Has the thought of owning a vacation rental ever crossed your mind? Maybe you are tired of paying high rental prices, or your family needs more space than a hotel can provide? Perhaps, you are looking for a good real estate investment that will fetch you considerable returns as time goes on.
The expansion of the economy, and the advent of the private accommodation sector, has made it relatively easier for families to go on more vacation of their own now. This has, in turn, led to the idea of vacation rental investments gaining significant momentum in recent years. However, owning a vacation rental is a major financial decision that is just not like traditional real estate investing.
For instance, did you know that there’s a special category of mortgage loans for vacation rentals? Or that the property management fees for vacation rentals can be thrice as much as what you’d pay a property manager for a long-term rental property?
Buying a vacation rental requires a deep understanding of local markets and the projected revenue—unlike traditional property, a vacation rental will have vacancies throughout the year.
Here are some things every prospective vacation rental owner must consider before buying a vacation rental.
Checklist To Owning A Vacation Rental
Before you even begin your vacation rental search, there are a few things you need to figure out. A lot of strategies go into buying a vacation rental. And fortunately, it isn’t difficult as you think. Here’s a list of the factors you should consider before owning a vacation rental.
- Do Your Research
What’s the golden rule of real estate investment? LOCATION.
As simple as it sounds, location is more important than any other aspect when buying a vacation rental—it is the one thing that cannot be changed after the purchase. Hence, instead of just choosing a city to invest in, also decide on a specific region within the city. The more specific you can be, the better.
Also, consider things like the market conditions, weather, employment rate, proximity to amenities, demands, and other crucial factors. While finance is one aspect, you have to make sure that the location of your potential vacation rental is pleasant, accessible, and can easily attract guests.
- Conduct An In-Depth Market Analysis
Alongside the location, you should also analyze the rental market and its demands closely. Study factors like proximity to popular attractions, how tourism demands changes throughout the year, accessibility to and from the property, etc. The vacation rental you plan to invest in should have a consistent demand that will help generate enough income.
Additionally, understand the seasonal requirements and vacation trends for different property types in the area. Then, conduct a competitor analysis to figure out the average rental prices in the area, cost of maintenances, monthly expenses, etc. It will help you come up with the income you can expect from the property.
- Determine Your Rental Rate
Depending on your research, find an optimal price for your vacation rental so that you can cover your expenses without scaring away potential guests with high rents. You should set your weekly rental rate at nearly 15%-20% higher than your monthly mortgage expense. Also, take into consideration the offseason that you will have to face every year.
- Market Your Property
After purchasing your vacation rental, it is time you start putting together marketing and advertising strategies to fill up your calendar with as many bookings as possible. Consider leveraging inexpensive booking sites like HomeAway, Airbnb, VacationRental.com, etc. that will fetch you more guests.
On the other hand, you can also set up a website for your vacation rental to get more direct leads. Booking sites often limit the information you can show your potential customers. By setting up a website, you will be able to give potential guests a detailed view of your vacation rental and why it makes the best choice.
Pros Of Owning A Vacation Rental
There are a lot of advantages that come with owning a rental property. In fact, this is the reason why Airbnb and VRBO continue to witness a growing number of property listing on their platforms. Here are a few benefits of owning a vacation rental:
- Higher Income – Vacation rentals will fetch you more income, and this can multiply exponentially if your property is located in the most populated corners of the world.
- You Have A Getaway Of Your Own – Alongside acting as a source of passive income, you can use the property to host special events like birthdays, parties, or family get-togethers.
- Tax Write-Offs – While you must pay taxes for your vacation rental, it also lets you write off many expenses like the ones that go into repairing, maintenance, and improving the property.
- Ensure Future Finances – It helps you make sure you have enough money to cover healthcare, future travel plans, emergencies, etc.
Cons Of Owning A Vacation Rental
Just like any other type of investment, investing in vacation rentals comes with a few disadvantages too. Here are some of the drawbacks of owning a vacation rental:
- Property Management – Vacation rentals involve a tedious amount of managing tasks than any other type of real estate. You have to clean, stock, and maintain the property for every new guest. Therefore, it is imperative that you hire a property management company to do all the work on your behalf. This will typically cost you 10% to 15% of your income.
- Finding Guests –Finding renters is going to be a daunting task, especially when you are a novice investor. Thus, marketing is going to be a key aspect of your vacation rental. Doing special promotions and discounts will help you make money in slower seasons, but it will also add to your marketing expense.
- Monthly Payments and Expenses – If you don’t properly manage your vacation rental, it will cause problems in your income. For starters, you have a mortgage to pay off. Then there will be extra expenses that come with owning a property like repairs, maintenance, utilities, etc. So, you have to make sure you have enough finances to avoid additional stress when managing the property.
Is Owning A Vacation Rental The Right Investment Move For You?
If you follow the right steps when buying a vacation rental, you are more likely to reap the many benefits this investment has to offer—of which cash flow would be the biggest payoff. Platforms like Airbnb and VRBO will help you generate income from short term lease. But, if your property is in high demand, you will be able to make even greater profits.
The tax benefits associated with vacation rentals also make it a worthy investment. If your property is rented out for at least two weeks per year, it will be considered a business, and its income will be taxed. However, you can write off a lot of your rental property’s expenses. There are many items you can deduct from your taxes, such as property management fees, utility costs, mortgage interests, occupancy taxes, etc.
Even better, alongside generating income by leasing out your property, you also get to vacation there with your family. You can also hold on to it as a future retirement home.
Have a Real Estate Questions? Ask Deby Bauer!
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