Buying a vacation rental property can be worth it if it pays for itself through positive cash flow!
Positive cash flow in real estate is the goal of every real estate investor. Regardless of the rental strategy that you’re planning on implementing, an investment property that can generate consistent income is what you are ultimately looking for. But can a vacation rental property generate enough rental income to pay for itself? And how should you go about finding positive cash flow properties? Keep reading as we answer these questions and give you a look at how profitable owning a vacation rental property can be.
Definition of Cash Flow in Real Estate
In any type of investment, cash flow is the amount of money that moves in and out of the business. More specifically, this refers to the movement of cash in terms of income and expenditure. There are two possible scenarios: positive cash flow and negative cash flow. Positive cash flow occurs when income is higher than expenses. Conversely, when expenses exceed the income that is being generated by the rental property, the investment is cash flow negative.
How to Calculate Cash Flow
Before investing in vacation rental properties, you need to have a basic understanding of how cash flow is calculated. The formula is rather simple and merely requires an accurate representation of income and expenses. Here is what you need to determine:
- Gross income: This is the total sum of rental payments that you receive from your tenants + any other source of extra income from the investment property.
- Operating expenses: These are the costs that come with operating a vacation rental property. We discuss these expenses in more detail below.
- Net operating income: The NOI is the result of subtracting expenses from income. This is the profit that you generate from renting out a vacation home without taking capital expenditure into account.
To determine the cash flow, you simply subtract capital expenditure from the net operating income. Capital expenditures are the one-time expenses that the real estate investor incurs at the start of the venture.
A Simpler Way to Calculate Cash Flow
Fortunately, there is a much easier way of calculating cash flow. In fact, you can let an advanced tool do everything for you. This is where the Mashvisor vacation rental income calculator comes in! Using this tool will save you a lot of time and effort and allow you to speed up the process of searching for and analyzing the best vacation rental properties in the housing market.
Watch our video to find out 20 ways to maximize your return on investment on vacation rental homes:
Do Vacation Rentals Pay for Themselves?
This is the question that every novice real estate investor should be asking. After all, these income properties might appear too seasonal to allow you to recoup the initial investment. However, this concern is not rooted in reality. In fact, making money with vacation rental property is relatively easy once you grasp all the variables at play. Here are the steps you should take in order to ensure that your vacation rental property is cash flow positive and ultimately pays for itself:
1- Pick a Good Location
We often stress the importance of location in real estate investing. But when it comes to buying a vacation rental property, it is by far the most consequential factor. Investment properties that are situated in a good location will invariably have a high occupancy rate, which is the key to generating positive cash flow.
Besides boasting all the basic amenities, the location you invest in should be active throughout the year and not just during a few months. A good example of this is beach properties that are located in mild climate areas.
With the advent of high-end real estate investing tools, there is no reason to rely on manual market research. A dedicated tool will allow you to identify the best places to buy a vacation home. Learn all about the heatmap and how it will help you find the best neighborhoods to invest in real estate.
2- Use Real Estate Investing Tools to Find the Ideal Vacation Rental Property
Real estate investing tools have come so far that you can use them to not only pinpoint profitable locations but also find the ideal properties for investment. There is no better example of this than the Mashvisor Property Finder. The tool employs the latest in AI technology and does all the heavy lifting for you.
With filters that include everything from rental strategy to budget, you will be able to find a positive cash flow vacation rental property with complete ease. The tool will also allow you to access an investment property analysis report that will tell you the expected rental income, occupancy rate, cap rate, and CoC return.
3- Incorporate Real Estate Comps into Your Property Analysis
Real estate comps are properties that are nearly identical to the vacation rental property you’re planning to buy. Including these comps in your analysis will allow you to assess the profitability of the real estate market and set your own income expectations and rates. Moreover, it will ensure that you are in line with what the market dictates. So where can you find real estate comps? Right here on Mashvisor! Sign up and gain access to comps in any housing market in the US.
4- Make Sure Your Rental Rate Is High Enough to Cover the Mortgage
If you used outside financing to acquire a vacation rental property, then mortgage payments are another major expense that needs to be accounted for. Paying off mortgage needs to be done in a slow and efficient manner that does not put your real estate investment in a precarious position. To offset this expense, your rental income should be at least 20% higher than your mortgage payments.
5- Manage Your Expenses
Expenses are what’s going to make or break your vacation rental investment. Real estate investors who fail to properly estimate their expenses will end up dealing with an ever-growing deficit. Furthermore, accounting for every expense is crucial if you want to accurately assess your overall expenditure. Here are some of the costs of operating a vacation rental property:
- Repairs, cleaning, and year-round maintenance
- Insurance and taxes
- Accounting fees
- Marketing and paid advertising
- Appliances and supplies
- Furniture
- Vacancy periods
Managing these expenses can feel overwhelming to some. To make this process easier, you can always retain the services of a professional property management company. Professionals can help ensure all costs are covered and that the vacation rental property pays for itself.
The Bottom Line
As you can see, finding a vacation rental property that can generate positive cash flow is very feasible. Whether you’re intending to use it strictly as an income property or as an occasional second home, a vacation rental property can definitely pay for itself if you abide by the guidelines in this blog.