One of the hottest trends in real estate is leasing investment properties as vacation rentals, providing investors an alternative to traditional long-term rentals and the ability to occasionally utilize the property themselves. Vacation rentals are becoming increasingly popular with consumers seeking properties that suit their particular needs and offer the same amenities as home. Before you turn your property into a vacation rental, however, you should do your homework in order to determine the potential risks and benefits for you and your investment.
When advising my clients about the local vacation rental market, I always caution them that it is an unstable and risky market compared to the traditional long-term rental market. The vacation rental market is driven by uncontrollable concerns like the consumer’s ability to spend and the area’s current attraction for tourists. The long-term rental market is historically less risky and is very slow to move as there are always tenants who need a primary residence.
Part of your analysis for your investment property could include a SWOT analysis, (Strength, Weakness, Opportunity and Threats) to forecast desirability and analyze risk in turning a property into a vacation rental. As an example of a SWOT analysis, I have listed the following points per category:
Strengths, for example:
- Great location
- Property uniqueness and/or amenities
- Size of the property
- Accessibility
Weaknesses, for example:
- Poor location due to the distance and/or difficult access
- Poor location due to close proximity of other residents. Keep in mind vacation renters are on vacation and rent property to enjoy it. If renters feel they may have conflict with nearby neighbors, they are not likely to choose that property
- Lack of upgrades and/or no amenities
- Size of the property, too large or too small for a vacationer’s needs
Opportunities, for example:
- High demand for vacation rentals in the general area with little inventory
- Occasional use of the property by owner
Threats, for example:
- Low demand for vacation rentals in an area with high inventory/competition
- HOAs that may prohibit short-term rentals
- Bad weather trends, natural disasters or negative media coverage for general area discouraging tourism
- Consumer’s future ability to spend money on travel
- New rules/restrictions for vacation rentals being implemented by local governments
- Taxes and government regulations
If you are an investor who is thinking of turning your investment into a vacation rental, please thoroughly research and understand your market, your property and think about your investment objectives. I always advise clients to identify their investment objectives and create a strategy. If the objective is to maximize the short-term return on the investment, consider leasing the property as a vacation rental. On the other hand, if the objective is to combat risk with a higher focus on the long-term return, consider leasing long-term rather than as a vacation rental. I always recommend that any investor, no matter how seasoned they are, seek legal opinion from a real estate attorney and visit with a qualified CPA to fully understand the potential tax consequences of vacation and long-term rentals. FBN
By Mike Hutchins of Sterling Real Estate Management.