Covid-19 forced a near-total shutdown of the tourism industry in March last year, but vacation rental platforms like Airbnb and VRBO are currently seeing more inquiries due to the pent-up demand.
Therefore, knowing how to invest in vacation rental property in the right place provides you with a chance to benefit from both property price appreciation and high rental prices.
Case in point, Mashvisor’s real estate data shows that in February 2021, Airbnb rentals in the California real estate market brought in an average rental income of $4,177 and a cash on cash return over 3%. The highest Airbnb cash on cash return was seen in the Kentucky housing market Arizona at 7.35% and an average monthly income of $2,432.
Covid-19 has forced us to reevaluate priorities when it comes to living space. People are no longer splurging on hotels; they aren’t just seeking affordable vacation rentals because of price, but also because they offer a chance to experience outdoor living” says Kristina Morales, realtor at Morales Team Real Estate, Cleveland, Ohio.
Learning how to invest in vacation rental property is also a good idea if you travel to specific locations for extended periods (say 2-3 months). When you travel to a particular location (e.g., Malibu) for vacations every year, instead of doling out months of rent for a beach front property or paying for a 4-star hotel, you could save much more money over time if you know buy a second home which you rent out when not there.
A good vacation rental property in the right location offers steady rental income, and you get to have your own get-away spot.
But wait! There are some specific things to know before buying a vacation rental property. For example, you should know that property management fees for vacation homes can be 3 times what you pay a company to manage a long term rental. Also, you should keep in mind that the conventional mortgage types would offer no tax advantages when applied to second homes (like vacation rentals).
You would have to consider taking special types of loan (e.g., a HELOC, or Home Equity Line of Credit).
This article would show you all that you need to know about buying a vacation home, how to get financing for your investment, and how to find the best places to invest in short term rentals. These would ensure you won’t fall into the common vacation rental investing pitfalls that newbie (and even experienced) investors fall into.
How Do I Finance My Vacation Rental Property Investment?
While buying a vacation rental property is similar to buying an investment property, it is important to note that second homes are financed a bit differently. The differentiator is that your lender expects you to live in the home for a set period of time each year.
The home also has to be about 50 miles from your primary home. An investment property is one in which you don’t live, but you rent it out every year. The down payment requirements and interest rates for investment properties are usually higher. This makes vacation (Airbnb) rentals less desirable for new investors.
It is best to get it right from the start, else you might incur heavy fees. There are many ways to finance your investment including all cash purchases, 401k loans, hard money lenders, conventional financing (second mortgages), and co-ownership.
But the easiest and most common way to obtain financing for vacation homes is via home equity. According to the NAR, around one fifth of vacation home buyers tap primary home equity to help finance their down payment.
Home equity loans and home equity lines of credit use the equity in your home – that is, the difference between your home’s value and your mortgage balance – as collateral. Home equity loans tend to come with very competitive interest rates because they are secured against the equity value of your home.
You could access the equity on your home as a lump sum, in form of a fixed rate mortgage (cash-out refinance), or as a revolving source of funds or line of credit (HELOC).
However, the downside to using your home equity is that lenders place a second lien on your vacation home if you miss payments. Step by step, here’s how to find vacation rental investment.
Steps to Buying Vacation Rental Property
Follow the steps below when purchasing a vacation rental property:
Check Out Mortgage Rates and Terms
For vacation properties, you’ll typically need a 640 credit score, a 25% down payment, and a 2-month contingency/reserve budget. You must also have a DTI of 43%-45% and plan to occupy the property for at least 15-18 days a year. With these settled, you can start checking rates offered by different lenders.
The larger the down payment you can offer when you plan to buy a vacation home, the better your interest rate options will be. On the other hand, according to Fannie Mae and Freddie Mac rules, a credit score of 680 or higher may give you a chance to get away with a down payment of less than 25%. In any case, the down payment for second homes would usually be above 10%.
Determine Your Goals
If you’d like to learn how to invest in vacation rental property, odds are generating rental revenue is a priority for you. Whatever your goals are, you should be transparent with your lender.
You should also assess your vacation rental potential revenue relative to expenses such as hiring a property management company. You should communicate with previous owners and check rental comps in your target location to help determine rental income and cash flow projections.
Do an In-Depth Vacation Rental Market Analysis
Odds are you’ve narrowed down your search to one or two locations, the next step is to examine rental demand and occupancy rates in these areas.
