Are Vacation Rentals A Good Investment In 2023 (Explained)

After the dark cloud that hovered over vacation rental properties during the pandemic, 2022 is very promising for real estate investors. We are seeing a great comeback with vacationers that for a long time found themselves in lockdown. So to the question, are vacation rentals a good investment in 2022?

I believe it is, and here is why.

As the travel industry picks back up again, the demand for short term rental properties is also on the rise. As a real estate investor, owning vacation rental properties is one of the best strategies to build wealth.

A tool that all real estate investors must know about is AirDNA, a short-term rental data analyzer that provides forecasts of what you can expect to see this year in the vacation rentals market.

Let’s discuss what 2023 trends you can expect to impact the vacation rentals market.

Flexible Work Arrangements

As more people were forced to work from home, businesses responded by building a flexible work structure that allows workers to fulfill their duties remotely. Employees saw this change as an opportunity to create various types of work environments outside of their home office.

Traveling while working became a popular concept for people who were mostly used to only traveling a couple of weeks out of the year. Most employees are now able to take their full-time work anywhere without disturbing their roles.

As more working styles are created, the demand for vacation rentals is on the rise again. More people are choosing to have working vacations where they experience a new scene while still fulfilling their duties at work.

This trend is creating travelers that are renting for longer stays and want a true “home away from home” experience. Instead of looking for hotels, travelers prefer the coziness of the “real home” feel that vacation rentals provide. This benefits owners and property managers because it means fewer guest turnovers, making it much easier and more economical to manage.

Unique Travel Opportunities

Another trend in traveling we are seeing now is the demand for rare accommodations. Vacation rentals are expanding into offbeat categories such as tiny homes, farm stays, tree houses, and many other unique rentals. This opens a variety of opportunities for real estate investors as they are able to maximize their offers.

Even large estates are becoming a trend for 2023 as many families and groups of friends are coming back together again after a couple of years of being socially limited by the pandemic. Real estate investors can expand their portfolios to include various types of properties and take advantage of this trend.

The Balance of Supply and Demand

As the pandemic became a long-term consideration, the market saw a shift out of urban neighborhoods and into rural areas. Real estate investors who were aware of this trend bought properties where people could feel free to roam outside without worrying about the restrictions of the pandemic.

Even though the demand for rural properties increased, we are now seeing a rise once more in the demand for urban rentals. As more people return to their normal lives, urban areas are experiencing a comeback. Once again, savvy real estate investors are seeing this opportunity and purchasing urban properties to fulfill the market’s needs.

As a real estate investor, it is important to stay current with market trends and make shifts accordingly. AirDNA reports that the average annual revenue expected this year for vacation rental properties is at approximately $56,000, which is an all-time high.

This number is expected to decrease by about 5% as the supply of properties rises and rates fall. However, in 2023, we are supposed to see an increase in the expected average annual revenue.

Are Short Term Rentals a Good Investment for 2023?

The short answer is … absolutely!

As a real estate investor, it is hard to predict what is going to happen to the market. There are several wildcards that include the pandemic, government restrictions, and the public’s response to all of it.

There is no certain way to know how travel will be impacted and consequently short term rentals. Something you can focus on is the fact that the real estate market will remain until the end of time. Whether good or bad, the real estate market is not going to disappear. Therefore, as it always does, it will go through waves of amazing highs and scary lows.

You have to see yourself as a life-long investor. Real estate investments can be part of your life as a real source of security, no matter what the market experiences. The vacation rental market is now recovering from the big dip it experienced the last couple of years, post-pandemic.

You can certainly start to get ready in 2022 for some exciting upward movements in the market. The vacation rental property scene is undergoing major changes. Keeping up with these trends will provide you with a great opportunity to stay ahead of the curve in 2022.

How to Choose a Vacation Rental Investment Property

Now that you know 2023 is a good year for investing in vacation rental properties, you must still follow the same rules as before. Let’s review some things you must consider as you prepare to purchase a vacation rental property in 2022.

1. Analyze the Pros and Cons

Even if purchasing a vacation rental home is a no-brainer for you, it is still a good idea to consider the pros and cons. Although owning a vacation rental property has great advantages, there are still some negative aspects you must calculate into the overall picture.

2. Crunch Your Numbers Thoroughly

It is tempting to eye-ball a deal without crunching your numbers well, but this is a mistake that can lead to major trouble. Even as an experienced real estate investor, it is still best to carefully analyze your numbers.

Once the real numbers are on paper, it is easy to spot any potential obstacles. Taking the time to carefully crunch your numbers will increase your chances of obtaining the best deal, so don’t skip this crucial step!

3. Ask Yourself if Now is the Best Time for You to Purchase

Every real estate investor is unique. There is no “one-size-fits-all” approach when it comes to making a beneficial deal. What may work for one person, may not work for another. You must comprehensively assess your situation and decide if it makes sense for you.

The market is now seeing a housing shortage, which is driving up prices. You will have to consider the changes seen in the market today and figure out what your money can buy. Perhaps you need to wait or move quicker than you thought to enter a deal at the best time.

4. Prepare For the Down Payment

Second homes or vacation rental properties are harder to finance. Lenders want to see a higher down payment before approving a loan. Be prepared to make a higher down payment and be sure to finance the property at the best interest rate.

There are still many properties being sold under market value, which is a great opportunity for investors. Although they are harder to find, as an investor, you must seek out good deals. Even if the down payment required is high, buying the property at a discounted price immediately puts you at a financial advantage.

5. Calculate Taxes

Work with a tax specialist that will help you benefit from maximum tax deductions. Generally, if you are single or filing jointly with your spouse, you may be able to deduct the full interest on your vacation rental property. This applies to quantities up to $750,000.

Consider the regulations you must fulfill required by the IRS. Your tax expert will guide you to minimize the taxes you have to pay on your rental home and maximize your bottom line.

Second homes are taxed differently than investment properties. A creative tax professional will help you choose the best way to arrange your property rentals.

What are the Benefits of Owning a Short Term Rental Property?

If you are considering purchasing an investment property in 2022, owning a vacation rental home is a great option. It provides you with the opportunity to capture the trends happening in travel and the work-life balance. Now, it is a perfect time to start looking into what type of vacation rental property fits you.

The benefit of owning a vacation rental property is that you have the option to be as involved as you wish. Many real estate investors are opting for allowing a property manager to handle everything. By giving up a percentage, you can have a property manager do everything necessary to maximize profits.

Paying for this service is well worth it as you will gain a significant amount of free time that you can devote to going after other deals.

Here are other benefits of owning a vacation rental property:

  • Rental Income
  • Prepare for Retirement
  • Long-Term Profits
  • A second home for vacations and more

Best Places to Buy Vacation Rental Properties

Market studies help you figure out where to set your eyes for your next investment property. In 2022, you can expect the following markets to yield the most profits, here are the top 10:

1. Maui, HI

2. Kenai Peninsula, AK

3. Chattanooga, TN

4. Gulfport/Biloxi, MS

5. Slidell, LA

6. C​​rystal River, FL

7. Joshua Tree, CA

8. Charleston, SC

9. Galena, IL

10. Southwest Harbor, ME

My Final Thoughts on are Vacation Rentals a Good Investment in 2023

There are many things still currently making vacation rental investments challenging. Covid is still here, inflation is very higher, the Ukraine war is ongoing but I still believe long term investing in vacation rental properties is a great strategy for wealth and cashflow.

What are your investment plans for 2023? Is a vacation rental property on your radar? I enjoy hearing from you, please comment below, and share your story.

Thank you very much and have a great day.

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