When you buy a vacation home, you’re making one of the few investments that offers both personal and financial rewards. And you don’t have to be a real estate tycoon to pull it off.
Buying a vacation home allows you to diversify your income, build wealth, plan for retirement, and, of course, take a vacation at no extra cost to you. Some investors weigh one benefit more heavily than the others, but once you’re clear on why you want to buy a vacation home, you can focus your search and match your investment with your priorities.
When you buy a vacation home and choose to rent it out, it’s possible to create a new, short-term rental revenue stream. This rental income could supplement your salary and any other interest-bearing income you earn.
While optimizing this income isn’t rocket science, it is vacation rental real estate science. You want to work with an agent who has the local expertise and vacation rental savvy to help you buy a vacation home with a good cap rate in a great market.
When you buy a second home, you join a community of savvy investors who understand the value of real estate holdings. Your home can be an investment property or a legacy you leave for your family.
You don’t have to pay cash (or cash in your savings) when you buy a vacation home, either. Nearly 75% of people who buy a vacation home will invest through some form of financing.* Then, by hosting short-term rental guests, the mortgage, property taxes, HOA fees, and home maintenance costs are offset—all while you build wealth for today and tomorrow.
Retirement may be a few years (or decades) off, but buying a vacation home now opens up interesting options for you. Do you want to retire at the beach, by the lake, in the mountains, or even in your favorite urban oasis? Is it your dream to host your children and grandchildren in a vacation home for holidays and other special visits?
As you move closer to retirement, the amount you owe on your vacation home mortgage will be smaller, or it may be paid off completely. Meanwhile, with the right property management company looking after things, your second home will be well taken care of until it’s time for you to retire there.
If you want to buy a vacation home to enjoy more downtime, join the bevy of home buyers making a vacation rental investment within a two- to four-hour drive from their primary residence. If it’s a quick jaunt for you, and it’s easy to block out time to entertain or unwind, you may never want to vacation anywhere else again.
After all, if you want to go to your vacation home to relax, chances are paying guests will want to, too—especially if you buy a home that’s easy on the eyes and pet-friendly.
In general, a vacation rental property is a fully furnished place for travelers to rent short-term. Typical vacation rentals include beach condos, mountain cabins, and lake houses.
The IRS has a special way of defining whether a vacation rental is a business or a personal residence for tax purposes. The key is the 14-day rule: in short, your vacation home is classified as a residence (rather than a business) if you use it yourself for more than the greater of:
Even if you rent your vacation home for part of the year (and it’s not your primary home), it’s still a personal residence in the eyes of the IRS if you use it yourself often enough.
Yes, investing in a vacation rental can pay off in multiple ways—as long as you invest wisely. Here are a few of our expert tips:
The pros can include equity appreciation, tax deductions, and having a personal getaway to use for your own vacations. The cons can include the effort of maintaining an additional property, and the extra expenses—both unexpected costs and expected ones, like taxes and insurance.
If you’re planning to rent out your vacation home, another pro is the potential for more income—but you’ll want to consider cons like marketing your home to guests (which can take a lot of work) and navigating complex local short-term rental regulations.
If your capitalization rate—essentially the rate of return on a real estate investment—is greater than your mortgage interest rate, you’ll generally come out ahead.
Overall, a “good” cap rate (or good ROI) really varies based on the vacation destination where you’re buying—based on factors like demand, home prices, and property types. In some areas, you’ll be looking at 5% to 8% cap rate, while others range from 3% to 5%.
California licenses
Vacasa Seasonals Inc.
California DRE #02160171
Vacation Palm Springs Real Estate, Inc.
California DRE #01523013
Vacasa offers property management and other real estate services directly through Vacasa LLC and through Vacasa LLC's licensed subsidiaries. Click here for more information about Vacasa's licensed real estate brokerage/property manager in your state. Vacasa’s licensed real estate brokerages/property managers include: Vacasa Alabama LLC; Vacasa Arizona LLC; Vacasa of Arkansas LLC; Vacasa Colorado LLC (Micah Victory); Vacasa Delaware LLC, 302-541-8999; Vacasa Florida LLC; Vacasa Illinois LLC 481.014072, Micah Victory Managing Broker Lic# 471.021837; Vacasa Louisiana LLC, Dana MacCord, Principal Broker, ph 504.252.0155 (Licensed in LA); Vacasa Michigan LLC, 602-330-9934; Vacasa Missouri LLC, Vicki Lyn Brown, Designated Broker; Vacasa Nevada LLC; Vacasa New Hampshire LLC,45 NH-25, Meredith, NH 03253, Susan Scanlon, Broker of Record; Vacasa Minnesota, Broker: Micah Victory, license #40877637; Vacasa New Mexico LLC, 503-345-9399; Vacasa New York LLC, 888-433-0068, Susan Scanlon, Real Estate Broker; Vacasa North Carolina LLC; Vacasa Oregon LLC; Vacasa Pennsylvania LLC; Vacation Palm Springs Real Estate, Inc., California DRE #01523013, Mark Graham, California DRE #00700720; Vacasa Real Estate LLC (licensed in Texas, Debra Brock, Designated Broker); Vacasa Real Estate LLC (licensed in Washington, Robert Brush, Designated Broker); Vacasa Seasonals Inc., California DRE #02160171, Lisa Renee Stevens, California DRE #01485234; Vacasa South Carolina LLC; Vacasa South Dakota LLC; Vacasa Tennessee LLC; Vacasa Vacation Rentals of Hawaii LLC, 69-201 Waikoloa Beach Dr. Ste. #2F17, Waikoloa, HI 96738; Vacasa Vacation Rentals of Montana LLC, Terah M. Young, Licensed Property Manager; Vacasa Virginia LLC; Vacasa Wisconsin LLC; Vacasa Wyoming LLC. In Canada, this advertisement is provided by Vacasa Canada ULC, CPBC lic. number 75826, 172 Asher Rd. V1X 3H6 Kelowna, BC.
*Source: 2019 Vacasa Vacation Rental Buyers Report
This document is for information and illustrative purposes only. It is not intended to provide “investment advice” or a “recommendation” regarding a course of action. The discussion is general in nature and has not taken into account your personal financial position or objectives. You should consult a licensed financial advisor or other professional to discuss your specific situation.
