In today’s era of Airbnb success stories and coastal getaway dreams, it’s easy to see the appeal of investing in a vacation rental. A charming cottage by the lake or a condo on the beach might feel like the perfect combination of personal enjoyment and passive income. But before you take the plunge, it’s worth asking: Should I invest in a vacation rental?
While vacation rentals can generate income under ideal conditions, they are rarely the golden goose they’re often made out to be. In fact, for many investors, vacation properties turn out to be more of a financial burden than a benefit. Let’s take a closer look at why the vacation property return on investment often falls short of expectations.
At first glance, the math seems simple: buy a property, list it online, and watch the bookings roll in. But once you account for the real costs, things look very different.
Vacation rentals typically command a premium price, especially in desirable tourist destinations. That means higher upfront costs and potentially higher interest rates if you’re financing. Add in property taxes, short-term rental insurance, HOA fees, cleaning services, management costs, and utilities, and the margins get razor thin.
Plus, vacation rental income is highly seasonal. If your property isn’t located in a year-round destination, you’re depending on just a few months to cover year-round expenses. That doesn’t add up to a strong vacation property return on investment.
Many people assume that buying a vacation home adds diversification to their investment portfolio. But real estate is still real estate. If you already own a home (and possibly other property), adding another in the same asset class doesn’t truly diversify your risk—it concentrates it.
This is especially true if your vacation property is in a region vulnerable to natural disasters, seasonal volatility, or regulatory changes affecting short-term rentals. And unlike stocks or mutual funds, real estate isn’t easily sold if you need quick access to your money
Even in peak seasons, short-term rental income isn’t guaranteed. Weather, local events, or even one bad review can affect your bookings. And let’s not forget the looming possibility of local regulations restricting or banning short-term rentals altogether.
So, is a vacation rental a good investment when income is so unpredictable? Not for the risk-averse investor. If you’re counting on that income to support your financial goals, it may be wiser to look elsewhere.
Despite what social media suggests, running a vacation rental is not passive. If you’re managing the property yourself, expect to be on-call for everything from broken dishwashers to last-minute cancellations. And if you hire a management company, expect to hand over 20–30% of your income—right off the top.
Even if your property is booked consistently, managing guests, maintenance, and cleaning takes time and energy. This is not a “set-it-and-forget-it” kind of investment.
There are tax deductions available for vacation rentals, but they come with strings attached. If you use the home for personal use more than a certain number of days, you may lose the ability to write off some expenses. Rental income is also taxable, and capital gains taxes may apply when you sell the property.
If your goal is to grow your wealth and create financial freedom, vacation rentals might not be your best option. The vacation property return on investment often pales in comparison to a well-diversified portfolio of low-cost index funds, traditional real estate investments, or retirement accounts.
Of course, if your heart is set on a second home and the financials are secondary, that’s a lifestyle decision. But don’t mistake it for a financial one.
At Investor’s Resource, we help clients make financial decisions based on long-term goals—not Instagram trends or vacation fantasies. Before purchasing a vacation property, ask yourself: Is a vacation rental a good investment for me? And more importantly: Does it align with my financial plan and values?
We’re here to help you crunch the numbers, weigh the risks, and align your investments with the life you want to lead. Thinking about a vacation rental? Matt is happy to help you crunch the numbers—connect with him here at Matt Leahy, CFP® – Investor’s Resource.
Investor’s Resource, a greater Huntsville Alabama financial advisor, delivers expertise in family planning, including portfolio management, retirement planning, and risk management.
Securities offered by Registered Representatives through Private Client Services, Member FINRA/SIPC. Advisory Services offered by Investment Advisory Representatives of RFG Advisory, LLC., a registered investment advisor. Private Client Services, Investor’s Resource and RFG Advisory are unaffiliated entities.
