In the past few years, vacation rental properties have become a popular alternative for tourists looking for temporary accommodations while traveling. For property investors, this has presented an opportunity for making money in real estate! Many now buy vacation properties as second homes and also as investment properties to rent out for the short-term on sites like Airbnb to bring in rental income that offsets some costs of ownership. When done right, this can be a very lucrative investment. As the vacation rental industry is growing in the US and globally, the thought of buying a vacation rental property must have crossed your mind at some point. If so, keep reading to learn how to buy a short-term vacation rental property in 5 simple steps.
Step 1: Find the Ideal Location
Location is everything in real estate investing as it’ll determine how profitable your investment property is. A good location for buying a vacation rental property will have a good demand for short-term rentals. In addition, amenities and attractions are also important when considering where to invest in a short-term rental. The best places to buy vacation rental properties usually have main attractions like beaches, mountains, lakes, or a national park. These are popular vacation destinations and are often visited by tourists. It’s important to invest in such locations to ensure that your investment property will be rented frequently – i.e. has a high Airbnb occupancy rate.
Moreover, it’s important for real estate investors to choose an area not only based on its desirability, but also based on affordability, short-term rental rates, and expected return on investment. For example, major cities like New York and San Francisco are top vacation destinations but are ruled out for being too expensive and not having a high enough return on investment. Essentially, you want to find a place that has upside Airbnb investment potential.
Want to know where to invest in vacation rentals based on our Airbnb analytics? Check out The 10 Best Places for Buying a Vacation Home in the US in 2019!
Mashvisor’s Tip: Check short-term rental laws and Airbnb regulations in the area before buying a vacation rental property. Pushed by the hotel lobby, many towns and cities have started implementing strict short-term rental laws or even prohibit Airbnb. So before deciding on where to buy Airbnb rental properties, make sure that it’s legal there.
Step 2: Secure Financing for Buying a Vacation Rental Property
Having reliable financing is equally as important as an ideal location. After you choose the location of the investment property, start thinking about how you’ll pay for the property. Of course, you can pay cash for your vacation home rental, but most real estate investors choose to finance it with a loan. The most common types of financing for buying a vacation rental property include:
- Conforming Loans: Lending qualifications for these loans on a vacation home are more lenient than for a rental property but stricter than for a primary residence. Lenders know that you’ll be living there part of the year and are not entirely dependent on rental income to pay the mortgage. A down payment of 20% and a credit score over 680 are generally needed.
- Multifamily Loans: These are to finance a multifamily vacation rental with 2-4 units or an apartment building with more than 4 units. There are 3 types of multifamily loans: conventional mortgages, government-backed loans, and portfolio loans. Each type has its own lending criteria so make sure you learn more about them to see which one you can apply for.
- Short Term Loans: These include hard money loans. They generally have more lenient qualifications than conforming loans and are ideal for an investment property that needs to be rehabbed before you refinance it with a permanent loan.
Mashvisor’s Tip: If you’re buying a second home and you have a mortgage on your primary residence, lenders will look at your debt-to-income (DTI) ratio. Basically, this is your total monthly debt payments divided by your monthly pre-tax income. This lets lenders know whether you have sufficient income to cover both mortgage payments. According to NerdWallet, a good DTI for real estate investors buying a vacation rental property is 36%.
Step 3: Look for Properties for Sale
After acquiring financing for your investment property, you can now start searching for a vacation home for sale. You can find these rental properties with a real estate agent or online. If you’re buying a second home for investment out-of-state, you should find an experienced real estate agent in that market. He/she will know the hot tourist’s spots, where to find affordable properties for sale, and help you narrow down your search.
Even with a real estate agent by your side, it’s best to start your search for vacation rentals online. To get a head start, check out Mashvisor’s Property Finder. This tool is designed to help real estate investors find the most profitable investment properties in any city in the US housing market in a matter of minutes. You can filter results based on price range, property type, and the number of bedrooms and bathrooms. Once you customize your criteria, the tool will show you a list of the best properties that match.
As you can see, you’ll get data regarding each property’s listing price, estimated value, and cash on cash return! This will help you in finding and buying a vacation rental property that fits your investment needs and is profitable as well. Do you have a free Mashvisor account? Use our Property Finder to find lucrative investment properties that match your criteria in a matter of minutes!
Step 4: Calculate Potential Income and Costs
For successful real estate investing, you should buy a vacation home that makes financial sense. So, after finding a potential investment property for sale, you should perform a property analysis to make sure you can afford it even when it’s vacant. Look at vacancy rates for the area as well as short-term rental rates to determine the potential monthly rental income that the property can yield.
Real estate investors also need to keep in mind the costs and expenses associated with ownership before buying a vacation rental property. Once you find out potential operating costs and rental income, you can easily figure out if the investment property will generate positive cash flow. Besides the fees that online sites like Airbnb charge for booking your rentals, you will also be responsible for paying:
- Property taxes, which differ from state to state
- Rental income tax
- Basic utilities
- HOA fees
- Maintenance expenses
- Mortgage payments
- Property management services
The easiest way to analyze investment properties is with an Investment Property Calculator. Simply plug in all these numbers and the tool will do all the calculations for you and provide you with an estimated return on investment. Mashvisor’s Investment Property Calculator is one of the best out there – it gives you real estate comps to find out what vacation properties rent for as well as accurate estimations of a property’s cash flow, cap rate, and cash on cash return! Sign up with Mashvisor to start analyzing and comparing investment properties in your city of choice.
Step 5: Close the Deal and Start Renting Out
Closing a vacation home is the same as closing a primary residence or a rental property. This final step will involve plenty of paperwork. You’ll need to hire a real estate attorney when buying a vacation rental property to review contracts, forms, and other necessary legal documents. After paying closing costs and signing paperwork, you’ve become the proud owner of a vacation home. But that doesn’t mean your job is done – you need to learn what comes after buying!
The goal of buying a vacation rental property is to make money in real estate. Therefore, you need to start renting the property out as soon as possible to start generating rental income and offset your ownership costs. List the property on Airbnb and other short-term rental websites to expose it to vacationers. Also, remember to block off the days you want to use it so no one else can rent it during that time.
While you’re learning about how to buy a vacation rental, it’s best to educate yourself some more on how to manage your short-term rental property as an Airbnb host, trends that might affect your investment, as well as the best practices to make more money. Keep in mind that real estate investing is a business, and you need to treat your vacation home as one. To get a head start, read this: Starting a Vacation Rental Business: An Investor’s Guide.
Check out our real estate investment blog for more information on what comes after buying a vacation rental property and how to be a successful Airbnb host.