Real estate investing is a vast field. That is why I absolutely love being a real estate investor. I previously shared how I got started as a commercial real estate investor. This week, I am going to focus on another aspect of my portfolio – vacation rentals. Considering vacation rentals has a lot of benefits to consider, but one that I absolutely love is that I am able to invest in properties that my family and I can enjoy now. While I am generation X, I understand and appreciate that younger generations are more interested in options that provide them more immediate gratification. You can have a portfolio that enables long term wealth creation with opportunities that you can leverage, make money on, and enjoy now! By investing in vacation rentals, my family and I are able to vacation and build memories in properties that are paid for with other peoples money, will appreciate over time, and have the potential to be in our family for generations. I can’t think of more suitable additions to a legacy wealth portfolio than vacation rentals.
Four main pros of investing in vacation rentals:
- You own a vacation destination. As I previously mentioned, by investing in vacation rentals, you and your family get to enjoy it too. The key is to purchase in areas where there is a tourist demand and where you would want to vacation on a routine basis.
- Extra income. The income that is generated from my vacation rentals is used to pay the mortgage, any expenses associated with the property, fund improvements to the property, and to put extra payments toward the mortgage to pay it off early. This is a huge benefit. If I choose to augment my income, I could do that as well, but for now the priority I set for the income is to pay all related expenses and to pay off the mortgage within a set timeline so that I can pass the property to my heirs free and clear – this is about legacy.
- You can write off a lot of your expenses. If you rent the home out for more than 14 days, it’s considered a business for tax purposes. That means you have to pay taxes on the income it brings in. But it also lets you write off many of the expenses you’ll incur to repair and maintain the property. The current tax laws are very generous to property owners. You can deduct almost any “ordinary and necessary” cost of doing business. You can even write off hosting fees charged by Airbnb and other platforms. Here’s a list of items (not all-encompassing) you might consider writing off as a rental investor:
- Hosting fees.
- Cleaning costs.
- Supplies (toilet paper, K-cups, and so on).
- Occupancy taxes.
- Insurance premiums.
- Utility costs.
- Lawn maintenance.
- Property management fees.
- Mortgage interest.
- You have a new nest egg — or even a future retirement home. A vacation home can be a great way to build long-term wealth and ensure you have healthy finances upon retirement. Sell it and use the cash to cover your future costs of living, travel, healthcare, and more. Or keep it and enjoy the relaxing retirement you’ve always imagined. Either way, you win.
It is important to understand that real estate investing, to include vacation rentals, is normally not a passive investment opportunities. Vacation rentals need to be managed. You could hire a professional property management company to deal with the turnover tasks, repairs, maintenance, and other hassles of the home. But it won’t come for free. According to industry averages, short-term rental property managers generally charge 15% to 40% of your income. That can be hefty and if you want to maximize the financial benefit gained from owning the vacation rental, you have to seek ways to minimize expenses. Owning a vacation rental property isn’t like traditional real estate investing. Unlike a traditional buy and hold property, buying a vacation rental means you’re adding a property to your portfolio that will have vacancies throughout the year, therefore consistent cash flow is not guaranteed. If you buy in the right market, I have found that the income generated by a vacation rental is exponentially more than buying a traditional residentially rental. While a traditional rental will typically earn you about a 2% monthly return on the monthly investment. A vacation rental typically earns about 15-20% monthly return. Buying a vacation rental property requires a keen understanding of local markets to ensure max occupancy rate so that maximum income potential can be achieved.
This blog is part of a Building a Legacy Wealth Portfolio series:
If you want more information on commercial real estate investing or need help with creating a legacy wealth budget for your household, please do not hesitate to contact me for help.
Charleese Hasan, PhD, The Budget Dr. OH Charlie LLC: firstname.lastname@example.org