Investing in Vacation Rentals: Everything You Need to Know
Although hotels are a popular choice for people on a leisure trip, vacation rentals are becoming an in-demand alternative. In fact, a study done by Clever Real Estate says that 60% of their respondents prefer to stay in an Airbnb (a vacation rental marketplace) over a hotel while on holiday.
Investing in vacation rentals? The market for vacation rentals is exponentially growing; in 2019, the vacation rental revenue was at $87.09 billion at a 6.9% market growth rate. Therefore, if you’re planning to venture into the real estate industry, a vacation rental is an excellent starting point.
Why Are Vacation Rentals a Good Investment for Beginners?
A vacation rental can come in many forms—it can be a house, apartment, or even just a spare bedroom. It serves as a temporary dwelling for travelers. Compared to hotels, some vacation rentals have a kitchen that visitors can use if they want to save money on dining during their trip. Some even come complete with amenities, ranging from washing machines and dishwashers to pools and gyms.
The reason why vacation rentals are popular among tourists is that hotel rooms usually have an occupancy limit. But with a vacation rental, you just need to find a property that can accommodate the number of people in your group.
Starting a business can be overwhelming, especially if you decide to invest in real estate. But don’t fret. Investing in vacation rentals is a great strategy if you want a great return on investment. We’ve listed out some reasons why you should consider a business opportunity in this sector.
Dual-Purpose Property
One of the best perks of buying a vacation rental property is having a second home to yourself. Let’s admit it: guests will not be there to occupy your property all the time. There will be vacant days, and since the property is yours, you can use it for leisure.
Rental Income
Vacation rental property management generate a steady source of income. A study done by Priceconomics says that rental property owners earn an average of over $900 per month just by hosting vacation rentals. And while listing your property on online marketplaces will be beneficial to your vacation rental business, you can also attract potential clients on your own efforts. The rental income you collect can be used to pay the mortgage and other expenses for the maintenance of your property, and the excess is net profit!
Guests Are Everywhere
As mentioned earlier, more and more travelers now consider booking a vacation rental over a hotel when they are on a trip. Thus, you can be sure to have a market for your business. To reach more potential customers, you can enlist your property on a real estate platform that specializes in vacation rentals.
Less Risks
Unlike other kinds of real estate investments, a vacation rental offers relatively small risks. As previously stated, vacation rentals attract more guests. And with the continuous stream of bookings, you can reach high occupancy rates and high rental income later on. And if short-term rentals don’t end up working for you, you can always switch to traditional, long-term rentals. In the worst-case scenario, you can just keep the property for private use or sell it.
Appreciation
Real estate properties naturally appreciate over time. Depending on your plans, you can eventually sell yours at a higher price and cash in on the profit. You can make more money out of a property by having it remodeled or otherwise improved to increase its value.
Tax Deductions
You can also enjoy tax deductions with vacation rental properties. Note that these deductions vary depending on where the property is situated and the local laws that apply. Some of the common expenses you can deduct from your vacation rental property tax include:
- Repair costs
- Utilities
- Cleaning and maintenance fees
- Property management fees
- Loan interest
- Business-related transportation expenses
- Advertising
- Depreciation
Easy to Manage
For inexperienced investors, property management is a major concern. Yes, managing a vacation rental may demand much of your time, but you can do it on a part-time basis. There are vacation rental management services you can rely on in case you have other important businesses to attend to.
There’s Always Room for Mistakes
No, you won’t be an expert in managing vacation rentals overnight. But because this industry produces high tenant turnover, you’ll be able to acquire enough experience in a fairly short time. You’ll learn how to handle different kinds of issues, and you can apply these solutions to the later bookings. You may eventually have a full-time career once you fully understand the ins and outs of the vacation rental industry.
Pros and Cons of Investing in Vacation Rental Properties
Investing in any kind of business isn’t something you should do on a whim. Decisions like this should take some time. You should research first to decide if it’s feasible on your end. Before purchasing that vacation investment property you’re eyeing, take a look at some of the pros and cons of this industry:
Advantages
- Extra income
- Tax-deductible expenses
- You’ll have a property that constantly increases in value
- Potential future retirement home or investment
- Private getaway spot
Disadvantages
- You need to manage your property
- Regular maintenance and repairs
- Some places do not allow vacation rentals (depending on the local/state)
- Fixed and unexpected expenses
- May require a higher amount of down payment
- More taxes and fees
Getting Started with Vacation Rentals
All set to begin implementing your vacation home investing plans? Managing a vacation rental property requires you to have a deep understanding of local markets and projected revenue. Without further ado, here are the steps you need to take when starting a vacation rental business:
Check the Location
One of the most important factors to consider when searching for a vacation rental property is the location. It is a “plus point” for potential customers if the property is set close to an appealing destination—perhaps near the beach, lake, or popular tourist spots in the area. Additionally, your future guests should have easy access to amenities or facilities that can meet their other needs while on a vacation. All in all, the location should not only be pleasant and desirable but also accessible to your guests.
Market Analysis
When checking out a property in a certain location, ask yourself: “Would I take a vacation in this area?” Analyze the demands of vacationers and study if that location would be able to sustain your vacation rental investment. Take a look at the vacation trends and what appeal it offers to customers throughout the various seasons in a year.
Identify the Right Property
This depends on your personal preference. While some would like to invest in bigger properties, others are content with single units. Of course, bigger properties give you the chance to entertain more guests. However, you can still have a workaround for single-bedroom houses. For instance, you can add a sofa bed for extra sleeping space. At the end of the day, the right property for you is one that suits your budget.
Calculate Income and Expenses
Your potential vacation rental property should be something you can afford, even when it’s vacant. Search for the occupancy rates of vacation rental properties in your chosen location so that you’ll have an idea of what your potential income can be. You also need to remember that occupancy rates and the amount of collected rent may decline during off-peak seasons. That is why you need to examine if that property you want to buy will bring you the income you desire.
When it comes to expenses, be prepared to pay for repairs, maintenance, utilities, homeowner association (HOA) fees, insurance, and more. If you believe you’ll not be able to spend that much time managing your property, you can hire a property manager. They are a big help, especially if you are far from your vacation rental. Of course, you will need to include their fees in your total expenses.
Finance Your Property
Once you’ve already decided which property to buy, then the next step is for you to finance it. You can do so with different kinds of loans, such as portfolio loans, conforming loans, multifamily loans, or short-term loans. Certainly, having cash is preferable, but be prepared for financing if necessary.
Advertise Your Property
Congratulations! You now have purchased a vacation rental. All you have to do is furnish it, and you can then market it. Before listing off your property on marketplaces, you may want to first block off days wherein you will be using it for yourself. Also, if you’ll be managing from afar, you need to set up a system so your staff and guests can easily use the property even without you. Alternatively, you can hire a property manager for further assistance.
Conclusion
Investing in vacation rentals isn’t just about buying a property and renting it out to travelers. You still need to do your research to determine whether this business is something that you can do. After all, it would be pointless if your investment will not generate revenue. Learn more about the vacation rental industry on our website today!