Buying a vacation rental property can bring lucrative returns for real estate investors. A vacation home can generate high rental income, provide tax breaks, and give you a second home for your own vacations. However, ensuring a good return on the investment property requires careful research into local markets, calculating your expenses, and understanding the rhythm of vacation rental properties.
Investing in a vacation rental property requires a different investment strategy than a typical buy-and-hold property. A vacation rental home typically has more vacancies throughout the year. Also, short-term vacation rentals have higher maintenance costs and experience seasonal highs and lows.
This article will guide you through the process of buying vacation rental property. You will learn how to analyze the rental market, find the right vacation rental property, and maximize profits from rental income.
Whether you’re a first-time real estate investor or a seasoned pro looking to add to your portfolio, these tips and tricks will help you make a smart and profitable investment in short-term rentals.
Do Your Research
Due diligence before buying a vacation home is key to healthy cash flow and regular rental income. Remember—the vacation rental business has more intricacies than traditional real estate investment. Research into vacation rental investing should include rental market analysis, calculating expenses, projecting potential income, and finding a great location for a vacation home.
Conduct an in-depth market analysis
Thorough market analysis is crucial when investing in rental properties. The chances are that you do not live near the vacation location. Therefore, it pays to do due diligence on the specifics of the area. Here are a few questions to ask about the rental property’s location:
- Would I like to take a break in the area myself?
- What attractions are nearby?
- How does seasonality affect the local economy?
- Is there sufficient demand for rental properties in mid and low seasons?
- Are local regulations favorable for owners of short-term rental properties?
After considering specifics affecting vacation rental properties, you must carry out due diligence to find a vacation property with potential for profit. The best way to do this is to make market comparisons. Short-term rental sites like VRBO and Airbnb can provide market data for comparison. You can then use this data to identify average rental prices and vacancy rates in high and low seasons.
Once you compare a few properties, you will get an idea of the income from rent you can expect from vacation properties in the area.
Research vacation spots and narrow down potential locations
All property investors know the importance of “location, location, location.” However, finding a great location is even more crucial when buying a vacation home. But first, you should decide if you want to buy a vacation home in a town, beside a lake, beachfront, at a ski resort, in the countryside, or in other popular travel destinations.
Regardless of the location, it should attract visitors, be accessible, and be close to local attractions. After deciding on a suitable location, you should dig deeper to find the most desirable areas. Remember, the more appealing the location, the easier it will be to attract visitors. Even though the cost of buying a vacation home in popular tourist spots comes at a premium, you have more rental income potential.
You should also consider the type of investment property to buy. Do you want a luxury chalet in a ski resort? Or do you want a beach house with an ocean view? A lakefront cabin may have spectacular views but can come with higher expenses like higher homeowners insurance.
Once you know the type of vacation rental property to invest in, you must assess local conditions in the short-term rental market.
Calculate your expenses and potential income on a monthly basis
Once you have a few rental properties you are considering, it’s time to crunch the numbers. However, calculating potential profit on a short-term rental property can be tricky. For example, long-term rentals tend to have higher occupancy rates throughout the year. But with short-term rentals, vacancies occur frequently throughout the year.
To calculate income potential from your rental property, you need the following figures:
- Nightly rental rate
- Occupancy rate (as a percentage)
- Number of days
- Monthly operating expenses
- Total expenses (mortgage payments, property taxes, property manager fees, and insurance fees)
Here is the formula to calculate the estimated monthly rental income for vacation property:
Rental income = [nightly rental rate x occupancy rate x number of days] – total monthly operating expenses
For example, suppose your vacation rental property has a nightly rental rate of $300 with an occupancy rate of 60% and total monthly expenses are $2,900. The calculation would look like this:
Estimated rental income: [($300 x 60%) x 30 days] – $2,900 = $2,500
In that case, the potential monthly income from rental payments is $2,500, even if rented for 18 days a month.
It’s crucial to remember that revenue from a vacation rental home depends on the season. For example, a lakefront log cabin will thrive during the summer season. However, the winter occupancy rate could significantly decrease, impacting your cash flow.
Look into vacation rental property expenses
Owning a vacation rental has many tax benefits. If you rent the property for at least 14 days a year, you are eligible for tax deductions from property expenses. If the vacation home is rented for fewer than 14 days, the IRS considers the property a second home.
