Is buying a vacation rental in Colorado a good investment?

Updated: Feb 26

I moved from the Midwest to Colorado 10 years ago, and I'm as likely to move back as I am to rock a bowl haircut again. (To be clear, the likelihood is "never.")


But if I didn't live here, I'd want to buy a Colorado vacation rental. Denver, Colorado Springs and the rest of the state has proximity to the mountains, 300 days of sun, great beer, legal weed, arts and culture, skiing and hiking. What's not to love?


But is buying a vacation rental in Colorado a good investment?



As with most real estate questions, the answer is, "It depends." If bought right, an Airbnb investment property can cash flow as a pure rental property. But there might be other priorities for you, like having a place to enjoy family vacations. A "good investment" can mean different things.


Here are some considerations when deciding whether you want to purchase a second home in Colorado


Ready to start your search for a Colorado vacation rental? Contact us today.


KNOW THY LAWS


The first step is knowing whether a city prohibits short-term rental investment properties. Now, some people are happy to carry the holding costs and want to retain the vacation home only for themselves. Totally fine, and in that case, the Airbnb laws don't matter. But it's good to know what to expect.


In the Denver area, for instance, there are only a few cities that allow Airbnb investment properties. And the details of each law differ in ways that can impact your usage. It's good to work with an agent who follows the laws and can keep you out of trouble. (Hmm ... I wonder who you could call?)


The mountain towns tend to be more lenient, but they have their own quirks. Again, check with an agent who knows the Airbnb laws in your city.


Want to read a bit more about Airbnb laws and strategies in Colorado? Check out our guide here.


EARN SOME INCOME


This is a biggie. In general, short-term rentals or vacation rentals pull in two-to-three times the revenues of a traditional long-term rental. For truly unique properties, that exponential can be higher.


How much rent you will actually make with your Airbnb is dependent on the location, number of bedrooms and furnishings. Check out AirDNA's Rentalizer tool to gauge a property's revenue potential. We have a subscription to the paid version, which provides a real deep dive into the occupancy rates, daily pricing and seasonality. But for a rough estimate, the Rentalizer tool does the trick. (You do have to sign up, but it's free.)


AVOID SOME TAXES


Talk to your CPA about this, but there are some tax advantages to owning a second home in Colorado.


If you rent out the house when you're not there (and don't just leave it vacant -- that's a different tax story), then you can deduct mortgage interest, property taxes, insurance premiums, and utilities that are equal to the percentage of days you rent it out of total days it's used by anyone.


For example, if you stay at the house 30 days a year, and rent it another 170 days a year, then you can deduct 85% (170 divided by 200) of those expenses.


On top of that, you can deduct the entire amount you pay a short-term property management company.


There may be other tax advantages, so again talk to your CPA. (We work with a great CPA who knows Airbnb. Ask us for an introduction.)


USE A SECOND HOME LOAN


If you were buying a pure investment property, lenders require a 20% down payment and charge a higher interest rate. But if you buy a Colorado vacation rental as a second home, many lenders will require only 10% down and can use primary residence mortgage rates.


That is to say more succinctly, you can bring less money to the table and get a lower interest rate.


GAIN A GETAWAY


This is an obvious perk but one that must be acknowledged. You're sick of the humid heat of Austin. You've got cabin fever from the brutal cold of Chicago. You know what would be nice? A vacation home in Denver or another Colorado city to get away is the ultimate luxury.


You don't ever have to worry about booking a spot for that family vacation. It's just sitting there waiting for you.


REVEL IN THE APPRECIATION


Any good agent will tell you there's no guarantee that property values will go up during any particular period. But even conservative economists think Colorado's real estate markets aren't going anywhere.


A diversified economy, a growing group of remote workers and coastal migrants with tech money, and amazing quality of life mean Colorado homes are likely to go up.


Various real estate sites estimate price appreciation in Denver and Colorado Springs alone to be between 8-12% in 2021 alone. On a $600,000 home, that's as much as $72,000 in equity gained in one year.


Those are short-term views with all the inherent risks. No one has a crystal ball. Long-term prospects for Colorado real estate values seem even more secure. Buffered from short-term volatility, the low supply and increasing demand will put upward pressure on those prices.


CONSIDER THE WORK


Owning a vacation home in Denver or Colorado Springs or elsewhere in the state is not without drawbacks. An increased workload is the likeliest drawback.


Now, a good Airbnb property manager should lift nearly all stress off your shoulders, but let's be real. You will have to deal with any major repairs. You'll also have to furnish the property and set up utilities. (Oh yeah, did we mention that unlike a traditional long-term rental, you're the one paying for utilities like gas, electric, cable TV, and internet.)


I don't know if it's obvious from this list where we stand. I mean, we literally listed one potential drawback and six benefits (five if you count "appreciation" as a neutral factor).


Still don't know? Give us a shout. We love chatting about real estate in general and can help you see if a second home fits your goals.

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Denver, CO 80218

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Colorado Springs, CO 80909

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ERIN SPRADLIN

719.491.4949

erin@erinandjamesrealestate.com

JAMES CARLSON

720.460.1770

james@erinandjamesrealestate.com