Have you been thinking about investing in vacation rental properties for sale? Read on to know whether they’re profitable and how to find them.
Table of Contents
- Are Vacation Rental Properties Profitable?
- What Is a Good Rate of Return on a Vacation Rental?
- How to Find Vacation Rental Property for Sale in 4 Steps
Over many years, real estate has created many millionaires. While there are several ways of investing in real estate, short-term rentals have gained a lot of popularity over the past few years.
Many investors have been buying such types of properties since they offer a higher profit potential and flexibility. Many vacation rental owners have earned a substantial income from this type of real estate investment.
In today’s blog post, we’ll look at learning how to calculate the profitability of rental properties for sale and how Mashvisor can help you do that.
Are Vacation Rental Properties Profitable?
Vacation rental properties are a profitable way of investing in real estate in 2022. Once you look at the numbers, it’s easy to understand why many real estate investors are considering this type of investment.
By the end of 2021, the average annual earnings for a vacation rental was $56,000. In hot markets, such as tourism hotspots like Florida, the annual average is growing by up to 70% yearly.
Advantages of Vacation Rental Properties for Sale
Let’s break down some of the reasons why vacation rental properties for sale are profitable:
- Higher revenue potential: The 2021 annual average income of $56,000 was the highest average ever recorded. Airbnb rentals in some hot markets receive a cash on cash return of at least 10% annually.
- Growing market: It’s hard to find any city, town, or metro area in the US without a growing Airbnb market today. There are currently a little over 1.1 million vacation rentals across the country. By the end of 2022, the figure is expected to grow by 20.5%.
- Value appreciation: Real estate serves as an excellent hedge against inflation. The value of properties appreciates at a higher rate than inflation. It provides a profit potential due to the increase in equity. For example, the US housing market performed better in 2021 compared to the previous 15 years, despite the ongoing pandemic.
- Resistance to recession: Vacation rentals in tourism hotspots like Florida perform well even during a recession. It is because inflation leads to families opting for more affordable vacation options like Airbnb rentals instead of expensive hotel rooms.
- Tax advantages: Vacation rental property owners enjoy the same tax benefits as other real estate investors. However, your vacation rental must be rented as a short-term rental for 14 days or more every tax year for you to qualify for tax benefits.
- Diversification: The best thing about short-term rentals is that they come in all property sizes and types. You can start with studio apartments, then slowly grow to log cabins and beach houses. As a savvy investor, it is a perfect way to diversify your investment portfolio and earn more income.
While vacation rental properties offer a lot of benefits to investors, there are also a few potential downsides.
Potential Drawbacks of Vacation Rental Properties for Sale
Here are some of the potential disadvantages of investing in vacation rental properties for sale:
- Attention and time: Vacation rentals require a lot of attention and time due to the high tenant turnover.
- Income fluctuations: Short-term rentals are subject to income fluctuations due to seasonality. Increased competition may also contribute to lower annual income.
- Maintenance and management fees: While Airbnb occupancy rates may be higher, short-term rentals are expensive to maintain since you need to clean them every time a guest checks out. Also, Airbnb property managers charge a percentage of the rental revenue, usually 10%.
- Marketing and promotion: Marketing your short-term rental can be a taxing activity. All your calendars on different platforms must be in-sync to avoid multiple bookings on the same dates. Guests are attracted to your property’s appeal, so you must hire a professional photographer to take high-quality photos of your rental. You must also ensure your guests enjoy their stay so that they can give you positive reviews.
- Local laws and regulations: Your local authorities may impose stringent regulations on vacation rental properties. Some limit the number of days you can rent out your property every year, while others don’t even allow short-term rentals altogether. It’s important to understand your local laws and regulations before investing in such types of properties.
Some of the above downsides can be minimized by hiring a good property manager or management agency. A good property manager will ensure your rental is well-managed, cleaned, and stocked ahead of bookings and also handle your guests well to their complete satisfaction.
What Is a Good Rate of Return on a Vacation Rental?
To answer the question, anything between 10% and 20% is considered a good rate of return for a vacation rental. Keep in mind that, just like other rental properties, the location greatly influences a vacation rental property’s return on investment.
So, how do you actually know that a vacation rental is a good investment? By calculating the rate of return on the investment.
First, let’s look at how you calculate the return on investment.
How to Calculate the Return on Investment
Calculating the return on investment is quite straightforward. Here’s the formula:
ROI = Annual Revenue / Cost of Investment x 100
If the above formula is hard to understand, you can break it up as follows:
ROI = (Gain – Cost) / Cost
Where:
- Gain is the investment gain
- Cost is the total investment cost)
While the two formulas appear different, they’ll still generate the same result.
Also, there are a few other factors you must consider, even though you might not account for them in the equation. They are important since they also influence your property’s return on investment. The factors include:
- Property maintenance and repair costs
- Debts and mortgage costs, including interest, for the money borrowed in the initial investment. They are referred to as leverage.
- Other costs associated with the debts
Since calculating the return on investment while accounting for the above factors can be overwhelming, you need to use a software tool for this function. This is where Mashvisor’s Airbnb rental calculator comes in.
The rental calculator is an excellent great tool for calculating the ROI in one place without having to organize all your data on a spreadsheet. Also, you can eliminate errors in your data or stop worrying about the above factors.
The best thing about the said tool is that it provides you with data for both traditional and Airbnb rental strategies. It helps you choose the best investment strategy for your financial and investment goals.
