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Case Study Scenario: We’re 63, have $1.6 million, and own a $1.1 million beachside vacation house that we usually rent out during the summer for $2,000 a week. A recent zoning change has made short-term renting impossible for our property. That income is a key piece of our retirement plan. Should we sell the property or convert it to a long-term rental, where someone would live in the house year-round?
Platforms like Airbnb and VRBO have long enabled people with second homes to get the best of both worlds — short-term rental income and a place to vacation themselves. But the prevalence of these short-term rentals has caused a growing number of cities to crack down.
In New York City, property owners and tenants alike are barred from renting out an entire apartment or home for fewer than 30 days. San Francisco, Los Angeles, and Las Vegas also have restrictive rules.
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In New Jersey, where beach tourism is huge during the summer months, many municipalities have rules that cap short-term rentals to prevent excessive noise and overcrowding. And given that many beach house owners buy their homes for peace and relaxation, it won’t be surprising to see more towns across the U.S. get stricter in the coming years.
That could create problems for property owners who rely on short-term rental income, though.
That’s what’s happening to the couple in our case study, Brian and Sally. They are a 63-year-old couple with a $1.1 million beach home that normally commands $2,000 a week during the peak summer season. In the absence of that rental income, they’re not sure they can afford to keep the home, as they need the money to support their overall lifestyle.
Here’s what the experts have to say about their conundrum.
The zoning update changes the equation
If you’ve owned your beach house for years, it’s not just any old asset. Unloading that beach house isn’t the same as selling an underperforming stock.
Still, you need to think carefully about whether it makes sense to keep the beach home, says
Stacy Brown, VP of Property Management Enablement at Real Property Management, a Neighborly company.
“At 63, this is no longer simply a vacation property decision,” she says. “It is a retirement stability decision.”
As Brown explains, many people purchase beach or vacation properties with a hybrid mindset. For Brian and Sally, that second home may be a lifestyle choice and legacy asset as much as it is an income producer.
At this point, though, Brown says, “If the summer rental income was a meaningful part of your retirement planning, the first step is to remove emotion from the analysis and evaluate whether the property still performs the function it was intended to serve.”
Converting to a long-term rental could be a mixed bag
Since renting out the beach house on a short-term basis is no longer viable, your next logical move may be to see if you can make it work as a long-term rental.
Brown says, “Converting the home into a long-term rental may absolutely make sense if the property still cash flows comfortably, there’s strong demand for long-term rentals in your market, you’re comfortable with someone living in the home all year, you want to continue to benefit from the appreciation potential of the home, and the operational demands of a long-term rental still align with your lifestyle.”
As Brown explains, there are several advantages to having a long-term rental, including predictable monthly income and lower turnover costs. Also, she points out that you won’t have to keep track of and store inventory, such as paper products, that you’d normally provide to short-term renters. And, she says, your marketing expenses will be lower.
But there are also some tradeoffs.
“A home that once felt like yours can begin to feel fully occupied by someone else’s life,” Brown says. “Long-term rentals create a very different ownership experience than seasonal vacation use. There is increased wear and tear, less flexibility for personal use, and, depending on the state, additional compliance.”
Also, a long-term rental may not command the same income on an annual basis as a short-term rental that capitalizes on a peak rental season. If you’d normally get $2,000 a week for 10 or 12 weeks, that’s $20,000 to $24,000 a year. You may want to talk to a local real estate agent to see what’s realistic on a yearly basis, as that could help inform your decision.
If you do decide to make the home a long-term rental, there could be an added bonus. If the long-term rental doesn’t work out, you may be able to do a 1031 exchange, in which you sell the beach house and roll the proceeds into another real estate investment. That could help you avoid an immediate tax bill (though you might face one eventually).
Does the rental belong in your investment portfolio at all?
While converting your short-term rental to a long-term rental allows you to keep the home, you’ll need to consider whether that’s worth doing if your usage of it will be limited. And from an investment perspective, it may not make sense to tie up so much of your money in a single asset.
As Evan Mills, associate financial adviser at Scholar Advising, explains, keeping the home could be risky.
“You have a $1.6 million portfolio and a $1.1 million beach house, so you’re looking at almost half of your total wealth sitting in one concentrated area,” he says. “On top of that, depending on where it is, you’re worrying about floods, hurricanes, any type of damage that could set you back a fair amount of money.”
A portfolio of stocks and bonds could lose value based on market conditions. But that’s not the same thing as having to spend money to fix a failing roof or bear the cost of rising homeowners insurance premiums and property taxes.
Mills does point out that a long-term rental provides more stable income than a short-term rental. However, he says, “Now you’re looking at wear and tear with somebody in there year-round, management fees, what they cover versus what you cover, insurance, [and] a lot of fees that pile on top of something you’re never going to get to enjoy.”
Or, to put it even more bluntly, “You’re giving up the lifestyle piece entirely and taking on a whole different set of headaches for a yield that may not justify it.”
Brown points out that coastal properties in particular carry added risk. There’s insurance pressure and climate-related risk.
Between 2019 and 2024, homeowners insurance premiums rose 3% nationally but by 25% or more in southern coastal areas, according to the U.S. Government Accountability Office.
“Those are not emotional considerations,” says Brown. “They are operational and financial realities.”
If you do decide to unload the beach house, though, you’ll need to keep a couple of things in mind.
First, since it’s not a primary residence, you won’t benefit from a capital gains exclusion on the sale. If the home has gained a lot of value since you bought it, you could have a large IRS bill on your hands. You may also be looking at depreciation recapture.
“The strongest long-term investors are … the ones willing to reassess even the assets they love when the environment around them changes.” — Stacy Brown
It’s a matter of priority and honesty
Ultimately, keeping your beach home could still make financial sense if the rental income you generate exceeds your operating expenses and is meaningful to your retirement plan. But you’ll need to be honest with yourself as to whether you view the rental property as a retirement income source or as a lifestyle asset.
“Sometimes,” says Brown, “The right answer is, ‘we can afford to keep this because it brings us joy.’ And other times the answer is, ‘this asset no longer aligns with the retirement we actually want.'”
Neither answer is wrong, Brown insists.
“The mistake would be avoiding the conversation because the property carries emotional value,” Brown says. “The strongest long-term investors are not the ones who never change strategy. They are the ones willing to reassess even the assets they love when the environment around them changes.”
