A vacation property is a great investment that provides tangible benefits in addition to the financial one. However, making the wrong decisions about your vacation property is not only a headache but financially ruinous.
With the advent of the sharing economy, investing in a vacation property isn’t an either-or situation, since services like Airbnb allow you to rent out part of your living space in vacation areas to supplement your own cost of living.
Benefits of vacation property
Everyone wants to go on vacation at some point and whether you’re thinking of investing in vacation property nearby or far away, this might work as a way to build your nest egg for retirement or to fund a new business venture. If you invest in a property where you like to vacation, you have the additional benefit of using the property when it’s not rented out.
Here are some more financial benefits to owning vacation property:
- Done right, property ownership generates passive income, meaning it doesn’t require much effort so you’re free to pursue your career or your own business venture.
- Tax advantages specific to property ownership reduce your taxable income from other sources.
- Property appreciates over time, on average. Thus, you not only gain financially from rental income, your investment appreciates so you make more when you sell the property than you invested.
Despite the appeal of property ownership, there are significant risks associated with this investment strategy, just as other investment strategies.
Risks of vacation property
Obviously, the main risk to owning property is loss of either income or investment. Location is the key ingredient in turning a profit from your property. You must find a suitable location in an area where lots of folks want to vacation, where the local business and government leaders support property owners, and where the area will likely grow over time, at least in the next 10 years or so.
Since many vacation properties are located in locations like mountains, beaches, and tourist destinations, such as amusement parks, the environment is sensitive to natural disasters such as hurricanes that lead to property damage and loss of income, as well as dependence on the popularity of the tourist destination. If interest in Orlando suffers from the high cost of park admission (which doesn’t seem likely) your property value decreases, for example.
Obviously, issues like the pandemic and associated restrictions hit vacation spots more severely than other types of investments.
So, let’s delve into some advice for you before you jump into this investment strategy.
Look for the right location
Firstly, it’s important to scope out some locations that meet your needs and offer growth potential. When looking for the right location, there are lots of things you might want to consider before investing. Some obvious aspects to consider are the same as for any other business opportunity:
- Estimates of tourism in the area (demand). Obviously, renting your property is easier when the location is in high demand. For instance, the Outer Banks of North Carolina (OBX) is a prime vacation spot for many of us here in the DC Metro area because it’s on the beach, it’s easily accessible within about 5 hours, it’s a great place to relax after the stress of living in the center of the US government, and it’s very family-friendly (we’ll discuss this in a minute). Many, like me, started going to OBX as a child and continue this tradition with our own families.
- Estimates of the growth in tourism in the area (increase in demand). Look for a location that’s likely to increase the number of tourists visiting each year.
- Competition, since the more competition there is in an area, the harder it is to make money from your investment.
- Cost of your investment and the prices charged by existing businesses. Will the rent you can charge cover expenses?
- Business friendliness of your prospective neighbors and the local government. Spending time fighting new local ordinances or nuisance lawsuits filed by unhappy neighbors cuts into your profits and makes ownership a headache.
Consider property types
You have a number of different property types you might choose and your choice likely considers the availability of properties and common rental types. Remember, your choice is a function of what visitors in the area want and expert.
When it comes to vacation homes, some tourists choose a lodge while others prefer a house or condo. For instance, in OBX, it’s common for families to travel to the destination, often in multi-family groups. Hence, investing in a larger home offers both high market demand plus a premium price, since the rental price per sq foot is higher for large properties. Conversely, offering a small home for a couple means you have less competition in the area.
In addition to property type, consider amenities travelers want from the property. Don’t invest in a property that’s at the bottom of the rung when it comes to meeting visitor expectations.
Market your property well
In this day and age, it’s important to market your vacation property well. Why? Because there are so many other vacation rentals available nowadays that it really pays to do a great job of promoting your property so you can cut through the noise.
If you have multiple properties, you might try doing your own marketing by building a website and using SEO and advertising to help prospective visitors find you online. If you only have 1 or 2 properties, most owners opt for a management company to do the heavy lifting. Property management companies distribute advertising and website costs across many properties, making ownership more affordable from a marketing perspective. These firms also handle all the paperwork involved in the rental, such as contracts, collecting rent, and distributing access to the property that makes them perfect for passive income needs. They also handle things like cleaning and maintenance.
Create an emergency fund
An emergency fund is necessary since rental income can vary dramatically from one month or one year to the next. Look at how the pandemic destroyed the market for vacation homes for over 12 months. In OBX, for example, access was closed except for residents to reduce the risk of transmission. Plus, you need to plan for unexpected repair and maintenance issues. Restricting your rentals to family units helps protect your investment and reduce repair costs as destructive parties take place at a higher frequency when renting to younger visitors.
In OBX, for instance, parties aren’t allowed in any of the homes without prior permission and the management company enforces this rule with severe penalties for those visitors who violate their policy. As a property owner, you must ensure your insurance company covers these types of losses.
Consider other financing issues so when you finance a vacation rental, it’s the right one for you.
Conclusion
Investing in a vacation property is a great way to increase your excess capital if you follow the advice shared here.
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