Selling a Vacation Rental Property? Read This First

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Over the past several years, the vacation rental market has skyrocketed in popularity — not just for travelers, but also for the owners and investors who own the properties. As of September 2023, short-term rental listings in the U.S. reached 1.6 million, a record high according to AirDNA data. Last year, oversaturation in the vacation rental market led to lower occupancy rates and a revenue per available room decline of 4.9%, also the first on record.

Demand is expected to rebound in 2024 as the economy strengthens and domestic travel becomes less expensive, however, some hosts impacted by the downturn in bookings might be considering the option of selling their vacation rental property.

With the help of real estate experts and the latest statistics, we’re taking a closer look at the current state of the short-term rental market and its impact on you, a potential seller.

Selling a Vacation Rental Property?

Working with a top agent (especially one with experience in the vacation rental property market) can help sell your home faster and for more money, according to HomeLight data.

What qualifies as a vacation rental?

A vacation rental property, also known as a short-term rental (STR), is a home that is rented out to guests for — you guessed it — short periods of time. Definitions differ, but STR stays typically do not exceed 30 consecutive nights.

There are two main types of short-term rental properties:

  • Owner-occupied: With this type of property, the owner has occupancy more than half the time and rents out the home throughout the rest of the year for up to 30 days per rental.
  • Non-owner-occupied: In this scenario, the owner does not live in the property at all and rents it out at least once a year for up to 30 days per rental.

Approximately 1.6 million vacation homes in the U.S. are listed on online travel agency sites like Airbnb, Vrbo, and HomeAway. Connor Griffiths, listing manager with Lifty Life, an Airbnb property management service, points out that the ideal locations for short-term rentals are major cities, oceanfront, or lakefront homes, or skiing destinations — but short-term rentals are also growing in other areas across the country.

If you’re an absentee owner, trying to manage a short-term rental is very difficult. People are going to call you if there aren’t enough towels — it’s intense. These companies may charge a good amount, but usually between what they can get you in terms of higher rent, higher occupancy, and the fact that they’re on the ground and just take everything off your plate? It’s usually worthwhile.
  • Darren Tackett
    Darren Tackett Real Estate Agent
    Darren Tackett
    Darren Tackett Real Estate Agent at eXp Realty
    Currently accepting new clients
    • Years of Experience 27
    • Transactions 1054
    • Average Price Point $774k
    • Single Family Homes 768

Signs that it’s time to think about selling a vacation rental property

Owning and operating a vacation rental can be a lucrative and enjoyable pursuit — until it’s not. If any of these factors apply to your situation, it might make sense to reach out to an agent to explore selling your vacation rental property:

Your rental income isn’t covering your expenses

Cash flow should be the primary driver of the selling decision, says Kathy Fettke, a real estate investor with Real Wealth Network. “If the income doesn’t cover your expenses, then it is a negative income property. That means you are feeding it, rather than it feeding you.”

The capitalization rate (cap rate) ties into this. The cap rate is calculated with the following formula: income minus expenses, divided by purchase price. “If your cap rate is weak or failing, you may want to focus on other investment opportunities that will generate a higher return,” says Griffiths.

For example, if you receive $120,000 in rental income each year and pay out about $50,000 for maintenance, repairs, and taxes, and the property was purchased for $1.5 million, the cap rate formula would look like this:

$120,000-$50,000 = $70,000

$70,000/$1,500,000 = 4.67% cap rate

The market is favorable for sellers

“Once the pandemic started, we saw a massive uptick in short-term rental interest,” says Darren Tackett, a Scottsdale, Arizona-based real estate agent with 27 years of experience. “Because of all the lockdowns, people were just going nuts. People were coming here to rent places to escape restrictions, and a lot of them decided they liked it here and decided to buy a house.”

But a red-hot seller’s market can’t last forever. According to top real estate agents surveyed by HomeLight, 2023 witnessed buyers gain back some of the leverage they lost in the frenzied 2020-2022 market. Although existing-home sales have hit a 28-year low, we’re still in seller’s market territory due to tight inventory and a nationwide housing shortage.

“Within the last six months, I would say the [short-term rental] market has slowed down quite a bit,” says Tackett. “I have people who purchased and the rentals have not been as lucrative as they had been. Those folks are now looking at doing a one-year rental just because they think the numbers might be better than what they’ve been getting from vacation renters.”

If you need to sell your vacation rental property quickly, HomeLight’s Simple Sale platform can get you an all-cash, no-obligation offer within 24 hours. You can close in as few as 10 days without any extra fees, agent commissions, or prep work involved. To get started, you’ll need to answer a few basic questions regarding the condition of your home, how much work it needs, and your selling timeline.

Big-ticket repairs are on the horizon

Bill Samuel, property investor and owner of Blue Ladder Development, says the overall condition of the property should be one of the key factors in deciding whether to sell.

“It’s wise to sell before you expect capital expenditures to come due,” he says. “These are the larger expenses that are required to maintain a home, such as replacing a roof, furnace, fence, or windows.”

