A Vacation Rental for Retirement Income? An Expert Shares Pros and Cons

Having your “own place” to escape to, host family reunions and maybe even receive passive income on your investment may sound like a retirement dream. Short-term vacation rentals continue to grow in popularity, with Consumer Affairs projecting that the short-term vacation rental market will grow to $81.63 billion between 2023 and 2033.

VRBO, one popular app for listing and booking vacation rentals, made $3.8 billion in 2024 and comprised 28% of Expedia’s total revenue, according to the Business of Apps.

Read: A surf goddess at age 50+? You’re Too Old For That

Discover: When your kids move back home & take your money

There’s clearly money to be made in renting out your vacation home. But it’s not entirely passive income and there are some trade-offs to be made. We spoke with David Ciccarelli, founder of Lake.com and a vacation rental owner, about the pros and cons.

Short-term rental income can add to your retirement portfolio and provide extra income. But the benefits aren’t only monetary.

Create Family Bonding Experiences at a Destination Point

When Ciccarelli and his wife first bought a cottage on a lake, they weren’t intending to rent it out. “It was more about having somewhere we could spend the summer with the kids,” he said. “It was an opportunity to create teachable moments through outdoor activities like fishing … and maybe impart some life skills, as well.”

Of course, you can do this at hotels or resorts, but there’s something emotional about going back to create core memories in the same space, year after year. “It really is such a distinct experience,” Ciccarelli said.

He soon realized there were going to be periods of time they wouldn’t be using the cottage and it made sense to host guests. Fixing up the cabin and showing his kids the business side of running a vacation rental taught them even more life lessons about entrepreneurship and delegating responsibilities.

Hold onto a Property That’s Been In Your Family

“A lot of people choose to rent out a place because it’s been in the family. They inherited it, and they don’t want to sell it to cover property taxes and maintenance,” Ciccarelli explained.

Holding onto a vacation home can be the best choice to preserve a family legacy. Ciccarelli recommended hiring a “success-based” property manager who collects a percentage of the fee. This person handles maintenance and repairs, as well as emergencies, oversees cleaning, and is the go-between who meets and greets guests. This lightens your load so that running a vacation rental is more passive income and less like being an active landlord.

“When [a stay] goes well, it’s not an issue. But if something goes a little sideways, you don’t want all that extra stress of trying to make someone else’s vacation great,” Ciccarelli said.

Have a Place to Host Family Events

One benefit Ciccarelli found in having a vacation home is it became a destination point for his extended family. “We actually had a 25-person family reunion,” he said. “The cottage served as the destination.”

Especially if you are purchasing a larger vacation home, which also commands higher nightly rates, you can generously host family and friends for larger gatherings.

Your Vacation Can Pay for Itself
A vacation rental can offset the costs of other travel. If you opt to stay somewhere else, you can rent out the vacation home to earn income.

Generate Extra Income

Ideally, renting your vacation home will do more than just cover the costs of the home and your own trips. Depending on how frequently you rent it, you can add between $20,000 and $50,000 to your annual income with a 65% occupancy rate, according to Wealthbuilders.org. This figure comes close to matching AirDNA’s report, which found that Airbnb and VRBO hosts in the US earned an average of $4,300 per month.

Of course, the vacation rental’s size, location, amenities, and how frequently you rent it will influence the income. Hiring a property manager, house cleaners, and other contractors will reduce your income, but will save time and headaches, transforming your rental from a side job to passive income.

Take Advantage of Tax Benefits

If you rent your vacation home for more than 14 days and also rent to others more than 14 days each year, you can deduct your mortgage interest and property taxes on your personal income tax returns. You can deduct any business expenses from your rental income.

“If you’ve done any modifications or spent any money on your short-term rental, you can have a 60% depreciation on those costs,” Bill Park, founder of TaxHakr, a platform for solo entrepreneurs and gig workers, said. “When it comes to investments and tax optimization, everything is based on the person’s individual tax profile.”

