Buying a vacation rental can be one of the smartest real estate investments you can make. Generate income for most of the year, use it yourself for vacations whenever you want, and enjoy the appreciation of your property while you’re at it. In the right location and with the right approach, vacation rentals regularly outperform traditional rental properties by 20 to 40 percent.
But here’s what most first-time buyers don’t realize until six months in: This isn’t passive income. This is a hotel business that involves real estate. You’re competing against hotels, professional property managers who manage dozens of listings, and every other landlord in your area.
The difference between successful and struggling homeowners usually comes down to expectations. If you think your property will “pretty much run itself,” you will be disappointed and likely lose money. If you treat it like a business, do the work (or pay someone to do it), and focus on the four areas below, vacation rentals can generate returns that are well worth it.
Here’s what really matters when you buy one.
What is a vacation rental? A vacation rental (North American vacation rental) is a furnished property that you rent to guests for short stays, usually a few days to a few weeks. If you’ve used Airbnb or VRBO, you already know what it is.
The term “holiday rental” is British. Americans and Canadians call them vacation rentals or short-term rentals. The concept is the same: you are competing with hotels for tourist dollars.
Why vacation rental financing is different This is where most buyers are surprised. You can’t just get a regular mortgage and start listing your property online.
Unless you’re paying cash, you need specialist financing. A vacation rental mortgage works differently to standard home loans, and most first-time buyers don’t realize this until they’re already looking at a property.
Funding in the UK: Expect to put down 25-40% (not the 15-20% you would need for a regular rental purchase). Interest rates are 0.5-1.5% higher than standard mortgages. Lenders want proof that projected rental income will cover 125-145% of your mortgage payment because they know your income will be seasonal and unpredictable.
US-Canadian funding: You will either apply for a mortgage for an investment property (15-25% down payment, higher rates), or you will potentially qualify for second home financing if you actually use it personally more than 14 days per year. But here’s the catch: Many US lenders won’t consider projected vacation rental income at all to qualify. You must be eligible only on your regular salary.
Work with brokers who specialize in vacation rental financing. Your regular mortgage manager probably hasn’t done enough to know which lenders are actually willing to work with short-term rent projections.
The real differences compared to regular rentals Vacation rentals generate higher revenue per night, but you’re constantly looking for reservations. Long-term renters pay less monthly but require almost no effort once they move in.
You have to provide everything, down to wine glasses and coffee filters. Regular rentals just need a refrigerator and a working toilet.
Management intensity is the biggest killer that most people underestimate. You respond to messages at 10 p.m., coordinate cleanings between same-day rotations, and handle “WiFi not working” texts during guest stays. Long-term tenants may call you twice a year.
The tax treatment varies wildly depending on how many days you use it personally or if you rent it. More on this below.
Should you really do this? Vacation makes for work when you own a property in a really high demand area (not “we get tourists in the summer”), you can achieve 60%+ occupancy without destroying yourself with constant marketing, and you either live close enough to manage it, or you can afford to pay someone 15-30% of your gross income to do it for you.
They don’t work if you need a predictable monthly income, hate dealing with people, or have chosen a property in an area where 200 other hosts are already competing for the same reservations.
The successful owners I know treat this like a hospitality business. They respond to requests within the hour, set dynamic rates based on demand, constantly adjust their listings, and maintain the property as if it were a boutique hotel. Those who fail thought they would list it on Airbnb and watch the money roll in.
Choose the right location (this matters more than anything else)
Location isn’t just important. This is the difference between a property that books itself and a property whose prices are constantly falling and which still cannot find a buyer.
Most buyers fall in love with a property first, then try to justify the location. It’s backwards. Start with the request data, then search for the property.
In the UK, you want areas that attract tourists all year round or have concentrated peak season demand strong enough to see you through the off months. A cottage in Cornwall that sits empty from November to March must absolutely crush it from April to October. Can it be realistic to book 20+ weeks at £800-1,200 per week to make your numbers work? Do the math before you fall in love with sea views.
The Lake District and Cotswolds benefit from more consistent traffic throughout the seasons, but face brutal competition. Edinburgh works if you’re close to the Royal Mile and can capture the festival season at premium rates. Welsh coasts offer lower entry prices, but check actual booking data and not tourist board optimism.
For North American buyers interested in these markets (or considering properties closer to home), the same principle applies. Orlando’s nearby parks, Colorado’s ski resorts or Outer Banks beach properties have proven themselves. But a “lovely cabin” two hours from anywhere rarely works, unless it’s priced so low that you barely cover the costs.
