How to buy a vacation rental property

Estimated read time 14 min read

Real estate investors can make a lot of money by purchasing vacation rental properties. Renting out a vacation home is a great way to earn money, get tax breaks and have a second place for vacations. To ensure a high return on investment, you must do thorough research in the local market, calculate your expenses and understand the rental property’s rhythm.

A vacation rental requires a completely different strategy for investing than a traditional buy-and-hold. Vacation rental homes are usually vacant for a greater part of the year. Short-term vacation rental homes have higher maintenance and seasonal fluctuations.

This article will guide through the buying process for vacation rental properties. This article will teach you how to analyze rental markets, find the best vacation rental property and maximize rental income.

These tips and tricks can help you to make a smart investment in short-term rental properties, whether you are a newbie real estate investor or an experienced pro looking to expand your portfolio.

Do Your Research

To ensure a healthy cash flow, and a regular rental income, it is important to do your due diligence before purchasing a vacation property. The vacation rental business is more complex than traditional real-estate investment. Renting market analysis, calculating costs, projecting income potential, and choosing a great vacation home location are all important aspects of vacation rental investing.

Analyse the market in depth

When investing in rental property, it is important to conduct a thorough market analysis. It is likely that you don’t live in the area of your vacation destination. It pays to research the specifics about the area. Ask these questions about the location of the rental property:

  • Do I want to go on a vacation in this area?
  • What are the nearby attractions?
  • What is the impact of seasonality on local economies?
  • Does the demand for rental property in low and mid seasons meet the supply?
  • Local regulations are favorable to owners of short-term rentals?

You must do your due diligence after you have considered the specifics of vacation rental properties to identify a property that has potential for profit. Comparing the market is the best way to achieve this. Comparing market data can be done using short-term rental websites like VRBO or Airbnb. This data can be used to determine average rental rates and vacancy rate in high and low season.

You can get a good idea of what you could expect to earn from renting out vacation properties by comparing a few.

Find out about vacation destinations and narrow them down.

The importance of location is well-known to all property investors. However, it’s even more important when purchasing a vacation home. You should first decide whether you want to purchase a vacation property in a city, on a lakefront, near a beach, in a ski resort or other popular destinations.

No matter where you choose to build, the site should be attractive, accessible and close to local attractions. You should look deeper after deciding on the best location to discover the most desirable areas. The more attractive the location is, the easier it is to attract tourists. Although the price of a vacation house in a popular tourist spot is higher, it has a greater rental income potential.

Consider the type of property you want to invest in. You may want to buy a luxury ski chalet. Do you prefer a beachfront house with a view of the ocean? The view from a lakefront cabin can be spectacular, but it may come at a higher cost. For example, homeowners insurance.

You must first assess the local market conditions to determine the best type of property for your investment.

Calculate your monthly expenses and income potential

It’s time for you to do the math once you have selected a few properties that you would like to rent. Calculating potential profits on short-term rentals can be difficult. Long-term rentals, for example, tend to have a higher occupancy rate throughout the entire year. Short-term rentals have vacancies throughout the year.

You will need to know the following numbers in order to calculate your potential rental income:

  • Rates for nightly rentals
  • Occupancy Rate (in percentages)
  • Number of Days
  • Monthly Operating Expenses
  • Total expenses include mortgage payments, property taxes and fees for property managers, insurance, and property manager fees.

This formula will help you calculate your estimated rental income.

Rental Income = [nightly rent rate x occupancy rates x days] minus total monthly operating costs

For example, let’s say that your vacation rental has a $300 nightly rate with a 60% occupancy rate and $2,900 in total monthly expenses. This is how the calculation would look:

Estimated Rental Income: [($300 * 60%) x 30-days] – $2,500

Even if the property is rented out for 18 days per month, you can earn $2,500 a month from rent payments.

Remember that the revenue of a vacation rental property is dependent on the season. A lakefront log home will flourish during the summer. Winter occupancy rates could be significantly lower, affecting your cash flow.

Consider vacation rental costs

Renting out a vacation home has many tax advantages. You can deduct property expenses if you rent out the property at least 14 times a year. The IRS will consider the vacation property as a second residence if it is rented less than 14 days.

