Almost everyone who has thought about real estate has had the same idea on a beach or a chairlift. We love it here. We should buy a place, use it a few weeks a year, and rent it out the rest of the time. It would pay for itself.
It's a common first real estate idea, and it isn't a dumb one. You know the town, down to which restaurants stay open in March. You'd use the place, which is more than most investors can say about their rentals. And the napkin math looks wonderful.
The trouble is that a vacation property is being asked to do two jobs, and each job makes it worse at the other. Once you see that, you can probably keep the beach.
Why the napkin math looks so good
Take a hypothetical condo that books at $350 a night. Multiply by 365 and you get $127,750 a year. A long-term rental at $1,800 a month brings in $21,600. On the napkin, the vacation place earns about six times as much.
The 365 is the problem. Bookings cluster in the season people come for, and the shoulder months go quiet. Your mortgage, taxes, and insurance are the same in February as in August.
Then look at which nights you'd give up. You want the beach in July and the mountain in February, same as everyone else, and those are the nights that pay the most. Every week you spend there is a peak week you didn't rent.
When it does work
The first is the lifestyle purchase. You'd buy this place anyway, for your family, and you can carry every cost of it with no rental income at all. Then you rent it some weeks to take the edge off, and the rent works as a discount on something you'd own regardless. If no guest books a single night, nothing breaks. That's a sound way to own a second place.
The second is the hospitality business. Some people want to run a short-term rental. They price nightly, answer guests at 10 p.m., schedule cleaners between checkouts, and treat reviews like a scorecard. In a market that allows it, run by someone who wants that job, it can work.
What usually doesn't work is the middle: a place bought for love and expected to perform as an investment, run by someone who already has a full-time job.
Why the middle usually fails
It has costs a long-term rental doesn't. A long-term tenant signs a lease and stays a year. A short-term rental needs cleaning and turnover after every stay, full furnishing that wears out fast, utilities and internet you pay, booking platform fees, and supplies. A short-term manager does more work per dollar of revenue than a long-term manager does, and charges for it. Our cash flow guide shows a plain rental's expenses for comparison.
The price was set by people who aren't doing the math. In places people love to vacation, buyers are often paying for a view and a feeling. That's a fine reason to buy, but it means the price isn't anchored to what the property earns.
The rules can change under you. Local governments regulate short-term rentals, and the rules move. Summit County, Colorado, caps short-term rental licenses in its neighborhood zone, has waitlists in three of its four basins, and isn't accepting new applications for that license. New York City bars renting an entire apartment or house for fewer than 30 days, and since September 2023 booking platforms can't process stays at unregistered listings. A long-term rental has its own rules, and they change too, but a ban on short stays doesn't touch a 12-month lease.
Lending and insurance treat it differently. Fannie Mae's rules for a second-home loan say the property must be used by the borrower for part of the year, must not be primarily used as a rental, and must not be under an agreement that gives a management firm control over occupancy. Rent it heavily through a manager and it no longer fits those rules. On insurance, the Texas Department of Insurance warns that a homeowners policy probably won't cover injuries or damage caused by paying guests, and that landlord insurance is built for long-term leases and may not fit either.
What personal use does to your taxes
If you use the property for personal purposes for more than 14 days, or more than 10% of the days it's rented at a fair price, whichever is greater, the IRS treats it as a residence. Your rental deductions are then capped at your rental income, so the property can't show a rental loss that year. Expenses over the cap can carry to the next year. A day your family uses the place counts as a personal day even if they pay full price, unless they pay a fair rent and it's their main home. So does any day anyone stays for less than a fair rent. You also split expenses between rental and personal use based on the days used for each.
There's a quiet perk on the other end. If you use the place as your residence and rent it fewer than 15 days in the year, you don't report that rent as income, and you don't deduct rental expenses for it. For the lifestyle buyer who rents a week or two, that's clean.
Rentals with very short average stays get separate treatment, covered in the short-term rental tax loophole, and that strategy also fails once personal use crosses the same line. Your CPA confirms how any of this applies to your property.
Separate the two goals
You're trying to do two things with one property: have a place you love and build wealth. Split them, and each gets easier.
Let a plain rental do the investing, in a market where rent supports the price. That's often nowhere near where you live or vacation (see out-of-state investing). As an example, 2107 S Seale Rd in Phenix City, Alabama is listed at $230,000 with a rent estimate of $1,800 a month.
| Monthly line | Example |
|---|---|
| Rent estimate | $1,800 |
| Interest-only payment at 6.5% (not a Lineage quote) | $997 |
| Property taxes | $226 |
| Insurance | $74 |
| Total payment | $1,297 |
| Left before management, repairs, and vacancy | $503 |
The debt service coverage ratio (DSCR) is 1.39. Twenty percent down is $46,000, and cash to close is about $58,000. Lineage recommends six months of reserves on top of that, $7,782 here. The 6.5% rate and 20% down are example terms that some first-time buyers get and some don't. It has one tenant on a 12-month lease, a licensed manager, and no cleaning between guests.
Then rent the beach house for the two weeks you want it. You pick the week, you pick the place, and you leave when it's over. The off-season mortgage, the zoning vote, and the furnace that fails in January belong to someone else.
How Lineage fits
Lineage sells long-term rentals that meet the Lineage Standard, with a vetted tenant on a signed 12-month lease before you close, and bundles the DSCR loan, insurance, and property management referral into one transaction. You pay Lineage one fee, $749, and Lineage also earns on the transaction. The plan builder shows a ten-year plan of plain rentals, with no sign-up.
This is education, not tax, legal, or investment advice. The figures above are an illustrative example. Actual returns vary based on market conditions, property performance, and financing terms.
On the example's numbers, the Phenix City rental leaves $503 a month before management, repairs, and vacancy, and the lease doesn't have an off-season. Build my plan or talk to a consultant.
Frequently asked questions
More than the greater of 14 days or 10% of the days it's rented at a fair price, and the IRS treats it as a residence, which caps rental deductions at rental income. Your CPA confirms how it applies to you.
If you use it as a residence and rent it fewer than 15 days in the year, you don't report that rent and don't deduct rental expenses for it.
Fannie Mae's second-home rules require that you use the property part of the year, that it isn't primarily a rental, and that no management firm controls who stays there. A heavily rented property needs a different loan.