The vacation rental industry has grown over the last few years, so it’s no surprise that more people are looking in this sector to build their personal wealth. While there were about 23,000 vacation rental companies in the United States as of 2018, there are a growing number of individuals who are managing their own properties. But before you decide to jump into the vacation rental scene, there are a few things you should know about investing in a vacation rental property. COVID Update: Many vacation rentals were forced to cancel reservations during the lockdown and new bookings will take a bit of time to rebound. This could create an opportunity to purchase an existing rental at a very good price.
Stay on Top of Your Finances
According to Investopedia, if you’re planning on buying a second property, you need to figure out how you’re going to afford it. Unless you have a stash of cash available, then that means financing. Your most likely option is a conventional home loan. To qualify for this kind of loan, you’ll need a credit score as high as 750. Bear in mind, however, that you will also need to have money set aside for a down payment that can be as much as 35 percent of the selling price. While the price of real estate varies by location, you will need to determine how much properties you might be interested in usually cost. For example, in the last 30 days, Portland homes have been selling for an average price of $450,000. Another option is to purchase with a partner.
Research the Best Vacation Rental Locations
To get the most out of your vacation rental property, the ideal location will allow guests to be close to activities, dining, and local attractions. So consider popular neighborhoods and proximity. Keep in mind too that when you’re looking for the right property, you want to work with a real estate agent who is deeply familiar with the area and who understands what you want in a vacation rental. The right agent will not only help you find a property but also guide you through the process.
Analyze the Market
Before you jump into buying a property you love, however, Fit Small Business recommends conducting a market analysis. In a nutshell, the market is considered favorable if the price of the property is lower than the rent you can get. When you’re ready to conduct your analysis, be prepared to evaluate the neighborhood for amenities that will interest renters, including things like businesses, and access to public transportation. You can even start thinking about ways to make your property stand out by looking at what renters like in that area. You should also research comparable properties and use online tools to calculate the rent per square foot. Vacancy and occupancy information for the property you are interested in or at least similar properties will play an influential role in your analysis as well.
Consider the Management Side
If you plan to manage your own vacation rental, be prepared to give a fair chunk of your time to prepping between guests, managing bookings, and marketing your property. This in addition to any regular maintenance and emergency repairs. If your time is limited, your next best option is to work with a vacation rental management agency. The right agency will provide top-notch local hospitality, cleaning, and maintenance services, in addition to ensuring a quality guest experience. While there are definitely costs involved in hiring a management company, it’s a worthwhile investment if you can’t devote the time to running the property.
Determine Your Cash Flow
Since the main reason you’re thinking about buying a rental property is to build your wealth, you need to make sure you can make money. When pricing your property for rental, consider the fixed and variable costs associated with running it. Fixed costs are those that remain the same month-to-month; variable expenses change. The mortgage and HOA fees are fixed. Repairs, updates, and maintenance are variable. You’ll also need to think about taxes and the cost of any amenities you plan to provide, such as small appliances, dishes, books, and movies, all of which have a tendency to break and/or disappear.
Looking at the rental structures of your competition will also be helpful. Bear in mind that keeping your property in excellent condition, boosting your curb appeal, and using security services (expect to pay $15 – $35 per month of ongoing monitoring) can go a long way in getting better rent than your competitors. Having set your rent price, you can then calculate the return on your investment using factors such as the cost mentioned above, average occupancy, and how long you intend to own the property.
Investing in a vacation rental property only works if you know exactly what you’re getting into. You will need to look into the best location for your property, what it takes to make it profitable, and make sure you’re in the best financial position to make the purchase.