Build your real estate portfolio and earn rental income from the rapidly growing short-term rental market. It has always been our aim to provide equal access to investments in commercial real estate.
Historically, short-term rentals have yielded high returns and with shifting domestic travel trends and a rise in people choosing to stay in vacation homes, the vacation rental market is rapidly growing. However, the cost associated with purchasing a home and the substantial amount of time, effort, and knowledge required to run a lucrative rental property have deterred the average person from investing in this asset class.
Therefore, we are thrilled to announce that we are incorporating vacation and short-term rentals into our platform. At FundVate, individuals can purchase shares in rental properties that generate income, starting as low as $1,000. FundVate manages all real estate operations, allowing investors to enjoy their portion of the rental income and the home's appreciation without worrying about any operation-related matters.
$13B Market
US vacation rentals are currently a $13B market & expected to reach $20B by 2025, +53% growth!
High Revenue
On average, a full time vacation rental can generate up to 130% more revenue than a traditional long-term rental
Growing Trend
Work-from-home flexibility & increased business + leisure travel have raised the average stay from 3.5 to 4+ nights from 2019 through 2021
Vacation Rentals vs Rental Homes
What is the better investment?
Vacation Rentals
Higher Potential Revenue
With limitless earning potential, vacation rentals in popular cities such as Nashville and Orlando are an ideal investment. Due to the possibility of charging higher rates per night compared to those of traditional long-term rental properties, these types of rentals can generate up to 130% more revenue on average. Opting for a vacation rental could potentially result in significant financial gain when compared to the more traditional and long-term rental property option.
Rapid Growing Industry
In 2022, the United States' vacation rental market has generated more than $13 billion in revenue. According to estimates, the market's overall worth is expected to surge to $20 billion by 2025, showcasing a 53% growth. Therefore, in the upcoming years, there would be abundant demand for vacation rentals from tourists seeking accommodations.
Seasonal Cash Flow
It is possible to generate considerably more earnings with vacation rentals, although the revenue may not be as steady due to the nature of the asset class. This is because the demand for vacation rentals tends to fluctuate seasonally. Peak seasons, like summer and holidays, experience a higher demand, making vacation rentals more active and profitable. On the other hand, during less active periods, there will be more vacancies resulting in less profit.
Rental Home
Consistent income with 1-2 year leases
The leasing of long-term rental properties to tenants for extended durations implies the absence of unstable revenue. The outcome being uniform, stable income and consistent cash flow.
Low Operating Cost
Maintaining the upkeep and bookings of short-term rentals can drain one's resources, whereas long-term rentals are generally more affordable for property owners to maintain. This results in accumulated savings over a long period of time. Moreover, opting for long-term rentals gives owners full autonomy over the screening process of potential tenants. To facilitate this task, many property owners tend to hire a property management company.
Tax Advantages
FundVate platform provides rental homes with the tax benefits of a Real Estate Investment Trust (REIT) structure. This means that instead of being imposed with ordinary income tax, capital gains taxes are applied when the property is sold. Furthermore, REITs can use the qualified business income deduction, allowing a reduction of taxable income by 20%.
Why Should You Invest in Vacation Rentals?
As individuals start considering investing in a second home as part of their real estate portfolio, it is common for them to examine long-term rentals. Although it is a favorable choice, there is also the option of having a property in another frequently-visited city that can be rented out for shorter periods of time. Perhaps investing in a holiday resort that you aim to retire in seems like a good opportunity, but it may not be the right timing.
The prospect of vacation rentals is an excellent means of generating income from your investment property. Additionally, it can also serve as an ideal short-term holiday or retirement addition to your portfolio. Ever since Airbnb's inception in 2008, the possibilities for short-term rental investments have greatly expanded. There has been an increase in the number of individuals who prefer unique and more personal experiences, prompting them to choose non-traditional accommodations. In fact, 19% of vacation rental bookings between March 2020 and April 2021 were first-time bookings. Consequently, investing in vacation rentals can be the perfect opportunity if one seeks to purchase a second home or rent out rooms.
What Are Vacation Rentals
Instead of selecting hotels, tourists often opt for vacation rentals which can be furnished apartments, residences, or professionally managed resorts or complexes, and can be rented for short periods of 30 days or less. These rental properties come with standard amenities and serve as an ideal alternative to hotels.
In recent years, there has been a surge in popularity of short-term rentals. The 2021 Vacation Rental Search Report by Vacasa indicates that vacation rental traffic and searches have shown a remarkable increase; with searches up to 235% and users soaring up to 116% by Spring. Such rentals have become an apt investment opportunity that offers investors a substantial source of income. As per Vrbo/Homeaway, private lodging income contributes to 24% of the median annual income of owners.
The Pros and Cons of Investing In Vacation Rentals
Pros
PRO
Rental income
People’s leisure travel preferences have undergone a transformation, thanks to vacation rental property websites like Airbnb, VRBO, and HomeAway. These websites offer travelers an opportunity to opt for distinctive properties offering an experience instead of monotonous, impersonal hotel rooms. Owning and investing in vacation rental properties in the ideal location can be highly profitable, particularly during peak season. The income a vacation rental property can generate depends on the location, size, and amenities provided. Nevertheless, research depicts that on average vacation rentals tend to generate 130% more revenue than conventional long-term rentals.
PRO
Dual-Use Property
By choosing a vacation rental, you can take advantage of the opportunity to invest in real estate while having a holiday home at your disposal. Simply block off the days or weeks when you plan to use the property as your second home, and you'll be able to enjoy the benefits of owning a vacation property while also making a smart financial move.
