5 Things to Know Before Buying a Vacation Rental Property
So you’re thinking about buying a vacation rental property, eh?
It’s not hard to see the appeal. Having your own place to escape to that also pays for itself with vacation renters? Doesn’t sound so bad!
But unless you’ve got a pile of cash in the bank, there’s a lot more to consider than just where you will buy your vacation rental property. And not all short-term rental markets are created equal.
We have now successfully purchased, owned and operated our first vacation rental property through the busy summer season, and believe me, it wasn’t easy!
Read on for 5 things everyone should know and consider before buying a vacation rental property.
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Thinking about Buying a Vacation Rental Property?
Buying a vacation rental property requires a few different considerations. It’s not just a financial decision, it’s a personal one too. And finding the perfect place that can mesh those two things together is key.
Here are the top 5 things to think about before jumping into your first vacation rental property investment:
Know Your Goals for your Vacation Rental
What do you hope to get out of your vacation rental?
Extra income? A long-term real estate investment? A place for your family to make memories?
Knowing your goals for your property will help guide you as you explore all options that make the most sense both financially and personally.
For example, do you want to invest somewhere close to your home, so you can use it for yourself often? Or do you plan to use the property to mostly produce rental income, so location doesn’t matter as much?
Do you need your property to pay for itself in rental income? Or are you willing to pay a little out of pocket each month for a larger investment opportunity?
How will you handle the maintenance and upkeep? Do you plan to do this yourself to save money, or will you need to hire out a professional property manager?
These are just a few initial questions to consider, but all will impact your budget, and thus, what kind of vacation rental property you’ll be able to invest in.
Understand the Laws and Regulations around Short-Term Rentals
The world of short-term rentals has become increasingly complicated with cities becoming more and more restrictive with what they will allow in terms of vacation rental properties.
We looked at a lot of different places when deciding where to buy, each with their own unique restrictions.
For example, at the top of our list was New Orleans – a city Matt and I both love and would happily return to again and again. However, the city’s rules around short-term rentals are extremely restrictive, essentially outlawing vacation rentals in the city’s most popular neighborhoods where we would want to buy.
Another area we looked at was Palm Springs. There, the city has a very structured program for short-term vacation rentals, but they do have a lot of restrictions as well, such as a maximum number of bookings per year, limit on the number of guests and strict penalties for unruly renters.
Don’t get me wrong, Palm Springs is still a great place to own a vacation rental property! But knowing the laws regarding short-term rentals will help you adjust your rental strategy and better estimate your profit margin.
Ultimately, we chose to buy our vacation rental in 30A, a traditional vacation area in Florida, where vacation rentals dot all along the coast and there are hardly any restrictions at all, aside from registering with and paying extra taxes to the county.
Pro Tip: Don’t forget to also check with local HOA’s for their short-term rental policies. While some cities may allow short-term rentals, specific neighborhoods or buildings reserve the right to ban them themselves.
This is where hiring a local real estate agent who knows the short-term rental market well is so key. Buying a property in a different part of the country can bring up all different kinds of rules and norms, so having someone on top of all of these nuances can save you a lot of headaches in the long run.
Research Booking Demand and Seasonality
If you’re looking at buying a property to use as vacation rental, I’m guessing profitability is probably at the top of your list of considerations.
As it should be! The worst mistake you could make is jumping into a property investment without knowing how much realistic income you can generate.
And estimating profitability of a vacation rental is not as simple as you would think.
One of the simplest ways to research profitability of your future vacation rental is to spy on the competition. Check sites like Airbnb, VRBO or local rental management websites to see what the competition is charging for comparable properties.
But don’t just look at the nightly rate, dig deeper into their booking calendar. If you’re finding a vacation rental charges $300/night, but has hardly any bookings, then their pricing strategy isn’t very competitive (and definitely not maximizing profitability).
