Are vacation rentals a good investment for YOU? Yes and no. As you often hear in life, it all depends. To better answer your question, you’ll need to do a little digging into your financial situation as well as look at the time you have to dedicate to a new business as a vacation rental owner.
As an experienced and full-service vacation rental management company, Georgia Cabins for YOU can take all the time needed to succeed in this ever-growing industry off your hands so you can sit back and reap the rewards of your investment property.
However, you’ll need to decide if investing in a vacation rental business is right for you — by considering variables, determining profitability, planning taxes, and seeking professional advice. Not to worry, we can help there, too!
Variables to Consider Before Investing in Vacation Rentals
Determining if buying a vacation rental is a good investment for you starts here, with a few things to know from experienced property managers on the inside of the vacation rental industry. For first-time vacation home buyers, this is especially important as the real estate market for vacation rentals can be somewhat difficult to navigate.
Short-term vacation rentals have created their own unique asset class in the world of real estate investing and are a great way to add a little flair to your investment portfolio. If you’re looking for something other than your typical stocks, bonds, mutual funds, and derivatives, then perhaps investing in a vacation rental is the right move for you.
Acquisition Cost & Property Income
An increased acquisition cost for a vacation rental does not equal more revenue. Like bonds, the price of investment properties may fluctuate, but the income rate tends to remain the same. In other words, buying a vacation property at an elevated cost doesn’t mean you’ll make more money than the previous owner. The up-and-down housing market does apply here.
Now, making updates to a short-term rental property is a different story. Depending on the quality and level of upgrades completed, you can increase the nightly rate to cover the costs and increase your cash flow, especially in peak seasons.
Factors for Property Performance
Once purchased through a real estate agent, personal networking, or traditional listing services, your investment property becomes a non-correlated asset, which means its performance is not directly linked to the stock market like many other financial assets.
So, what does affect vacation rental profit? Top factors to consider include market demand during peak/high seasons as well as off-seasons, employment levels, consumer confidence to book their getaway at your property, plus national/international issues, like pandemics, natural disasters, and gas prices.
Personal Property Use
Keep in mind for a vacation rental to classify as a business it must be primarily used by guests and not as your own vacation home. To put things into perspective, homeowners may use their vacation rental for personal stays either less than 14 days or less than 10% of total rental days for the year, whichever is greater.
Now, if you’re staying to work on the vacation rental home (repair appliances, paint walls, update the garden, etc.) for the majority of your stay as an owner, then that would count as a work stay, and it wouldn’t count towards your personal use days for the year. Just be sure to document everything while you’re there for tax purposes.
- What if you plan to use your investment property for more than the allotted personal use days to qualify as a vacation rental business? Not to worry, you can still make deductions in proportion to the amount of time your second home was used by renters for the year.
- What if you plan to only rent out a portion of your property? Yes, you can still deduct for the amount of space rented at the property that year. Again, documentation is everything with real estate investing for short-term rentals and long-term rentals!
Determining Profitability of Short-Term Rentals
If you plan to invest in a vacation rental as a full-time business, it’s important to look at property profitability. While we’ve listed 4 major factors to help determine a vacation home’s profitability below, please remember to consult with a licensed and trusted accountant in your state before investing in a vacation property.
Cap Rate (ROI)
Perhaps the biggest factor in determining profitability for a vacation rental is the cap rate. In a nutshell, the cap rate is the return percentage — calculated by dividing the net income (after operating expenses, not debt service) by the acquisition cost. Generally, an 8-12% cap rate or more is indicative of a good return on investment (ROI).
As an example, let’s say you purchase a short-term cabin rental for $450,000, and it grosses $55,000 for the year. After subtracting utilities, HOA fees, insurance costs, mortgage payments, property management fees, and any other operating expenses, your net income before taxes is $40,000. Calculating the cap rate would bring you to around 8%, which is a fairly decent profit.
