Vacation rental properties have become increasingly popular with tourists looking for affordable accommodation. As a result, many real estate investors are now buying a vacation home to rent out and also use as a second home.
There are different kinds of vacation homes out there including single-family homes, condos, and multi-family properties. However, not many people know how to buy a vacation rental property. That’s why we’ve put together some common dos and don’ts to help you get started.
Here are some things real estate investors must do when buying a vacation home to rent out:
Do Carry Out Extensive Research
When thinking about buying a vacation home to rent out, consider the local occupancy rates, your expected ROI, the desirability of the location, the current market rental rates, and their affordability. The best places to buy a vacation rental property are those close to popular attractions such as casinos, lakes, beaches, national parks, and mountains.
Real estate investors can find such investment properties by searching online listings on sites such as Mashvisor. The results can be filtered according to the areas real estate investors want to buy in, the price ranges, and other key return on investment metrics like cash on cash return and cap rate.
Alternatively, a real estate investor could hire a local realtor to help find suitable vacation rentals in the desired location.
Do Calculate the Income Potential
The main goal of buying a vacation home to rent out should be to make a profit. Therefore, it is very important to carry out a cost-benefit analysis to establish if renting out a house makes financial sense, even when it is unoccupied.
Check the current rental income and vacancy rates for the location, and then compare them to your monthly operational and financing costs. This will show if the vacation rental will generate a positive cash flow.
Real estate investors need a good vacation rental income calculator to figure out how much they could earn. Let’s say the property’s monthly mortgage payments are $2,150, monthly operational expenses are $300, the rental rate is $150 and the occupancy rate is 70%, the potential monthly income can be calculated like this:
Potential Monthly Profit: [($150) x (70%) x (30 days) – [($300) + ($2,150)]] = $700
This means that the cash flow will be positive if the investment property is available for rent for the whole month. However, take note that the occupancy rate could reduce significantly during off-peak seasons.
Real estate investors can use the rental property calculator at Mashvisor to calculate the income potential of vacation home rentals.
Related: Mashvisor’s Rental Property Calculator: A Guide for Beginner Real Estate Investors
Do Keep in Mind the Costs
Owning a vacation rental property comes with several associated costs. If real estate investors decide to list their property on online booking sites, they are likely to be charged a monthly fee.
In addition, they will be responsible for other costs such as HOA fees, insurance, hotel taxes (occupancy taxes), and utilities. These overheads could also include property taxes, property management fees, taxes on rental income, mortgage payments, and licenses.
Do Decide How You Will Make Money
Real estate investors can generate income from vacation home rentals through hotel programs, Vacation Rental By Owner (VRBO), or Airbnb.
- Hotel program – Investors have the option of buying a vacation home to rent out via hotel programs. The hotel will maintain it, rent it out for owners, and give guests access to all the amenities in the hotel.
- VRBO – This is a classified website where property owners advertise their vacation homes to tourists that want to visit the area. Vacation rental owners can hire a property manager to handle the day-to-day operations or manage the property by themselves.
- Airbnb – This is an online platform that allows real estate investors to list their rental property with a description of the number of bathrooms, bedrooms, and other amenities. Airbnb charges a service fee every time a booking is made on their site.
Related: How to Make Money with Vacation Home Rentals
So what should real estate investors not do when buying a vacation home to rent out?
Don’t Buy a Property You Wouldn’t Use
Besides renting out a vacation home, real estate investors might also want to use it once in a while when going on holiday. Therefore, the rental property should be in a location where they can visit at least once or twice each year. This will help cut down on vacation expenses significantly.
Ideally, real estate investors should be able to reach their vacation rentals within a 2-3 hour flight or drive. This way, they can easily visit on a weekend and get back to work or school on Monday.
Don’t Try and Figure Things Out by Yourself
With all that goes into buying a vacation home to rent out, it would be foolish to make decisions without consulting experts. A qualified tax professional will help real estate investors understand all the property taxes, occupancy taxes, and rental income taxes that are involved.
You will also need an experienced realtor to give advice on what to look for when purchasing a rental property. Property management companies can come in handy in handling the day-to-day operations of your vacation rental property.
Related: Leave Vacation Rental Property Management to the Professionals
Don’t Choose the Wrong Financing Option
Once real estate investors have identified a suitable vacation rental, they will have to pay for it. Buying a vacation home to rent out can be done using your own savings or through investment property financing.
Some of the financing options available include a multi-family loan, a portfolio loan, a conforming loan, a short-term loan, or a balance sheet loan. Real estate investors should select a financing option that is suitable for their type of vacation rental property.
Don’t Try to Sell Too Soon
The value of a vacation rental property might not increase as fast as expected. Manmade, natural or financial disasters could cause the value of an investment property to drop drastically. Therefore, it might not be a good idea to put it up for sale soon after purchasing it. The longer real estate investors keep a vacation rental, the higher the chances of making a good profit when selling.
Don’t Ignore Other Long-Term Financial Goals
Before buying a vacation home to rent out, real estate investors should ask themselves if they will still be able to save for other long-term financial goals. For example, can you buy a vacation home and still be able to save for a wedding, college, or retirement? You should think about your priorities and decide if this is the right time to buy that beach house.
Conclusion
Buying a vacation home to rent out can be a good investment if real estate investors carry out their due diligence. Don’t just rush out to purchase an investment property because everyone is doing it. Take time to think it through, and don’t hesitate to walk away if the deal doesn’t look right.
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