Vacation rentals are a valuable addition to any real estate investor’s portfolio. They have higher earning potential than traditional single-family properties, and investors view them as a valuable asset among the real estate they own and maintain. That said, caution is critical in the selection and planning process.
While it’s true vacation rentals are desirable real estate investments, property investors should study the subject in detail before starting searching for available properties for sale. Short-term rentals in popular tourist areas are often susceptible to risks other, long-term rentals aren’t, and understanding these challenges is vital to minimizing losses and maximizing profit.
The saying “look before you leap” applies here, and before jumping into vacation rental investments, preparation is nothing short of essential. We’ll detail everything an investor needs to know moving forward, laying the groundwork in a step-by-step guide.
1. Choose the Right Location
Real estate investors unfamiliar with vacation rental properties tend to favor sunny places near the sea, the typical locales most people imagine when they hear the word “vacation.” In truth, these investors limit themselves by their expectations, and the ideal location is wherever there’s high demand from short-term visitors.
Major metropolitan areas are often just as viable as areas near a sunny beach or a snowy mountain. Investors should search for locations with a unique feature that attracts tourists, whether it’s something of historical value, a large annual event, or festivals. A successful investor shouldn’t narrow their perception of what the rental should look like.
Take a smaller market, perhaps in the suburbs, for example. A little market research will tell you if there are unique qualities to your region that might make it a prime spot for a vacation or short-term rental. Suburban areas are usually more peaceful and may still have direct access to bustling city centers via bus lines and other modes of transportation. They might also be home to universities or colleges that attract a flow of visitors.
You can usually find affordable investment properties in cities across the US real estate market, and as prices climb a projected 4.6% this year, real estate investors will enjoy appreciation and high resale value. A condo in a safe, vibrant neighborhood is an excellent prospect for those who can’t afford Malibu or Miami Beach.
2. Crunch the Numbers
The higher earning potential of vacation rentals also comes with a heftier price tag. Real estate investors should set aside several days to work through the financial implications of purchasing a property in a tourist location. The subject goes more in-depth than their budget and what money they currently have available.
For example, you might be interested in beachfront vocational rentals. Then, it’s essential to remember properties near an ocean are vulnerable to stressors like sun, sand, humidity, and moisture. Without taking the proper precautions, maintaining the rental could prove unsustainable.
As an investor goes through the motions of calculating their finances, they should reserve extra money for maintenance fees. Budgeting beyond their initial projections is usually wise, and having a little extra in the emergency fund can only help. It’s important to account for the future when crunching the numbers.
3. Consider Management
The location of the vacation rental might make maintenance and cleaning difficult for the investor to handle on their own. If you prefer to take a passive approach to your investments, you should consider hiring a professional property manager to keep the property in a good condition. There’s no shortage of benefits with this approach.
Investors who’d prefer to delegate the responsibilities of ownership and maintenance to a manager alleviate much of the stress that comes with residential real estate. They won’t have to worry about obligations like rent collection, tax filing, and communicating with contractors. That said, professional property managers aren’t free.
On average, managers charge a fee between 4 and 10% of the gross monthly income for the property. For single-family properties, the fee is usually closer to 10%. Real estate investors who can find room in their budget for a manager should research their options, but only if they can justify the additional expense.
4. Create an Airbnb Account
Tourists and travelers tend to prefer Airbnb businesses to hotels, motels, and hostels. The appeal of living like a local is part of the vacation experience for some, and visitors will often seek out properties with a more authentic, personal atmosphere. Overly attentive hotel staff and the noisy activities of other guests aren’t an issue.
With this in mind, real estate investors can capitalize on tourists’ interest in Airbnb, enjoying the property they’ve paid for while simultaneously renting it to travelers. They can start a profitable Airbnb business and use the website’s platform to attract attention to their rental, and as for fees, they’re generally worth the added convenience.
That said, there are rules and regulations an investor has to learn if they list their rental on the website. Airbnb isn’t legal in every real estate market, and some US cities set limits on the number of days per month or year an investor can rent their Airbnb property. Knowing which laws apply is vital to compliance.
5. Construct a Marketing Plan
Without marketing, a vacation rental is virtually invisible. Beyond the essential responsibilities a real estate investor has to manage, like maintenance and cleaning, marketing is a fundamental necessity which is no less critical. All the time and effort you’ve placed in your property mean nothing if tourists are unaware it exists.
To enjoy more bookings and greater consistency, you should list your rental on sites like Airbnb, VRBO, HomeAway, and AllTheRooms. In doing so, you’ll expose your property to as many potential short-term guests as possible. Good pictures, an extensive description, and consistently stellar reviews will all contribute to a rental’s popularity.
Investing in Vacation Rentals
Though vacation rentals share similarities with traditional real estate investments, investors should show caution in the selection and planning process. You need to study a range of locations, assess your finances and management needs, learn the basics of short-term rentals, and build a marketing plan.
After all that, we’d say you’re ready to jump into investing in vacation rentals!
This article has been contributed by Holly Welles from The Estate Update.