3 Reasons Not to Invest in a Vacation Rental
Investing in vacation property seems to be all the rage these days. As the economy has improved and people are loosening their purse strings and taking more vacations, the vacation rental industry has seen a major increase in profits. So naturally, it follows that investors wanting in on the action will begin to think about buying a vacation rental of their own.
When you consider that these places can pull in hundreds and even thousands per week, it really doesn’t seem that crazy. But behind these insane numbers is a myriad of risks that can turn into major problems for the inexperienced investor. Before buying that oceanfront condo in Florida or chalet near the slopes in Colorado, consider these 3 reasons NOT to invest in this property type.
- Artificially Inflated Profits – Hundreds or thousands in income per week sounds pretty awesome, right? Of course! However, these figures are artificially inflated, and there’s no real guarantee behind them. There’s no promise that your rental will be occupied at any given time, and most of these properties are seasonal, too. That means that the big figures you’re dreaming about are probably only going to happen during peak season, which usually only lasts a few weeks or months. During the off-season, there’s a strong possibility that your unit won’t be rented at all, which will have a serious negative impact on your annual returns.
- A Down Economy Can Spell Disaster – Even worse than dealing with vacancies during the off-season is dealing with vacancies during peak season because of an economic downturn. We saw this happen not long ago with the Great Recession, when vacations/tourism dropped significantly, as leisure travel was a luxury that many could not afford. For investors who owned vacation rentals, the effects were felt as well, as profits took a serious hit during those years. While the economy will always have an impact on real estate investing, no matter what the property type, vacation properties tend to fare much worse than traditional rentals during hard times. Having a place to live is a necessity; renting a vacation home is not.
- Increased Competition – With a vacation rental, the competition for renters is more fierce than with a traditional buy-and-hold investment. Most vacation properties are located in areas where there are hundreds, if not thousands, of other properties functioning in the exact same way and all vying for the same thing – tourists willing to rent the unit. Your property has to really stand out among the rest to make it a top contender, and if it doesn’t, you’re going to have to do one of two things: lower your rental rates or add value to the property, both of which will cost you money.
These are just 3 of the risks you’ll have to contend with when you invest in a vacation rental versus a traditional unit. With a traditional buy-and-hold rental, you have the lease agreement to fall back on, but no such guarantee exists with a vacation property. Yes, you can ask for a deposit and implement a cancellation policy that can protect you to some extent, but there’s nothing long-term in place to protect your asset or ensure it stays profitable throughout the year. My advice: stick with a regular buy-and-hold investment, like a turnkey property. Don’t get into the vacation rental arena unless you have experience with this type of property, or you’re willing to take on these additional risks.