Should you be investing in vacation rentals in 2022?

Should you be investing in vacation rentals in 2022?

What are my investment options?

Here are the most popular real estate investment methods:

  • Rental properties
  • REITs
  • Real estate investment groups
  • Flipping houses
  • Real estate limited partnerships
  • Real estate mutual funds

Let's dive deeper into how these work.

Rental properties

Rental properties are the most hands-on option in this list. You buy a piece of residential real estate and rent it to tenants. Many rental properties are rented for 12-month periods, but shorter-term rentals through companies such as Airbnb (NASDAQ:ABNB) are becoming more popular as well.

As the property owner, you are the landlord. You’re responsible for upkeep, cleaning between tenants, big repairs, and paying property taxes. Depending on the lease terms, you may be on the hook for replacing appliances and paying for utilities.

You make money off rental properties from the rental income you receive from tenants and price appreciation if you sell the property for more than you paid for it.

You can also benefit from tax write-offs. Under passive activity loss rules, you can deduct up to $25,000 of losses from your rental properties from your normal income if your modified adjusted gross income is $100,000 or less. Depreciation (a noncash expense) and interest (which you pay no matter what), could make the property show an accounting loss even when you’re still making money.

When you buy rental property, you could need a down payment of up to 25%. But if you charge enough rent to cover your mortgage payment, you’ll get the rest covered by your tenant, plus any price appreciation.

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9. Ruidoso, New Mexico

 With a good mix of mountain-town magic and Southw

With a good mix of mountain-town magic and Southwestern style, Ruidoso is a repeat feature on our annual best places to buy list. This enchanting city in New Mexico is cradled by the Sierra Blanca mountains, making it a draw for snow-seekers who come for ski vacations.

Beyond winter adventures, though, Ruidoso has all the makings for a fun vacation no matter the traveler. Activities include casinos, historical sites, and White Sands National Park, a 275-square mile sandbox composed of shimmery gypsum crystals.

The median annual Ruidoso revenue hovers around $22,000, but some Evolve owners make closer to $68,000 a year. Hot tubs, spacious decks with mountain views, and game rooms all add value to secluded cabins here, helping your property snag attention from eager vacationers.

12. Pinetop-Lakeside, Arizona

 As an alternative to the desert landscape, Pineto

As an alternative to the desert landscape, Pinetop-Lakeside tends to surprise Arizona travelers with its expanse of Ponderosa pines, as well as its snowy winters and not-too-hot summers.

And unlike other Arizona destinations (like Sedona, Scottsdale, or Flagstaff), the Pinetop-Lakeside area is lesser-known. Visitors will find plenty to do here, with dozens of lakes and 200 miles of scenic multi-use trails to explore, along with family-friendly activities like miniature golf and arcade games. 

With a diversified economy that’s not entirely hinged on tourism, the region has a strong real estate market for any property type, according to our RES team. As a whole, Arizona is also a great state to buy a vacation home in because it’s free from a lot of regulations, and visitors come to the sunny state year-round.

When looking for a vacation rental in the Pinetop-Lakeside area, our RES team says cabin-style retreats with a rustic feel and modern amenities tend to fare best in this market. Renters often look for spacious homes too, so if you can swing it, properties with at least three bedrooms will help you best meet your booking goals.

2. Calculate Income Expenses

Once you identify a potential property, you need to make sure you can afford it, even when it’s vacant. Look at what vacation rentals in the area go for and compare this to your monthly financing and operational costs. If you can get an idea of occupancy rates for a vacation rental in that location, it will help you calculate income. Local property managers and real estate agents can help you find this information.

Example: If a property’s monthly operational expenses are $250, mortgage, taxes, and insurance are $1,750, and the nightly rental rate is $100, with an occupancy rate of 80%, you can calculate your potential monthly profit in the following way:

Potential monthly income: [($100) x (80%) x (30 days) – [($250) + ($1,750)]] = $400

In this example, the property is cash positive if it was rented a full 30 days in most months.

However, you reduce your occupancy rates and income if you live in the rental part-time. The occupancy rates and amount of collected rent also decline during off-peak seasons, so you’ll need to test several scenarios to make sure the property is bringing in the income you desire.

Let’s cover some of the expenses you may encounter so you can calculate the cost.

Vacation Rental Property Expenses

Besides mortgage and insurance payments, you’ll also have to pay for online booking fees for your rentals, taxes, insurance, homeowner association (HOA) fees, utilities, repairs, and maintenance. You may also have to pay extra to advertise for renters. If you outsource to a property manager, you’ll need to include those fees, but they generally absorb your advertising costs as part of your management contract and fees.

