7 things to consider before buying vacation rental property
There’s a revolution in the world of rental lodgings. Hotels are losing out to the emerging short-term rental (STR) industry. Airbnb — just one of several STR sites — has more listings than the combined total of the top five major hotel chains.
Any real estate investor can see the value in being an early adopter. But buying vacation rental property is a tad different than traditional real estate. If these disparities come as a surprise after the fact, you may realize you’ve made an unprofitable investment.
Don’t rush into the STR market without brushing up on the industry. Here are 7 key things to consider before buying vacation rental property.
1. Go Beyond the Mortgage
What’s the biggest mistake you can make when buying a vacation rental? Thinking you can afford one in the first place. It’s easy for new rental property investors to underestimate some of the hidden expenses.
You may have already considered some of the basics, such as the mortgage, insurance, and taxes. But owning a vacation rental isn’t like owning a single-family home or an apartment complex.
Remember that you’ll have to pay for new furnishings, the monthly amenities (like phone and internet), and cleaning fees. All of these small surcharges can add up to an unsustainable purchase, or something not worth the rate of return.
2. Identify a Hot Market
If your finances are in order, you’ll want to begin your search in popular vacation destinations. As you know, real estate is all about location, location, location. A vacation rental in North Dakota may not be as frequented as one by Disney’s Florida resort.
Consider tapping into common tourist hotspots — or try to offer a vacation rental in underserved areas. You can find rental property heatmaps online, which can give you a good overview of prevalent and oversaturated markets.
3. Know the Local Laws
Here’s the thing about the rental real estate industry: It’s not sanctioned everywhere. Some popular vacation hotspots are now completely devoid of vacation rentals. That’s because these cities are cracking down on the industry to free up long-term housing options.
For just one example, New York City doesn’t allow homeowners to rent out a property unless they live there. The same is true for popular destinations like San Francisco and Santa Monica.
Be sure you know the local laws before you decide on a location. And always keep in mind that new legislation presents a potential risk for out-of-state ownership.
4. Find a Real Estate Agent
Even if you’re an experienced investor, you don’t want to take a shortcut. Local real estate agents are an essential component to navigating real estate law. They’re your second defense against prohibitive rental legislation.
You won’t know the market as well as the real estate agent unless you’ve worked there previously. This is one reason a great agent can also help you score a rental property at a great price.
Check local listings to discover a coveted real estate agent. Preferably, you’ll find one with extensive local experience. For example, this agent specializes in the Mexican resort town of Tulum.
5. Have a Marketing Plan
Remember that marketing fees are going to cost you one way or another. Most vacation rental properties aren’t going to sell themselves. You’ll have to decide on a medium that gets the name out and handles the transaction.
Of all the short-term rental sites, Airbnb is perhaps the most popular. But it isn’t your only option. Vrbo and HomeAway fit the bill, too.
Know that any platform will take a little off the top through an annual marketing subscription or individual processing fees.
If you’re looking for less work, you may want to hand the home off to a rental company. They’ll help you find and rotate tenants. While convenient, it’s more costly than personally going through rental sites.
6. Choose a Maintenance Method
General maintenance expenses can sneak up on you, especially if you’re new to owning a vacation rental property. Remember that these homes may be hundreds or thousands of miles away from you. In short: You can’t maintain the property without help.
You have two options. The first is to purchase an investment property near your home. This way you can make the repairs yourself and keep tabs on its condition.
But more likely, you’ll have to pay for property management. These professionals will inspect the house from time to time and take care of repairs in your stead. Be prepared to pay them about 10% of your rental income every month.
7. Avoid Seasonal Trends
Vacations are rarely a year-round affair. In winter, it may be hard to find a tenant for your temperate vacation home. Meanwhile, you’re bleeding funds through monthly mortgage payments.
There’s nothing inherently wrong with short-term rentals. But you’ll lower your risk if your investment property has long-term potential. That’s because there’s still rental opportunity once the tourists dry up for the season.
How do you keep the rental flexible? You can market to new clients, such as traveling business people or college students. Taking this route may require a minor renovation or new furniture.
Start Buying Vacation Rental Property
Long-term rental investments are still popular and profitable. But the reality is short-term rentals offer better margins and less risk. And as the young industry continues to grow, these trends are likely to continue.
So what are you waiting for? You have the knowledge you need to start buying vacation rental property with confidence. Give your real estate agent a call and get started today.
Even a savvy investor can benefit from a fresh take on the industry. Stay in-the-know with the real estate section of our blog.