Are you ready with your New Year’s Resolutions? Is making more money on the list? If so, how about buying rental property? Investing in rental properties comes with many benefits, the most important of which is the ability to make money both in the short and the long run. In specific, buying a vacation rental property is emerging as one of the best real estate investment strategies in 2020. Keep reading to figure out why.
Why Buying a Vacation Rental Property Is a Good Idea in 2020: 9 Reasons
Reason #1: Vacation Homes Serve a Dual Purpose
Buying a vacation property combines buying a second home and buying a short term rental property. You get to spend the holidays with your friends and family in your favorite location in the comfort of your own home. Then, you – as a real estate investor – generate Airbnb income by renting out your vacation rental home for the rest of the year. Now, if that’s not a good idea in 2020, what is?!
Reason #2: Vacation Rental Homes Are a Low-Risk Investment
Every real estate investment comes with a certain degree of risk even if investing in residential real estate properties is much safer than any other investment strategy out there. Owning a vacation rental property, however, offers even lower risk than a traditional rental property. Just as with any other property investment, buying a vacation home should happen only after careful real estate market analysis and investment property analysis to ensure positive cash flow and high return on investment. But if things still don’t go as expected, you can switch the rental strategy and turn your property into a long term rental. Worse goes to worse, even if this does not work out, you will be left with a second home where you can spend your vacations in addition to letting your friends and relatives spend theirs. Not a bad deal, right?
Reason #3: Vacation Rentals Come with Tax Benefits
As a beginner real estate investor, you should actively search for any possible way to decrease your recurring expenses as this will increase your rate of return and allow you to make more money. One way to save money in real estate is through tax deductions and tax benefits. Similar to any other income properties, you can claim tax deductions on the costs of running a rental business related to vacation rental homes. Moreover, depending on the number of days a year you use the property for your own purposes and the number of days a year you rent it out on Airbnb or another homesharing platform, you can benefit from various types and degrees of tax deductions.
However, honestly, calculating the tax benefits on a second home rented out on a short term basis is complicated and confusing even for experienced real estate investors. Thus, we recommend that you hire an accountant to help you out when buying a vacation rental property. This is the best strategy to ensure that you take maximum advantage of tax deductions without breaking any IRS laws.
Reason #4: Short Term Rentals Are in High Demand
The homesharing industry has grown at an unexpected and unseen rate since the establishment of Airbnb.com in 2008. This real estate trend is expected to continue in 2020 and beyond as more and more travelers decide to stay at vacation homes rather than hotels and hostels. That’s one of the main reasons why investing in a vacation rental property is such a good idea in 2020.
If you choose one of the best locations for Airbnb rentals (either a hot tourist destination or a busy business hub), you are guaranteed a high Airbnb occupancy rate. Having your vacation rental occupied for most of the time is one of the prerequisites for high return on investment, whether you consider Airbnb cash on cash return or Airbnb cap rate.
To help you out in your vacation rental property search, here is What Airbnb Occupancy Rate Can You Expect in 2020?
Reason #5: Vacation Rental Properties Bring More Rental Income
Regardless of their experience, budget, and preferred strategy, all real estate investors buy rental properties in order to make money. And what’s the way to make money in real estate in the short run? With rental income.
Nationwide real estate market analysis conducted by Mashvisor’s tools shows that short term rental properties are expected to generate significantly more monthly rental income in 2020 than long term rentals in the vast majority of US housing markets. The main reason for this is that with an Airbnb investment property, you can charge a higher nightly rate, and as long as your Airbnb occupancy rate is good, you’ll end up with a better rental property income. This makes buying a vacation rental property one of the best real estate investment strategies in the coming year.
Reason #6: Airbnb Rentals Generate More Profit
One of the main advantages of buying a vacation rental property in 2020 is that these rental properties are forecast to enjoy a higher rate of return than traditional investment properties in nearly any US real estate market. Mashvisor’s investment property calculator uses nationwide real estate big data and predictive analytics to estimate the average return on investment for both rental strategies in thousands of locations across the US housing market. The results show that in the vast majority of locations short term rentals will be more profitable than long term ones. Airbnb cap rate and Airbnb cash on cash return will continue exceeding traditional cap rate and traditional cash on cash return in 2020. This is only logical considering the fact that the property price is the same, and the recurring expenses are comparable, while the rental income for vacation rental properties is much higher.
For comparison, you can see the traditional and Airbnb 2020 Cap Rates by City: What Real Estate Investors Should Expect.
Reason #7: Vacation Home Rentals Make Money in the Long Term
Making money in the short term is important for real estate investors, but so is generating return in the long run. Buying a vacation rental property in 2020 is definitely a good way to make a lot of money in a few years, when you decide to sell your house.
Real estate appreciation happens naturally, without any efforts on behalf of Airbnb hosts or landlords. The land on which residential real estate properties are built is a very limited resource, which means that rental properties are also somewhat limited. With the constantly increasing population and the high percentage of renters vs. homeowners, this puts pressure on property prices and pushes them upward all the time. Even when a certain housing market takes a temporary downturn, it is bound to bounce back within a couple of years at the most. In the long term, the values of vacation rental homes are guaranteed to go up.
To help you get started in real estate investing, here are the 5 Best Cities for Real Estate Appreciation in 2020 if long term return on investment is what you are after.
