Your Ultimate Guide to Buying Vacation Rental Properties
Finding the best vacation properties is important whether it is for you or for profit. Read on for your ultimate guide to buying vacation rental properties.
Most vacation homes are purchased as a second home or investment property.
Did you know you could boost your annual income by turning your property into a vacation rental? It’s true.
The vacation rental industry is exploding. In 2016, it was valued at $100 billion in 2016 and by next year, experts expect the industry to be worth $167.9 billion.
If you’ve dreamt about owning a vacation property, but couldn’t find a way to justify it – now you can. You just need to buy smart.
Ready to learn more about buying vacation rental properties? Keep reading to learn how to choose a property with incredible profit potential.
Getting Started: Buying Vacation Rental Properties
Follow these five steps to find your first potential vacation rental property.
1. Location, Location, Location
Location is everything when choosing a vacation rental property. Why? Because while affordability is critical, you also want to buy in a high traffic area to maximize occupancy.
A secret hideaway in the Rocky Mountain foothills might be both affordable and charming, but if it’s three hours from the nearest large town, you’ll struggle to make bookings.
Plenty of data is available demonstrating the return on investment potential in real estate markets in the United States and further afield. Start by looking at lists of the best places to buy vacation rental properties and narrowing your scope from there.
Remember to keep an open mind — recommended areas may surprise you.
While resort areas seem like an obvious choice, urban centers are now becoming popular vacation rental destinations. Companies like VRBO and Airbnb have changed the travel landscape for business and leisure travelers, particularly among Millennials.
Changes in the market have seen cities like Chicago join the top of the list for the first time ever.
At present, data points to southeastern cities as being the best places to buy vacation properties. Panama City Beach, Florida regularly ranks well. Other runners-up include Napa, Memphis, and Tulsa.
There are wrong places to buy. Ironically, many times those poor choices are traditional vacation destinations like Aspen and Martha’s Vineyard.
What makes a location good or bad? Keep reading to find out.
2. Calculating Your Profit Potential
Your profit potential is the amount you’ll make from projected rental income after expenses like your mortgage payment and the other common costs outlined below.
Profit should be the end goal in a rental business, and it’s another reason location is so important.
For example, the explosion of housing costs in New York, San Francisco, and Seattle mean you’d have to charge an incredible amount to make ends meet, much less profit. These cities may be favorites for vacation rentals, but you’re more likely to lose money because the costs are so high.
At what point do vacation property buyers start to miss out on the benefits?
According to AirDNA, the producers of a data-driven analysis of the best cities to buy in, the sweet spot seems to be buying in an area where the Zillow mid-tier home index sits under $300,000.
Common Costs and Taxes
Keep in mind that your mortgage isn’t the only cost. The average vacation rental property also sees mandatory expenses like:
- Financing costs
- Annual property taxes
- Rental income cases
- Occupancy taxes
- Property insurance
- Homeowners association fees
- Management fees
Be sure to calculate all the potential charges and subtract them from your potential rental income to make sure your investment is worth all the fuss.
Don’t forget, the taxes and tax write-offs on second homes, vacation homes, and investment properties impact your taxes. Be sure to consult your accountant to learn what a vacation rental home might mean for you come tax season.
3. Choosing Your Amenities
It’s time to do even more research.
You want your vacation rental to be competitive, so it needs to match the baseline amenities offered by most other properties in the area. Filter through some of the most popular properties in your potential location to see what potentials renters might expect from your home.
For example, if you’re choosing a remote, mountain location, you might see that most properties offer a hot tub or jacuzzi. Or in family destinations like Orlando, the property might include an outdoor community pool or game room.
You’re not shut out of the market if a property like the ones you currently see isn’t in your budget. Instead, you’ll need to adjust your expectations and target a different group of renters, usually those below your current price range.
Once you’ve narrowed down some options and begin looking at properties, ask your real estate agent whether the previous owners used it as a vacation rental.
4. Working with Turnkey Real Estate Companies
Most of us won’t buy a vacation rental property in the city or even the state we live in. Your lack of proximity to the property changes the search and buying process different from buying a primary residence.
The biggest difference is that buyers in the market for a vacation rental property are almost always better suited to turnkey properties. The property should be as close to move-in and rental ready as possible after closing.
You may find the fixer-upper you transformed into your primary residence isn’t a good idea if you’re looking at an investment property. Not only does it require further investment for renovations, but those properties often need regular maintenance, which might put your property off the rental market on a regular basis.
Working with a turnkey real estate company makes it easier to identify properties that are already ready to rent.
5. Choose Your Advertising Venue
The perfect vacation home won’t be booked if no one can find it. Spend time researching the various listing sites for advertising your vacation rental.
Every site charges some fee whether it’s a credit card, subscription or booking fee — or even all three. Don’t forget to factor in traveler’s costs; they may be put off by the number of fees tacked on to their rental.
Remember, there are more sites available than just Airbnb and VRBO. If you’re interested in seeing how these platforms stack up, see more here.
Turn Your Vacation Destination into an Investment
Buying vacation rental properties requires as much consideration as buying your primary residence. You need to choose a great neighborhood with the right amenities while also balancing all the taxes and fees associated with buying any real estate property.
Are you looking for even more ways to vacation on a budget? Read our guide to budget-friendly family vacation ideas.