The novel concept of vacation rental property investment has gained a lot of traction in recent years. That said, determining if you are ready to invest in a can be challenging, given the magnitude of the investment.
Here are some things that every aspiring vacation rental owner should be aware of to ensure they are ready for this sizable investment:
Pick the correct location.
The cardinal rule of investing in vacation rental property for beginners is location, location, location. Simply put, the location of a property is its most important feature — it is that one thing that you can never change after all. Therefore, before you jump into buying your first vacation rental property, make sure you have a firm grasp of the area you want to buy the property in. Though you must gauge the tangible financial aspects of a prospective vacation rental property, you cannot gloss over the fact that your impending investment must be in a desirable, accessible, and beautiful location to easily attract guests.
We recommend spending some time in the area — especially in the vicinity of the property you want to buy. Savor a taste of nearby restaurants, take the local bike trail, and head to the top-rated tourist attractions in the area. Immerse yourself in the area and live like a local to truly understand the perks and shortcomings of your property’s location and any potential deal-breakers you may have been oblivious to, such as flooding on the street after heavy rainfall.
If you want to see a quick return on your vacation rental investment, consider buying a vacation home in or near a tourist hotspot. This could mean beaches, golf courses, ski resorts, theme parks, or national parks.
Getting the advice of a local real estate professional is one of the best ways to ensure you have found the perfect location. They are familiar with the local market and can help you see the property’s income potential before you put in an offer.
Analyze the market in depth.
After you have narrowed your search to one or two potential locations, it is time to dig deeper into the vacation rental market and demand.
Ask yourself if you will want to spend your own holiday breaks in this area. Consider practical factors like what kind of attractions are nearby and how their popularity rises and falls throughout the year. Next, consider if there is enough steady demand for your vacation rental property investment to be considered viable — is it as appealing in the summer as it is in the winter, and vice versa? A rental property near the water, for example, will thrive in the summer, whereas a rental property near a ski resort will attract more interest in the winter. You should know what to expect during both peak months and off-seasons.
In addition to considering vacation trends, you should also examine property types and the local market. Once you have decided on the type of vacation rental property you want to buy, it is essential to look at “comparable” to get an inside look at how similar properties perform in the market.
Free vacation rental listing platforms like Airbnb and Vrbo are excellent market data sources. With the help of the market insight you get using these platforms, you can comfortably settle on a rental price range and start to formulate the earnings you can realistically expect from the property you are interested in.
Ensure you have the capital for the investment.
Like most real estate investors, you will need to find a way to finance your new vacation rental property. Luckily, many options are available to you, ranging from short- to long-term. You can get conforming loans, portfolio loans, multifamily loans, and short-term contracts like a bridge or hard money loan.
Unlike a primary residence, which generally requires a 3% to 5% down payment, a vacation rental property often requires 20% to 30% down due to the risks involved. Rental properties are more likely to have missed payments — and the hefty deposit makes it far less likely that you would buy a house you can not afford. Your credit score should also be in the mid 600s (or higher) if you want to qualify for a decent mortgage on your vacation rental property. (Source: Fannie Mae 2018 Eligibility Matrix)
Be financially prepared for unforeseen expenses.
Much like owning a primary residence, owning a vacation rental property can involve a host of unforeseen expenses. Utilities (gas, electricity, trash, water, Wi-Fi, etc.), décor, repairs, and maintenance are some of the most common expenditures — and then there is the cost of insurance premiums and property tax.
Another issue you will encounter is that guests (generally) do not treat a rental property as they would their own home. This can result in increased heating and air conditioning — thus, increased utility costs — or wrong items flushed down the toilets. The best thing you can do is get ahead of any possible issues by providing detailed instructions in the rooms and thoroughly vetting your vacation rental guests. You should also have extra money stashed away for unforeseen strokes of bad luck.
Understand the local vacation rental property rules and regulations.
An important thing you should know when reading this guide to investing in a rental property for beginners is that each city and municipality has its own set of rules for vacation rental properties. For example, in some cities like NYC, you can not rent out the entire property for fewer than 30 days — the only exception is if you are also staying there.
Though many of these rules and regulations may seem intimidating, you should not be alarmed. Most American cities are rather accommodating when it comes to vacation rental properties. A qualified local realtor can assist you in understanding the nuances of your community’s regulations so that you can operate a law-abiding vacation rental property from day one.
