Why Now is the Ideal Time to Invest in a Vacation Rental Property
If 2020 has taught us anything, it is that wealth diversification is incredibly important. During periods of high volatility, which 2020 undoubtedly was, having your wealth spread across multiple different asset classes can reduce your exposure to risk. One asset class that has received an exceptional amount of attention from wealthy individuals has been vacation rental properties.
Real estate, in general, accrues a significant amount of value over time. In the United States, real estate remains the largest component of household wealth, accounting for as much wealth as nearly all other asset classes combined. Vacation rental properties offer a unique opportunity for individuals to invest and own a larger slice of the national real estate market.
When purchased in the correct location, such as the rapidly growing state of Arizona, vacation rental property can be very lucrative. While owning a vacation rental property home (or homes) will indeed require careful property management, many property owners have observed that the returns generated through ownership significantly outpace those witnessed in the stock market or other more traditional investment options.
While many people are interested in purchasing a vacation rental property, they may be uncertain when it is the right time to finally enter the market. However, for many reasons, it appears that 2021 might just be the perfect time to make an investment. Below, we will discuss why now is the ideal time to invest in vacation rental property and offer a few tips to help you get started.
Benefits of Vacation Rental Property Ownership
Over the past ten years, the vacation rental property market experienced more growth than the national real estate market as a whole. These are just a few of the reasons billions of dollars are being poured into this lucrative sector every year:
- Diversification: as suggested, owning a vacation rental property can help you diversify your current asset holdings. This helps systematically reduce your exposure to risk and can increase your portfolio’s overall performance.
- Asset Appreciation: in the United States, most homes appreciate by about 5 percent per year, representing a very stable return on investment. However, vacation rental properties—particularly luxury properties in popular locations—can appreciate by 10 or even 20 percent per year.
- Continuous Revenues: in addition to the wealth you will accumulate through appreciation, vacation properties also offer considerable revenue streams. Luxury properties, which can often command $500 per night or even more, can yield $10,000 per month in revenue.
- Your Own Personal Getaway: of course, as a property owner, you will get first “dibs” on any given night of the year. Not only is your property producing a secondary income for you, but it also gives you a perfect vacation destination.
- Tax Benefits: many components of homeownership—along with commercial property ownership—can be tax deducted or even tax credited. By owning a vacation rental property, you can reduce your total taxes due. This type of situation is a bit more complicated than filing a standard tax return. Due to this fact, filing your taxes with a CPA would be a better choice than doing it on your own just to make the process simpler and significantly less burdensome on you.
If you are willing to put in the work (and also hire an effective vacation rental property management partner), you can enjoy all of these benefits and more. While vacation property ownership might not be for everyone, it is clear why this sector has become an increasingly vital component of the broader economy.
Low Interest Rates
According to Freddie Mac, 2020 was the lowest year for interest rates in history, with many new mortgages being given rates of 3 percent or even lower. The drop in interest rates, which has undoubtedly carried into 2021, reduces the total cost of owning vacation rental properties (due to lower mortgage payments), thus making the entire endeavor measurably more profitable. It is unclear how long interest rates will remain this low, but it is clear that now is a better time to buy than ever before. As a result, 2020 saw many people become first-time property owners.
The American population is always in motion, but lately, a few trends have been particularly notable. First, the population has been steadily moving both South and West, which has been very beneficial for states such as Arizona, Utah, and Nevada. Secondly, much of the nation’s population growth has been in “first-ring suburbs”, such as Scottsdale, Arizona. These cities have seen notable jumps in property values that can be expected to continue.
Increasingly Flexible Work Schedules
The COVID-19 outbreak caused many people to dramatically alter their work lives. Amidst an effort to increase social distancing, more than 25 percent of all American people switched from working in an office to working from home. Though some of these people will eventually go back to working as they were, a notable work from home “revolution” is well underway. With increasingly flexible work schedules and the ability to work anywhere, many ambitious workers have turned to long-term rental options throughout the vacation rental property market.
Changing Vacation Preferences
With each passing year, a growing portion of the vacation market is being shifted from traditional hotels to online vacation rental platforms such as Airbnb. Airbnb’s market share has more than doubled over the past five years, which has been very beneficial for single-unit property owners. Guests prefer these platforms due to their simplicity, relative affordability, ease of use, and opportunities for unique experiences.
Vacation Rental Property Ownership Tips
To become a successful vacation rental property owner, you will need to begin by hiring a vacation rental property management team. Typically, these firms will take a small portion of your revenues, meaning that they will not get paid until you’ve been paid. With customizable service packages, these firms can help manage every element of the vacation rental property ownership experience, including guest communications, marketing, basic management, cleaning, and more.
In addition to finding a quality team, it is important to remember that location is the most important driver of a property’s value. Choose a property in a growing neighborhood, in a city that experiences high volumes of visitors every month. From there, offering additional amenities for your guests, such as food, guides, and entertainment, will help ensure that your ownership experience is a measurable success.
There is no doubt that vacation rental property management is a lot of work. But with the right team, the right property, and the right investor mindset, owning a vacation rental property can be incredibly rewarding.