The most important thing to do at this stage is to assess the property and look through a potential renter’s eyes: Is this a place you’d love to vacation in? What do you love about the area? When does the area see high tourist demand and when does demand tank? For example, winter is the peak season for vacations in mountain regions. You would likely have to bring down daily rates during the off-seasons.
Mashvisor’s neighborhood heatmap tool comes handy here. It allows you to analyze areas within a market based on a number of different factors including listing price, Airbnb rental income, Airbnb occupancy rate, and Airbnb cash on cash return.
Mashvisor’s Heatmap Tool
Check Airbnb Laws in Your Target Area
In many cases, there are state and local regulations around short term rental listings. It’s always a good idea to stay abreast of these as the last thing you want to do is to incur huge fees. For example, in the Florida real estate market, all vacation rentals must be licensed through the DBPR (Department of Business and Professional Regulation).
You should also know about local homeowner association rules and dues. Here are 10 US cities with strict laws around Airbnb listings, which you should generally avoid.
Decide on the Property Type
Most Airbnb guests want a nice get-away but also privacy. Therefore, multifamily housing might not be a great option. You should consider buying a single family home, an apartment, or a beach house. One other criterion you should consider is walkability, i.e., how walk-friendly the area is and how close it is to parks, supermarkets, and gyms.
Mashvisor’s neighborhood analysis pages will help you decide on the optimal property type as well as the best number of rooms and bathrooms for the Airbnb strategy in your location of choice. Then you can start your search for vacation rentals for sale using Mashvisor’s property marketplace.
Work With a Local Real Estate Agent
When it comes to buying an Airbnb property in a location you’re not too familiar with, you should not approach buying as a one-man team. Reach out to a local real estate agent who has experience working with vacation rental investment properties.
He/she’ll be able to negotiate, dot all the I’s and cross all the T’s for you to get you to a smooth closing. If you need to outsource other tasks, an agent might be able to point you in the right direction too.
Create Your Airbnb Listing
The first step if you’re just starting out with Airbnb would be to test run the platform by creating a listing. Follow these steps:
- Select the option that best describes the portion of your vacation home you’d like to rent out (shared property, private room, or entire place).
- Upload the best photos of both the interior and the exterior of your listing (when there’s good amount of lighting).
- Create a list of the property’s features and amenities in your description and set your AirBnB prices.
- Add your house rules and set availability periods (when would your vacation home be unavailable?).
- Clean up the space and store up your valuables.
Depending on your budget, experience and cash flow expectations, you might want to consider hiring a property management company that specializes in working with short term rentals. They’ll handle property listings, maintenance, and guest management for you.
Use Mashvisor’s vacation rental calculator to figure out your monthly cash flow from your vacation property after mortgage and expenses to decide if that’s the best option for you.
Top 5 Places for Investing in Vacation Rental Properties
The right place to start your vacation rental search is the best cities for Airbnb investment. We have used Mashvisor’s real estate data and analytics to short list 5 locations with good ROI for vacation rentals in the US housing market.
1. Greenville, Pitt, NC
- Median property price: $269,803
- Airbnb daily rate: $93
- Airbnb occupancy rate: 69.50%
- Airbnb rental income: $2,624
- Airbnb cash on cash return: 7.46%
2. Bakersfield, Kern, CA
- Median property price: $380,973
- Airbnb daily rate: $135
- Airbnb occupancy rate: 74.10%
- Airbnb rental income: $3,016
- Airbnb cash on cash return: 5.46%
3. Wilmington, Brunswick, NC
- Median property price: $412,973
- Airbnb daily rate: $139
- Airbnb occupancy rate: 56.67%
- Airbnb rental income: $2,676
- Airbnb cash on cash return: 4.74%
4. Gainesville, Alachua, FL
- Median property price: $311,458
- Airbnb daily rate: $147
- Airbnb occupancy rate: 58.33%
- Airbnb rental income: $2,217
- Airbnb cash on cash return: 4.40%
5. Carrollton, Dallas, TX
- Median property price: $330,023
- Airbnb daily rate: $163
- Airbnb occupancy rate: 64.21%
- Airbnb rental income: $2,578
- Airbnb cash on cash return: 4.20%
Are you a new investor interested in short term rentals? Are you trying to figure out how to invest in vacation rental property? Follow the ideas in this guide to sidestep the common mistakes that new investors make with Airbnb properties.
Starting a vacation rental business on the right foot requires knowing how to evaluate the investment potential of real estate listings. Use Mashvisor’s investment property calculator to search for and analyze rental properties for sale to find the best vacation home for your purposes.
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