Understanding Short Term Rental Ownership: What to Know Before Buying a Vacation Rental Property

Buying a vacation rental property is often seen as the first step to building a real estate portfolio that generates passive income for years to come. With vacation rental usage and ownership surging over the last several years, vacation home ownership is becoming one of the most popular avenues for real estate investing.

This guide is designed for prospective owners who are researching whether a vacation rental makes sense for their financial goals, risk tolerance, and desired level of involvement. It is especially relevant for first-time vacation rental buyers, second-home owners exploring rental income, and existing owners looking to better understand performance drivers.

How Vacation Rental Properties Work

Unlike a traditional investment property where you’re generating rental income from long term tenants, vacation rentals are typically rented out for stays of 30 days or less, usually less than 7 days (which is why they’re commonly referred to as short term rentals or “STRs”). Traditional long term rentals generally have the rent set where the owner can cover the mortgage payment, expenses, and generate a little bit of cash flow. The major value is the actual real estate itself, and having renters that cover the ownership costs.

With short term vacation rentals, revenue is generated through fluctuating nightly rates and occupancy. Unlike long term rentals with a fixed monthly income, short term rental income can vary wildly depending on seasonality, local events, pricing strategy, and even changes in local regulations. While this variability can create major revenue swings during the offseason, peak vacation times can generate enough income in a single month to cover the mortgage payments and HOA dues of your investment property for an entire year.  

Short term rental ownership models vary. Some owners manage the property themselves, handling listings, advertising, bookings, guest communication, cleaning coordination, and maintenance. Others work with professional property management companies that oversee daily operations on the owner’s behalf for a fee, usually a percentage of the monthly booking revenue.

Pros of Owning A Vacation Rental Property

Passive Income Potential

The major draw of owning a short term rental property for almost everyone is the income potential. We’ve all seen the Instagram posts of the ultra luxurious $20,000+ per night Airbnb and VRBO mountain home listings in Aspen, and while that’s probably out of reach for 99.9% of real estate investors, you can still turn a sizable profit with the right vacation home.  In the first half of 2025, the average daily rate for short term rentals in the US was $338.83, an almost 7% increase over 2024. Depending on your property’s occupancy rate, it’s not unrealistic to recoup your down payment in a few years and cover the mortgage, if not generate some cash flow. The right property, in the right market, during peak season, can generate significant revenue well beyond covering the operating costs.  

Personal Use

Another major benefit of vacation rental ownership is the ability for personal use. While there can be restrictions on personal use of STR investment properties, you’ve got a built-in getaway spot year-round.  

Property Appreciation

While property appreciation can never be guaranteed, just as your primary residence or long term rental property can grow in value, a vacation rental property in a desirable location can see long term equity growth as well. One of the major boosts to property value for short term rentals is that you can grow it through upgrades and improvements, which may able to be classified as business expenses. These upgrades can have immediate improvements to your guest reviews and ADR.  

Investment Diversification

Tax Benefits

In many aspects, vacation rentals are treated very differently from primary residences, but when it comes to taxes, they enjoy many (if not more) of the same benefits you get from traditional home ownership. Depending on how you use your vacation rental home, you may be able to qualify for tax deductions on insurance premiums, property taxes, mortgage interest, and more.

Potential Downsides of Owning A Vacation Rental Property    

Income Fluctuation

Vacation rentals are highly impacted by seasonality. Demand fluctuates with travel seasons for the area, events, weather, and economic conditions. Cash flow planning and budgeting are critical, and homeowners need to be prepared for the “shoulder season” and the off-season. You also need a plan to maximize income during peak season to ensure there’s enough operating funds for expenses like upkeep, repairs, upgrades, and marketing.    

Operational Complexity

Owning a vacation rental is more complex than the average long term tenant rental. Where long term rental properties can get to an almost “set it and forget it” level with the right tenants, short term rentals are changing tenants every week or even multiple times per week. This means managing check-ins, bookings, and guest communication along with increased cleaning, maintenance, inspection, linen changes, and more. A professional vacation rental property management company helps alleviate much of the burden, but as the owner, you’re still responsible for the financial planning.    

Regulatory Risk

You should know the city, county, municipality, and homeowners association rules and laws before you buy vacation rental property, along with the permitting process. Those rules can and do change, though.  Community feelings towards short term rentals ebb and flow, and it’s not uncommon for new zoning restrictions or ordinances to be put in place over time that have an adverse impact on the ability of homeowners to rent out their property.  

