Deciding whether to buy a holiday let or to park the same capital in stocks is not a narrow finance problem. It’s a choice about liquidity, work, risk tolerance and the type of return you want. Both routes can make money over time, but they pay you in different currencies: equities pay liquid market returns and passive diversification; a vacation rental pays lumpy cash flows, possible capital gains, and a lot of operational headaches. Below I focus on the benefits and expected return profile of the stock market, then explain the costs, risks and practical hurdles of holiday lets, and finally describe what a vacation rental must actually deliver, in general terms, to be the superior choice.

What the stock market gives you (the straightforward case)

The stock market’s main financial virtues are liquidity, diversification and long term compounding. With a broadly diversified equity allocation you are buying a share of many businesses that, over long periods, tend to grow profits and distributions. That expected growth translates into a reasonably predictable long term average return when you hold through ups and downs; you can access that return through low cost index funds or ETFs with minimal active work. The market also gives instant liquidity: you can sell a tranche of holdings in minutes, not weeks or months. Tax sheltered wrappers in many countries further increase the net return to households that use them. For many retail investors the market is the simplest route to broad, low friction exposure to economic growth.

Two other practical advantages matter. First, transaction costs are low relative to property: commissions and bid off spreads on broad market ETFs are tiny compared with stamp duties, legal fees and estate agent charges. Second, scaling and rebalancing are easy: adding to an index fund or trimming a position takes seconds and you keep portfolio construction centralised rather than local and operational. In short: the stock market buys you growth and convenience, and that convenience has value that often gets overlooked when comparing headline yields across asset types.

What to expect from stock returns (in general terms)

Expectations for equities are probabilistic not guaranteed. Over multi year and multi decade horizons the equity premium, the extra return you receive over cash or low risk bonds, has historically been positive, meaning equities compensate investors for volatility and risk. That expected premium is the baseline you should use when judging alternative investments. Importantly, you should think in after-fees after-tax terms: gross index returns sound attractive until management costs, transaction taxes, and personal taxes reduce them. The other point is variability: equity returns can be uneven year to year and you must be willing to live through drawdowns.

Want to learn more about stocks and stock returns? Then I recommend you visit the website Investing. Investing.co.uk is a British website that is designed for British citizens, but the information provided is equally true for anyone living anywhere else. Only a low percentage of the information is UK-centric and it’s very clear when the information is UK-standard.

Vacation rentals — what they actually are, beyond the glossy listing photos

A vacation rental is not primarily a financial product; it is a small hospitality business that happens to use a residential asset. That distinction matters because the economics are dominated by three variables: achievable rates (what guests will pay), occupancy (fraction of time the place is let) and cost structure (finance, cleaning, platform fees, maintenance, insurance and local taxes). Those variables are sensitive to local demand cycles, competition, regulation and to the owner’s execution. Price photography, guest reviews, and responsiveness all affect occupancy and yields.

The revenue is irregular. Peak weeks may deliver most of the cash, while shoulder season or off season may be thin. Gross headline revenue looks bigger than net proceeds once you account for management and upkeep. Furthermore a vacation let is thinly liquid: selling a property takes time and costs, and market sentiment can shift fast if local rules change or tourism falls.

The hidden costs that erode the headline yield

Owners routinely under-estimate the running drag on profitability. Typical drains include: professional management or agency fees, frequent cleaning and linen costs, higher insurance premiums, council and business rates in some jurisdictions, more rapid wear and tear and periodic larger capital expenses such as roof, boiler or kitchen replacements. On top of that come booking platform commissions and the time cost if you self manage. Finance costs are especially important: many buyers use mortgages and holiday-let lending commands higher rates and bigger deposits than standard residential borrowing. The combined effect is that nominal gross returns can be paper-thin once you account for all these items.

Regulatory risk is not theoretical. It is not unusual for local government to ban or limit the renting out of properties. This is especially true in areas where a large percentage of properties are being turned into vacation rentals. New rules are put in place to reduce the number of properties that are used as rental properties and make the area more affordable to people actually living there. This is more common in developed nations than it is in undeveloped countries. Investing in third-world countries is less risky when it comes to rental bans, but that introduces completely new regulatory risks, as these areas are usually less stable than developed nations. The ideal area for a rental is a popular tourist area, in an area that has little regulation and is likely to remain unregulated.