What are the expenses associated with vacation property ownership? You can expect to pay the following expenses:

  • Utilities : In contrast to long-term rental, the property owner typically covers all utility costs. These costs may be higher than those for your primary residence.
  • Calculate the monthly mortgage payment to determine if the property is profitable. Calculate the mortgage interest rates and other fees related to financing.
  • Homeowner Association Fees: If you purchase a condominium or rent a property that has communal areas, then you must pay the HOA fee. These fees cover maintenance costs, security and other utilities.
  • Property Management Fees: The majority of rental property owners hire a company to manage their property on a day-to-day basis. Remember that property management fees for short-term rentals can be more expensive than those for long-term rentals.
  • Property tax:Consult a tax expert to maximize tax benefits from owning a vacation home.
  • Property Insurance: You should also have vacation rental insurance. The insurance covers the risks of renting out your property to paying customers. You may also need to purchase additional insurance if your second home is located near water, or at risk of forest fires.

When calculating the costs of running a vacation rental, keep in mind that utility bills are typically higher than those for standard long-term rents. Most guests don’t care about energy saving. When calculating your expenses, be sure to include higher utility costs.

Monthly income from vacation rental properties

Seasonal variations can have a significant impact on the potential income of vacation rentals. The majority of vacation homes are seasonally based. Ski resorts are more popular in the winter and beach areas are busier in the summer. When estimating the profitability, make sure that the income from the vacation rental property is sufficient to offset the losses in the off-season.

You can certainly find ways to bring guests to your vacation rental during the off-season. In spring and summer, walking or hiking trails are popular in ski destinations. You could also offer discounts to encourage guests to visit a lake or beach destination during winter.

Compare the pros and cons

You can decide whether or not a vacation rental is right for you by weighing the pros and cons. While short-term rental properties can be profitable, they also have some disadvantages.

Pros:

  • Earn more income: A property that you rent out can earn you more money than the average rental property.
  • Tax Breaks: You are able to write off many expenses related to vacation rentals. VRBO and Airbnb fees are included, as well as property management, insurance, and maintenance costs.
  • Owning your own vacation homeA vacation rental allows you to enjoy a private getaway. It can be used for vacations, parties, events and to create special memories.
  • Build Wealth: Owning an additional property to your primary residence can give you the opportunity to build wealth through rents and equity.

Cons:

  • Finding short-term guests:Finding short-term renters is one of the greatest challenges facing new vacation rental owners. Off-peak season and low occupancy rates can be difficult to manage.
  • High management fees for properties: Due to the high turnover of guests, property manager fees are often expensive. Cash flow management is essential to a healthy business.
  • Short-term rental restrictions: Some cities or HOAs have strict regulations regarding short-term rentals.
  • Market volatilityVacation home owners tend to suffer during economic downturns.
  • Expensive financing: Financing investments in real estate typically costs more than purchasing a primary home. You may be required to pay a larger down payment and have higher mortgage rates.

Consider Your Options

It is important to look at rental properties after determining the best location for a vacation rental, and after calculating your likely income. To do this, you should perform due diligence on at least two or three properties. You will need to conduct thorough market research and analysis before purchasing any investment property.

BiggerPockets Guide to Real Estate Investment includes a section on how to purchase a vacation property in a great area. To help you decide on your investment strategy, check out Market phase.

Choose an agent that specializes in vacation home purchases

Working with a local agent who has experience in vacation rental short-term is a smart investment.

A vacation home isn’t just an investment property. When buying a vacation home, there are some unique challenges. These include seasonal fluctuations and rental prospects. A vacation home agent can help you navigate through these factors to find the right property.

There are five advantages to working with a vacation rental agent.

  • Local Market Knowledge: An agent who is local to the area has a good understanding of local market conditions and trends. They can help you find a vacation rental that suits your needs.
  • Access off-market listingsYou can get listings before they’re advertised to investors. You can gain an advantage in the search for a great investment.
  • Local connections A local agent with good local connections has established local networks including local property inspectors and real estate professionals as well as service providers.
  • Know the local laws: Owners of short-term rentals face many challenges when navigating local rental regulations.
  • Agent can assist with viewings The agent will attend the property viewing to save you time and money.

