The vacation rental industry has been booming, especially after the pandemic. But despite popular belief, buying a vacation rental property is not the same as regular real estate investing. Investing in vacation rental properties, unlike standard buy-and-hold properties, requires a thorough awareness of local markets as well as some operational experience.
It is true that on average, Airbnb hosts earn a rental income of $900 per month, with hosts in the most in-demand areas earning four times that or more. But the question remains, how do you make money on vacation rental property and which is the best place to invest in vacation rental property?
In order to answer these questions, we have to deeply understand why investing in vacation rental properties is a great investment and explore step-by-step how to invest in a vacation rental property.
Why Is Investing In Vacation Rental Properties A Great Investment?
Advantages Of Investing In Vacation Rental Properties
Considering the growing popularity of Airbnb and VRBO as well as the flourishing vacation rental demand, the number of people investing in vacation rental properties has been increasing dramatically.
- More rental income is the first and foremost appealing advantage of investing in vacation rental properties. As already stated, an Airbnb host may make up to $900 per month on average. This can make your cash flow much more favorable as you’re covering expenses.
- Vacation rental homes such as beach houses and cabins allow you to have your own ideal getaway anytime you choose. You can use the property for any special occasion, such as birthday celebrations, parties, or family gatherings. Invest in a place you'd like to return to again and again.
- While you must pay taxes on the revenue it generates, a vacation rental property has tax benefits that also allow you to deduct a significant portion of the costs associated with maintaining, repairing, and upgrading the property. Those tax deductions include the hosting and maintenance costs charged by these properties. You can also write off the following:
- Insurance premiums
- Mortgage interest
- Property management expenses
- Investing in vacation rentals is a great way to ensure that you have enough money to cover future needs such as healthcare, travel plans, and emergencies. You may perhaps keep it as a retirement house if all goes according to plan. In either case, holiday rentals might be a sound investment for the future.
Disadvantages Of Investing In Vacation Rental Properties
Vacation rental properties, like any other investment, have a number of disadvantages, including property fees, difficulties, and drawbacks. All of these factors are worthy of equal attention as the advantages. Some of the disadvantages of investing in vacation rental properties are as follows:
- Having your own vacation home is comfortable and handy. However, as you’re planning to rent it out, you’ll have to bear the responsibility of managing, cleaning, and stocking it. Vacation rental homes are among the most complicated investments you'll ever make. You may engage a property management company to conduct all of this work for you for 10% to 15% of your monthly revenue.
- When it comes to short-term vacation rentals, several towns and HOAs have a number of restrictions and regulations. Once you've decided where to invest, make sure to check out the local rental rules.
- Vacation rental assets might produce income issues if they are not carefully managed. For starters, you'll have an additional mortgage payment. Then there are the additional costs of owning a real estate property, such as maintenance, repairs, and utilities. To minimize any additional stress from maintaining another house, make sure you have your finances in order.
- Finding tenants, especially for rookie investors, maybe a challenging and intimidating endeavor.
How To Invest In A Vacation Rental Property
There are a few things to consider before you consider purchasing a vacation rental home. This is due to the fact that knowing how to acquire a vacation rental necessitates a unique set of tactics.
Fortunately, getting started investing in vacation rental homes is not as tough as many people believe. The very first step in practically any form of real estate investment is to complete your study before taking any action.
- Where To Invest In Vacation Rental Property
The golden rule to investing in any real estate property is figuring out the best place to invest in vacation rental property. Once you have an answer to where to invest in vacation rental property, half your work is done.
Simply said, a property's location is more significant than anything else; it's the one thing that can't be changed. Proceed to select not just a city but also an area inside that city to invest in. It's best if you can be as detailed as possible.
It is important to pay specific attention to:
- Market circumstances
- Employment rates
- Accessibility to key amenities
- Inventory, and a variety of other criteria.
- Analyse The Market Scenario
The next important thing to consider is the market trend. It is crucial to chalk out some market comparisons once you've decided what kind of home you want to invest in. These properties, also known as "comparables," will provide you with an inside look at how the market performs for a specific asset category.