Opportunity cost: what you give up by choosing property over equities

When you buy a holiday home you tie up a large lump of capital in an illiquid asset. That capital could otherwise grow in the stock market where it compounds, is easy to rebalance and is shielded by low friction. To justify tying up that capital in a single property the expected return from the rental, both rental cash flow and capital appreciation, must be meaningfully higher than the after-tax expected return you expect from equities, because property returns need to compensate you for extra work, illiquidity, concentrated local risk and higher transaction taxes.

Put simply: a vacation rental needs to pay you a premium over the stock market’s expected after-tax return to be worth the trade. That premium must cover the value of lost liquidity, the higher ongoing operating and financing costs, the behavioral cost of running a small hospitality business, and the probability that the property is empty or requires expensive repairs at the worst time.

What you actually have to earn for a vacation rental to be a good investment

Without doing precise math, think of the required premium qualitatively. Start with the stock market’s expected after-tax return as your baseline. Then add layers:

• An illiquidity premium: the additional yield you demand because selling takes time and costs.
• An operational premium: compensation for your time or what you pay a manager.
• A vacancy and variability premium: because occupancy fluctuates and there will be periods of little or no income.
• A financing and tax premium: because mortgage rates for holiday lets and transaction taxes like stamp duty are usually higher than for personal homes.
• A regulatory premium: for the chance local rules reduce allowable lettings or increase compliance costs.

Only when the rental’s net yield comfortably exceeds the market baseline plus that bundle of premiums is it a financially attractive substitution for stocks. “Comfortably exceeds” is critical: marginally higher might not be enough because unforeseen repairs, a bad season, or a policy change can erase the premium quickly.

Non-financial reasons people still buy holiday lets

Not all value is on the ledger. Owners value personal use, lifestyle, the ability to holiday with family, and sometimes a belief in local land scarcity. Some buyers enjoy running a small business and the social rewards of hosting. These non-financial benefits can justify a lower financial return, but they should be acknowledged as explicit trade offs. If you factor them in, you’re buying utility not purely investment return, and that’s fine if you are conscious of it.

The leverage effect — friend and enemy

Leverage amplifies return if prices rise and cash flows cover debt costs; it amplifies losses when occupancy or prices fall. Many holiday let purchases use loans which can create attractive cash on cash returns when things go right. But in stressed scenarios higher mortgage rates or a period of low occupancy can convert a modest yield into a negative cashflow hole that you must fund from other income. The market alternative, equities bought without leverage, rarely creates such forced margin situations. If you plan to use financing, the premium you require from the rental must be larger to compensate for the downside leverage risk.

Practical signals that a specific holiday let might beat stocks

Without running detailed numbers you can look for qualitative green lights. These include: a market with year round demand rather than purely seasonal spikes; above-average nightly rates relative to property price; a strong, local regulatory environment that supports short term lets rather than suppresses them; the ability to finance at a modest rate or to buy with significant equity so interest costs are small; and a realistic path to professional management that keeps costs in line. If most of these are missing, the chance the property outperforms a passive equity allocation is low.

Alternatives that capture some property benefits with less hassle

If you like property exposure but dislike the operational burden, you can get partial benefits without hosting guests yourself. Listed property funds, REITs focused on leisure or short let portfolios, or private funds that operate multiple properties give property exposure, diversification and professional management while keeping liquidity and reducing personal time costs. These vehicles won’t deliver the exact upside of a single well-run holiday home on a cheap buy, but they often provide a lower risk, lower effort path to similar economic themes.

Who should prefer the stock market, and who might reasonably pick a holiday let

Choose the stock market if you want low effort, high liquidity, broad diversification and returns that compound passively over long periods. Choose a holiday let only if you have the tolerance for concentrated risk and the stomach for hands on management, if you accept illiquidity, and if you find a market where achievable net yields plus plausible appreciation exceed the stock baseline plus the premiums discussed above. Many owners make the decision because they value the lifestyle and occasional personal use; if that is your motive, be candid about it and treat any financial payoff as secondary.

A final practical verdict

In general terms the stock market is the default efficient choice for most investors because it pays a competitive expected return with low friction and excellent liquidity. A vacation rental can outperform that default, but only in selected scenarios: favorable local demand, manageable financing, disciplined cost control and a real premium above market returns to compensate for the concentrated risks and work. If your decision is primarily financial, require a clear margin of advantage before committing sizeable capital to a single property. If your decision is partly about lifestyle, then include the non-financial benefits as part of your return and proceed consciously, not because the numbers look marginally better.