Buying a vacation home is one of the easiest and most straightforward ways to become a real estate investor. Owning a second home gives you the chance to enjoy your favorite location in a homey environment while also providing you with the opportunity to make money by renting it out on short-term basis.
In addition, you even get to save some money through tax deductions. That’s a sweet deal, right?
However, deciding to buy a vacation home is not enough to start a successful real estate investing career. As you probably know, location is key in the world of real estate investments, so you have to choose carefully where to buy your second home if you want to be renting it out.
Where Should You Buy a Vacation Home?
One of the first states which comes to mind when talking about investing in vacation rentals is no doubt California. The great climate, the beach, the many tourist attractions make California a top choice among millions of Americans for where to spend their holidays each year. You, as a savvy real estate investor, should take advantage of this fact and buy a vacation home in California now.
Is Airbnb Legal in California?
Since we are talking about buying a vacation home to rent out, Airbnb rentals – or short-term rentals – should automatically come to your mind. While the Airbnb rental strategy is the optimal one in many cases of real estate investing, when dealing with it, you should check the local Airbnb laws and regulations.
As short-term rentals have been growing in popularity in recent years, so has been the lobby against them, mostly led by the hotel industry. Naturally, as a top tourist destination, California has been one of the locations which have witnessed the strongest opposition against Airbnb rentals.
For example, in April 2018, local lawmakers backed up new rules which would prevent renting out on Airbnb in the Los Angeles real estate market except for primary residences.
This means that real estate investors who are considering the option to buy a vacation home in California should study the local Airbnb laws and regulations carefully in order to make sure that short-term rentals are legal in their location of choice.
What Are the Tax Implications of Owning a Vacation Home as a Real Estate Investment?
Before you engage in any form of real estate investing, you should make sure that you are well aware of the tax implications. On the one hand, you have to assure that the property tax, the income tax, and all the other associated taxes will not eat up all your rental income and leave you with no cash flow.
On the other hand, you want to make sure that you take advantage of all possible tax deductions as that’s a proven way to make more money in real estate and assure positive cash flow.
The situation with taxing vacation homes is complicated. How much tax you will have to pay and what tax deductions you can enjoy as a real estate investor in vacation rentals all depends on how many days you spend in your second home and for how many days you rent it out.
If you rent out your vacation home for up to 14 days a year, this is considered personal use by the IRS, so you don’t have to report your rental income. If you rent out your real estate property for 15 days or more and live in it for up to 14 days a year, your vacation home is considered a rental property, so you have to report your rental income, but you can deduct the rental expenses from your taxes.
When you are ready to buy a vacation home in California and start renting out on short-term basis, make sure that you go over the tax requirements and benefits carefully and take advantage of all possible deductions.
What Are the Best Places to Buy a Vacation Home in California?
The top 3 locations to buy a vacation home in California might come as a surprise. These are not the usual hot real estate markets – Los Angeles, San Francisco, San Diego, Sacramento, San Jose, Fresno, Oakland, Long Beach, Anaheim, Riverside, Palm Springs, etc. – you might be thinking about.
To the contrary, these are 3 small towns which have been gaining more and more popularity as hot tourist destinations in recent years: Joshua Tree, Twentynine Palms, and Yucca Valley.
1. Joshua Tree
- Average Property Price: $301,200
- Airbnb Rental Income: $2,670
- Airbnb Cash on Cash Return: 6.4%
- Airbnb Cap Rate: 6.4%
- Airbnb Occupancy Rate: 55.6%
- Traditional Rental Income: $940
- Traditional Cash on Cash Return: 0.8%
- Traditional Cap Rate: 0.8%
The first on our list of the top 3 locations to invest in a vacation home in California is Joshua Tree, a census-designated place in San Bernardino County in the State of California, with a total population of about 7,400 residents. The most famous landmark around is the Joshua Tree National Park, a major tourist attraction occupying 800,000 acres of desert land.
As the data computed by Mashvisor’s rental property calculator, a must-have real estate investment tool for investment property analysis, shows, Airbnb Joshua Tree investment properties enjoy a high return on investment in the form of a cap rate of 6.4%.