To find the best deal, use BiggerPockets agent Finder. You can get expert advice to make your dream of owning vacation rental properties a reality.

Use software and operational services to manage your property

It can take a lot of time to manage a vacation rental. Vacation homes, for example, have a higher turnover, as some guests may only stay one or two days. It is necessary to clean the home frequently and prepare it for the next guests. Also, guests can arrive or leave at unsuitable times.

There are two ways to manage a vacation rental:

  • You can hire a property manager
  • Manage your property using an app

Property managers eliminate the need for on-the-ground management. They take care of routine and seasonal maintenance as well as the maid service. They also advertise and fill vacancies. Property management companies are available 24 hours a day to deal with guests, emergencies and other unexpected events.

When investing remotely, it is important to use a property manager who has the necessary qualifications. You only have to pay fees and collect rent checks.

If you want to manage your vacation rental property yourself, an app will be essential. Software can automate many property management tasks. Included in this are:

  • Real-time Property Updates
  • Calendars
  • Communication with guests
  • Integrate with popular booking platforms such as Booking.com Airbnb and VRBO
  • Find local cleaning contractors and agencies
  • Management of expenses

Property management apps are usually charged a monthly fee, or a percentage on each booking.

Get Financing for Your Purchase and Close on Time

Getting the right financing for an investment property is essential. Your mortgage lender or your bank may offer you the following types of loans for purchasing a vacation property:

  • Home mortgages are available for those who qualify.
  • Portfolio loans include multifamily loans and government-backed loans as well as traditional mortgages
  • Conforming loans are popular for buying properties to rent out for a short time.
  • Multifamily Loan–for vacation rentals that have at least two units

You will be responsible for the closing costs, and perhaps private mortgage insurance in addition to your down payment.

Closing on the property is next. You take legal possession of the vacation rental. A title search and transfer of funds take place during the closing. All legal documents must be signed.

Advertise Your Property to Renters

It is important to advertise your rental home to potential renters to fill the calendar and receive money for your investment. The most popular platforms for advertising vacation rentals are Airbnb, VRBO and Booking.com. These booking websites are affordable and allow you to maximize your exposure.

Here’s a brief description of the booking platforms available to holiday homeowners.

  • Airbnb The most popular platform for tourists and visitors to find a place in which to stay while on vacation. Most hosts charge a flat rate of 3% on the total booking.
  • VRBO This platform offers two payment options: a flat annual rate or a per-booking charge. Annual subscriptions cost $499. This can be an affordable solution for those who use VRBO primarily to make bookings. Pay-per-booking charges are 5% of total booking cost and a payment processing fee of 3%.
  • Booking.com Booking.com is the most expensive booking platform, charging vacation rental owners 15% commission on all confirmed reservations.

You can also advertise your property by creating your own website. This is a great way to show off why your property stands out from the rest. You can encourage visitors to book by using high-quality videos and images. You don’t have to pay any fees when guests make a booking. You can promote your website through social media such as Instagram, Facebook and YouTube.

No matter how you choose to market your property, there are some key factors that make it stand out. Here are some tips.

  • Write a compelling description
  • Photos of high quality can be used to show off the rooms, amenities and surrounding area.
  • Walk-through videos
  • Use reviews prominently in your marketing.
  • Social media is a great way to promote your property

Understanding the Rhythm of Vacation Rentals

Understanding the seasonal effects on demand is essential to ensuring success in your vacation rental company. You can maximize your booking rates and manage your investment better. Understanding vacation rentals’ rhythm can help you boost your bottom line.

Here are some tips to increase your profits:

  • Offer discounts during off-peak seasons to offset the higher prices charged in peak periods
  • Use a marketing plan to promote your home during specific seasons, holidays or events
  • When bookings are low, plan essential maintenance and upgrades

Avacation rental can be an excellent investment. To be successful, you will need to have a solid strategy. Making good investments will allow you to enjoy many of the benefits that come with owning vacation properties. Tax advantages, additional income from renting, and personal use are all possible. You can also invest in a property which builds equity, and generates passive income.

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