Taxes on Vacation Rentals

  • Property taxes: These are typically tax-deductible. Consult your certified public accountant (CPA) to take advantage of the most tax deductions available for a vacation rental. You can find property tax information online, usually on the property’s listing, or through the assessor’s online database.
  • Rental income taxes: You’ll pay these at the end of the year, but only if you rent the property for more than 14 days. Anything less, and you won’t have to pay taxes. If you do have to pay taxes, you will be taxed on your rental income based on your ordinary tax rate.
  • Occupancy taxes: Also known as a hotel or lodging tax, these generally range from 5% to 19% per night, depending on your state. Vacation rental landlords typically charge these taxes to their guests. These may be in addition to state lodging taxes. If you rent your property through Airbnb, it may collect the taxes for you if your city has signed up with them to do that.

Property Insurance

Make sure you have the right homeowners policy for your type of property and how you plan to use it. A regular second home policy may not cover you if a renter gets hurt or damages the property. You will need either a homeowner’s or landlord insurance policy based on use and occupancy. The type of insurance you need depends on how often you will rent the property and how often you will use it yourself. Inquire about flood insurance if you are in a flood zone.

HOA Fees

If you purchase a condo or a home in a planned community with common areas, you will be responsible for paying HOA fees. These fees vary based on property type, size, location, and amenities. HOA fees are usually paid monthly but can also be paid quarterly. If you rent the property the fees can be tax-deductible.

Utilities

Include expenses for heating, cooling, electricity, and gas for cooking. Before buying property, you can get a general idea of these costs from the seller and local utility companies. The costs will vary depending on how you and your guests use the property.

Management Fees

Some vacation rental property owners hire a property manager if the property is far from their primary residence. These fees vary based on the services provided by the management company. Average fees are 28% of the vacation rental income. They’re higher than the average fees of 4% to 10% for long-term rentals because the rental income is sporadic or seasonal, and the property management company has more work to do with more frequent tenant turnover, so expenses are higher.

Financing Costs

If you finance your vacation investment property, you need to include your monthly mortgage principal, interest, and private mortgage insurance (PMI) payments into your costs. If the property has 20% equity, you aren’t required to pay PMI. Also, calculate the financing costs including the appraisal, loan origination fees, and closing costs.

How to Make Money on Vacation Rental Properties

Popular ways to make money on vacation rental properties include advertising on Airbnb, Vrbo, and other online vacation rental platforms. Some high tourist areas have local magazines for advertising vacation properties. If you hire a property management company, they advertise the property for you.

Airbnb

Airbnb

Airbnb is an online platform that lets you rent out your vacation property to tourists looking for hotel alternatives. You can create a property listing with a description of the property’s amenities, number of bedrooms and bathrooms, and any other highlights. Include photos with your listing that are taken during the day for the best lighting.

Airbnb charges a service fee every time a booking is completed on the site. The service fee ranges from 3% to 5%. Taxes are included if the region requires it, but the service fee is calculated from the booking subtotal before fees and taxes are added. Fees are deducted automatically from your payout.

Vrbo

Vacation Rental by Owner (Vrbo), is an online classified ad site. You can manage the property yourself or hire a property manager to list on Vrbo. Vrbo offers several fee structures, including a $399 annual subscription for long-term rentals and an 8% booking fee if you self-manage your listing or 13% booking fee if you want the listing managed for you by Vrbo. The fees are deducted automatically from the rental income.

4. Available Funds For Customizing Your Home

Your vacation home may be in your dream destination, but it might not be your dream home. Determine if you have the financial resources to renovate your future vacation home to align with your specific needs and preferences.

This will be especially important if the property will be a vacation rental home. The more accessible and fixed up the home is, the more appealing it will be to potential renters. For example, if your vacation home will be in a popular retirement area, you may need to make your property accessible.

Develop a process to screen guests and protect your investment

Mackenzie Kearnan is the marketing manager at Autohost, a guest-screening system for short-term and vacation rentals. The intelligent software runs Airbnb background checks and flags risks to reduce parties, property damage and fraudulent activity. Mackenzie is a vacation rental host herself and knows a thing or two about screening potential guests. Here’s her advice on owning a vacation rental home: 

The vacation rental industry faces a considerable amount of risk from guests damaging properties. To protect our earnings, investments, and the trust our communities place in vacation rental owners and operators, we have to safeguard our properties from unruly guests. It’s incredibly important to screen guests. If you’re just starting, develop a process for it. Ask questions, verify IDs, and collect security deposits. That way, guest screening will be embedded in your operations. One bad guest has the potential to destroy your reputation and cost you thousands of dollars in property damage. By screening guests in a legal and non-discriminatory way, you can avoid the risk altogether.

Pro tip from the Hostfully Team: With the right PMS, you can set guest screening on autopilot. For example, from within Hostfully you can activate Autohost (a guess screening system) and NoiseAware (a noise monitoring service) services. The result is that when a reservation comes in, Hostfully sends the reservation data over and Autohost screens the potential guest. Then during the stay, Hostfully and Noiseaware work together to make sure your guests respect the noise rules of the vacation rental property.

