Vacation Rental or Residential Rental – Which is the Best Option?

By: Renters Warehouse

Investors beware! All rental properties are not created equally.

One of the factors that will affect a property’s likelihood of financial viability and long-term success is the decision to rent it out as a vacation rental or a residential unit. Renting your property in the wrong way can result in less income or more headaches than you may be bargaining for.

But the good news is that identifying the most profitable and suitable opportunity for your particular circumstance isn’t hard. With a little bit of research, you’ll soon have a decent idea of which option will be best for you.

Given this reality, we’re delving into both the good and the bad features of both vacation and residential rentals. This article will help you to find out what you need to know, and how to best determine which opportunity offers the best return on your investment.

Vacation Rental

Short-term vacation rentals often result in a higher net income, but they also have significantly more operating expenses than residential units. Due to the high number of guests coming and going, they require a bit more work to manage.

Pros:

• High Rental Income: If the property in question is located in a tourist hotspot, renting it as a vacation rental could result in a higher rental income. Some vacation properties located in high-demand areas can bring in as much as $4000-$6000 a week during peak season.
• Guaranteed Vacation Property: Owning a vacation rental can be a great choice for landlords who wish to still have access to their property and use it as a vacation getaway. It’s a great way to keep the property accessible and still earn a bit of income on the side.

Cons:

• High Operating Expenses: It’s important to factor in the costs involved with operating a property as a vacation rental. It’s estimated that operating expenses for vacation rentals are similar to those of a hotel: up to 60-75% of revenue. Vacation homes need someone to help manage the property, and clean up in-between guests. There are also additional maintenance and repair costs associated with vacation rental properties because of the high number of guests passing through. And don’t forget, someone will need to be there to provide access to property, offer help and information to the guests, and run the property during peak season.
• Vacancy Rate: The viability of a vacation home is tied directly to the local tourist economy. If the home isn’t in a popular location, chances are it will be often be quite empty. It’s also important to take into consideration that the peak tourist season in most areas is seasonal, and during off-season the rental will be vacant.
• Zoning Restrictions: Some areas have zoning restrictions prohibiting vacation rentals. It’s important to ensure that the unit in question isn’t located in a restricted area.
• Tax Laws: The amount of time that the owner occupies the vacation home each year will determine the amount of tax that is owed on the rental income and will affect the deductions that are able to be claimed. It’s important to brush up on current tax laws surrounding vacation rentals before making a final decision.

Residential Rental

It’s believed that long-term rentals provide greater stability. Longer occupancies mean less maintenance and cleaning expenses, and unlike vacation rentals, with residential units there isn’t a peak season and off-season to consider. In some areas though, rental units bring in less net income than vacation units.

Pros:

• Easier to Manage: Residential properties are easier to manage than vacation rentals. Since tenants occupy units longer than vacationers do, residential rentals require less maintenance and cleaning in between occupants. Guests of vacation rentals could be paying $200 or more each day, so they expect the rental unit to be spotless. With residential rental units, there isn’t such a high level of expectation.
• Lower Vacancy Rate: Unlike vacation rentals which usually have both a peak season and a down season where the unit sits empty for several months of the year, residential units are for the most part occupied year round.
• Lower Operating Expenses: Residential units have significantly lower operating expenses than vacation rentals. A single residential rental unit should have an expense ratio of 35-45% of revenue: That’s 30% less than a vacation unit!

Cons:  

• Potentially Lower Net Income: One of the biggest downsides to a residential rental is that in a booming tourist economy, renting a home out as a residential rental instead of a vacation rental may result in a potentially lower net income. Many realtors agree that vacation rentals often generate more net income than residential units in high-demand areas. Of course, this depends greatly on the local rental market, and the demand for vacation units in the area.
• No Guaranteed Vacation: With residential units, it’s hard for the owner to use the home as a vacation getaway since the unit will most likely be occupied all year.

As you can see, the best option depends on many different factors including the rental property’s location, and the local market, as well as the amount of time you are willing to invest in maintaining the property. Before taking a decision, it’s good to run a careful cost analysis and weigh the projected income and expenses for each option. Trees Full of Money offers a handy and free investment analysis spreadsheet that makes it easy for you to enter your numbers, and then calculate your estimated income (after expenses).

Also, be sure to head over to FlipKey, and Zillow to find out what vacation rentals and residential units are renting for in your area. With a bit of research, you’ll soon discover which opportunity is best for you.

Good luck and happy landlording!