Consider Investing in Short-term Vacation Rental PropertiesJul 01, 2022
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Investing in a vacation rental property is enticing as it is. As an investor, maybe you're thinking about buying your first rental property, or perhaps you're considering expanding your portfolio. It not only provides a wonderful vacation spot for you and your family, but it also allows you to diversify your real estate portfolio and accumulate wealth over time.
As the economy opened up from corona virus lock downs, more people are now spending their disposable income on vacations.
Despite popular belief, owning a vacation rental property is not the same as traditional real estate investing. Instead, purchasing a vacation rental property necessitates a thorough knowledge of the local market and expected revenue.
If this excites you, I can guide you and get you started in this rapidly expanding market.
In this article, let's go through this short and comprehensive guide in starting your Short Term Rental (STR) investments, specifically in the games of vacation rentals.
Bullets to take note of:
- Investing in Vacation Rentals: Pros and Cons
- Picking your perfect vacation rental property
- Finding Your Vacation Rental Lender
- Managing and maintaining your vacation rental
Vacation rentals and short-term rentals are an exciting and rapidly growing new asset class. Airbnb and HomeAway, among others, are bringing attention to this growing and lucrative opportunity. Data reveals that the global vacation rental industry witnessed a huge recovery in 2021, with revenues growing by 36.7 percent to $66.9 billion. Over the next three years, this figure is forecast to rise to $88.4 billion., and the Coronavirus pandemic has only increased demand.
Many people are trying vacation rentals and like them because they are seen as a safer travel option than hotels.
- Vacation revenue in the US is expected to show an annual growth rate of 10.55%;
- The average revenue per user is expected to amount to $299.96 in 2021; and
- Vacation rental user penetration is 13.3% in 2021, which is expected to hit 18.1% by 2025.
Investing in Vacation Rentals: Pros and Cons
You make extra income. Airbnb hosts alone earn upwards of $900 per month on average, while hosts in the most in-demand cities can make four times that or more. And that's only on one platform. Dozens of other vacation rental sites exist, opening the door to even more earnings if you play your cards right.
Personal Use. Owners can use the property for a limited number of days each year without losing their tax benefits.
Can write off significant expenses. For tax purposes, renting out your home for more than 14 days is considered a business. So you have to pay taxes on the money you earn from it. However, it allows you to deduct a large portion of the costs of repairs and maintenance.
Almost any "ordinary and necessary" business expense can be deducted. You can even remove the fees charged by Airbnb and other platforms for hosting.
Highly Lucrative. You might be able to make more money with vacation rentals than with long-term rentals. A well-performing vacation rental will typically generate more rental revenue. Higher operating expenses are usually offset in part by higher revenues.
Future Retirement. A vacation property can be an excellent way to accumulate long-term wealth and ensure a secure financial future in retirement. Sell it and use the money for future living expenses, travel, healthcare, and other expenses. On the other hand, keep it if you want to have the relaxing retirement you've always wanted. You win in either case.
Regulations. Short-term rentals are regulated or outright prohibited in many cities and homeowner associations. As a result, it's critical to double-check the requirements in your area before renting a vacation home. However, some cities, such as beach towns, are very pro-short-term rentals.
Extra Monthly Payment. Consider these costs too; utilities, lawn maintenance, and general upkeep. You'll almost certainly need emergency repairs, and who knows how much they'll cost? Before moving forward, check your overall financial picture and make sure the additional costs aren't going to put a strain on your finances.
Off-Season. Seasonal vacation rentals are common. Summer, for example, is a great time to visit the beach, but November is not as popular. Lodgify has some excellent suggestions for increasing off-season bookings.
Volatile. Consumer spending on travel and leisure is subject to changing economic conditions. Often during recessions, they spend less on travel and leisure. Therefore, plan accordingly to handle an increase in vacancy in the event of an economic slowdown.
Picking your perfect vacation rental property
A city with a high demand for short-term rental properties is an excellent place to invest in vacation rental property. As a result, you should seek out a city with a steady stream of visitors throughout the year. The best vacation rental investment locations are usually near beaches, mountains, national parks, lakes, and other tourist attractions. However, you should look for a city with affordable property prices because the price you pay for your property will significantly impact its profitability. You certainly don't want to buy a vacation rental in a high-cost city and end up being unable to cover your property expenses.
- Walkability to entertainment, food, etc.
- Occupancy rates
- Current supply and demand in the area
- Average revenue for rentals in the area
- Crime rate
Once you find your perfect vacation spot property, the money factor comes in. Don't forget to calculate a projected income of your property, such as the Annual Revenue, Average Daily Revenue, Occupancy Rate, Cap Rate, Net Operating Income, etc.
Finding Your Vacation Rental Lender
You must then obtain a mortgage, just as you would for your primary residence. To qualify, you'll need a minimum of 20% down payment, 2-12 months' worth of cash reserves, and monthly mortgage payments on both your primary and secondary homes that cannot exceed 45% of your gross monthly income.
On the other hand, if you have more at hand, skip the conventional and straight to evaluating portfolio and try a loan in your local bank or with a specialist who provides investor loans with STR experience, but they're more expensive than conventional loans. They usually amortize over 15 or 20 years rather than 30 years and include a "balloon" payment after five or 10 years. I have some great resources available when you decide to work with me.
Managing and maintaining your vacation rental.
Do I need a Property Manager?
If you're a DYI'er, I can recommend some property management tools online and some tricks, too, so you can do this easily. Just message me anytime. But if you opt to hire a property manager, consider hiring local property managers in the area.
Because the vacation rental market is so competitive, it's critical to make your property stand out from the crowd. If you hire a property manager, they will almost certainly handle this for you.
Here are some tips to make it stand out:
- Hire a professional photographer to showcase your property with high-quality photos.
- Mention the property's proximity to local attractions, including shopping, dining, and trails.
- Feature positive reviews of guests' stays.
- Highlight the cleanliness and offer a flexible cancellation policy.
Pro Tip: Don't forget your insurance. STR is considered a business, and therefore a standard homeowner's insurance policy is not adequate coverage. Instead, I recommend you ask your insurance company for vacation rental coverage. In addition, you must consider these: Property Protection, Liability Coverage, Loss of Rent Coverage, Supplemental Coverage Based on Protection. Everybody’s risk threshold varies so take into consideration different options and strategies that meet your needs.
Vacation rental properties can be an excellent way to build long-term wealth and earn consistent income. They do, however, come with several costs and drawbacks. Study local rental regulations, research the audience and market you're buying into, and make sure you have the time and resources to make your vacation rental a success before you invest.
Finally, plan out how you'll make the most money as a rental investor. The more you prepare ahead of time, the faster you'll see results once your property is operational.