Here’s what separates properties that work from those that don’t: proximity to what people actually came to do. Walking distance to the beach, ski-in/ski-out location, walkable town center or less than 15 minutes to national park entrance. “Quiet and secluded” is code for “you’ll need a car and we’re not close to anything,” which limits your market to specific demographics.
Research actual occupancy rates for your area. No projections, but actual rates. Talk to local property managers. Check Airbnb calendars to find comparable properties and see how often they are actually booked versus just available. If 40% of listings in your target area are showing consistent availability, that’s market saturation screaming at you.
The cost/income ratio matters more than the absolute price. A £400,000 property generating £40,000 a year beats a £200,000 property generating £15,000, although the cheaper one appears to have less risk. What you’re actually buying is the revenue stream, not the bricks.
Understanding the tax implications The tax situation with vacation rentals is more complex than traditional rental properties, but it can work in your favor if you structure things correctly. It can also cost you thousands of dollars if you don’t.
Not only the rental income of your vacation rental affects your taxesbut the tax treatment varies wildly depending on where you are and how you use the property. If you get it wrong, you will lose a lot of money on the table.
UK tax treatment and FHL benefit:
If your property qualifies as a furnished vacation rental (available for rental longer than 210 days, actually rented for more than 105 days, no guest stays more than 31 consecutive days for more than 155 days total), you gain tax benefits that standard rental owners lost years ago.
You can deduct all of your mortgage interest as a business expense. Regular rental owners find themselves faced with a 20% tax credit which does little to help taxpayers at higher rates. You can also claim 100% tax relief on furniture and equipment straight away rather than spreading it over several years, and your profits are counted towards pension contributions.
When you eventually sell, you could be eligible for Business Asset Disposal Relief and pay just 10% capital gains tax instead of the much higher rates on residential properties. This difference alone can be worth tens of thousands of dollars on a profitable property.
The trap? You really have to meet those rental thresholds. If you use it half the summer for family vacations and only rent it 80 days a year, you don’t qualify. Follow everything meticulously as HMRC will want proof.
Properties used for short-term rental may be subject to business rates instead of council tax. In some areas, small business rate relief means you pay nothing. In others, you face a large annual bill. Check this before purchasing.
US and Canadian tax complexity:
In the US it’s all about personal use rather than rental days. Use it less than 14 days or less than 10% of rental days and it is treated as a business. You can deduct everything: mortgage interest, property taxes, insurance, utilities, cleaning, maintenance, depreciation, and even your Airbnb service fees. You can potentially create tax losses that offset other income.
Use it for more than 15 days AND more than 10% of rental days? It is now a personal tax residence. You can only deduct your expenses up to the amount of your rental income. You cannot create losses. Personal use days are not eligible for deductions. This limitation attracts many buyers who want both rental income and regular family vacation use.
There is a special feature to note: rent your property for less than 15 days per year and all rental income is completely tax-exempt. You don’t even point it out. But you can’t deduct rental costs either. This works for people close to major events (Super Bowl, Masters Tournament, etc.) who can rent their place by the week at astronomical rates.
Canadian taxation follows a similar logic. Rental income is taxable but expenses are deductible. You can claim a deduction for depreciation (depreciation), but this may trigger a recapture when you sell.
Both countries also require the collection and remittance of tourist taxes (the equivalent of hotel taxes), typically 8-15% of your rental rate. Most platforms handle this automatically now, but you are ultimately responsible for making sure it happens.
Don’t try to go it alone. An accountant specializing in vacation rentals will save you more than their fees in the first year. Good tax planning makes the difference between a property that is marginally profitable and a property that actually creates wealth. Understand how this fits into your larger vision financial planning Strategy is essential before you commit to a purchase.
Prepare it for the guests Once the property is closed, the real work begins. Most buyers underestimate this part by about 200%.
Prepare it for potential guests means you’re not just furnishing a house. You create a product that rivals all the professionally managed hotels, B&Bs, and rentals in your area. Your photos are your showcase. Your reviews are your reputation. Get it wrong and you’ll see your competition book strong while your calendar remains empty.
See also
Start with following safety rules, because nothing destroys a vacation rental faster than having it shut down for violations. In the UK you need up to date gas safety certificates (annual), electrical condition reports every 5 years, smoke detectors on every floor and carbon monoxide detectors wherever combustion appliances are located. Some boards require additional licensing. Check before listing anything.
