As a real estate investor, you're no doubt aware a vacation rental could be a solid addition to your portfolio -- especially if you buy one in a prime spot. But is now a good time to buy a vacation home to rent out? Here are the benefits and drawbacks.
Pro no. 1: Low mortgage rates
Mortgage rates have been unbelievably low since summertime. Today, you can get either a 30- or 20-year fixed loan for well under 3% and a 15-year mortgage for well under 2.5%. Low mortgage rates mean lower monthly payments on your property, freeing up cash for other investments and giving you more flexibility.
Pro no. 2: You may snag some deals from desperate sellers
Though some vacation property owners have fared reasonably well this year, others have been struggling. The coronavirus pandemic has really put a damper on travel, and in some parts of the county, tourism has hit record lows. But as an investor, this gives you an opportunity to scoop up discounted vacation properties owners may be eager to get rid of coming off a dreadful season.
Pro no. 3: There may soon be a surge in demand for vacation homes
A lot of people have been stuck working remotely and staying close to home since March. Meanwhile, health experts say it's possible a coronavirus vaccine will be widely available by mid-2021. If you buy a vacation property now, you may find that once travel restrictions ease and fears subside, there will be a boom in potential guests looking to escape their surroundings and venture out. That could, in turn, put a lot of rental revenue in your pocket.
Con no. 1: Inventory is low
The housing market has been tight this year, with many would-be sellers holding off on listing their homes due to the pandemic and the general economic uncertainty it's caused. Because inventory is so low, property values are surging, so if you aim to buy a vacation home now, you could end up paying top dollar for it. And that could negate the savings you'd reap by locking in a competitive mortgage rate.
Con no. 2: You could end up settling
Low housing inventory doesn't just mean inflated prices; it also means you may end up having to settle for a vacation rental that needs a lot of work. And if you're not handy, you could end up spending a small fortune to hire a contractor for renovations just to make that property marketable.
Con no. 3: Travel restrictions may trip you up
Once the coronavirus pandemic ends, travel bans and quarantine mandates shouldn't come into play. But now, state-imposed restrictions could leave you struggling to get bookings. Be prepared to endure a period of sluggish revenue if you opt to buy a vacation rental in the near future.
What's the right move for you?
Clearly, there are advantages to buying a vacation home now, but consider the disadvantages as well. As is the case with any investment, real estate or otherwise, there's risk involved, so think about not just your tolerance for risk but your cash flow situation. Buying a vacation rental right now could really pay off, but it may take some time to reap the benefits of that decision. Keep that in mind as you decide whether to expand your personal portfolio.