Reason #8: (Some) Vacation Rental Properties Sell at Affordable Prices
Many real estate experts predict that the lack of affordability will become one of the major challenges in the US housing market in 2020. While property values are flying through the roof in many US cities, there are generally a limited number of markets such as San Diego, New York, Los Angeles, Boston, and San Francisco. There it’s hard to buy an investment property for less than $1 million. Nevertheless, these locations don’t even make the most profitable places for investing in a vacation rental home, namely because of the prohibitively high property prices as well as the strict Airbnb laws and regulations.
Moreover, when buying a vacation rental property in 2020, you have financing options that are not available to homebuyers. These include hard money loans, private money lenders, and others. In addition, the fact that you expect to make rental income will help you get better terms and conditions on a conventional mortgage. So, Airbnb rentals are an affordable option even for beginner real estate investors in the US.
Reason #9: Short Term Rental Properties Can Be a Passive Investment
Many refrain from joining the millions of successful Airbnb hosts around the world because they erroneously believe that buying and owning a vacation rental home is a lot of hard work. Well, it can be if you want to do the whole job on your own: from furnishing and marketing, through welcoming new guests, to cleaning after each visit. But in 2020 there’s an easy and cost-efficient way to turn short term rentals into a passive real estate investing strategy: by hiring professional property management.
A property manager will take care of all the aspects of owning, managing, maintaining, and renting out your vacation rental all the while increasing the rental income. The fee that you pay will be worth it as you can expect an increase in the rate of return as your property gets managed more efficiently. Moreover, you’ll have all the time you need to enjoy the passive income from buying rental property.
What to Consider Before Investing in Vacation Rental Homes: 2 Things
1) Short Term Rental Laws and Regulations
The rapid expansion in the short term rental industry has been accompanied – and somewhat suppressed – by the adoption of restrictive and even prohibitive Airbnb rules and regulations in many top locations. For example, Airbnb Law Vegas is no longer possible for a period of less than 30 days, while Airbnb Los Angeles is legal only for primary residences.
Thus, before you choose a location where to buy a vacation rental property, make sure that non-owner occupied short term rentals are legal in all neighborhoods and for all property types there.
2) Must-Have Real Estate Tools in 2020
The fact that vacation homes are the ultimate rental strategy in 2020 doesn’t mean that every single investment property for sale will make a profitable Airbnb rental. You still have to conduct diligent real estate market analysis to choose the best city, careful neighborhood analysis to select the top neighborhood, and detailed investment property analysis to find the top-performing rental. All this will take up to 3 months unless you equip yourself with the best real estate investment tools for 2020. These include:
The heatmap analysis tool on Mashvisor’s Airbnb analytics platform allows you to find the neighborhoods with the lowest property listing price and the highest Airbnb rental income, Airbnb cash on cash return, and Airbnb occupancy rate in any US housing market in 2020.
Mashvisor’s Property Finder tool helps you quickly and efficiently identify the best-performing vacation rental properties in any US city based on your budget, preferred property type, and optimal number of bedrooms.
Mashvisor’s Airbnb profit calculator shows you the profitability potential of various neighborhoods in thousands of US cities and towns. You can see the median property price, the average Airbnb cash on cash return, and the average Airbnb occupancy rate in addition to real estate comps and Airbnb rental comps. Once you’ve narrowed down your property search to a few investment properties for sale, the rental property calculator will analyze each one of them and show you the listing price, the startup costs, the recurring monthly expenses, the Airbnb rental income, the cash flow, the Airbnb cash on cash return, the Airbnb cap rate, and the Airbnb occupancy rate.
Where to Invest in a Vacation Rental in 2020: 5 Best Places
If you’re a beginner real estate investor, starting the research for the most profitable locations for buying a vacation home in 2020 might be overwhelming. To help you out, we’ve put together a list of the 5 best places to invest in this real estate strategy based on the highest return on investment. The figures below have been computed by Mashvisor’s investment property calculator:
#1. Huntington, VT
- Median Property Price: $155,700
- Price per Square Foot: $79
- Average Airbnb Rental Income: $2,00
- Average Airbnb Cash on Cash Return: 8.3%
- Average Airbnb Occupancy Rate: 45.1%
#2. Tuscaloosa, AL
- Median Property Price: $328,200
- Price per Square Foot: $188
- Average Airbnb Rental Income: $3,670
- Average Airbnb Cash on Cash Return: 7.7%
- Average Airbnb Occupancy Rate: 39.3%
#3. Sevierville, TN
- Median Property Price: $385,500
- Price per Square Foot: $180
- Average Airbnb Rental Income: $3,520
- Average Airbnb Cash on Cash Return: 7.7%
- Average Airbnb Occupancy Rate: 72.8%
#4. Buffalo, NY
- Median Property Price: $186,100
- Price per Square Foot: $101
- Average Airbnb Rental Income: $2,280
- Average Airbnb Cash on Cash Return: 7.6%
- Average Airbnb Occupancy Rate: 58.7%
#5. Gatlinburg, TN
- Median Property Price: $393,900
- Price per Square Foot: $204
- Average Airbnb Rental Income: $3,800
- Average Airbnb Cash on Cash Return: 7.5%
- Average Airbnb Occupancy Rate: 70.1%
For all the reasons above, buying a vacation rental property is one of the best things you can do with your money in 2020 to make more money. Now that you know why and where to invest in a vacation home in the coming year, just sign up for Mashvisor to start searching for the most profitable short term rentals in these top markets.