Taking the long view of investing in vacation rentals

I probably get asked once per week why I invest in vacation rentals. Folks will say “well you can just put $100,000 into XYZ Mutual fund and earn an easy 12 percent.” I don’t normally argue against such people, as I like for investors to do what they feel comfortable with, and what works for them.

But for a little truth about the stock market: For 4 of the last 9 decades, the S&P has actually lost value, inflation adjusted.  So your and my stock market returns depend a whole lot on when we are investing and when we are liquidating.

I do believe that real estate, and vacation rentals in particular, beat the pants off of most investments, and by a long shot. That is assuming that you score even a marginal deal. No home run required - a base hit will do the trick!

Why are vacation rentals so much better? It’s simple: You aren’t paying for your investment. Someone else is. Yes, you put down 20 to 25% of your own money to buy a place, but other people will be paying off the remainder of that note for you.

Now, I see a lot of folks fixated on the “monthly income” of vacation rentals, and while that is nice to have, it is really the icing.  The cake is that the asset is being paid off by other people.

Back in 2005, I bought a cabin in Cosby TN for $240,000 at the top of the market. During the financial crisis, it would lose half of its value, maybe even more. I overpaid big time. Twice what I should have. But my investment in that property was still only around $75K. $50K down, and another $25K to get it ready to rent.

The first few years, the rents were just enough to pay the mortgage and bills. But over time, as rents increased, the cabin would be producing more and more income. Yet even if it had not made a single dime above my monthly expenses, it would still be an incredible investment. Remember, my investment was $75,000. That investment is now worth about $650,000. That is an annual yield of over 17 percent, after paying twice what I should/could have for the cabin just a few years later!

The moral of the story is, don’t fall into the trap of focusing too much on the short term with short term rentals. If you happen across a home run and make quick profit, great. But vacation rentals work best when you buy and hold.