Upfront Costs

When you buy vacation rental property, it’s a different experience than buying a traditional residential property. Home prices in the most desirable markets will be higher because of the short term rental potential. In addition to the higher purchase price, lenders may require a higher down payment and have higher interest rates since this will be a second home and not an owner-occupied primary residence. Vacation homebuyers will have the upfront costs of furnishing the property and getting it up to guest-ready standards. Ongoing maintenance costs, property management fees, and listing/marketing costs can add up as well.

Competition

The most lucrative vacation rental markets also attract the most competition. Generating revenue from your rental isn’t as simple as taking a few pictures and listing the property on Airbnb, Booking.com, or VRBO. Pricing and marketing strategy can become major factors that dictate the success of your rental investment. High vacation rental inventory can also put pressure on average daily rates and occupancy if supply outpaces demand.

Are Vacation Rental Properties Good Investments?

For many, vacation rentals are excellent investments, but whether or not it’s a good investment for you depends on several factors. Your investment goals, risk tolerance, financial situation, target market, and type of property all impact the ROI of your investment property.    

Real estate investors generally evaluate vacation rentals on several metrics.

• Average daily rate for similar properties in the area
• Occupancy rates
• Tourism and travel numbers
• Revenue per available rental (RevPAR)
• Local regulations and laws
• And more

Compared to a primary residence or long term rentals, vacation rental properties offer a significantly higher income upside but with higher variability. Homebuyers who approach STR ownership with realistic expectations and a long term perspective are often rewarded with a higher return on their investment.      

How To Buy Vacation Rental Properties The Right Way

Do Your Research On Locations

Before you do anything else, you need to pin down your ideal location for STR ownership.  Location is the number one factor that will make or break your profitability and investment goals. A slope-side condo at a ski resort or beachside home in Florida will command a significantly higher average daily rate than most properties in urban areas, but for some owners, that’s completely acceptable. Once you pick an area, state, or city, learn as much as you can about the local real estate market, vacation rental regulations in the area, the licensing process, travel seasonality, and the current short term rental inventory.

Determine Your Metrics For Success

Once you’ve narrowed down your ideal location, start calculating your costs and potential income. Factor in elements like whether or not you’ll allow pets (which can bring you a higher ADR), if you’ll make any upgrades or add amenities, and what your upfront costs might be.  Estimate your purchase price, closing costs, furnishing expenses, and ongoing operating expenses. You should take into account things like property management fees, cleaning, maintenance, utilities, insurance premiums, taxes, and marketing-related costs. You’ll want to be able to reasonably calculate your breakeven point and understand the occupancy and pricing you’ll need to meet and exceed it. At this stage, it doesn’t hurt to talk with a local vacation rental management company or real estate agent to fact-check your research and expectations.  

Get Your Funding In Place

Unless you’re paying cash for your new vacation rental, you’ll need some type of financing, and getting a loan for a short term rental isn’t quite as straightforward as a mortgage for an owner-occupied home. Lenders often consider vacation rentals to be higher-risk loans due to income fluctuations. This means you might be subject to higher credit score requirements, heftier down payments, and higher interest rates. The terms of the loan can have a major impact on cash flow, so it’s important to explore different financing scenarios and understand how monthly mortgage payments could impact profitability.  

Decide How Your Vacation Rental Will Be Managed

Many first-time vacation rental owners want to manage their own property, and there’s nothing wrong with that.  Don’t underestimate the time and effort it takes to manage your own property, though.  Keeping your property in pristine condition and attractive to guests should be your top priority. Once a property starts collecting negative reviews on listing platforms, it’s a challenging hole to climb out of. If your property isn’t nearby your primary residence, self-management may not even be an option. Many areas require a registered contact for the property who can be on call 24/7 and respond to incidents within 30 minutes.

Hiring a local property management company that specializes in vacation rentals is an attractive option for most homeowners. Management companies may offer different levels of engagement, ranging from basic listing, booking, and guest management to full service, where homeowners can take an almost entirely hands-off approach. Full-service management will generally handle everything from listing and marketing to cleaning, maintenance, and even tax remittance.  

Purchase Your Property & Get Your Business Rolling

Once you’ve found the perfect property that meets your goals, make your offer and take possession. In most areas, you can’t start the licensing process (if required) until you physically have possession of the property. After signing the closing documents, your next stop should be dropping off your completed STR permit application. With licensing in process, you’ll have at least a few days, and possibly a few weeks, to get the property ready for guests.  Start putting your plan into action or working closely with your local vacation rental manager to ensure you’re taking all the necessary steps for success.      

Ready to get started with your vacation rental journey?

Contact SkyRun Vacation Rentals to learn more about how you can maximize the return on your vacation rental rental investment with expert local STR management.