The idea of investing in vacation rentals has gained a lot of traction in recent years, and for good reason. As the economy has grown and the private accommodation industry has emerged, it has become much easier for families to take their own vacations.
There has been a notable increase in the number of people able to afford to take vacations recently as a result of the improving economy.
Vacation rental property ownership is not the same as other types of real estate investments, despite what many people believe. A thorough familiarity with local markets and expected earnings is essential before investing in a vacation rental property. (Keep in mind that unlike a typical buy-and-hold property, a vacation rental will have vacancies at all times of the year.)
So, before making an offer or starting the process of purchasing a vacation rental property, here are some things that every potential buyer should know.
How to Get Started with a Vacation Rental Business
There are a few things you should work out before shopping for a holiday rental. As a result, a unique combination of skills is needed to learn how to buy a vacation property.
Fortunately, getting started in the vacation rental investment market is not as challenging as one may think. I’ve simplified the whole thing into five easy stages that any hard worker with an eye for detail can follow. Like any other sort of investment, the first thing you should do is research the market thoroughly before making any purchases.
Complete your homework.
The old adage that “location, location, location” is paramount in the real estate business rings truer than ever. There is nothing more crucial than a property’s location, because it is the one factor that can never be altered. Therefore, it shouldn’t come as a surprise that settling on a location is the first stage in the process of investing in holiday rental properties.
Select a city and a specific area inside that city to invest in. More specificity is always preferable. Take all relevant elements into account, including the employment rate, current market, weather, demand, proximity to particular amenities, and inventory. While the property’s potential financial returns are important, so are the property’s location, desirability, and accessibility, especially if you want to use these to draw in guests. So try to find the best places to invest in vacation rentals.
Historically, the housing market in Florida has been among the best in the country from which to buy a second home to rent out during the winter months. Florida’s many well-known attractions draw millions of visitors each year, and the state’s relatively affordable housing market and welcoming policies toward Airbnb hosts are further bonuses.
Complete a market research study
When you’ve narrowed your options down to a select few cities, you may dive deeper into the market and customer demand. Remember that the demand for holiday rentals is not the same as the need for permanent residences. Would you like to take a vacation there yourself?
Think practically about things like the kinds of neighboring attractions and how their popularity rises and falls at different times of the year. Ask yourself if there is enough of a steady demand for holiday rentals for the investment to be viable. How about the winter? Does it hold as much allure as the summer? It is important to take into account the vacation patterns and property types that are shaping a specific region.
You should think about the local market and the different kinds of properties available, in addition to vacation rental patterns. Once you have settled on the type of real estate you wish to acquire, it is necessary to conduct market research. These properties, often called “comparables,” will provide useful insight into the asset class in question.
Using free listing sites like Airbnb and VRBO is a wonderful way to gather market data. It is simple to learn what the rents are in a certain region and use that information to estimate how much money you may make off of a given piece of real estate.
Get in sync with vacation rental rhythms
The demand fluctuations we briefly discussed earlier are worthy of a more in-depth analysis. Vacation rentals are not like regular apartments since the money you make from them might fluctuate greatly from season to season.
Summertime buyers are more likely to be interested in a waterfront home. The winter months are ideal for a home near a ski area. You should be aware of the high and low times of the year. You should also have a rough estimate of the total cost of living each month. Consider the cost of weekly cleaning and furniture upkeep as well.
Insurance premiums for the home itself may go up, and if it’s located in a flood zone, there will also be flood insurance. A larger down payment of at least 25% will be required, and a higher interest rate can be expected, if you want to buy the house.
Determine your budget needs and income forecast.
If your market of choice has inherent demand and your financial projections show a good promise of constant positive cash flow, you can proceed to delve a little deeper.
The amount you can anticipate earning from rent each week will depend on a number of factors, including the cost of living in the neighborhood, but in general, landlords charge 10–20% more each week than their tenants can be expected to pay in mortgage payments. Landlords in popular neighborhoods may be able to charge much more, though, so doing market analysis and comparing rental rates is essential. Keep in mind that you need to strike a happy medium between scaring off potential tenants and making a monthly profit from your rental property.
It is important to account for the unavoidable downtimes that your property is likely to suffer, in addition to adjusting your revenue to pay more than your estimated mortgage. Indeed, seasonality is a major factor in the leasing of holiday homes. It is also important to make enough money during the peak seasons to make up for the slower times of the year. In order to account for the times when the building is most likely to be empty, a vacancy rate of at least 25% is recommended. There are additional costs to consider, such as condo or HOA dues, regular maintenance, and so on.
The property management fee is the last of the costs to consider. It’s feasible to be your own landlord, but doing so isn’t suggested unless you’re an expert in the field. This is especially true if you are a long-distance investor. With their assistance, even a mediocre home may be elevated to the next level, and all you have to do is sit back and collect rent payments.
You should now have a decent sense of the rental revenue and costs that can be expected from the property. A deal may be in the cards for you if the numbers still add up in your favor.
Advertise
After purchasing a second home for use as a holiday rental, the next step is to advertise it widely and attract as many guests as possible. Fortunately, there are a variety of low-cost booking companies that help owners of vacation rentals attract as many potential guests as possible to their listings. Here are a few illustrations:
The most popular website for listing holiday rentals is Airbnb. Since there is no yearly membership cost, this site is ideal for renting out homes in urban areas and other popular vacation spots. Just make sure you search locally; if there isn’t much site traffic in your area, it’s preferable to list elsewhere. With its user-friendly mobile design, minimal listing costs, and prominence as the go-to listing service, this platform is a great choice for maximizing exposure for your property.
