June is Investment Properties and Second Homes Month here at Inman. We’ll explore everything including top investor insights, the latest at Airbnb and Vrbo, and the surprising locales emerging as investor hot spots across the country.
This article was last updated June 3, 2024.
You may have purchased your second home as a central hub for far-flung family members or as a crash pad for your favorite getaway spot.
But savvy investors recognize that when your vacation home is empty, it’s just draining your bank account. You don’t need an MBA to unlock the potential of your second home. Here’s how to turn it into a lucrative short-term rental.
Why buy a second home?
If you have the resources, buying a second home is a great way to begin building an investment portfolio.
You don’t need cash to buy a second home. It’s possible to capitalize on equity in your primary home to rustle up a down payment.
People buy a second home for a wide variety of reasons, including:
- Saving over renting in an area they visit frequently
- Getting experience with rehabbing and flipping houses
- Building a retirement portfolio through real estate
Potential pitfalls of a second home
As with your primary home, the hidden costs of a second home can be startling. If you buy in an area with a Homeowners Association, there’s that to consider. But don’t forget things like:
- Property tax
- Lawn maintenance
- Snow removal
- Security features
- Emergency repairs
If you choose not to find tenants and manage the home yourself, you’ll also need to budget for a property manager. These costs can add up.
Short-term rental considerations
Not all homes can be easily transformed into lucrative short-term rentals. Here are six factors to consider.
Where it’s located
Short-term rentals perform best in hot vacation spots (i.e., areas with a beach or with other typical vacation activities). It can be harder to rent out a second home in a landlocked state with no recreation close by.
You might still have a market with people relocating, but those renters could be few and far between.
How often (and when) you’ll use it
If you plan to use your beachfront property every holiday weekend and all summer long, you may not be able to make much money on your rental. If it’s possible, shift your use to a time when rentals are less in demand. Think about gathering at your beach house in the fall or spring, and leave it open for snowbirds and summer travelers.
Rental market prices
If you have yet to purchase your second home but think you might try short-term renting in the future, you’ll need to consider how much rent you can charge. Many inexperienced investors buy a house that cannot be rented for enough to cover the mortgage and expenses.
Available amenities
How many amenities can you provide for your short-term guests? These days, many vacationers expect certain features to come standard (i.e., basic kitchen equipment and cooking supplies, towels, and linens), but what can you add to make your property more attractive?
Consider adding:
- Bikes with which to explore
- Beach gear (e.g., dedicated towels, body boards, chairs, etc.)
- Gaming systems
Make guests feel more welcome with gift baskets stuffed with goodies and snacks, and subscribe to the fastest wireless internet available.
The rules: laws and taxes
Because of their impact on a tight real estate market, some localities have started to ban or heavily regulate short-term rentals. There is still money to be made, but it’s important to follow all local laws — including declaring rental income. The penalties for not declaring rental income can be steep (and even include jail time). Fortunately, once you declare rental income, you can also deduct associated expenses.
Sure, you could rent outside of the major short-term rental marketplaces (Vrbo and Airbnb), but that’s a risky business. Not only do these platforms provide a calculator to determine your potential profit, but they also provide protections for landlords and renters. This helps both parties feel confident in their transactions.
How much time you have to spare
Renting a second home can bring in extra income, but it takes time. You’ll need to clean the home between tenants, manage online bookings and make repairs on a second property. Rental properties generate what is often referred to as “passive” income, but there’s nothing passive about replacing damaged carpets or cleaning up after particularly rowdy guests.
How to transform your property
If you have found a second home and are ready to put it to work for you, there are ways to easily transform it into a lucrative short-term rental property.
Make it renter-proof
Choose sturdy finishes that are easy to maintain. This is especially important in heavy-use areas, such as the kitchen.
Buy quality furnishings
Quality furnishings last longer and hold up better under renters who don’t take as much care as your family might. Invest in well-built couches, tables and kitchenware.
Maximize the space
When you’re shopping for furniture, consider pieces that do double duty. A pull-out couch adds another sleeping space as does a twin-over-full bunk bed for a larger family.
Minimize clutter
Another way to make the most of your space is to pare down to the essentials. Don’t crowd your second home with tchotchkes and clutter. You don’t need to make it minimalist but do remove precious family pictures or anything that has sentimental value and is not easily replaceable.
Make it comfortable
Don’t advertise a short-term rental that sleeps eight — then provide a table that only seats four. For most people, the goal of a short-term rental is to get away and relax. Give guests plenty of room to get comfortable.
Of course, it is OK to limit the number of guests. This prevents people from renting your house for big parties (and leaving all of the mess that comes with those).
Fix what’s (about to be) broken
Keep your property in good repair, taking the time for regular maintenance tasks. This prevents sudden emergencies and can also extend the life of the systems in your home.
Consider a property manager
Property management companies front-load their service charges, but once they are engaged, it can make real estate investing easier and actually save money in the long run. They handle emergency calls and organize repair services, find renters and collect money. This is a great option if your second home is out of state or if you are considering using your second home as a medium-term rental.
Your home away from home
It can be difficult to open your second home to renters, but the income it generates can be substantial. This may eventually make it possible to add to your real estate portfolio.
It is possible to have your cake and eat it, too. To make the most of your second home, reserve weekends on the calendar for treasured family gatherings and personal vacation time well in advance.
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Luke Babich is the CSO of Clever Real Estate in St. Louis. Connect with him on Facebook or Twitter.