That’s why it’s smart to speak with a tax professional to see how your rental property income fits in with your other retirement income for overall tax planning.

Downsides of Using a Vacation Rental for Retirement Income

As with any financial choices, especially running a business or side gig, there are pros and cons to using a vacation home to generate rental income.

Additional Costs

The first factor to consider is the added costs. Even though expenses like insurance, repairs, and licenses may be tax-deductible, they have to be paid whether you rent the home or not.

Ciccarelli advised that renting the vacation home will increase your homeowners’ insurance. You may want to increase your liability insurance in case someone gets hurt on the property.

Additionally, there may be licensing fees for your region. These costs must be paid as soon as you list the property as a rental, whether you have success finding guests to host or not.

Repairs and Property Readiness

Renting a vacation home means everything should be in tip-top shape for guests.

“What might be acceptable to you and your family is not going to be tolerated by someone who spent $5,000 on a week’s vacation,” Ciccarelli explained. “There may be some upfront cost to getting the property up to the standards of a rental.”

Likewise, if something breaks, you can’t put off repairs or just live with it, which you might do in your own home.

You Can’t Personalize the Space

One thing that surprised Ciccarelli when he first started renting his family’s vacation cottage, he said, was having to put away his personal belongings. Owning a vacation home offers convenience you won’t find in a hotel. You can leave seasonal clothing, sporting equipment, and other things at your vacation house. But if you’re renting the property, these things will need to be tucked away in bins or stored off-site. “We had to remove all of our personal effects, everything from photos of the kids, to our shoes, jackets, all of it,” he said. “The home lacked the character we had built into it for years.”

Ciccarelli said a vacation home that doubles as a rental can have more of a hotel vibe. You’re essentially a visitor in your own vacation home. For instance, you can’t leave food in the refrigerator when you leave. For some people, however, the extra income is worth the trade-off.

You May Not Have Access to the Home When You Want It

Finally, you can always mark your listing as booked when you want to use the property. But you’ll have to be okay with losing that potential income, especially at peak times.

You Could Earn More With Other Investments

If you’re looking at buying a vacation rental for the extra retirement income more than for your own enjoyment, these downsides may not matter as much to you. But there’s still an important question to ask, and you’ll need to run the numbers by yourself or with help from your financial advisor. Could you earn more money from other investments?

Park said, “It’s important to consider where the capital is coming from. Is it just sitting in your bank account? Or is it in a 401(k) or IRA account?”

If the goal is to have a vacation retreat that’s subsidized by renting the home to guests, you’ll want to minimize tax liability but won’t worry as much about maximizing your earnings. When it comes down to it, you might be able to earn more by investing any cash you have available for a vacation rental in the stock market. On the other hand, if you intend to leave your retirement investments in a 401(k) or similar account, you could earn more with your short-term rental.

S&P 500 stocks have generated an average annualized return of 11% to 13% in the past 10 years. However, finance experts said a more accurate figure is a 10% rate of return. Of course, the stock market can be volatile and your money may not always be available if the market is down and you don’t want to sell at a loss.

The cash-on-cash return of a short-term vacation rental should fall between 10% and 14% for a self-managed property, according to AirDNA. If you hire a property manager, your profits will be lower. As with the stock market, returns can vary. But a vacation rental offers liquid income that you can choose to invest to grow your portfolio.

Essentially, returns on short-term rentals and stocks are similar. If you plan to keep your money in a 401(k), which typically offers an annual average rate of turn between 5% and 8%, according to Investopedia.com, you might earn more with a vacation rental.

Before making the decision, Park said, “Ask yourself, what are you trying to accomplish? What’s your investment thesis?”

Should You Or Shouldn’t You?

As with any decision related to retirement income, there’s no one-size-fits-all answer. If you already have a vacation home in your family, or you’d like to start the tradition, and you’re looking to boost your retirement income, renting the property is one way to do it.