Buying a vacation home to rent out is one of the best ways to make money in real estate. It is the best of both worlds – you have a second home to go to on your vacations and you can earn a passive income from it during the rest of the year. Although some consider investing in vacation rental property quite risk-free, it is normal for you to worry about things you can miss in the process.
If you are a beginner real estate investor or have not built an investment property portfolio yet, this article is for you. Here are the major risks associated with buying a vacation rental property and how to avoid them.
Buy a Vacation Rental Property in a Place With Year-Round Appeal
The first risk of investing is not getting a good occupancy rate, which will heavily impact your return on investment. If your vacation rental home is only occupied during one peak season, it will be harder to make the annual rental income you expect.
Beach and ski resorts are great, but they might not be the best place for positive cash flow properties because they are busy only one season a year. To minimize this risk, you should invest in a location that will have guests all year round – like buying a vacation home in Florida where the weather is good all the time, for example. National parks, historic towns, lively cities full of festivals are all great locations, too.
Although part of the fun of owning a vacation home is that you will be using it, your plans for vacationing shouldn’t drive your choice of location.
Related: What Do I Need to Know About Buying a Vacation Rental Property?
Research the Short-Term Rental Regulations
The second risk of real estate investing is going into a housing market where Airbnb regulations only allow you to rent out an owner-occupied property. Los Angeles is one such city and buying a vacation home to rent out there is useless. So make sure to find out about the local Airbnb laws before investing in vacation rental property. Here are some cities with no Airbnb legal issues:
These are among the best places to buy a vacation home.
Analyze the Neighborhood Using a Rental Heatmap
Even if you have carefully chosen the town or city for your vacation rental home, exploring in detail the local short-term rental market is key to your success as an investor and a host. There is a chance that some neighborhoods there are better than others. Especially if you are investing out of state, it is hard to know the housing market there very well.
This is why analyzing a neighborhood before buying a vacation home rental is essential. Mashvisor’s Heatmap tool can help you. It is a tool that visualizes vacation rental data and makes it easy to understand so you clearly see the investment potential of your neighborhood of choice.
Can you afford to be buying a vacation home rental downtown? Look at the property prices the Heatmap lists. How are other hosts doing in the area? The tool uses rental comps to show you the average rental income, Airbnb occupancy rate, and cash on cash return of short-term rental properties there. All this data enables you to make a well-informed real estate investing decision.
Related: Airbnb Rentals: Finding Income Properties in 2020 with a Heatmap
Do you wonder which neighborhoods are tourist favorites and which ones are run-down and to be avoided? Mashvisor’s Neighborhood Analytics Page shows the number of rental properties listed on Airbnb and a Walk Score so you see both the level of competition and the potential advantage for guests.
Sometimes it will turn out a neighborhood you had in mind sees low Airbnb demand and it is not a good place for a vacation rental investment. Other times profitability might look great, but vacation homes for sale in the area might be well over your budget. Using Mashvisor’s Heatmap tool and Neighborhood Analytics Page, you can easily find a neighborhood that fits your real estate investing goals.
Sign up for Mashvisor now to analyze neighborhoods of interest across the US housing market before buying a vacation home.
Do an Investment Property Analysis Before Buying
Probably the biggest risk when buying a vacation home is not getting the returns you want. The idea of an investment property is – after all – to bring you an investment income that covers the costs and leaves a profit. To minimize the risk of making a bad investment then, you should analyze the property before buying it.
The Investment Property Calculator
Another of Mashvisor’s tools, the Investment Property Calculator, will save you tons of time and effort on that. When you have shortlisted a few property listings, you can use the calculator to run a deep investment analysis on them.
It estimates profitability metrics based on rental comps in the area. You get a report on:
- rate of return (cash on cash return and cap rate),
- cash flow,
- recurring monthly rental property expenses,
- vacation rental occupancy rate,
- tax history.
You can quickly make comparisons with similar properties and figure out what a good ROI for vacation homes is. This way, it is far easier to make a good and profitable choice when buying a vacation home.
You can input your own numbers in the investment property calculator to compare financing methods – cash or mortgage. This can be a life-saver for beginner real estate investors as it would minimize risks connected to defaulting on a mortgage, for example.
The analysis also compares rental strategies by monthly rental income, occupancy rate, return on investment, etc. It also projects time for payback for each, which is very helpful if you are not sure whether to go with Airbnb vs traditional renting for your investment property.
Conclusion
If you want to minimize risks when buying a vacation home rental, you can reverse-engineer the process. A tool like Mashvisor lets you search for vacation homes for sale based on your criteria. You can explore property listings up to a certain price, above a certain rate of return, or even that bring a certain rental income.