The Pros and Cons of Vacation Rentals for Real Estate Investors

According to a 2023 study of the vacation rental industry, an estimated 63% of family travelers reported that they prefer to stay in vacation rentals rather than hotels. This desire for an authentic experience in a travel destination equates to high profitability potential, with average rental rates sitting around $217 per night. 

But is a vacation rental a better investment than a traditional long-term rental? And is it the right investment for you? 

To help you decide if a short-term vacation rental is in your future, we’ve compiled a list of the pros and cons of vacation rentals for real estate investors. 

Pros of Vacation Rentals

Let’s start with the benefits of vacation rentals as compared to long-term rentals.

1. Potential for High Rental Income 

At an average rate of $217 per night, the per-night rate for vacation rentals is substantially higher than the rate for a long-term rental (which currently sits at $1,702 per month, equating to $55.96 per night). This can lead to higher cash flows with a vacation rental, even if the property sits vacant several nights per month.

2. Flexibility for Personal Use 

Your vacation rental could serve double duty as both an income property and a vacation home for you. When the property is not occupied, you could stay there yourself or offer it to family and friends.

3. Peak Periods 

Depending on the location, vacation rentals can experience peak periods of high demand. During holidays, spring break, or summer, for example, you might be able to charge premium rates to maximize income.

4. Quick Adjustment to Changing Rates 

Unlike long-term rentals, which often come with one-year leases, vacation rentals may have a term of just a week (or even just one night). This provides flexibility to adjust rental rates and terms regularly based on market conditions and guest demand.

5. Tax Benefits 

As with long-term income properties, short-term vacation rentals could qualify for various tax deductions and benefits. You might be able to deduct rental expenses and property depreciation from your income tax calculations.

Cons of Vacation Rentals

Now let’s consider the potential downsides of vacation rental investments.

1. Regulatory Challenges 

Some cities have specific regulations governing vacation rentals (like New Orleans, which has a permit process and requires the property owner to live onsite). And many more cities are voting on new restrictions. So investors need to be aware of the existing regulations as well as the threat of increasing regulations. 

2. High Operating Costs 

The high turnover rate of vacation rentals means higher maintenance, cleaning, and marketing costs compared to long-term rentals. Keeping the property’s furnishings in good condition and keeping the property stocked with toiletries and pantry items adds to the expense.

3. Continuous Marketing and Guest Management 

In addition to the financial cost, vacation rentals also come with a greater time commitment as they require ongoing marketing efforts and guest management to attract bookings, handle inquiries, coordinate check-ins, and address guest concerns. Handling this yourself is a time-consuming job, which is why many vacation rental owners hire property management companies.

4. Seasonal and Cyclical Nature 

While vacation rental investors can take advantage of peak season demand, they are also susceptible to off-season lows. Reduced demand during slow seasons can result in periods of low occupancy and reduced rental income.

5. Potential Rental Risks 

With so many guests coming through your property, there is an increased risk of rental cancellations or damage to the property. This can result in additional expenses for repairs, replacements, or lost rental income.

The Bottom Line   

Vacation rentals come with substantial profitability potential, but they also represent a greater risk than traditional long-term rentals. Before you invest in a vacation rental, do your due diligence, have reserves ready to cover vacancies and maintenance, and prepare an exit strategy. 

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