A vacation rental has the potential to be a great source of extra income and a valuable long-term investment. Managing a short-term rental can be difficult, though, so the decision to purchase one should never be taken lightly. If you’re thinking about buying a vacation rental, you should carefully consider every aspect of the investment first. The following are the key steps for buying your first vacation rental property:
Decide if it’s the right choice
Before taking any action, you should weigh the pros and cons of buying a vacation rental to decide if it’s the right choice for you. With the rise in popularity of short-term rentals in the last decade, many investors have been quick to flaunt the income they’ve made from their properties. However, making money from a short-term rental is not always as easy as it seems.
If you buy the right property in the right area, a vacation rental can be an excellent source of income. You can rent out the property to short-term tenants for higher rates than you would a long-term tenant, and the home may rise in value dramatically over the years. A successful rental will help you build wealth so that you can invest in additional properties, pay off the mortgage for your primary residence, or retire early. You can also use the rental for your own vacations, saving you money when you travel.
On the other hand, vacation properties have some risks and downsides compared to long-term rental homes. With guests constantly coming and going, the income is likely to be inconsistent. Most tourist destinations are only popular for a portion of the year, so you need to be prepared for a loss of income in the off-season. You also have to constantly advertise the property and vet new guests, which can be a time-consuming process. If the property is far from where you live, you may need to outsource the day-to-day management to a local company, which could eat away at your profits.
Choose a location
If you’re certain that a vacation rental is the right investment for you, it’s time to choose the location. If you live in or near a popular tourist destination, you could purchase a short-term rental nearby. This will make managing the property yourself much easier.
When buying a rental in another region, think carefully about the tourism industry in that location. Try to choose an area that has a long tourist season so you can maximize your income. For example, a cabin in the mountains might be popular for skiing in the winter and hiking in the summer, providing you plenty of opportunities to book guests.
After narrowing down your search to a few locations, look at the supply and demand in each area. Many tourist destinations are already oversaturated with vacation rentals, and breaking into that market could be difficult. If possible, choose a location that’s popular with tourists but still has a high demand for vacation rentals. You should also research the local regulations on short-term rental units. Some states and cities have imposed different tax rates, fees, and restrictions on vacation properties.
Choose the type of property
Vacation rentals come in all sizes and styles. Researching what types of properties are popular for travelers in the area can be helpful when choosing what to buy. Consider your target market as well as the demographics that usually travel to the area. If the location is expensive and luxurious, a high-end rental unit with lots of amenities will probably be appealing to travelers. If the area is a popular budget-friendly destination, you should search for a more basic rental that most visitors will be able to afford.
You can consider the number of guests you plan to have with each booking, too. A smaller condo or townhome could be perfect for couples on vacation. A house with many bedrooms and bathrooms is better suited for a family reunion, a bachelorette party, or other large groups.
Calculate your expenses
As you look at properties, you should calculate your estimated income and expenses to decide if each one will provide a return on your investment. Although you can’t predict your rental income with complete certainty, you can research similar units on Airbnb or VRBO to find their occupancy rates and rental rates.
Calculate all the costs and fees of the rental property to the best of your ability. This includes the mortgage, utilities, rental insurance, rental income taxes, HOA fees, and management fees. Make sure you can cover all of these expenses and make a profit while charging a similar rate to the comparable rentals in the area.
Get Financing
Once you’ve found a promising rental property, you need to secure financing. A conventional mortgage is the most popular option for first-time buyers of vacation rentals. Just as you did with the mortgage on your primary residence, you’ll need to provide proof of income, assets, and debts to be approved for the home loan. Some buyers do a cash-out refinance of their primary home to come up with a down payment for the investment property. Be careful not to stretch yourself too thin, though, as defaulting on either mortgage payment will be devastating for your finances.
An alternative to a conventional mortgage is an asset-based loan. In this case, the amount of the loan depends on the value of the rental and its projected income. An asset-based loan may require a higher down payment and have a higher interest rate than a conventional mortgage. The repayment term may be shorter as well.
Hire a property manager
If you purchase a short-term rental in your area, you may choose to manage it by yourself. However, hiring a management company is usually best when investing in a property that’s more than a day’s drive away. The company will assist with marketing, tenant screening, cleaning, maintenance, and other operational tasks. Research as many property managers in the area as possible, and reach out to past clients to hear their experiences.
Advertise the property
When you close on your new rental, you can finally start looking for guests. Most property management companies will handle the advertising and marketing of your rental unit. If you’re managing the rental by yourself, you can use sites like Airbnb and VRBO to advertise. Take high-quality pictures of the rental and write an appealing listing that mentions all the amenities. Respond to questions or requests as quickly as possible, and ask satisfied guests to leave reviews.
Consider offering promotions to attract guests and reduce your vacancy rate. You could offer a discount for longer stays or for visitors that come in the off-season. Some rental owners give a discount to repeat guests, too. Over time, you’ll discover what marketing strategies work best for your property, and you can fine-tune your approach to maximize your income.
Finding, purchasing, and managing a vacation rental is no easy feat, but it can be a wise investment when done properly. What’s most important is that you do your research during every step of the process. If you choose the right property, you’ll reap the benefits for years to come.
