Vacation Home or Income-Producing Investment

by Meaghan McGlynn –

Image Source: Alex Master Shutterstock

Whether you’re a skier who loves the mountain slopes of Colorado, a lover of the beaches of Southern California, or a potential retiree seeking to escape the snow-laden Northeast for the wide-open, sunny lands of Arizona, there are homes available to meet a wide range of budgets. The biggest decision a potential second homeowner must make is whether they are going to solely own their vacation home or turn it into a vacation rental. Here are the advantages and disadvantages to both options:

Investing in vacation rentals

Pros:

A good vacation rental property generally provides a healthy rental revenue which could potentially cover mortgage payments while also generating healthy additional profit.

Using an online short-term rental service like Airbnb makes it convenient to manage your rental property. Their website interface makes pricing, marketing, and communication with potential guests quite straightforward and easy. Airbnb will also oversee the billing process for you.

You may qualify for federal tax breaks and deductions related to your investment property. Everything from professional fees or commissions – including property management services- to cleaning and maintenance are potential tax write-offs.

Cons:

Vacation rentals can be costly to manage, both in terms of time and money. These properties may require seasonal upkeep and special maintenance considerations. You may even incur costs to maintain or monitor the property even when it’s not actively being utilized.

Vacation rental properties are particularly sensitive to seasonal fluctuations and economic downturns, which could leave you financially exposed if you suffer a lack of booking revenue.

Many states and cities are cracking down on short-term rental services. In California, for example, the fight has been primarily local, reaching a fever pitch in the San Francisco Bay Area. Increasingly state and local municipalities are seeking to reign in short-term vacation rentals, which could put a damper on potential revenue from these properties.

You may experience higher renovation and repair costs on a short-term rental. Most travelers expect the latest appliances and furnishings, so you will have to update every few years. Unfortunately, short-term renters are less likely to report any necessary repairs and guests are far less likely to treat the property with respect since there’s no sense of ownership or obligation.

Owning a vacation home

Pros:

Long-term profits: While assets fluctuate in value in the short term, vacation properties are more likely to retain their value and appreciate because they are located in popular areas with a geographically limited supply.

Familiarity: Returning to the same place time and after time can be comforting as you become familiar and comfortable with the location. It allows you the freedom to be yourself and the opportunity to expand long-term friendships with residents.

Convenience: The ability to conveniently store items that are used exclusively at the second home simplifies travel and packing.

Retirement head starts: Though we may love where we work and live, every place has its drawbacks. A common goal of retirement is to have a place to retreat for the times of the year we dislike the most at our main residence. Locating and buying a second home prior to retirement enables you to experience the benefits of a refuge before actual retirement, a time to correct and amend your plans if the reality is different than the dream.

Cons:

Initial purchase costs: Most people have higher expectations for a property that they intend to own, rather than to rent. These expectations can translate into high prices.

Home maintenance: As the homeowner, you are responsible for all home maintenance work.

Travel time: A second home will be located hours from your primary residence, requiring either long auto trips or airline flights.

Inflexibility: If you are paying a significant amount of money each month for a second home, you may feel that you need to constantly visit the property to justify your investment.