Owning rental property is a great way to earn passive income. We purchased our first rental property almost twenty years ago, and have been in the rental business ever since. We started out owning traditional rental properties, and self managed anywhere from 2-8 properties at any given time. About 7 year ago we sold off our rental properties and made the switch to vacation rentals. Here are a few reasons why:
Better profit margins
Our “typical” rental property numbers are listed on the chart below. Below that, is a chart of one of our lower performing vacation rentals. We have found that vacation rentals can net a much higher yearly income!
| Gross Monthly Income | $1500 |
| Monthly mortgage/taxes/insurance | -$900 |
| Monthly expenses/reserve fund | -$200 |
| Net monthly income | $400 |
| Gross monthly income | $6,000 |
| Monthly mortgage/taxes/insurance | -$1800 |
| Monthly expenses/reserve fund | -$1,000 |
| Net monthly income | $2200 |
As you can see, our yearly income for our traditional rental property was around $5,000 per year. All it takes is one major repair (new roof, heat pump, etc) to wipe out all of your income for the year. Financially, you are still benefiting from owning a property that is being paid for by tenants. After the house is paid off, you own a home, that you only had to pay for the down payment!
No need to self manage
If you choose your vacation rental wisely, the income you receive will pay for your management fees! These management fees can range from 12-40% (which is tax deductible) depending on where your vacation rental is located. With traditional vacation rentals, many people choose to self manage because the profit margins are so much smaller. Self managing means that you get phone calls at any time of the day or night to unclog toilets, figure out why the internet isn’t working, or fix emergency water leaks. It means that you will get a phone call every time you are on vacation about a repair that needs made. When you self manage, you don’t get tax write offs for the time and energy you spend having repairs done. You are working for free! And who wants to do that??
You get to use the vacation rental
This is one of the best perks! When your vacation rental is not being rented, you can use it. Who doesn’t want a beach house or a cabin in the mountains?? We have made so many wonderful memories at our vacation homes and they have truly become a gathering place to spend time with extended family and friends as well! We also have had church groups and charitable organizations benefit from using the properties.
Your income is more diversified
So we have already discussed how tight the profit margins are on many rental properties. Now imagine how much those profit margins suffer if you have a tenant that doesn’t pay for a few months. We encountered this often as landlords. Tenants lose a job, or suffer other financial hardships and they are months late on their rent or they must be evicted. It usually takes 2-3 months to evict a tenant (depending on local laws) and get your house cleaned and rented again. This means months of lost rent and sometimes a house that gets trashed by evicted
tenants. With a vacation rental, you have different clients coming every week and the rental is fully paid for BEFORE they use it. If a client cancels, there are plenty of other clients to help make up for lost income.
Check out my posts on leveraging debt to purchase real estate, and how to choose the perfect investment property:
How to (safely) leverage debt to buy real estate
Choosing the perfect vacation investment property.
For help choosing great vacation rental markets, check out this great article: https://www.vacasa.com/top-markets/2021-best-places-to-buy-a-vacation-home
This is an awesome topic! I’m definitely following!