You may simply establish a rental price range and start to estimate the revenue you can fairly expect from the property you are interested in, in addition to familiarizing yourself with a certain neighbourhood.
- Trends Of Vacation Rental Properties
The rises and falls of demand require a more in-depth examination.
Vacation rentals are not like typical rentals in that the money gained is often seasonal. For instance, during the summer, a home near the lake will be more appealing, whereas, during the winter months, a home near a ski resort will prosper.
You must be aware of what to expect throughout peak seasons as well as off-seasons. You should also have a rough notion of how much money you'll require each month. You should budget for the cost of furnishing and cleaning the property every few weeks. If the residence is close to water, the homeowners' insurance may be raised, and flood insurance may be added.
- Estimate Your Expenses
You cannot answer the question, how to make money on vacation rental property, without calculating your expenses on the same.
While your rental earnings will undoubtedly vary depending on the place you purchase, you can anticipate charging a weekly rental rate that is 10 to 20% greater than your monthly mortgage costs.
However, in today's market, landlords in high-demand regions may be able to get away with asking for even more (which is one of the reasons why market research and comparisons are so crucial). Remember, you want to make money each month and not frighten off potential renters at the same time; you need to find a good balance.
- Spread The News
Now that your roadmap for investing in vacation rental properties is almost set, it's time to start marketing your vacation home. Fortunately, a number of low-cost booking platforms allow vacation rental owners to get as many eyes on their properties as possible. Here are several examples:
Airbnb is the most well-known vacation rental listing platform on the internet. This platform is great for city rentals and residences in hot-spot areas because it has no yearly charge. Just be sure to perform a local search; if there isn't much site traffic in your region, it's best to list somewhere else. This platform has a mobile-friendly layout, inexpensive listing costs, and the most popular listing service, so your property listing will attract the most attention possible.
VacationRentals.com, VRBO, and HomeAway
With increased visibility comes increased competition among vacation rental owners, and with a substantial yearly charge (about $350 at the time of writing), this option is ideal for homes in high-traffic regions owned by people who want to rent on a regular basis.
Create Your Own Website
Why rely on the big vacation rental listing sites to generate leads and offer information to potential renters when you can create your own website? Platforms like Airbnb and VRBO provide a plethora of useful services for both tenants and renters, but that doesn't mean you can't establish a separate website with information (particularly video and photos) that shows renters why your home is the best option.
Best of all, you may include a link to your vacation rental website in your listing service profiles and promote it through social media platforms.
Financing Vacation Rental Properties
The majority of investors will need to find a way to fund their new rental property. Fortunately, there are a variety of solutions available, ranging from short-term to long-term. You can choose from the following financing methods:
Because the qualifying conditions are less stringent than for a principal property, this is a popular alternative for holiday rentals. It's customary to have a strong credit score of around 680+ and a 20% down payment.
Investors with numerous properties or a single multi-unit property frequently employ portfolio loans. These loans have less stringent requirements than other categories.
Multifamily loans are utilized for vacation homes with 2-4 apartments or apartment buildings with more than 4 units. This category includes portfolio loans, as well as traditional mortgages, government-backed loans, and short-term multifamily loans.
A short-term loan is an excellent choice for investors who want funds to acquire a vacation home before securing long-term financing. This category includes both bridge loans and hard money loans.
Final Thoughts: How To Make Money On Vacation Rental Property?
Investing in vacation rental properties is an excellent way to enter the world of passive real estate investing as well as passive income. However, diving headlong without a strategy isn't enough.
Instead, you must carefully strategize and make sure you understand what you're getting yourself into before you jump. You could find that your vacation rental investment is well worth it if you prepare properly.
Investing in a vacation real estate property may provide you with tax benefits, greater income cash flow, and the option to vacation in a home you already own, to name a few positives. Those that are well-prepared may discover that investing in holiday rental homes pays out for many years to come.
1. Where should I buy a vacation rental property?
Simply said, a property's location is more significant than anything else; it's the one thing that can't be changed. Proceed to select not just a city but also an area inside that city to invest in.