You just came back from your summer vacation. You feel relaxed and the tranquility of the beach house you stayed at is kicking in. Motivation starts to bring out the best of you and you decide on buying a vacation rental property of your own.
While it may sound like an appealing investment strategy that could possibly generate positive cash flow, you need to think twice before making the move. There are certain things to take into consideration when buying a vacation rental property to ensure you make a smart investment decision. Give thought to the following factors when you’re looking at buying a vacation rental property.
1. Buying a vacation rental property: Consider the location
When buying a vacation rental property, it is important to choose your location carefully. Deciding where to buy a vacation rental property is not just about you. You have to take into consideration your future tenants. Who are they and where do they want to spend their time? In other words, the vacation rental home should attract you, the owner since you might be staying there too, as well as the tenant.
Consider locations that you are familiar with or have spent previous vacations there. Choose a vacation rental property that is accessible and easily attracts guests. Think about the seasonal changes as well. Ask yourself, will your vacation home make a profit during low peak seasons or will you be putting in money from your pockets to make up for losses during vacant periods.
The location for your vacation rental property should give you high rental income, return on investment, cash on cash return and cap rate. You don’t want to invest your hard earned money in a property that will bring you more stress than ease. So carefully consider the location before buying a rental property.
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2. Buying vacation rental property: Consider laws and regulations
Before buying a vacation rental property, check to see if vacation rentals are permitted in your area. There have been many ongoing regulations imposed on short-term rentals. Some cities have regulations on the number of days your property can be rented out. The last thing you want is to invest in a vacation rental and then find out that you are investing illegally. There are high fines for investors who are caught and you could possibly lose your license. To learn more about short-term rentals regulations and the cities to avoid, read: Top 3 Cities in the US with Strict Airbnb Regulations.
3. Buying vacation rental property: Would you rent it?
A great tip suggested by many experienced vacation home owners is before buying a vacation rental property, rent it yourself. This way you can get to see how the property is and all the amenities it provides or lacks. Try renting it out for at least a month to see what kind of maintenance expenses the property requires. Your vacation rental property is in fact considered your “second home.” For this reason, if you rent it out yourself and enjoy the stay, then for sure guests will enjoy it too.
4. Buying vacation rental property: Consider maintenance costs
If you live far away from your vacation rental property, then it’s going to be difficult to get there quickly if an emergency happens or something is destroyed. Experts recommend setting aside money each year for maintenance and upkeep expenses, generally around 1-2% of the value of the house per year. Obviously, you will save money by doing any repairs yourself, but that’s only possible if you live close to your rental property. Otherwise, you will need to hire professional property management to take care of the investment property.
5. Buying vacation rental property: Consider a mortgage
A loan for a second home is slightly more complicated and has higher rates than that of a first home. Unlike the first loan you applied for when buying your first rental property, second home loans don’t qualify for FHA or VA loans, and it is hard to get mortgage insurance for one, so typically the mortgage rate is slightly higher than that of your first home.
The usual debt-to-income ratio still applies to second homes. You need to prove that you can make mortgage payments on both your homes for 2-5 months in order to qualify for a loan. Additionally, if you plan on renting out your vacation rental property for more than a couple of weeks per year, then you’ll have to pay a higher mortgage because it will be considered as an “investment property”, not just a vacation home.
6. Buying vacation rental property: Consider insurance
As with any type of rental property, insurance is needed to help cover any future damages that may occur. As for vacation rentals, the National Association of Insurance Commissioners recommends reviewing the policy for your existing home to see whether any of that coverage could be extended to your vacation rental home. However, if you are using your vacation home for money, then the Nationwide Insurance Company won’t cover under the existing policy because your property will be considered a “business activity.” If you do rent out your vacation home more frequently, you might want to consider applying for a stand-alone commercial or business liability policy.
7. Buying vacation rental property: Consider marketing strategies
You’ve picked out the investment property in your preferred location. Now it’s time to attract tenants to your rental property. How? Through marketing and how you list your property on vacation rental websites.
Before you close the deal and sign any paperwork, think about how you’re going to list your vacation rental property. Will you list it through online platforms like Airbnb or HomeAway or will you market your vacation rental property through different social media websites? It’s easier to use a property manager to take care of all the different details of listing your property. They can coordinate the advertising especially if you are not located near your rental property.
Want to know more marketing strategies for your vacation rental property? Read: Marketing Vacation Home Rentals to Increase Bookings.
Pros and Cons of buying a vacation rental property
Now that you have an idea of the different things to take into consideration before buying a vacation rental property, let’s briefly discuss the pros and cons of buying a vacation home. When you know the good and the bad for a certain type of real estate investment, you can easily determine if it’s the right investment strategy for you.
- Rental income: Vacation rental properties can generate a steady rental income in the right locations and you can use this rental income to pay off the mortgage for your second home. So it’s as if the vacation rental is paying for itself.
- Property appreciation: Just like any other type of real estate investment, your second home will also rise in value. So by the time you come to sell, the property’s value will be more than what you originally paid for.
- Tax benefits: Vacation rental properties are subject to tax advantages so check out your city’s taxation system to see what applies to your investment property.
- Higher renovation and repair costs: As previously mentioned, vacation homes have more maintenance costs for repairs or damages mainly because it is harder to keep an eye on short-term rentals.
- More risks: Vacation homes are considered to hold more risks only because they are prone to natural disaster damages (that’s only if your vacation home was a beach house for example). But if you have the right insurance, this shouldn’t be an issue.
- Unexpected costs: You never know what situation may come that will require you to put down some money. Maybe insurance fees, mortgage payments, or anything in between. Always be prepared for unexpected costs.
To sum it up
Buying a vacation rental property can be a good way to generate cash flow and obtain a steady income. However, the process is not easy and requires some thought. To help you make smart investment decisions, check out Mashvisor.
To learn more about how we will help you make faster and smarter real estate investment decisions, click here.