While this may not sound like a lot to beginner real estate investors, who keep hearing from the experts that a good cap rate is above 8%, 6.4% is actually a really good cap rate in the current competitive real estate investing world hosting millions of US property investors.
The Airbnb rental income is excellent, especially when you consider the relatively low average property price. For comparison, the average property price in Los Angeles is $916,700, $1,623,000 in San Francisco, and $821,900 in San Diego, while the cap rate for Airbnb rentals there does not exceed 1%.
Note: As you have noticed, the cap rate and the cash on cash return in the data above are the same. This is because here the cash on cash return has been calculated assuming that the investment property is purchased fully in cash in order to simplify the calculations. When you use Mashvisor’s rental property calculator, you can set your expected down payment and mortgage plan to get the exact cash on cash return for your vacation rental.
Thus, as an aspiring real estate investor, you should not limit your horizon and conduct real estate market analysis nationwide, including in small towns and villages, to find the best real estate investments. No worries, Mashvisor’s property finder, investment property calculator, and predictive analytics will accompany and support you along the way.
2. Twentynine Palms
- Average Property Price: $169,700
- Airbnb Rental Income: $1,610
- Airbnb Cash on Cash Return: 4.5%
- Airbnb Cap Rate: 4.5%
- Airbnb Occupancy Rate: 43.0%
- Traditional Rental Income: $810
- Traditional Cash on Cash Return: 0.9%
- Traditional Cap Rate: 0.9%
The second on our list of the 3 best places to buy a vacation home in California is Twentynine Palms, a small city in San Bernardino County, with a total population of just above 26,000 residents. Twentynine Palms is located in the Mojave Desert in Southern California and right next to the Joshua Tree National Park. The city has a strong tourism potential due to the unique desert landscape.
While the city-level cap rate in Twentynine Palms for short-term rentals is lower than the one in Joshua Tree, the average property price is about half the value in Joshua Tree, which makes Twentynine Palms a highly affordable location for real estate investments, especially for first-time property investors.
3. Yucca Valley
- Average Property Price: $265,200
- Airbnb Rental Income: $2,600
- Airbnb Cash on Cash Return: 5.5%
- Airbnb Cap Rate: 5.5%
- Airbnb Occupancy Rate: 49.3%
- Traditional Rental Income: $1,550
- Traditional Cash on Cash Return: 2.6%
- Traditional Cap Rate: 2.6%
Yucca Valley, the third location on our list of the best places to buy a vacation home in California, is another small city in San Bernardino County in Southern California, with a total population of just above 20,000 residents. This place is yet another dream-come-true for hikers, naturalists, and other tourists, which translates into a perfect location for investing in short-term rentals for real estate investors.
According to Mashvisor’s investment property calculator, which uses traditional and predictive analytics to bring you the most accurate profitability estimates, Airbnb rentals enjoy a very good cap rate in Yucca Valley. Meanwhile, real estate investment properties are highly affordable, which is a great benefit for new real estate investors.
You don’t have to invest in real estate in the largest and hottest markets in order to make a lot of money as a property investor. On the contrary, it is much better to buy a vacation home in a small town with high tourist demand as property prices there tend to be lower, which leads to higher return on investment in terms of both cap rate and cash on cash return.
Indeed, it is much more recommended to invest in two or even three cheaper rental properties in smaller but highly demanded markets rather than in one expensive property in a hot housing market. In this way, you spread the investment risk, receive more rental income, boost your return on investment, and become richer faster.
Thus, consider buying a vacation home in one of these 3 best locations for Airbnb rentals in Southern California now in order to capitalize on the opportunities still offered.
To start looking for the best real estate investments in Joshua Tree, Twentynine Palms, and Yucca Valley, sign up for Mashvisor.
In case you are not convinced of the benefits of buying a vacation home for renting out on Airbnb in California as the right form of real estate investment strategy for you, you can take a look at the best places to buy a vacation home in other US states:
- The Best Places to Buy a Vacation Home in Florida in 2018
- The Best Places to Buy a Vacation Home in New York State
- The Best Places to Buy a Vacation Home in Michigan