Written by Julie Anderson| July 18, 2021 in Tips & Advice
Are you thinking about purchasing a vacation home - on your own - and renting it out to earn additional income?
Airbnb, VRBO, and other shared economy brands have streamlined this process over the past decade, making it a more desirable option than ever--at least on the surface.
However, is buying and renting out your vacation property the financial and lifestyle boon that shared economy brands might have you think?
Or, will pulling back the layers of this investment type prove that it’s actually a financial and lifestyle burden?
Read on as our article answers the above questions.
A nightly rental property typically involves renting out a vacation property for the short term. While the agreed-upon length-of-stay is often only for a few nights, it can even span half a year.
The idea is to have a vacation property of your own while simultaneously earning rental income from the guests. This way - in an ideal world - you’ll have some help paying off the mortgage while eventually turning a considerable profit on the home.
As discussed in the intro, this type of investment has exploded over the past decade. And shared economy brands such as Airbnb and VRBO have spearheaded the boom.
Generally, owners follow this blueprint with their short-term rental properties:
Choosing a specific short-term rental strategy that works for them
Using some form of marketing automation through a given app (e.g., Airbnb)
Selecting their tax benefits and levels of flexibility
Below, we’ll delve into the pros and cons of nightly and short-term rentals:
There’s no denying that you’ll bring in some manner of income with a vacation rental property. For instance, your average Airbnb’er brings in $500 per month.
Perhaps, you’ve had a good year financially and don’t feel like renting out your vacation property.
Or, maybe you want to split the difference and rent it out half the summer.
Really, it’s up to you (depending on where you’re located). As long as nothing is signed on the dotted lines to the contrary, you have the choice to earn rental income or use the property yourself with your friends and family. You own the home, after all.
Owning your vacation home is much like owning your primary home--the value may increase over time. In fact, the average appreciation is 3.5% to 3.8% per year. We have to admit, having that kind of nest egg - at a glance - sounds appealing.
But these pros don’t paint the entire picture, which brings us to the next section of this article.
Owning a property means dealing with all the headaches that come with managing it.
Renters aren’t responsible for maintenance, cleaning, prepping, and restocking in between guests; you are, as the owner.
There are rental property managers you could hire to shoulder the load, but they’ll charge you up to 50% of your income. Combined with some of the additional costs we’ll discuss below, this type of financial burden could send you spiraling into debt.
Homeowners associations (HOAs), cities, and municipalities across the US all view vacation rental properties differently.
In fact, restrictions can be most harsh on short-term rental properties. Some places might ban them altogether. In other instances, there are limits on the length and frequency of short-term rentals. You might also require a business and hospitality license.
Altogether, that’s a lot of legal red tape to navigate.
Unless you have cash on hand, you’ll be taking debt to pay for a nightly rental property.
Investment property loans charge higher interest than standard mortgage loans. With that comes an increase in monthly payment amounts and more interest paid during the loan’s lifespan.
Investment properties also require a far more sizable down payment than a home strictly for living, regularly demanding 25%.
For additional context, the average price for a home in California at $668,300, meaning nightly rental property owners will have to put $167,000 down for properties in the area.
The following expenses apply to short-term or nightly rental properties:
An extra mortgage payment
Unexpected repairs (which are impossible to budget or prepare for)
You’ll also be stuck paying income and self-employment tax. Furthermore, you might be on the hook for occupancy/hotel taxes, depending on the city.
All these expenses work against any income you earn. Remember, just because you’re bringing in money doesn’t mean you’re turning a profit.
Once you realize your property isn’t pulling in the amount of rental income you expected, there’s then the need to spend every waking moment, vacationing there. Otherwise, what’s the point of owning the place?
Suddenly, you’re limited in the options you have with your leisure activities. Say goodbye to traveling the globe or even a stress-free staycation.
Savvy co-owners pay less and get more from their vacation properties.
Sharing 1/8th of a property with a group of fellow owners means you are not taking on enormous debt to legitimately own the property.
As such, you enjoy the benefits of actual ownership without the headaches.
Namely, the property can still appreciate, and you may turn a profit when it’s time to sell (in a process that’s similar to selling any other property). And that’s without the risk of a monstrous down payment or keeping up with finance-sapping monthly mortgage payments.
Beyond that, you don’t need to manage the property--that’s on us. We take care of the cleaning, maintenance, repairs, and restocking between guests.
You also won’t have to pay for or fix repairs by yourself because the owners share in those expenses (unless the repair is a result of an owner damaging the property, of course). Plus, the owner group builds a cash reserve in preparation of the unexpected.
Furthermore, since you aren’t sinking every last dollar into a Savvy home, you won’t be tethered to the property. You won’t feel guilty for splitting your vacation time between your co-owned property and wherever else you’d like to explore.
Savvy makes it so that all you need to worry about is enjoying the time you spend on our breathtaking vacation properties.
Find out more about our co-ownership options by contacting us today.
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