Six Reasons to Invest in Vacation Rentals
Kate Stoermer 
Vacation rental - or short-term rental investing offers many perks along with the profits of real estate investing.
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Any of my friends or family members will tell you I am vacation - obsessed! It really hurts my soul when people talk about creating a life you don’t need to take a vacation from. As a wife, mother, household manager and entrepreneur with multiple businesses the to-do list is never ending and one way to mute it for a while and really sink into time with myself and my family is by getting away and out of our routines… you know - vacation.
My goal - for this season in my life anyway, isn’t about creating a life I don’t need to take a vacation from - it’s about creating a life with more vacations!
One strategy I use to achieve this goal is short-term rental investing. I stepped into real estate in 2019 and haven’t looked back. In fact, I left my 27 year healthcare executive career a few months ago to lean into the vacation rental industry more fully! (check out this case study for one of my properties!) So why short term rentals?
Here are 6 reasons why I love short term rental investing and think you should too -
Turn Your Annual Vacation Budget Into An Investment
One of my clients told me the reason they wanted to invest in a vacation rental was because he was routinely budgeting - and spending over $10,000 annually just on lodging for his family's annual summer vacation - and wanted to use those funds more wisely. Frankly, I can’t think of a better reason to invest - own the vacation rental, get all the perks, save your vacation budget AND earn profits?
Their annual summer vacation now happens in their vacation rental - totally paid for, and they just booked an epic winter vacation this year too - a perk of having those funds repurposed!
(If you are looking for some help getting started, our 30 page Roadmap covers every aspect of the short-term rental business, packed with hints and tips for success)
Diversify Investments
Diversification is the name of the game for wealth management. I think the last three clients I worked with all came to me wanting to mitigate the downturn in their stock portfolio. Admittedly, I have never enjoyed the stock market too much; I really enjoy seeing and enjoying my vacation rental investments! I have a healthy 401K and we do invest in a couple stocks through a brokerage account. Real estate is a great vehicle for investing - the returns can be better than your stocks, and the perks associated with vacation rental investing through personal use are tangible today even as our investments mature and we dream of “retirement”.
It’s the Perfect Vacation Home
Whenever we travel, we far prefer to use short-term rentals. That said, we require a king bed (my husband is 6’4”) and the boys really need some space to move around. Oh, and typically we bring the dog. Because my husband and I both work remotely, reliable internet is a must and I like to ensure I have all the things to make our favorite foods in the kitchen.
I don’t know about you, but showing up at our vacation rental and having it set up exactly how we like to live is a very comforting and a big perk. We’ve rented places that have not met our expectations or needs, and while we will always travel and rent homes, having our rentals and using them is always a joy!
99% of the Wealthiest People Invest In Real Estate
Real Estate is always a good investment. The statistic is that over 90% of the world's wealthiest people invest in real estate. Why? Appreciation, depreciation and other tax advantages. Plus, real estate is a basic necessity - so demand is assured. Regardless of how you use the property, the benefits are well understood by the wealthiest.
Offsetting Tax Liability
The “short-term rental loophole” for offsetting tax liability is specific to vacation rental investing. I learned in Tax-Free Wealth: How to Build Massive Wealth by Permanently Lowering Your Taxes by Tom Wheelwright that 99% of the tax code is about reducing your tax liability. This was an interesting perspective. The rental loophole is an attractive component for those looking to offset their tax liability. I’m not a CPA, but I’ll do my best to explain the loophole with the caution that you should always discuss your specific situation with your tax person!
Active vs. Passive Income. Money we make trading our time for money - such as through a W2 job, is considered active income. Money we receive from investments - dividends from stocks as an example, is considered passive income. The IRS requires us to keep active and passive activities separate - so a loss in passive income can’t offset a gain in active income. Real estate investing is considered passive.
For example, if my taxes owed are $40K and we paid $30K through our W2. Say I own a long term rental property that I bought and - because of a squatter and renovation, it had very little income and a lot of expenses so it showed a loss of $12K we still have to pay the $10K difference on our taxes owed even though we have a loss of $12K on our real estate investment.
That said, same scenario but instead we bought a short term rental property and spend over 250 hours setting up the property and putting all the pieces together to get it up and running as a short term rental. Since its a short term rental where people are staying in it for 7 or less days at a time the IRS no longer considers it real estate investing - its a hospitality business which now converts any loss to active and now instead of paying $10K back in taxes the government will have to send me a check.
Yes, there are a lot of pieces to this to ensure you are compliant; talk with a CPA who understands.
Own a Second Home - and never Mow the Lawn
My cousins have a wonderful little lake cottage; they were very purposeful in their decision to purchase while their kids were young, and intentional about having these quality times together with their kids. The kids are adults now, the cottage is still a haven for them as a family. It struck me a few years ago when my cousin commented that they really hadn’t vacationed anywhere else in years - I guess that was the tradeoff.
Another friend was complaining about having to do a quick run up to their cottage - an obvious inconvenience in the telling, to mow the lawn.
I have always loved the idea of a second home - a comfortable, family-focused place to spend quality time with family away from the day to day routines in our “regular” lives. But I never wanted a second home that added stress to my already stressful life from having to clean and maintain it. Not to mention the sense of “obligation” to use the home at the expense of doing other things with our precious vacation time.
I feel no compulsion to “have” to go to our second home. We enjoy it fully when we are able; and we enjoy traveling to other places as well and have paying guests when we aren’t using it. It makes enough money to not only pay the mortgage and expenses, but to pay the handyman, cleaning person, lawncare, and even upgrades to the home itself. So from a lifestyle viewpoint, we can get the perks of owning the second home and none of the hassles because we rent it out as a vacation rental.
Interested in learning more? Check out our Short Term Rental Roadmap, a workbook helping clarify your short term rental goals and get you started!
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Hey, I'm Kate from The CEO Host. I'm a US Navy veteran and ex-healthcare executive doing vacation rentals full time. Well, not really "full time". Now, I get to focus more on being Mom, and invest more time into me and the things I love. I enjoy sharing my journey - and helping others find success as well. Owning vacation rentals has helped us grow our wealth exponentially, while giving our family fun places to stay - and its also been a terrific family "project". Hang out with us at The CEO Host on Facebook and learn how you, too, can experience the profits and perks of vacation rental investing.
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Categories: : second home, short-term rental investing, vacation rental investing