How To Successfully Maintain A Vacation Rental

Owning a vacation rental property is a smart financial move to grow your wealth and build assets. However, there are lots of moving parts to consider. Here are some things you need to accomplish that will help you successfully run a vacation rental.

Maintaining Financial Expenses

Financial expenses for a vacation rental don’t just stop at your monthly mortgage payments. There are several different expenses you need to cover, whether they’re a one-time purchase or monthly bills.

Here are some potential expenses for buying a vacation rental property:

Homeowners insurance: Just like your primary residence, you’ll need homeowners insurance for a vacation property. The standard homeowner’s insurance policy provides coverage in the event of damage. The average insurance cost is $1,015 per year.1

Property management: This will include house repairs and outdoor landscaping. You’ll want to set aside an annual fund amount that’ll go towards maintenance. You can hire a professional property management company to handle tasks like house cleaning, landscaping and repairs to make the rental process easier.

Home furnishings: A rental property won’t be very appealing to potential renters without proper furnishings. Set your home up with bedding, living room furniture and kitchen appliances to start. The more usable your home is, the more appealing it will be when it’s listed online.

Security system: Even if your rental property is in a gated community, it’s better to have a security system locked in to protect yourself and your renters. You can install smart security cameras on the house exterior or a smart doorbell that records video footage of people who attempt to access the home through the front door.

Housecleaning: You’ll either need to clean the home yourself or hire a third-party housekeeper to clean the property after a renter finishes their stay.

Establish A Digital Presence

Promote your vacation property on popular rental sites such as Airbnb and VRBO. On those sites, you’re able to decide how long rental stays can be and the total fees and costs for potential renters.

After approving a renter’s stay, connect with them via an email or online messaging system to keep them informed about the vacation property. Try an email template that will include important things to know before coming to use the home, as well as local go-tos and activities for the renters to try out during their stay.

How Much Is Beachfront Insurance?

The homeowner’s insurance on a beach house is likely to be several times more expensive than the coverage for a primary home. This cost difference is mainly due to often mandatory flood insurance. Insurance charges spiked early in the 21st century, particularly on the East Coast, which suffered widespread hurricane damage.

A yearly premium of $10,000 or more for flood insurance is increasingly common for Florida beach homes. Other East Coast states, such as North Carolina, command more reasonably priced premiums. While insurance costs in California are typically lower than East Coast rates, the savings are generally offset by higher real estate prices.

You dont have to break the bank on upscale decorations and freebies to make an impression

Jordan Bishop is a writer and digital nomad. He’s earned the Superhost status and operates a stylish designer loft in central Istanbul that earned the coveted Airbnb Plus title. Jordan boosted his property with unconventional tricks that every new host can implement: 

You don’t have to break the bank when it comes to decorations and freebies for your vacation rental home. In fact, dollar stores are a great source of cheap, but upscale-looking items any host can use to transform a bland vacation rental into a designer’s paradise. Here are a few I used in my own Airbnb Plus property:

  • Candles: Candles can get expensive. Luckily, there are plenty of great ones at the dollar store. I’ve had several guests tell me that the candles I left out for them were a lovely gesture. It’s a luxury item that boosts the guest experience by setting a great ambiance with the added benefit that it makes the apartment smell great.
  • Bathroom organizers: Guests love having a handy bathroom organizer that allows them to arrange their toiletries and makes them feel at home during their stay. The dollar store has a bunch of different varieties, most of which look great.
  • Dishware & cutlery: The dollar store has plenty of great dishware and cutlery that you’d never know only cost a buck. The other bonus of buying dishes at a dollar is that they are easily replaceable. If a plate breaks or you lose a fork, you don’t need to buy an entirely new set – just grab one more, and you’re good to go.
  • Picture frames: Just like dishware and cutlery, you can get great-looking picture frames at the dollar store, and no one would ever know where they came from. If you have a lot of photos in your home, as I do, this is a huge money-saver.
  • Premium toiletries: My rule as a host is that anything that touches my guests’ bodies has to feel luxurious. I always offer brand-name soaps like Dove. Surprisingly, you can find these high-quality items at the dollar store.
  • Greeting cards: One unique thing I like to do for my guests is leaving them a pre-stamped postcard that they can mail to a friend or family member around the world. And where do I get those postcards? You guessed it: the dollar store. Guests think this is such a thoughtful touch that they often write about it in their reviews. It doesn’t take a lot of money to impress!

Step 3: Estimate ROI on a vacation home investment property

When you find an investment property that appeals to you, run some numbers to calculate your potential return on investment (ROI). The experts at Vacasa Real Estate can also share an estimated monthly cash flow analysis for individual properties, plus estimates of their operating expenses and net income.

Once you get familiar with this data, you may be surprised to discover that vacation homes selling for the same price can have very different cash flow potentials as vacation rentals. When you factor in short-term rental data around location, square footage, bedrooms, bathrooms, HOA fees, property taxes, and more, you may find yourself more attracted to a specific type of property or a core location.

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