Samuel suggests also evaluating the home’s appeal in terms of upgrades. As an example, one of his Illinois properties was renovated with a new kitchen and bathrooms in 2015. While the upgrades may still be relevant today, he expects that might not be the case in another, say, five years; at which point he probably won’t be able to sell at the higher end of the neighborhood’s range.

You don’t have the time, capability, or interest to manage the property

If you’ve been managing the property yourself but are in a position where you can’t or don’t want to continue doing so — and if you don’t want to enlist a third-party property management company to take over the duties — it might be time to start looking for a buyer.

“If you’re an absentee owner, trying to manage a short-term rental is very difficult. People are going to call you if there aren’t enough towels — it’s intense,” says Tackett, who generally advises his clients owning short-term rentals to utilize property management services. “These companies may charge a good amount, but usually between what they can get you in terms of higher rent, higher occupancy, and the fact that they’re on the ground and just take everything off your plate? It’s usually worthwhile.”

But, if you’re not up for self-managing and you’re reluctant to pay a property management company, then yes, it may be time to consider selling your vacation rental property.

Regulations are limiting your rental income

Tackett points out that local restrictions or HOA regulations can hamper some property owners’ ability to legally operate, and could nudge them in the direction of selling.

“A lot more HOAs are becoming active in pushing back against vacation rentals,” Tackett cautions, explaining that if you’re thinking of selling, “there are a lot of factors you have to weigh before you determine which way you want to go.”

Checklist for successfully selling your vacation rental

So, you’ve decided to list your vacation rental and move on to investing in other properties, enjoying the ones you already have, or maybe getting out of the short-term rental business altogether. As with any real estate transaction, the first key to success is to start with a plan. By following this step-by-step checklist, you’ll be in a much better position to land the right kind of offer.

Pick the right time to list

While there is no single, universal rule as to the best time to put a vacation rental on the market, there may be a more favorable season depending on where your property is located. If you’re curious, HomeLight’s Best Time to Sell Calculator can help you pinpoint the best (and worst) months to list your vacation rental property.

Lucas Machado, property investor and owner of House Heroes, suggests listing your home for sale as early in the season as possible, as long as the property is ready to rent. “Buyers will see this as a benefit because they can start making money quickly,” he points out. “Also, if the seller can show that the booking rate is high, that makes it an even stronger offering.” (Note that in most jurisdictions, transferring your short-term rental permit or license is not allowed; the buyer will have to submit a new application.)

Tackett echoes this sentiment, especially since an active vacation rental is probably in good shape and appealing to buyers. “Most of our vacation rentals show extremely well. Usually, when we see a rental listed, it’s in pretty great condition to begin with.”

If your property needs some work before it can operate at peak efficiency, however, Tackett says it’s worth doing some touch-ups first, because “90% of our buyers don’t want to lift a finger. The more turnkey it is, the quicker it’ll sell.”

Spell out the income potential

While some potential buyers may be curious about your house as a primary residence, others are likely to be interested in it for the same reasons you were — as a source of income. Needless to say, if you’re selling a property that has been reliably renting and generating cash flow, buyers are going to want to see that evidence.

Be ready to show rental history, listing reviews, and professionally shot photos to make your short-term rental more attractive to potential buyers. This is where working with an experienced agent who has knowledge of vacation rental trends in your market will be invaluable — they’ll be able to help you prepare accurate, enticing reports to present to buyers.

Partner with an agent who knows the short-term rental market

Speaking of great agents, let’s touch on a few more advantages to working with someone who has a strong familiarity with vacation rentals.

Not only will they know more about any existing rules and restrictions, but they will also have greater expertise in some of the finer details, such as local HOA requirements, nearby attractions, and the lifestyle of specific neighborhoods.

Another key benefit of using an investor-friendly Realtor® is their access to an extensive local network of reputable cleaners, inspectors, contractors, and remodelers. That being said, it’s worth doing your homework before shaking hands with the first agent who looks your way

“It’s amazing to me how many people just don’t vet agents very hard,” says Tackett. “The first thing I tell agents who are on my team is that if I can Google you and you show up in maybe two places, that’s not very good.”

Tackett recommends looking for an agent who has a strong online presence with good consistency. “How many reviews do they have? How long have they been doing this? If they’ve been selling for five years, have they done at least a hundred transactions? Most people, especially when they’re going to buy, ask very few questions of agents,” he says.

Bearing this in mind, don’t be afraid to ask questions and seek out a local agent who has worked with vacation rental properties before — they’ll be well-equipped to help you get the most for yours. HomeLight can help match you with a top agent in your market who specializes in investment properties. The service is completely free, and it only takes two minutes to get performance-based recommendations for agents in your area.

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Factor market shifts into your price

To set an appropriate price for your vacation rental property, the experts recommend looking at a combination of these valuation methods:

  • The sales comparison approach (SCA), which looks at recent comparable sales in the area.
  • The capital asset pricing model (CAPM), which takes into account the level of risk and how that will impact the return on investment.
  • The annual capitalization rate (the expected annual rental income divided by the value of the property).
  • The cost approach, which prices a vacation rental based on what it would cost to construct a new similar property.

There is no hard-and-fast rule for pricing a vacation rental, as each property is different. Particularly in unstable economic times, it’s more important than ever to consult with an agent who has a good understanding of the local market and can help you calculate a price that reflects the property’s value and is in line with comparable sales.