And don’t forget about seasonality. In most vacation rental markets, you’re not going to make the same amount every month. You might be fully booked and charge a super high rate during the summer, and then have nearly no bookings with cheap rates through the winter. What’s important is averaging your entire year’s earnings, through the good times and the not so good.
One of the best resources I have found for researching profitability is AirDNA. This website analyzes all short-term rentals in a given market and tells you the average rental rate, occupancy rate, projected revenue, and most common amenties offered by your competition. You’ll get pretty basic statistics using the free version, but it still offers some solid, measurable data to help you estimate your earnings.
Pro Tip: When you get to the stage of looking at properties on the market, get in touch with local property management companies as well (whether or not you plan to use them). Ask for a “yearly rental projection,” which will give you a solid idea of how much money your vacation rental property could realistically make.
Don’t Underestimate Your Operating Costs
When calculating the operating costs of your vacation rental, you’ve probably got your mortgage and utilities included. But there are lots more hidden costs that come with buying a vacation rental property.
Firstly, check for HOA fees, which can be quite hefty in some areas (I’ve seen condos with HOA fees upwards of $1000/month!). In some markets, like Palm Springs, you might also have a land lease or special tax assessment to add to your monthly mortgage pyament.
And if you do plan to mortgage your vacation rental property, don’t forget to budget for a higher interest rate. You’ll likely pay half to a full percentage point more for an investment property vs. an owner-occupied home.
And then, of course, there are those added fees for running a short-term rental, like local tax assessments or yearly registration fees. You can easily find these by searching the local city or county’s website for information on short-term rentals.
Does the vacation rental property you’re buying need some remodeling work? Is it in need of new furnishings? These are big costs that can take a hit out of any profits for the first year or two (and you’ll certainly want to have extra cash on hand to tackle these projects right away, so you can get your vacation rental up and running as quickly as possible).
Lastly, regular maintenance and repairs are unfortunately going to be more for a vacation rental property than for a typical owner-occupied home. Vacation renters just aren’t as gentle on things and are quick to call the maintenance person for every small thing. If you plan to use a professional management company, it’s important to know their policy on billing for service calls and repairs, big and small.
Decide if You’ll Self-Manage or Hire a Full-Service Property Manager
One of the final decisions you’ll have to make when buying a vacation rental is whether you want to self-manage all aspects, just parts of it, or if you’ll use a full-service vacation rental property manager.
If you have your heart set on managing things yourself, be prepared for a lot of work. Yes, it will save you a ton of money, but in addition to managing your booking calendar, marketing and photos, and collecting payments, you’ll also be in charge of the not so fun stuff like fielding guests questions (and complaints), scheduling cleanings, and completing repairs.
I get why people choose to self-manage, though. Full-service property managers typically charge 20-25%, a huge chunk of your profits! (some markets can be as low as 10%; others as high as 50%!)
Still want to maintain some control of your property, but not do it all? Virtual property management companies like Evolve provide a hybrid approach, handling all of your marketing, guest bookings, payments and inquiries, while you handle the on-the-ground stuff like cleaning and property maintenance. It’s a good in-between solution, especially if you’re close to your vacation rental property.
Ultimately, it will be up to you to decide how much you want to be involved in the management of your rental property. For us personally, we knew there was no way we’d be able to manage our vacation rental from across the country, but we also didn’t want the stress of managing the property either. So it was worth it to us to pay a bit of our earnings each month to let someone else handle the grunt work, while we enjoyed the fun parts of owning a vacation rental.
The Bottom Line
Bottom line: owning a short-term rental property can be an amazing (and fun!) investment, but it also requires a lot of careful planning. Unless you have enough savings to buy a rental property in cash, you’ll likely see very little return until the property is paid off.
But remember, it’s a long-term investment, and one that may include more than just financial considerations.
All things considered, we are extremely happy with our real estate investment in our little beach condo in 30A Florida. It pays for itself (and a little extra), and gives us a place to escape the frigid cold winters of Nebraska – what more could we ask for?
Do you own a vacation rental property? What advice would you add?