PRO
Tax Benefits
As far as tax deductions and benefits go, owning a vacation rental property that is primarily employed as an investment is deemed a vacation rental business. Most property expenditures are regarded as tax write-offs, from repairs and maintenance expenses to insurance, along with property management fees, marketing expenses, and mortgage interest. These tax benefits make owning a vacation rental property a wise investment choice for people looking to invest in real estate.
PRO
Property Appreciation
Apart from providing a steady flow of rental income in the short run, a holiday rental property also gains value over time. In other words, if you decide to sell the property, you are guaranteed to earn a substantial profit, along with the monthly income it generates. Typically, the short-term rental market in prime locations exhibits a marked increase in growth trajectory and a higher rate of return in the long run.
PRO
Likely to Survive Recessions
Investing in properties has a significant benefit due to the constant human need for shelter. This highlights that it can be a wise investment to make. Studies indicate that recession does not impede people from going on a vacation, although they might opt for shorter trips, pool resources and keep holidays nearer home.
Cons
CON
Vacancies and inconsistent income
If you own a vacation rental, you're likely no stranger to vacancies, particularly during the off-season or if your rental is seasonal. Don't worry; it's completely normal. Most properties tend to earn more on days when they're occupied, making up for any lost revenue during vacant periods. However, it's crucial to keep an eye on the number of days your rental stays empty. Excessive vacancies can negatively affect your cash flow.
CON
Expenses
As a result of the distinctive features of a vacation rental, which necessitate the cleaning of the property and refilling and inspecting the amenities after each guest's stay, the costs can accumulate over time. Engaging a property management company can further diminish your rental income due to additional fees. In addition, you will need to account for supply expenses, cleaning costs, and maintenance costs resulting from wear and tear, as well as utility usage.
CON
Hands on Management
When it comes to short-term vacation rentals, there are several pressing tasks that require frequent attention. Unlike long-term rentals, vacation properties demand a lot more management, marketing, and time investment in booking. Regular duties include supervising cleaning and upkeep activities, preparing the property for new guests, replenishing essential supplies, promoting the rental online or through other channels, scheduling reservations, addressing guests' questions and concerns, and managing check-ins and check-outs. All these activities require regular attention if you want to run a successful vacation property rental business.
How to Choose a Suitable Vacation Rental
When seeking a vacation rental investment property that generates continuous cash flow and appreciation, the key factor is choosing the right property. Here are a few things to consider as you begin your search for potential investments.
Firstly, Location is critical - possibly the most crucial decision. Although your personal preferences may influence your purchase, such as where you enjoy spending summer holidays or where you wish to retire, from an investment standpoint, it's best to target the hottest markets with the highest profit margins. According to AirDNA's 2021 and 2022 report on vacation rentals, the most promising regions for investment are the Appalachian mountains, northern California, Minnesotan lakes, and upstate New York. The top-scoring cities for investors include:
Maui, Hawaii
Kenai Peninsula, Arkansas
Chattanooga, Tennessee
Gulfport/Biloxi, Mississippi
Slidell, Louisiana
Crystal River, Florida
Joshua Tree, California
Charleston, South Carolina
Galena, Illinois
Southwest Harbor, Maine
Rental Demands and Expenses
There was a noticeable surge in demand for vacation rentals located in small and mid-sized cities, destination resort towns, as well as rural areas. The range of this increase spanned from 8% to 67% over the span of two years.
To assess the potential of purchasing a property for the purpose of renting it out, rental demand should be evaluated. Rental demand is comprised of both annual occupancy and listing growth rates. Specific attention should be paid to the seasonality of the property's location, as this will dictate the expected demand. There was a noticeable surge in demand for vacation rentals located in small and mid-sized cities, destination resort towns, as well as rural areas. The range of this increase spanned from 8% to 67% over the span of two years.
To assess the potential of purchasing a property for the purpose of renting it out, rental demand should be evaluated. Rental demand is comprised of both annual occupancy and listing growth rates. Specific attention should be paid to the seasonality of the property's location, as this will dictate the expected demand recommended that a list be made of both the monthly and annual recurring costs, including cleaning, restocking supplies, hosting fees, property management fees as well as marketing expenses. When evaluating the rental demand versus the costs, it is crucial to determine if these ongoing expenses remain achievable and cost-effective enough to justify the investment.
Investing in A Vacation Rental VS. Buying A Second Home
In the perspective of the IRS, a property that is retained by a homeowner exclusively for personal purposes without any attempt to rent it out is categorized as a second home. Nevertheless, a property that is possessed for the purpose of investment, like a vacation rental, is viewed as a rental home and subjected to different tax measures.
In the case of a property that serves a dual purpose, such as a vacation rental that is also used for personal reasons, it is mandatory for individuals to divide the usage in order to compute the taxes as per the regulations laid down by the IRS.
If you decide to sell a second home and earn a profit, it is mandatory to pay capital gains tax on your earnings. In order to exempt yourself from paying this tax, you can choose to make it your primary residence for a period of two years. On the other hand, if you plan to sell a rental home and reinvest the funds in another investment property, you will not be required to pay capital gains taxes.
Easily invest in vacation rentals
If you are seeking a real estate investment with lucrative rewards and minimum financial barriers, vacation rentals may be the answer. Properties situated in high-demand areas tend to offer stable cash flow year after year as well as increased value.
FundVate is on a mission to facilitate accessible real estate investment opportunities by enabling investors to enjoy the benefits of rental income, as well as property appreciation, without dealing with the hassle of property maintenance and management. Our fractional investing model caters to those interested in the hottest housing markets, with no substantial down payment or upfront costs. Begin your journey by exploring the properties presented on FundVate's website.
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