9 Hidden Costs of Owning a Vacation Rental That Nobody Talks About

The luxury and leisure of owning a vacation home can be tempting, and it could even be an extra source of income. But too many people underestimate the costs of investing in one.

As a result, you might be left with some unpleasant and costly surprises if you aren't prepared ahead of time.

To avoid making costly mistakes, here are some costs you should fully understand before buying one.

Just as your primary home is, a vacation property is an investment. You won’t want to skip the initial inspection. It helps you avoid unwanted surprises that could require a lot of money to fix.

It’s also a good idea to have home inspections performed periodically. You’ll want to ensure your property is up to local and state codes, especially since you rent it to guests.

Closing costs accompany all property purchases, including vacation rentals, so don’t forget to include these in your budget.

Closing costs might include title transfer fees, escrow fees, and processing fees. You may also face other fees in addition to your down payment and mortgage.

You can expect to pay between 2% and 5% of your loan amount in closing costs. So if your loan is for $200,000, anticipate closing costs between $4,000 and $10,000.

Vacation rentals come with the same utility bills you have at your primary residence. And since you rent for short intervals, paying them will likely fall on you.

You’ll encounter basic utilities such as electricity, water and sewer, and heat. Your guests won’t be thinking about keeping the costs down the way you would in your own home, so those bills may surprise you.

Most guests will expect free Wi-Fi and might also expect a landline telephone. And you will still need to pay these bills when the vacation home is empty.

You will likely need to pay property taxes on your vacation rental; how much depends on various factors, such as the location and assessed value.

Since you’ll need to invest in a rental where people want to vacation, you’ll have fewer options for choosing a low-tax state. The good news is that property taxes are fairly low in states like Hawaii and California; the bad news is that home prices in these states are not.

You may also need to pay tax on your rental income. To avoid unnecessary tax burdens, you’ll want to keep detailed records of all your expenses related to the property.

Hiring an experienced accountant can help protect you from making mistakes that cost you more money or missing out on significant deductions.

There are all the usual expenses like lawn care, pest control, and battery and filter replacements. But things can break down and wear out in vacation rentals, as in any other home. These problems will need addressing before they result in larger issues.

Curb appeal is important. You must maintain the property to keep it attractive as a rental. You also have to maintain the property when it’s not in use.

If it’s a seasonal rental, there may be extra expenses in closing and re-opening the property between seasons.

To successfully rent the property, you will probably need to advertise it, and, of course, advertising costs money.

Many property owners choose to list on popular vacation rental platforms, such as Airbnb, which takes a percentage of your earnings.

You may need to experiment with marketing to see which types provide the best results. This could get expensive very quickly, especially if the strategy is ineffective.

A vacation rental needs to be fully furnished. Cheaper furniture is more likely to become damaged or broken and may not appeal to high-paying guests.

But expensive furniture is costly to replace and, often, more difficult to clean and maintain. Guests will not want to rent the vacation home if the sofa is full of stains or the mattresses are lumpy.

In addition to furniture, you may need to purchase household furnishings and items for your guests to use during their stay.

You can purchase some infrequently, but others will need to be replenished regularly, such as bathroom supplies such as toilet paper, basic cleaning supplies, toiletries, and kitchen staples. If you provide sheets and towels, there will also be laundry to do when guests leave.

Depending on the location, you may want to provide other conveniences at the rental, such as firewood, a beach umbrella, or even puzzles and board games. You should also factor in replacement costs for theft and breakage; you could find towels or other items missing once a guest leaves. And there’s the cost of cleaning and re-stocking between visits.

If your vacation rental is in a community that requires HOA fees, those fees will be an added cost.

HOA fees can cost as much as thousands of dollars per month. However, you can expect lower fees in many areas. And if the HOA also offers attractive amenities, such as a community pool or golf course, that could increase your rental income and be well worth the fees.

To ensure the vacation home is affordable and a good investment, determine how much the HOA fees are before you buy, and remember that you will need to pay them whether or not the property is occupied.

Owning a vacation rental may sound great, but the actual costs can be a big surprise. It pays to make smart money moves when you invest your hard-earned money.

You can minimize expenses by comparing lenders, considering vacation rental locations, and gathering the necessary information before deciding on a purchase.

Owning and renting out a vacation property can be lucrative, but be sure to consider all the costs. The last thing you want is for unexpected costs to eat into your profits or for your “passive” income to become a full-time job.