In recent years, more travelers are choosing to stay at vacation homes instead of traditional hotels. Therefore, buying a vacation home can be very profitable for anyone that wants to venture into real estate investing. This property can make money as a Vacation Rental By Owner (VRBO), Airbnb, or hotel program.
So, why is buying a vacation home a good investment? The following are some of the advantages of owning a vacation home investment property:
- Dual-purpose property – Investors can use their vacation home investment when going on vacation with their families. This means avoiding accommodation costs that would have been incurred in a hotel or Airbnb accommodation. The vacation home is then rented out for the rest of the year.
- Rental income – Buying a vacation home as an investment means rental income for investors all year round. The money earned can help pay off the mortgage as well as other costs such as repairs, maintenance, insurance, and property tax.
- Increased value through appreciation – Besides generating some income in the short term, investing in a vacation home can also be very profitable in the long run. The value of real estate property usually increases over time. Therefore, when investors are ready to sell their vacation rentals, they can make a good profit by selling at a higher price. To make even greater profits, real estate investors could make improvements and modifications to boost the market value of their vacation homes.
- Tax deductions – Just like any other investment property, a vacation home investment allows landlords to enjoy tax deductions. This applies to expenses such as insurance premiums, mortgage payments, utilities, and property tax.
- Flexibility – A vacation home rental is more flexible compared to other kinds of real estate investment. If the property has a low occupancy rate, poor rental earnings, and negative cash flow, investors could choose to switch tactics and become a traditional landlord. This means the location chosen for the vacation home investment should work for short-term rentals and long-term rentals/traditional rentals.
- Easy to manage – Real estate investors don’t have to manage their vacation home investment full-time to make money. Instead, they can hire a professional property manager to take care of all the day-to-day tasks involved in running the rental. The investor can then focus on major responsibilities such as marketing and collecting rental income.
Here are 5 steps to find the right vacation home investment and manage it for success:
1. Select a Vacation Rental Property
Obviously, the best spot for a vacation rental is one which is frequently visited by tourists. Preferably, this should be a location within close proximity of attractions such as national parks, lakes, mountains, theme parks, and beaches. There are two main ways real estate investors can look for suitable vacation homes within these locations:
- Online Search Tools – An online search is one of the best ways of identifying potential investment opportunities. Investors can get a feel of different destinations by looking at rental properties available, maps, hotels, and local attractions. Mashvisor has a heatmap analysis tool that is ideal for finding the best investment location. The site also has a property finder that can filter real estate investments based on different geographical areas, price ranges, and even the expected return on investment.
Related: Heat Map Analysis: Real Estate Investing
- Realtors – An experienced local realtor will help investors carry out further research on the destination and schedule appointments to visit different vacation rentals. The realtor can also provide vacation home investment tips about short-term market rental rates, local occupancy rates, short-term rental laws, expected return on investment, and the general desirability of the location.
2. Figure Out the Income Potential
Besides being strategically located, a vacation home investment should also make financial sense. A cost-benefit analysis should be carried out to find out if the property is a worthwhile investment. Real estate investors need to look at the short-term rents as well as vacancy rates of the destination and compare them to the monthly operational and financing costs. For instance, if the vacation home’s monthly mortgage payments are $1,800, the occupancy rate is 75%, the nightly rental rate is $130 and the monthly operating expenses are $200, the potential monthly profit can be computed as follows:
Potential Monthly Profit: [($130) x (75%) x (30 days) – [($450) + ($2,050)] = $425
This means that the vacation home investment will generate positive cash flow if rented out for a full 30 days. However, it is likely that the rental property will have lower occupancy rates during off-peak seasons. The property owner should, therefore, have a flexible rental strategy to accommodate anticipated periods of vacancy.
Besides mortgage payments, the other costs associated with owning a vacation rental include HOA fees, property taxes, mortgage payments, taxes on rental income, advertising to prospective tenants, licenses, utilities, and property management fees.
Mashvisor’s real estate investment calculator can help potential buyers crank out the numbers quickly and perform an accurate vacation home investment analysis. This will allow them to settle on the best vacation home investment with confidence.
Related: Real Estate Investing 101: How to Calculate Rental Income
3. Apply for Financing
Once a suitable single family home, multi family home or condo has been identified, investors will need to get financing to buy it. Vacation homes can be financed with a portfolio loan, conforming loan, balance sheet loan, multi family loan or short term loan. The good news is that it is even possible for investors to buy the rental property with no money down.
4. Hire a Property Manager
As mentioned earlier, a property manager takes care of daily operations such as repairs and maintenance, landscaping and cleaning. If the vacation home investment has a pool, a separate firm could be hired to maintain it. However, if the property is purchased with a homeowners association (HOA), the external maintenance will be taken care of. If the vacation home is maintained well, travelers will continue coming back year after year. They will also give positive feedback which will attract even more visitors.
5. Advertise the Vacation Rental
A vacation home investment can be advertised offline on magazines, newspapers, radio, and television. Property owners could also print flyers and posters and distribute them in strategic locations. However, online advertising is the best way of reaching an even larger audience. Paid social media ads can be used to reach a targeted audience all over the world. Vacation rentals can also be listed on websites like Airbnb.
Related: How Do You Create the Most Attractive Rental Ads?