Standard Property Depreciation
Taking advantage of standard property depreciation tables and rules for your rental property is a fantastic way to save at tax time! Qualifying passive income property owners can write off a portion of the acquisition cost for their vacation rental each year as depreciation losses in accordance with IRS (Internal Revenue Service) guidelines.
Fortunately, qualifying homeowners can continue to claim depreciation losses for their vacation rental for up to 27½ years. Not to mention, these deductions help ease tax payments during tax season. Taxes are reduced based on how much is written off. However, this is quite a complicated process and requires the assistance of a licensed accountant, which is an added cost-benefit.
A tax planning tool that helps homeowners reallocate/reclassify real property assets, cost segregation may help increase your eligibility for more tax deductions in the near future. How does it work? Basically, cost segregation helps accelerate depreciation deductions and defer income taxes for your vacation property. It allows owners to cut the typical 27½-year period down to 15, 7, or even 5 years!
For example, let’s say you bought a mountain chalet for $750,000. Instead of depreciating over decades, you could place your property asset on a 5-year depreciation schedule. If the tax rate were at 30%, you could save an additional $43,750 in taxes for the first 5 years of ownership.
Another factor when determining the profitability of your vacation rental includes the tax deductibility of your operating expenses for your business — including utilities, insurance costs, repairs/renovations, furniture purchases, housekeeping, maintenance costs, laundry, credit card processing, community fees, management commission, etc.
Even travel expenses to and from your vacation property could be deducted, so consider the distance to your primary residence when purchasing an investment property! However, deducting too many items could raise flags for an in-depth review of your tax return by state or federal tax authorities…which is never fun as a real estate investor.
Tax Planning for YOUR Vacation Rental Investment
Although we’ve briefly touched on tax rules regarding short-term rentals, there’s so much more to tax planning that should be considered before investing in a vacation property. As with any property investment guide, tax planning tools/concepts mentioned are subject to change.
Again, we highly recommend enlisting the aid of a professional tax consultant or specialty accountant to give you a full picture of your investment options and opportunities in the vacation rental industry. For greater tax benefits, the upfront study costs are worth it!
Property Tax & Mortgage Interest Deductions
Personal itemized deduction limits for property taxes and home mortgage interest rates won’t apply to your vacation rental since it would be considered a separate business. In other words, your short-term rental deductions won’t be limited by personal itemization rules.
Major Improvements Deduction
Changes made to Section 179 of the tax code now allow some vacation property owners to write off the costs of installing security systems, HVACs, fire systems, and roofs — up to $1 million. This is only applicable for vacation properties rented more than 50% of the time.
Pass-Through Business Deduction
Planning to own your vacation property under a partnership or LLC? You may be able to deduct up to 20% of the net rental income. Just like real estate, however, if your vacation rental business exceeds $157,000, certain limits will apply.
Once upon a time, vacation property owners could only deduct 50% of the cost of personal property used for business. Under new tax laws, you can deduct 100%, which includes appliances and furniture, in one year.
Professional Advice & Property Management
As for any legal or financial advice and forming an investment strategy, please seek out an experienced, licensed accountant to help steer your investments in the right direction. After careful consideration, if you decide a vacation rental property is a good investment, Georgia Cabins for YOU is here to help YOU dominate the vacation rental market, push your property to high demand, grow your occupancy rate, and build wealth fast!
With our own financial team and a senior revenue manager, we can help navigate the financial side of your business. You can even get a FREE rental estimate online. Plus, you’ll be assigned a personal owner representative who will work with you to surpass your investment goals, offer suggestions, and keep you informed. To start, we’ll add your property to our user-friendly sites plus popular vacation rental websites, like Airbnb and VRBO.
Of course, as a full-service property management company, Georgia Cabins for YOU will handle everything year-round — including maintenance, housekeeping, laundry, guest calls, reservations, marketing, dynamic pricing, and partnerships with local attractions — so you won’t have to lift a finger for your vacation rental investment!
Reach out to Georgia Cabins for YOU to learn more about our profitable partnership and high commission splits today — at 1.800.580.5524.