A Guide to Vacation Rental Investment
by Arina Smith Real Estate 21 October 2021
Over recent years vacation rental investment has become increasingly popular. More and more people are buying vacation rental property and letting it out to guests via short-term rental sites such as Airbnb. It’s a profitable business, but you shouldn’t enter into the world of vacation rental investment lightly. Find out more with our handy guide.
Are Vacation Rentals a Good Investment?
The value of real estate tends to increase year on year, which explains why so many people are buying vacation rental property as an investment. As a property owner, you can collect rental fees and then make a profit when the time comes to sell. This sounds like a good deal to us! If you buy a vacation rental, you could also benefit from paying less property tax—owning a second home can equal tax deductions.
How to Find the Best Vacation Rental Investment Locations?
It’s important to have a good working knowledge of the local market and potential revenue. Both real estate investment and rental investment can be profitable, but they do have their differences. With traditional vacation rental investment, tenants typically stay for months or even years at a time.
However, vacation rental investment usually entails short-term lets, so there might be quiet periods when your rental sits empty. For instance, if you purchase a beach house for rent, it will be popular in the summer months but might not attract guests at other times. The key is to find a location that has something to offer all year round, which can be a challenge!
How to Invest in a Vacation Rental Property?
Still keen to invest in your own vacation rental property? Here’s what to do:
Find out as much as you can about the area, e.g., is it a pleasant and safe neighborhood? Is it the sort of place that will attract visitors and guests?
Check for local regulations
In certain cities, short-term rentals are completely forbidden. In other places, you might need a permit to register your property or a license to list it and start taking bookings from paying guests.
Use analytical software tools
You can use data analysis tools to gain insight into the market and stay abreast of trends. Information is useful to help owners manage to price, predict demand, and devise a strategy for growth.
Create a business plan for your vacation rental business
A well-considered business plan is critical when starting or expanding a vacation rental business. The plan will help you outline ideas, pinpoint risks, focus on your business needs. You can also use the plan to request funds from investors.
Decide how you will finance your vacation rental investment
There are a variety of ways to secure funding. You could refinance your mortgage (known as cash-out finance) or take out a reverse mortgage (money upfront and then repaid with interest when you sell the property).
Alternatively, you could keep your mortgage and take out another for your rental, or if you prefer the traditional route, you could explore the possibility of a bank loan.
What Are the Pros and Cons of Vacation Rental Investment?
Vacation rental pros
There are plenty of vacation rental pros. For a start, you can bring in extra money by collecting rental fees, and when you come to sell, you can make a profit (real estate increases in value year on year).
You can also enjoy taking a vacation yourself (or with friends and family) – after all, it’s your rental, so you may as well enjoy it! Don’t forget your rental is classed as a business, so keep track of expenses and tax deductions.
Vacation rental cons
There’s always a lot to do when you manage properties. It can be an expensive game too – with maintenance, insurance, listing fees, etc. If you’re hiring a property management company, you’ll have to pay for that too. It might be worth checking out property management software, such as IGMS, as an effective and more affordable solution. It’s also important to remember that despite your best efforts, demand for rentals can fluctuate, so your earnings might be sporadic.
How to Succeed with Vacation Rental Investment?
There’s so much advice floating about on how to acquire a profitable vacation rental investment, how to make money on a vacation rental property that it can be overwhelming.
To gain a vacation rental return on investment, you need to plan. Work out the basics:
- Where should you purchase your rental?
- How much can you afford?
- How will you finance the property?
Once you find the right location and property, you need to work out a competitive pricing structure. You will also need to market your rental and manage your property effectively.
You can keep track of your performance against goals by identifying and monitoring your rental key performance indicators (KPI metrics), e.g., occupancy, net income, etc. This should help you to improve the business. To learn more about vacation rental KPIs, read this helpful article.
Is Vacation Rental Investment for You?
Vacation rental investment can be daunting. However, if you get it right, you can enjoy financial gain along with the excitement of building a successful business.