Are you planning to invest in a short-term vacation rental property? Avoid these 5 novice mistakes in your business plan.
You will definitely want to make sure you have all the facts together before buying a vacation rental property and starting a rental property business. There are many factors that should be taken into account in a real estate investment strategy. The key is to make sure that your vacation rental business plan properly explains your mission and goals and offers a clear strategy for how your business will become profitable. If you are a beginner, it might be confusing to understand what to include in your business plan. However, there are plenty of online resources on real estate investing for beginners that go as far as to offer templates to make sure you get it right!
To help you double-check your plan, we have gathered the five most common flaws in vacation rental business plans.
1. Poor Market Knowledge
Many novice investors overlook the first (but very important) part of their vacation rental business plan: the market analysis. Ask yourself, is there a market for your vacation rental property in the intended location? If you do not understand the culture and demography of the investment location, your business can fail. However, much of the early analysis is just common sense. If the location of your investment property sees only a few visitors/tourists here and there, the market for vacation rentals is very small or even non-existent.
One common mistake is not collecting all historical and current data about the housing market. This makes predicting your future income, occupancy rate, or ROI upon resale very difficult. If you already know the investment location, it is helpful to check the public record data on home value trends and property sales in general. If you have several options on your radar with regards to where to buy investment property, it might be useful to conduct searches based on zip codes. National statistical bureaus are helpful sources for this type of data, as well as the different analytics and real estate investment tools available online, such as Mashvisor’s Airbnb Analytics.
Basic Airbnb data, however, is often not enough and a mistake would be to leave the analysis there. If the larger economic or cultural factors are not taken into consideration, it is easy to over or underestimate the demand. Another often overlooked step in the market analysis is checking the laws and regulations of a particular location. These are hugely important because they can significantly impact your vacation rental business.
2. Targeting Everyone
Poor market segmentation is a common flaw in a vacation rental business plan. This is counterintuitive, considering that the customers of vacation homes are the ones who will bring in the money. A novice mistake is to make this analysis too superficial so that it only relies on basic demographic characteristics. Here, it is better to go the extra mile by also creating personas for the customer profiles, from their age to their income to purchasing habits. The more detailed you can make them, the more insights you draw for marketing your vacation rental property later on.
The costs and headaches of poorly defined target customers of a vacation rental business are many. For one, you cannot use targeted marketing. Also, you might receive frequent complaints from dissatisfied customers because you failed to understand their expectations. So, get to know your customers. Understand what they want from your vacation rental property.
3. Failing to Recognize Competition
So, you think you have an excellent location and investment property, and you know it appeals to certain demographic groups, but is it really unique? One likely flaw in your vacation rental business plan, despite being one of its most important elements, is the competitor analysis. With poor competition analysis, you cannot differentiate your property, take advantage of your competitors’ weaknesses, nor clearly define your unique value proposition.
This task is pretty straightforward to tackle. You can start by determining your likely competitors by searching rental properties in your intended location using popular vacation rental listing sites. Choose the main competitors and check their reviews, social media, websites, and branding strategies. If you notice you are up against more experienced real estate professionals in your investment location, you want to fully understand their strengths and weaknesses when evaluating how your rental property fits in.
If you do not know the types of your competitors’ properties, rental rates per night, clientele, agencies used, unique credentials, experience, or their weaknesses, you have not properly analyzed your competition. Failing to define the above in your business plan can be detrimental for your marketing plan, and ultimately, return on investment.
4. Wrong Distribution Plan
The wrong distribution plan is yet another common flaw in a vacation rental business plan. And why is getting this right so important? No matter how polished your marketing plan or your value proposition to the customer is, with a wrong distribution plan, your intended customers might simply never find your rental property.
Multi-channel strategies are very effective ways to reach your intended customers. The multi-channel strategy uses more than one type of distribution channel simultaneously. Online, you can market your property directly, or you can use middlemen, such as Expedia or TripAdvisor. In fact, it is recommended that new hosts add their rental properties to online travel agencies’ catalogs and listing sites for better visibility.
Your distribution plan should list the channels you will advertise your property on, how much these channels cost you, and also describe your rental property management. The latter is important, as coordinating bookings coming from different sites can become tedious (you might even consider the help of a channel manager). Proper customer segmentation will also help you define which listing sites your target customers are likely to use (hint: you need to be on those sites).
The sharing economy is very much digital, but offline distribution channels should not be neglected either if these channels best help you reach your intended audience.
5. Overestimating Revenues, Underestimating Costs
The final common flaw in a vacation rental business plan is poor revenue management planning. If you fail to analyze the numbers, you may end up over or underestimating your revenues and costs, and you won’t be able to accurately predict how long it takes to start making money in real estate.
One mistake is to overestimate the rental income and not take all rental costs and expenses into account. To keep your accounts green, you should start by defining your rental rate per night. Do you wish to keep it fixed or adjust it per peak seasons? On the costs side, you will at the very least need to know the tax percentage you pay to the Government. Other costs you need to estimate are the totals of your utility bills and marketing and distribution costs. Another frequent mistake is to forget the small cost items, like regular maintenance costs. Setting a target monthly income on your holiday rental property will help you plan a budget. You can then adjust the rental rate and desired Airbnb occupancy rate in line with your target. As you know, owning a vacation rental property also generates certain variable costs- you might want to define the desired cap for those as well.
We know it is easy to get overwhelmed by the numbers. There are plenty of analytics tools out there that can help you estimate incomes and costs, such as those available at Mashvisor. Start out your 14-day free trial with Mashvisor now to get ahold of our vacation rental income calculator.
We hope this list of the five common flaws in vacation rental business plans has provided you food for thought. We recommend you read your vacation rental business plan one more time. Does it really outline your path to success?