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The excellent potential return of investing in a vacation rental property is a motivator for many people to go this investment route. However, you must do a careful study of local markets, understand the trends of vacation rental properties, and calculate your expenses to ensure a lucrative return on your investment.
The strategy of investing in a vacation rental home varies from a typical buy-and-hold- property investment. There will be more vacancies all year round if you are running a vacation rental property. You should also expect seasonal highs and lows and bigger maintenance costs on vacation rentals.
This blog post will walk you through the process of purchasing a vacation rental property. It will also give you tips on how to assess the rental market and maximize your investment returns.
Analyze the Market
Investing in vacation rental homes requires an in-depth market analysis. Make sure you know the specifics of a location, especially if you live far away.
Determine if seasonality impacts the local economy and if there is enough demand for vacation rentals during low and mid seasons. You should also know the local regulations and whether they favor short-term rental owners. Moreover, find if there are any attractions nearby the area.
Then, once you have considered market specifics, find a property with the potential for good returns. Conduct market comparisons using data from sites like Airbnb and VRBO. Such market information helps you determine average rental prices and vacancy rates, giving you an estimate of the rental income if you invest in vacation rental properties in the area.
Invest in Vacation Properties Located in a Vacation Spot
The location plays a vital role in your vacation rental investment. Consider purchasing a property in a vacation or tourist spot, whether it be near a ski resort, in a coastal community, beside a lake, or in the countryside.
The proximity of your vacation rental property in a tourist attraction can bring in higher income. Do not be surprised if the purchase price of the property is expensive, especially if it is in a prime location.
The next thing you should consider is the type of property to purchase. Typical options are a lakefront cabin, beach house, villa in a high-end vacation spot, chalet in a ski area, and traditional bungalow in the countryside.
Calculate Potential Rental Profit
If you already have a shortlist of properties that interest you, calculate the potential rental income of each. Take note of these factors when calculating the potential rental income of a short-term vacation rental property.
- Total expenses (property taxes, insurance fees, mortgage payments, property manager costs)
- Airbnb costs
- Monthly operating expenses
- Occupancy rate
- Nightly rental rate
- Number of days
This is the formula to determine the estimated monthly profit of a vacation rental property: (nightly rental rate x occupancy rate x number of days) - monthly operating expenses = monthly rental income.
Consider the Expenses of Running a Vacation Rental
Make sure you know the expenses associated with owning and running a vacation rental home. Take note of this list for that purpose.
- Financing costs
- Utility expenses
- Property management fees
- Homeowner association fees
- Property taxes
- Property insurance
Hire an Agent Who Specializes in Buying and Investing in Vacation Rentals
Working with a real estate agent can help if you decide to purchase a vacation rental property. Pick an agent with experience and expertise in the vacation rental market to ensure you are making a profitable investment.
Make sure your agent has local market knowledge and has established a network of local real estate professionals, property inspectors, and service providers. The agent should also have access to off-market listings and knowledge of the regulations in your target area. Lastly, the agent should assist you in viewing properties that you are considering.
Obtain Financing on Your Property Purchase
Get the right financing when buying a vacation rental property. Here are several financing options you can obtain to that end.
- Conventional mortgage - a home loan that you can get from banks
- Multifamily loan - which is a good option if you buy a vacation property with at least two units
- Conforming loan - a financing option for investing in short-term rental properties
- Portfolio loan - a financing option if ever you cannot secure a traditional home loan
Typically, you will pay a down payment of 20 percent of the purchase price. You should also cover closing costs to ensure you take legal ownership of the property. The closing phase is when the signing of legal documents and conducting of title search happen.
Endnote
Buying a real estate property suitable for turning into a vacation rental home is your first step to earning lucrative investment returns. If you venture into the vacation rental market, make sure to do your market research and pick an area that is highly attractive to tourists. Also, consider calculating potential expenses and profit from your vacation property investment.
