, and handling the paperwork for each rental. You’ll also need to inspect the property after each rental to keep track of which tenant may have damaged the home.

To put it mildly, managing a vacation property with short-term rentals is a part-time job. The word “vacation” can quickly become overwhelmed by the reality that you’re running a business out of your second home. Yup, that’s what’s really happening.

There are management companies that will handle this for you. But if you go this route, expect to pay a fee of between 10% and 20% of the rental income on the property.

5. You Won’t Be Able to Use the Vacation Property Any Time You Want

There’s an inherent conflict with using a vacation property for short-term rentals. It’s likely you’ll want to be using the home at the very times of the year that will generate the most tenants and the highest rents.

So you buy a beach house with the idea of spending a few weeks enjoying it during the peak of summer. But each week you’re using the home, you’ll be missing out on the highest rents of the year.

The problem is even bigger with resort properties. For example, a beach location will be most popular during the summer months. A house in a ski resort will be in high demand during winter. That kind of property may only have rental value during peak season.

If you like to go to the beach in the summer or ski during winter, you may not get that chance – not if you want to maximize your income on the property.

You might have it rented out during peak seasons, leaving you to enjoy it only in the off-season. That will maximize the investment return. But it’ll be done at the cost of compromising its vacation value.

6. The Property May Not Rise in Value

Property appreciation is not uniform across all markets. While it may be common in metropolitan markets, it’s less certain in resort areas. It’s possible a vacation property won’t rise in value at all and may even decline.

Resort properties are often in remote locations. They’re not suitable for year-round occupancy because there are few employment opportunities or other services that will appeal to permanent residents.

In resort areas that depend on the tourist trade, property values can fall if tourism slows. The decline can be even more dramatic if the area is also overbuilt.

That’s common during years of heavy tourist traffic. But if that comes to an end, builders are stuck with unsold inventory, and property values fall throughout the community. The best example of this is what happened to property values in Miami during the last recession.

That doesn’t mean values are doomed to fall in the resort area or that they’ll never come back. But if you’re buying a vacation home for income purposes, it’s a risk you need to be aware of from the start.

The Bottom Line: The Pros and Cons of Buying a Vacation Property for Short-Term Rentals

I hope that answers your question, Steve. If you’re looking to buy a vacation home mainly for personal use, the financial angle may not be as important.

But if you’re interested in buying a vacation property for short-term rental, you’ll need to think of it as a business. The information in this response will help you do just that.

Also, if you would like to start investing but are unsure of whether to invest in real estate or index funds, read my post on Real Estate vs Index Funds.

OK readers, if you have a financial question you’d like me to answer, just drop me a line at Ask Jeff a Question @ GoodFinancialCents®.