If you’re looking to invest in a property with the interest of vacationing there, you may have wondered if it’s better to purchase a vacation rental or a timeshare.
While both options have unique perks, financial and real estate experts overwhelmingly agree that if you have the financial means to do so, you’re better off investing your money in a vacation rental. Simply put – when you’re not enjoying the property for your own vacations, it has potential to appreciate in value and simultaneously earning you revenue through rental income, proving to be a worthy investment.
“You will most likely use your vacation rental for just a few weeks a year, which means that you can rent it out on short-term basis for the rest of the year,” points out Daniela Andreevska, Marketing Director at Mashvisor, a real estate data analytics company which helps investors find traditional and vacation rentals. “Vacation rentals are in high demand, so you will be able to benefit from a very high return on investment.”
Experts say there are risks and rewards associated with both vacation rentals and timeshares. Here are the unique pros and cons that come with both vacation rental investments and buying into timeshares and why investing in a vacation rental is the smarter decision.
Pros and cons of investing in vacation rentals
Owning a vacation rental property can be a good way to ease into real estate investment, plus it comes with the added perk of having somewhere to vacation with your family members and friends.
Here are some of the pros of owning a vacation rental:
- Your property can appreciate in value: Real estate is historically proven to increase in value over time, Gordon Newton, president of Newton Group Transfers and author of “The Consumer’s Guide to Timeshare Exit.” In a new report, Rented.com ranked the best places to buy rental properties. Pigeon Forge, Tennessee; Gatlinburg, Tennessee; and Panama City Beach, Florida are among some of the top, recession-proof cities identified in the ranking. Unlike a timeshare, you can choose when you want to sell your vacation property and reap the benefits of a seller’s market.
- You can book your property whenever you want: Since you are the owner of the property, you get to decide when you want to use the home to host your own vacation and when you want to make it available to rent, points out Andreevska. However—and this may fall in the con category—you might want to consider vacationing mid-week or in a shoulder season so that you can rent your property during the weekends and peak seasons when there’s higher demand and you can set higher prices.
- You can earn year-round revenue: Not only will your vacation rental be the consummate host for your next getaway, but it will also help you earn money to fund your vacations. “The rental property can give you money back year-round and eventually you should make back your investment and start making pure profit,” says Stacy Caprio, a blogger at financial markets website Fiscal Nerd. “A timeshare will give you experiences but you won’t make money from owning it.” So, just how much can you expect to earn in rental income? For every $100,000 you spend on your vacation rental, you should target yearly rental income of $12,000 to $14,000, according to TurnKey Vacation Rentals.
Here are some of the cons of owning a vacation rental:
- You’ll need to put down a downpayment: If you’re planning to make an all-cash offer on a vacation rental, this, of course, doesn’t apply to you. But, if you need financing to afford your vacation rental, you’ll need to come up with a downpayment, which will be a larger up-front investment than what’s needed for a timeshare, Newton says. Underwriters will look at your debt-to-income (or DTI) ratio, so if you already have a mortgage, you will need to be able to show you have enough of a financial cushion to borrow for a secondary residence.
- You’ll probably need to pay taxes: If you rent out your vacation rental for 14 or more days, you’ll have to pay taxes to the IRS based on the income you’ve generated from your property. But, on the upside, you’ll also be able to take deductions for improvements and repairs you’ve made on the property, in addition to some of the costs of maintaining the vacation home.
- You’ll need to maintain the property: Whether it’s mowing the lawn, performing pool maintenance, or making sure appliances are working, homeownership comes with a long list of chores. Of course, you can outsource these tasks by hiring professionals, including a full-service vacation rental property management company like TurnKey Vacation Rentals.
Pros and cons of investing in a timeshare
Timeshares allow multiple, joint owners to use a property as a vacation home under a time-sharing agreement. They are typically resort-style condominiums.
Here are some of the pros of owning a timeshare:
- You can make repeat visits to your favorite vacation destinations: If you have a location that you like to frequently visit, and you tend to take vacation the same time each year, timeshares can be a good option for vacations, Newton says. “I would highly recommend purchasing a timeshare from someone trying to get rid of theirs as opposed to overpaying by purchasing directly from the resort,” he says. In theory, you can exchange your timeshare week for different locations depending on availability, however a common complaint is that the availability is scarce in desirable locations, Newton points out.
- Timeshare rooms are often spacy: Timeshare properties often have rooms larger than hotels, making this a nice option for larger families, Newton says.
- Timeshares nudge you to vacation: You’ve probably heard before that a lot of vacation days go unused here in United States. In fact, one survey found that 52 percent of Americans have unused vacation days that expire. Due to the pre-paid nature of the products, timeshare gives owners the discipline to vacation more consistently, says Peter Roth, vice president of marketing, communications and industry relations for American Resort Development Association. The trade association represents vacation ownership and resort development industries. Timeshares can certainly help you save on vacation, Roth says. He provides this cost analysis: A standard room in a resort-style hotel would cost approximately $225 per night. A family of four would spend $3,150 (cost of 2 hotel rooms) for a one-week stay. Over 18 years of vacationing, that adds up to $56,700. The average cost of a timeshare product is $22,180 (a 2-bedroom unit) plus annual maintenance fees (on average $980/year x 18 years = $17,640), the total is $39,820. Savings for vacationing with timeshare over 18 years is $16,880.
Here are some of the cons of owning a timeshare:
- It’s often tough to sell your share in a timeshare: Is is estimated that over a million timeshare owners are seeking to end their timeshare ownership at any given time, says Newton.
- You can’t use it whenever you want: Unlike a vacation rental, you can’t vacation at a timeshare whenever you want. You will have a pre-designated time to enjoy the property, which could be problematic, say, if it ends up coinciding with a busy week at work or you were hoping to enjoy the destination during different seasons.
- Maintenance fees can give you sticker shock: These fees typically increase every year as well, Newton says, and historically at a rate higher than inflation. Even if you’re not using the timeshare, you have to pay them. Also, special assessments which may be assessed from time to time and must be paid by all owners.
- You’ve got to watch out for upselling: With timeshares, the risks are that you don’t use it every year, and that the company upsells you each time you want to use it, says Brian Davis, a real estate and personal finance columnist, real estate investor, and co-founder at SparkRental.com. “There’s a lot of upselling in the timeshare industry,” he says. “You buy at one price, thinking you then get ‘free; vacations for life, but every time you actually go to use the timeshare they hit you with ‘Well, if you want to visit that property at that time of year, you’re going to have to pay an extra $1,000.’”
Whether you invest in a timeshare or a vacation rental, you’ve got a guaranteed place to stay on your next vacation. We think that’s a great thing. In fact, studies show that vacations can contribute to your health and wellbeing, and increase your productivity when you return to work. While a vacation rental will likely require a bigger investment (in the form of a down payment and taking care of the property), it also yields a greater return. Not only can you earn income from it through rental revenue, but you also have the flexibility to determine when you want to vacation, and how often you want to enjoy getaways. On the flip side, timeshares, given the shared nature, typically limit your vacation to a pre-set week (or weeks) every year. The bottom line? Many of the pros that come with a timeshare, including having a place to vacation, also come with vacation rentals, but with more flexibility.
Not sure how to manage your vacation rental after you purchase it? Schedule a consultation with us here.