What expenses are associated with owning a vacation property? Here is a list of outgoings you can expect:
- Utilities: Unlike long-term rentals, property owners typically cover all utility costs. Remember, these may be higher than the cost of utilities for your primary home.
- Financing costs: Consider the cost of monthly mortgage payments to ensure the rental property will be profitable. You should also calculate mortgage interest and fees associated with financing.
- Homeowner Association fees: You must pay HOA fees if you buy a condo or a rental property with communal areas. These fees cover maintenance, trash removal, security, and other utilities.
- Property management fees: Most rental property owners use a property management company to run the day-to-day. It’s vital to remember that paying for property management for a short-term rental can be costlier than for a long-term rental property.
- Property taxes: Consult with a tax professional to maximize the tax benefits of owning a vacation rental.
- Property insurance: In addition to homeowners insurance, you should have vacation rental insurance. This covers risks associated with renting the property to paying guests. In addition, you may need specific insurance coverage if the second home is near water or is at risk from forest fires.
Remember that utility expenses are usually higher than standard long-term rentals when calculating expenses associated with running a vacation property. Typically, guests are not concerned about making energy savings. Therefore, make sure you allow for higher utility costs when calculating expenses.
Potential monthly income for vacation rentals
The potential monthly income from vacation rentals varies greatly depending on the season. Most vacation homes are seasonal—ski resorts boom in winter, and beach locations are busy in the summer. Therefore, when estimating the profitability of a vacation rental property, ensure income during the peak season is enough to offset losses during the off-season.
Of course, you can look for ways to attract guests to your vacation home during the off-season. For example, hiking or walking trails may be popular in skiing destinations during spring and summer. Or, you could consider offering discounts to attract guests to a beach or lake destination in winter.
Weigh the pros and cons
Weighing the advantages and disadvantages can help you decide if buying a vacation rental property is for you. Although real estate investments in short-term rentals can be lucrative, there are some drawbacks to consider.
- More income: A rental property can be a good investment because you have the potential or earn more than a typical rental property.
- Tax breaks: You can write off many expenses associated with vacation rentals. These include VRBO and Airbnb fees, property management, insurance premiums, and property maintenance.
- Your own vacation home: Owning a vacation rental gives you your own getaway. You can use it for a vacation, parties, special events, and a special place to create memories.
- Build wealth: Owning a property besides your primary residence gives you a huge potential to build wealth from additional income from rent and equity.
- Finding guests: One of the biggest challenges for new vacation rental owners is finding short-term renters. It can also be tricky to navigate off-peak seasons and low occupancy rates.
- High property management fees: The high turnover of guests means property manager fees can be costly. It requires careful management to ensure a healthy cash flow.
- Restrictions: Some cities and HOA have strict regulations on short-term rentals.
- Market volatility: Vacation homeowners tend to suffer when the economy takes a downturn.
- Costly financing: Financing real estate investments typically costs more than buying a primary residence. You may need a higher down payment, higher mortgage interest rates, and higher property taxes.
Look at Your Options
After considering the best locations to buy a vacation rental and calculating likely income, looking at suitable rental property options is vital. You should conduct due diligence on two or three potential properties to do this. This involves thorough research and market analysis, as you would do before buying any investment property.
Work with an agent who specializes in buying vacation homes
To make a good investment, working with a local real estate agent with experience in short-term vacation rentals makes sense.
Remember, a vacation home is not just a regular investment property. There are unique challenges when buying a vacation rental, like seasonal fluctuations and rental potential. An agent who understands the vacation home market can help you navigate these factors and find the perfect property.
Here are five benefits of working with an agent specializing in buying vacation rental property:
- Local market knowledge: A local real estate agent is familiar with local market trends and conditions. They can assist you in finding a suitable vacation rental property.
- Access to off-market listings: You may get access to listings before they are advertised to real estate investors. This can give you a competitive edge in finding a good investment.
- Local connections: A good local agent has established networks, including local property inspectors, real estate professionals, and service providers.
- Knowledge of local regulations: Short-term rental owners face several hurdles in navigating local rental laws.
- Assist with viewings: The agent can attend property viewing, saving you time and resources traveling to the potential investment property.
Use BiggerPockets Agent Finder to gain exclusive access to a network of experienced agents to find the right deal. Here you can find expert guidance to help make your dream of owning a vacation rental property a reality.