How to Find Vacation Rental Property for Sale in 4 Steps
If you’ve already made up your mind to invest in vacation rentals for sale, you don’t need to lose sleep worrying about how to go about it. We’ve compiled this comprehensive guide on how to find profitable vacation rental properties for sale.
Let’s break it down into the following simple steps:
1. Find a Profitable Location
Location is one of the vital pillars of a profitable real estate investment. It influences how much rent you can charge for your rental property, the expenses you’ll need to pay, and ultimately your property’s profitability. Thus, finding a profitable location should be your first step toward finding a profitable vacation rental property for sale.
One of the most important pointers for finding a profitable city is the demand for vacation properties. In short, the best cities for vacation rentals are those that receive an influx of tourists. They are places that are near national parks, beaches, mountains, and any other tourist attractions that may boost your Airbnb’s occupancy rate. For example, Florida is a great location for vacation rentals since it attracts tourists throughout the year.
While many people only consider tourist cities, you can also invest in a profitable Airbnb in a student district or business hub. It is because business professionals and students also visit such towns for a short time. Your vacation rental can receive a good occupancy rate from such guests.
Property Prices
Whether you choose to target tourists, students, or business professionals, don’t forget to check the property prices. The price you pay for your vacation property will significantly affect the rental rates you set and its profitability. You don’t want to pay a high purchase price and then struggle to cover the expenses since you can’t charge high daily rates.
The best way to find a profitable investment city is by looking at Airbnb data at the city level. The data includes Airbnb occupancy rate, rental income, cap rate, cash on cash return, and cash flow. You can use Mashvisor to search for your city of interest, and you’ll find a compilation of the best cities to invest in vacation rentals in the US.
2. Spot the Best Neighborhood
Once you’ve found a profitable city to invest in, you need to carry out more neighborhood analyses to find the best neighborhoods in that city. Narrow down your search to find a profitable neighborhood. Some neighborhoods are more profitable than others though they’re located in the same city.
Mashvisor’s Real Estate Heatmap helps you carry out neighborhood analysis fast and efficiently. It is an analysis tool that helps you see how different markets are performing based on the real estate metric you enter.
The heatmap tool is easy to use. You simply type in the location you want to analyze, say Florida, then use one of the following metrics to analyze the cities:
- Property price
- Airbnb rental income
- Airbnb occupancy rate
- Airbnb cash on cash return
After setting the above metrics, the tool ranks the neighborhoods based on your criteria. The locations that rank high are marked in green, while red indicates the dormant neighborhoods.
The best neighborhoods for vacation rental properties are those with low property prices but a high Airbnb rental income, occupancy rate, and cash on cash return.
You can use Mashvisor’s Real Estate Heatmap tool to find the best neighborhoods for vacation rental properties for sale.
3. Find a Profitable Vacation Investment Property
Now that you’re done with the market-level analysis and research, we get to the exciting part. It’s time to find a profitable vacation rental in the neighborhoods. While there can be dozens of listed vacation properties for sale, you need to find one that matches your budget and investment goals.
You can choose to hire a real estate agent to do all the heavy lifting for you. However, using Mashvisor’s Property Finder is a much easier and faster way to find the property you’re looking for. The tool allows you to find an investment property with a high return on investment based on your search criteria.
You can customize your search on the Property Finder using the following filters:
- Location
- Buying price
- Ideal rental strategy
- Property type
- Number of bedrooms and bathrooms
After you’ve set the filters, the tool scans the market for you and displays the best properties ranked in order of performance. In short, the best properties for sale are ranked first.
4. Carry Out an Investment Property Analysis
After searching for properties that fit your requirements in the previous step, you need to analyze each property for sale individually. Remember, you want to find the property with the highest profit potential. You also want to find out how much money you can make from your vacation rental property.
Carrying out an investment property analysis manually can be a painstaking process. Gathering all the data required, recording it in a spreadsheet, and manually carrying out the calculations are difficult and tedious. Let’s not even get started on how a small error can throw the entire analysis off.
This is why you need Mashvisor’s Airbnb rental calculator. The tool helps you carry out a comprehensive investment property analysis for any listing. It provides you with an in-depth report with all essential metrics so that you can evaluate a property’s profitability.
All metrics provided by the rental Calculator are pre-calculated based on the Airbnb rental comps and data from the housing market. The metrics include:
- Airbnb rental income
- Property expenses
- Airbnb cash flow
- Cash on cash return
- Cap rate
- Occupancy rate
The best thing about the calculator is that it doesn’t just show you the rental expenses but breaks the calculations down for you to understand them. Also, if your research shows that a particular figure differs from what the calculator shows, you can tweak the figures. The calculator will then recalculate to show you how the changes will affect your income.
Conclusion
Unlike traditional rentals, vacation rental properties for sale usually promise a higher rate of return, portfolio diversification, flexibility, and value appreciation. While the advantages are enough for you to make up your mind, be aware of the higher maintenance that such properties require.
However, you can counter the disadvantages by hiring a good property manager or management agency to ensure the property is well-run and the guests are satisfied.
Finding a profitable vacation rental property in Florida and other locations isn’t a hard task. Simply ensure you find a profitable city, spot a suitable neighborhood, search for a lucrative vacation investment property, and perform a comprehensive investment property analysis.
Mashvisor is your one-stop shop when it comes to real estate investments. The platform will walk with you and hold your hand through all the steps listed above. It’s the best way to invest in a lucrative real estate property and get value for your money.
Sign up for a free 7-day trial of Mashvisor now, followed by 15% off for life.