The American and Canadian requirements touch on the essentials: smoke detectors on all levels and in the bedrooms, carbon monoxide detectors, fire extinguisher near the kitchen, appropriate exit from the bedrooms. If you have a swimming pool, you need a compliant fence and safety equipment. Your insurance won’t cover you without these items, and a customer complaint to the local fire marshal can shut you down mid-season. .
The systems that guests actually care about: heating and air conditioning that work reliably (winter reservations in cold climates are worthless if your heating is dodgy), really fast Wi-Fi throughout the property, and hot water that doesn’t run out after two showers. They are not wealthy. They are obligatory.
A furnishing strategy that actually works:
Beds matter more than anything else. A guest will forgive poor kitchen equipment. They won’t forgive a bad mattress. Spend money here. Quality mattresses, high thread count sheets, several pillow options (firm and soft), waterproof mattress protectors. Plan to replace mattresses every 7 to 10 years and pillows every 2 to 3 years, as they will be destroyed faster than you think.
Fully fill the kitchen or don’t bother marketing it as “great for families” or “perfect for longer stays.” Quality pots and pans, sharp knives (dull knives cause constant complaints), enough plates and glasses for your maximum occupancy plus extras because things break, coffee maker, toaster, basic baking supplies. People choosing vacation rentals over hotels often do so specifically for cooking. Give them the tools or they will complain.
Bathrooms need powerful showers with good water pressure, quality towels (minimum two bath towels, two hand towels, two washcloths per person), backup toilet paper, basic toiletries, a hairdryer, and decent lighting. Budget bathrooms scream budget ownership.
Living spaces need durable furniture with fabrics that hide stains. Avoid white or cream upholstery unless you’re setting luxury rates and carefully screening guests. Performance fabrics exist for a reason.
If you have an outdoor space, set it up properly. Outdoor dining furniture, comfortable lounge chairs, a quality barbecue and good lighting can justify nightly rates 20-30% higher during desirable seasons. A neglected garden is just wasted potential.
What differentiates successful properties from those that don’t often comes down to the details you notice when weekend getaways in well-managed places. Little touches: a welcome book with local recommendations, coffee and tea stocked for the morning of arrival, clear instructions for everything from the TV remote to the thermostat, backup phone chargers. These don’t cost much, but that’s what’s mentioned in the five-star reviews.
Professional photography is not optional:
Hire someone who professionally photographs real estate or vacation rentals. Quality photos increase your booking rate by 30-50% and justify higher prices. This costs between $300 and $800 depending on the size of the property. It’s the best marketing money you’ll spend.
Your listing requires a comprehensive digital guide covering WiFi passwords, device instructions, payment procedures, restaurant recommendations, local attractions, emergency contacts and the nearest urgent care. Customers who don’t know how to operate their coffee maker at 7 a.m. will leave bad reviews.
The current reality that no one warns you about:
Set aside 10-15% of gross rental income for maintenance and replacements. No net, gross income. Vacation rentals are being hit much harder than primary residences or long-term rentals.
Address maintenance issues the same day they are reported. Broken air conditioning in the summer or spotty Wi-Fi during a guest’s stay guarantees a bad review, costing you reservations for months. Minor problems quickly turn into major reputational disasters.
Refresh your property every 2-3 years minimum. Repaint, replace bedding, update worn furniture, repair anything that looks tired in photos. Properties that appear dated see their booking rates decline each year, regardless of the quality of their location.
Monitor your reviews obsessively. Customers who mention uncomfortable beds, inadequate cooking utensils, or poor water pressure tell you exactly what to fix. Ignore trends in your reviews and watch your occupancy rate drop.
If you do not live within 30 minutes of the property, hire professional management. They will take 15-30% of your rental income, but they will handle marketing, customer communication, coordinating cleaning, maintenance and emergency response. For remote owners this is not an option, it is a matter of survival.
Here’s what no one tells you upfront: The most successful vacation rental owners spend 10 to 15 hours per week on their properties during busy seasons. Respond to inquiries, coordinate turnover, manage maintenance, update listings, manage pricing. It’s really field work.
If this sounds exhausting to you, you may want to reconsider whether this investment makes sense for your situation. There’s no shame in admitting that a vacation rental doesn’t fit your lifestyle. Long-term rentals generate less income but require a fraction of the effort.
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