Hire operational services and software to help manage the property
Managing a vacation rental property can be a time-consuming task. For example, there is higher turnover in a vacation home, with some guests maybe staying one or two nights. This requires frequent cleaning and getting the rental ready for the next guest. Also, guests may arrive or depart at inconvenient hours.
There are two solutions for managing a vacation rental property:
- Hire a property manager
- Use an app to manage the property yourself
A property manager eliminates the need for hands-on management. They care for routine and seasonal maintenance, the maid service, advertising, and filling vacancies. A reliable property management company is available 24/7 to handle guests, emergencies, and other unforeseen events.
Using a qualified property manager is vital when investing long distance. All you do is pay the fees and collect regular rent checks.
Using an app is essential if you decide to manage your own vacation rental home. The software can streamline many tasks associated with property management. These include the following:
- Real-time property updates
- Communicate with guests
- Integrate with popular booking platforms like Booking.com, Airbnb, and VRBO
- Connect with local cleaning agencies and contractors
- Expense management
The cost of property management apps for managing a vacation rental property is usually a monthly fee or based on a percentage of each booking.
Getting Financing and Closing on Your Property Purchase
When purchasing an investment property, getting the right financing is crucial. Here are some types of loans suitable for buying a vacation home your mortgage lender or bank could offer:
- Traditional home mortgage
- Portfolio loans, like multifamily loans, government-backed loans, and traditional mortgages
- Conforming loan—popular for investing in properties for short-term renting
- Multifamily loan—for buying vacation rentals with at least two units
In addition to the down payment—typically 20% of the purchase price—you will also be liable for closing costs and possibly private mortgage insurance.
Once financing is secured, it’s time to close on the property. This is when you take legal ownership of the vacation rental property. All legal documents are signed during closing, a title search is conducted, and funds are transferred.
Advertise Your Property To Renters
Advertising it to potential renters is crucial to filling the booking calendar and receiving money from your investment. Renting platforms like Airbnb, VRBO, and Booking.com are the most popular options for advertising vacation rental homes. These affordable booking websites enable to maximize exposure and attract the most number of inquiries.
Here is a short description of booking platforms for holiday homeowners:
- Airbnb: This is the most popular platform tourists and visitors use to find a place to stay on vacation. Most hosts pay a flat fee of 3% of the booking subtotal.
- VRBO: This booking platform has two payment models—an annual flat rate and a pay-per-booking fee. The annual subscription costs $499 and can be a cost-effective solution if you primarily use VRBO for bookings. The pay-per-booking fees are 5% of the total cost of the booking and a 3% payment processing fee.
- Booking.com: As the most expensive of the booking platforms, Booking.com charges vacation rental owners a 15% commission fee for all confirmed reservations and non-refundable bookings.
Another way to advertise your property is by having your own website. You can use this to showcase why your property is the best in the area. By using videos and high-quality images, you can entice visitors to book. Additionally, you have no fees to pay when guests book. Promoting your website on social media like Instagram, Facebook, and YouTube is possible.
Regardless of the method you use to advertise your property to travelers, some important factors make your place stand out. Here are a few tips:
- Write a compelling description
- Use high-quality photos to showcase rooms, amenities, and the surrounding neighborhood
- Use walk-through videos
- Encourage guests to leave reviews and use these prominently on your marketing channels
- Promote your property through social media
Understand the Rhythm of Vacation Rentals
Understanding seasonal demand’s effects is crucial to ensure success in your vacation rental business. This allows you to manage your investment asset better and maximize booking rates throughout the year. Understanding vacation rentals’ rhythm can help you boost your bottom line.
Here are a few tips on how to boost profits:
- Set higher rates during peak seasons and offer discounts in off-peak periods
- Have a marketing strategy to promote your property on specific holidays, seasons, or events
- Plan essential maintenance and upgrades when booking demand is low
Buying vacation rental property can be a great investment. However, you need a solid plan to be successful. You can enjoy the numerous benefits of owning a vacation property by making good investment decisions. These include tax advantages, more money from rent, and for personal purposes. Additionally, you have a property that builds equity and provides passive income from your investment.
Find an Agent in Minutes
Match with an investor-friendly agent who can help you find, analyze, and close your next deal.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.