Websites like VacationRentals.com, HomeAway, and VRBO: HomeAway is actually three separate websites with millions of listings all around the world. This option is excellent for properties in high-traffic regions owned by people wishing to rent continuously and comes with a costly annual charge (almost $350 at the time these words are written). However, with that gain in exposure comes strong competition among vacation rental owners.
Do you reside in a college town or a rural area that hosts major events once a year, like the Indianapolis 500 or a major college football game, and want to rent like a champion? The Super Bowl is almost around the corner, and Rent Like a Champion could be the best way to fill your empty home with eager guests. For those who already have a holiday property in a specific location, this website will be useful.
Why rely solely on the big vacation rental listing sites to bring in business and inform potential tenants when you may have your own website? Although websites like Airbnb and VRBO offer a wealth of useful services for both tenants and prospective tenants, this is no reason to forego the benefits of having your own website, which may provide a more in-depth look at your home and show potential tenants why it is the best option. In addition to promoting your vacation rental on social media and video-sharing sites like YouTube and Facebook, you can also include a link to your website on profiles with listing services.
Why is now a good time to invest in vacation rental
While location is paramount, time is everything in real estate. It would have been simple to purchase a dozen houses in the midst of the 2008 financial crisis. Give it a go today if you can. Situational timing is crucial. The following are some of the reasons why now could be a good time to invest in short-term rentals.
1. Dwindling housing supplies
There is a lot of rivalry for single-family homes as investment property, and there is a dearth of inventory. Simply put, there are far too many investors competing for far too few offers, and that doesn’t even take into account the vast majority of buyers who are actually in the market for a new home.
There is less competition from other investors because of the higher price point of vacation rental properties or because they haven’t yet discovered this asset class. If you’re a 1031 investor, finding a single high-priced vacation rental is much more feasible than trying to track down three or four standard long-term rentals during your 45-day identification period.
2. Degree of comfort
Those who have experience investing in single-family homes should feel at ease with the concept of buying a property to use as a holiday rental. The transition from buying a single-family home to buying a vacation rental is a simple one. There is a significant learning curve associated with other property types you might be considering, such as medical office buildings (MOBs), self-storage facilities, and still warehouses.
3. First mover advantage
In many price-increasing markets, getting in early while the numbers are provides a competitive advantage. Since vacation rentals tend to be situated in the most desirable areas, and since housing prices tend to rise over time, a deal that cash flows now may not do so tomorrow. Getting in now is very beneficial for you.
4. Interest rate has dropped
The current low interest rate environment makes it possible to purchase a larger vacation home for the same outlay of capital, making this a great moment to invest in a second home.
What do an $800,000 mortgage at 5% interest and a $900,000 mortgage at 4% interest have in common? The monthly mortgage payment remains at $4,280.
5. Personal Use
Numerous potential buyers want to use the holiday rental for their own getaways or even as their permanent home after retirement. Your property will be more affordable now than it would be 20 years from now, and the sooner you buy it, the longer you may enjoy it for your own holidays. This is especially true if you plan to move in and make it your “forever home” when you retire. If you acquire it now, you might even be the sole owner twenty years from now.
How much do you anticipate earning from a vacation rental property?
You’ll find a pro forma with conservative projections for a Florida vacation rental that caters to budget-conscious travelers below.
The pro forma shows a total investment of $210,000, which includes $35,000 in furniture.
The return on investment for the first year is calculated at $275 per night and 80% occupancy.
Rent costs are passed on to the owner (you) of a holiday rental, and property management fees are higher than they would be for a long-term tenant.
After accounting for operating expenses, your cash-on-cash return in the first year of business would be 7.2 percent, and it would only grow from there as rents went higher in subsequent years. Cash flow is protected from taxation to a considerable extent thanks to interest and depreciation write-offs (consult your CPA).
How to Get a Loan for a Vacation Rental
The vast majority of buyers will need to secure financing for their new investment property. Fortunately, there are a variety of choices, from the very temporary to the more permanent variety. You can choose from a variety of lending options, including conventional loans, specialized loans for things like rental properties, and even hard money and bridge loans for the short term.
This type of loan is commonly used for second homes because the requirements are less stringent than for primary residences. The typical requirements for a down payment and credit score are 680 or higher and 20%.
Portfolio loans are popular among investors who own several properties or a large single-family home with multiple units. The requirements for these loans are less stringent than those for others.
Multifamily mortgages are for rental properties with five or more apartments, or for vacation houses with two to four units. Conventional mortgages, government-backed loans, and short-term multifamily loans all fall under this category, as do portfolio loans.
Cash-strapped investors in search of a vacation home before securing permanent finance can greatly benefit from a short-term loan. This class includes both bridge loans and hard money loans.
Summary
You may ease into the world of passive income with a vacation rental investment. However, diving in headfirst without preparation is not a good strategy. Instead, make sure you’ve done your research and fully understand the implications of any decisions you make before moving forward. You could get a good return on your money by planning ahead.
Some of the benefits of investing in a vacation real estate property include tax breaks, a steady stream of extra cash, and the option to take a vacation in a home you already own. Investing in vacation rental properties can be a good long-term investment for those who are prepared.
