Investment Property: Long-Term Lease vs. Vacation Rental?

By | February 21, 2018

Everyone has that friend of a friend who converted their prime real-estate into a vacation-only rental and made lots of money. “Leasing for a single season pays for the whole year!” is a common assertion property owners associate with vacation rentals. However, the reality is much more complicated. Yes, vacation rentals and can do make money, in select markets and in highly-prized areas. But the stories of people making boatloads of money is overblown, some people make money, but many do not.

The problem with converting a property to short-term vacation rentals only is that you are still on the hook for all the costs, regardless if your unit is full or not. Moreover, vacation properties are in highly-prized areas which subjects them to higher property taxes, high HOA fees, and other costs associated with being a prized property. In general, short-term rentals, like hotel rooms, cost about 60 to 70 percent of revenue in operating costs. Conversely, a well-managed long-term lease will cost about 35 to 45 percent of revenue in operating costs.

Investors and real estate moguls in San Diego are catching on, and many of them flocked to acquire properties on the coast. Prized neighborhoods such as La Jolla, Del Mar and Solana Beach saw dozens of properties purchased, renovated, and re-sold for massive profit. One consistent theme you did not see, converting the properties into vacation rentals. Arguably, La Jolla, Del Mar and Solana Beach occupy some of the most sought-after beachfront property in the world and would, in theory, make excellent candidates for vacation properties.

The Law

Short-term rentals, thanks to the rise of Airbnb and the shortage in housing, are under regulatory attack all over the country, including San Diego. Earlier this year, the City Attorney issued a memorandum arguing that Airbnb and other short-term rentals be prohibited by the municipal code. Since that memorandum, the City has begun cracking down on short-term rentals from Pacific Beach to Solana Beach.

San Diego may be attractive for vacation rentals because it is one of the biggest Airbnb markets in the country, thanks to the weather, the beaches, its proximity to the border, and more. However, there are numerous risks that could endanger your property, subject you to fines and cost you thousands of dollars.

HOA Restrictions

Neighbors don’t like living next to vacation rentals. Vacationers, unlike people who live there, do not take the same care with the property, the neighborhood and their neighbors. Vacationers are loud, more likely to damage the property and disrespect the continuity of the neighborhood because, frankly, they don’t live there and are on vacation.

As a result, many HOAs adopt strict restrictions on how you can lease your property. Many prohibit short-term rentals. Furthermore, violations could also spark significant HOA fines and possibly even a forced sale of the property.

High-Risk

Vacation rentals are also high-risk. If you rent to a long-term resident, you might have a handful of crises a year. But, vacationers, you could face a crisis every week or even more. Vacationers don’t care for the property as a resident would because they don’t have to live there. Your maintenance costs are higher, and your cleaning costs are higher (because you need to clean the unit every time a vacationer leaves).

Additionally, you will need to replace things more often. Vacationers are rougher with the appliances, the fixtures, and the features. You will need to repaint, replace appliances, and repair the bathroom far more frequently. Overall, a vacation rental is more time, more work, more attention and more stress.

Finally, your income is chaotic. In good years, you could make a lot of money. In bad years, you could endure year-over-year losses. Vacation is one of the first things people cut back on when money is lean, therefore, your income stream is one of the first to get hit in an economic downturn. On the other hand, people always need a place to live, regardless of the economic situation. A vacation rental might sound like a good idea but only to round out a well-developed investment portfolio, not to replace a long-term lease property.

Rather than converting your property to short-term vacation rentals, consider retaining the assistance of a property management company. A property management company can take care of the crises, run maintenance, collect lease payments and help you find reliable residents. Property management companies, unlike vacation rentals, save you time, stress and allows you to keep more of your money.