Know your audience when marketing and selling a vacation rental

In a “normal” market, buyers of vacation properties are typically investors seeking a cash-flowing asset. In that case, you’ll likely need to provide evidence for your profit-and-loss statements, including bank statements, tax returns, vendor contracts, and any financial models and projections you’ve put together. You can really do your homework to impress investors by calculating three separate financial statements: one as a traditional long-term rental, one as a short-term rental while self-managing, and one as a short-term rental while hiring a property manager.

Buyers will want to know about any unique features of the house that may represent untapped income potential, such as a separate mother-in-law suite on the same lot or a sealed-off basement with a separate entrance. Further, make it clear whether you’re selling a furnished home or not. But, Tackett cautions, don’t expect to get rich off the furniture in your rental property.

“I see it all the time where sellers want to quote how much they spent, and the reality is that the secondary market for furnishings is pretty poor,” he says. “If you can get even 25 cents on the dollar then that’s probably a win.”

If this sounds bleak, remember that the alternative will be having to clear out those furnishings yourself — and it’s not exactly convenient to hold a garage sale or sell on consignment if you live out of state or are otherwise far from your vacation home.

Plus, putting a furnished house on the market typically means it’ll show better. Especially for prospective buyers who are looking at the property as an STR, turnkey is an advantage.

Manage active bookings during the sale

If you’re planning to sell a vacation rental that’s currently in operation, consider limiting or stopping new bookings once it’s listed for sale. If you decide to keep accepting reservations during this time, you have a couple of options for showing the property. You can schedule viewings when it’s empty or in the periods between guest check-ins and check-outs. Alternatively, you can block off specific days or weeks for the purpose of scheduling showings.

Most sellers pass along any existing systems and processes — for details like marketing, cleaning services, and maintenance — to the buyer. If you’ve been using a vacation rental management company, the buyer can opt to continue that relationship. Again, Airbnb and Vrbo do not allow listings to be transferred to new owners, so they’ll have to apply for a short-term rental permit and create a brand-new listing.

Beyond the numbers, you should be prepared to explain the “secret sauce” that has led to any past success with the property. That might mean the near-hidden pathway that leads straight to the beach, the well-maintained pool and hot tub, the proximity to local dining and shopping spots, or the friendly, on-call maintenance man who takes care of any issues within minutes. Remember, if certain factors have helped you find success with this property, those things are likely to be advantageous to the next owner, too.

Take taxes into consideration

Selling your vacation property could be lucrative in terms of freeing up equity, but you’ll also have to set aside some of the profits to cover the taxes.

When selling a home that served as a primary residence, a seller can exclude any capital gains taxes up to $250,000 for single homeowners or $500,000 for married homeowners. But for investment properties, they are required to pay a capital gains tax on the profits from the sale.

If you’ve owned your rental property for 12 months or longer, you’ll have to pay a long-term capital gains tax. For the tax year 2023, the IRS capital gains tax rate is 0% for individual taxable incomes up to $44,625, 15% for incomes ranging from $44,626 to $492,300, and 20% for incomes over $492,300.

For married couples filing jointly, the long-term capital gains tax rate is 0% for incomes up to $89,250, 15% for incomes between $89,251 and $553,850, and 20% for incomes over $553,850. Read more about rates for all other filing statuses as well as tax year 2024 by clicking here.

There are a couple of different ways to defer or reduce your tax liability when selling a vacation property:

  • Tax-loss harvesting: If you’ve experienced a loss from another investment within the same tax year, you can subtract that amount from any capital gains earned in the sale of your rental property. For example, if you lost $25,000 in stocks in the same year that you earned $50,000 in the sale of your vacation rental, you can offset half of the amount of your capital gains.
  • 1031 exchange: If you take the money earned from the sale of your vacation rental and invest it in a “like-kind” rental property, you can defer the capital gains tax, per the 1031 exchange rule. You’ll have to act quickly, though: The IRS requires that sellers choose prospective like-kind properties within 45 days of selling the original property and close on the new purchase within 180 days of the first sale. If you don’t do so within that time frame, you’ll have to pony up the full capital gains tax.
  • Live in the property before you sell: You could be eligible to deduct up to $500,000 of capital gains tax by converting your vacation rental into your primary residence. For this to work, you must have owned your property for at least five years and used it as your primary residence for at least two years.

To sell or not to sell? It’s your call

As with just about everything in real estate, there is no hard and fast rule for determining whether you should sell or not. It all depends.

“It’s so specific to a seller’s situation,” says Tackett. “If you’re not happy managing a rental, if the income isn’t what you hoped, if you feel like you can take that money and do something better with it, then by all means, sell.”

No matter when you decide to take that step, selling a vacation rental property involves navigating many moving parts, managing countless details and decisions, and following frequently changing rules and regulations. Having a specialized real estate agent in your corner will greatly increase your chances of successfully closing and moving on to the next chapter in your journey, whether that’s purchasing a new STR or just enjoying the financial fruits of your investment.

Header Image Source: (Sandra Seitamaa / Unsplash)