Are Vacation Rentals More Profitable?

[Micah Paroline]

You have an investment property you're looking to rent out. Looking to maximize this investment, you're now trying to decide if you want to rent it as a vacation destination, with stays averaging only a few days, or if you want to rent it year-round to steady tenants.

How do you decide? Let's dive in.

Important things to consider:

Time Commitment

The on a property booked through Airbnb or VRBO is roughly 4 nights. The standard lease we sign is 12 months. Most long-term tenants don't require assistance more than a few times a year, say for a running toilet or help to reset the thermostat. As a vacation rental, every day is a commitment to talking to current guests, addressing issues as they arise, fielding potential guest inquiries, and confirming bookings. Tenant expectations compared to vacation guest expectations can be very different, making the time commitment vary greatly.

Add that on top of the professional cleaning turnover, required after every stay to prepare for the next incoming guest. Property owners and property managers alike have much more free time during a long-term lease, although property managers can take a lot of tasks off property owners' plates in short and long-term leases alike.

Property Management

With frequent turnover comes frequent cleanings - and repairs. General property maintenance is expected, but there is a higher level of wear and tear when you have frequent turnover as opposed to consistently good tenants.

Speaking of good tenants, a key part of property management is who you allow on that property. When signing a traditional lease, property managers conduct credit and background checks and field applications, complete with reference checks, from interested parties for everyone's peace of mind.

Alternatively, when accepting short-term vacation guests through vacation rental platforms, those third-party platforms have complete power and their own reviews and "rankings" of guests. You get some basic information to make an informed decision, but you have no access to a thorough screening.

Additionally, with property management requirements in mind, you gain greater flexibility to stay at your own property when you lease as a vacation rental, meaning you can block out sections of the calendar to stay there during desired dates (ski season in Vermont, anyone?) and rent out all other days to guests. You're in control.

Stability

When renting as a vacation hot spot, you will have the possibility for greater swings in income, with the chance of popular seasons versus low times where guests simply aren't traveling. You'll be at the mercy of guests choosing to (1) travel to your area of the world, and then (2) choose you over all other lodging options. If you have poor weather for 4 months of the year (hurricanes, blizzards, etc), be wary of trying to keep every night full during those months.

Let's take an example. You have a 2 bed, 1 bath that could rent year-round for a premium $2000/month. That same property brings in a locally competitive $200/night average as a vacation rental, buffered with a 20% vacancy rate, meaning you earn $7.2k that month. In this instance, you could make more than triple per month as a vacation rental than you could in standard rents. Here, you have a much greater earning potential than you would with a year-round tenant, HOWEVER, that trade-off comes with much less stability and more frequent turnover.

In Summary

In the end, it's all about what you value. If you want to get the most bang for your buck, consider swinging for the fences and opt for a vacation rental, if suitable for the market you're in. If you want long-term stability in your portfolio, consider a long-term lease.

If you want to be hands-off either way, consider a trustworthy property manager to handle your properties on your behalf.