Ensure quality property management.
Maintenance is one of the most challenging aspects of owning a vacation rental property. Maintaining a rental vacation property could become your full-time job, as you must apply yourself to everything from cleaning and preparing the rooms to fixing Wi-Fi glitches.
If you intend to take on the upkeep yourself, make sure you have the time on your hand to do so. This means that your vacation rental property must be within driving distance from where you are, and you must be able to respond to guest inquiries and complaints in real-time. If you cannot do that, you risk receiving negative reviews or even losing your business.
That said, you do not have to give up your day job to own a profitable vacation rental property. Signing on a professional property manager allows you to manage your property. Property managers can assist you with the daunting logistics of property ownership, such as housekeeping, property inspections, compliance with local laws, itinerary suggestions, house calls, and more — all while you sit back and collect rent payments.
Calculate your estimated revenue.
Although rental earnings will undoubtedly vary depending on the location in which you buy, you can expect to charge a weekly rental rate that is 10 to 20% higher than your estimated monthly mortgage payments. If you have bought a property in a sought-after area, you may be able to ask for even more — this is just one of the reasons why market research and comparisons are crucial when buying a vacation rental property.
In addition to adjusting your earnings to cover more than your mortgage payments, remember to account for the inescapable slow periods that your vacation rental property may experience — after all, the majority of vacation rentals are seasonal. While high seasons can bring high demand, the demand must be profitable enough to make up for the less popular months. We recommend allowing for at least a 25% vacancy rate to account for when your vacation rental property will most likely be unoccupied.
You should now understand the expenses of owning a vacation rental property and the earnings it could fetch. As long as the balance between the expenses and earnings swings in your favor, you may have a deal.
Market your rental property.
Simply investing in a vacation rental property will not bring in guests. You must also market your property so that people know it is up for rent. You can turn to free vacation rental listing platforms like Airbnb and Vrbo or even market your property on Facebook and Instagram. You can also create a dedicated website with pictures, videos, and other information about your vacation rental property.
Like maintenance, marketing your vacation rental property can quickly become an arduous task. Again — a qualified property manager can lend a helping hand. They can take over your marketing efforts, listing you on leading vacation rental sites and using their experience to maximize your reservations year-round.
Is investing in a vacation rental property worth it?
If you follow the appropriate steps when buying a vacation home, you are more than likely to reap the untold benefits that this investment offers.
The most significant benefit of vacation rental properties is increased revenue. Vacation rental platforms (such as Airbnb or Vrbo) are an excellent way to earn money from a short-term lease. You will bring in even more money if your property is in high demand.
Tax incentives associated with vacation rentals are also available to you. Your vacation rental property is deemed a real estate business (for tax purposes) if rented out for at least two weeks each year. In other words, while you pay taxes on the revenue generated by your rental property, you can also deduct many of its expenses on your tax return, including utility costs, mortgage interest, property tax, repairs, and more.
Not only can you earn money by renting out your property, but you also have the luxury of having your own ideal escape anytime you want. You can use your vacation rental property for any special events, such as anniversaries, birthdays, or family gatherings. You can even hold on to it and use it as a retirement home in the future.
Are you emotionally and mentally ready to invest in a vacation rental property?
Buying a vacation rental property should not be a hasty or impulsive decision. The steep mortgage rates are actually intended to deter impulsive purchases. Having said that, even if you are financially ready and have a plan for property marketing and maintenance, sit down with a friend or family member to talk it over. Explain the advantages and downsides and specifics on how you will run everything. You are probably ready to go for it if you have made it this far — but a second or third opinion cannot hurt.
When is the right time to buy a vacation rental property?
There is a real estate fallacy that you should always buy your vacation rental property during the off-season. If you buy your vacation rental property during peak season, you will be able to learn its ins and outs while it is at its high point. For example, if you buy a property by the beach, you might not know that your guests would need passes to access your home’s biggest selling point — the beach. You can get ahead of problems early by buying during peak season, ensuring that your guests have a positive stay at your rental.
The Last Word
Investing in a vacation rental property is an excellent way to enter the world of passive income. However, jumping headlong without a plan will do you no good. Before you take the leap, do your research and know what you are getting yourself into. With proper planning, you will find that being a vacation rental owner is well worth it.0