Investing in vacation rentals makes an excellent investment option for a beginner real estate investor as you are more likely to accumulate higher rental income.
The key to succeeding in buying vacation rental property is to cogently assess the attributes that will yield a high return on investment. Whether you are a first-time real estate investor or an experienced one, you must thoroughly assess your rental strategy and meticulously plan out your investment.
Below, we have developed a guide with the necessary steps to follow when investing in real estate vacation home rentals.
1. Find the Right City
Location is important and finding the right city marks the very first step of buying a vacation rental. The location of your investment property will determine its profitability and your rental strategy will determine the location and even the type of renters you’ll be able to attract. When investing in vacation rentals, consider locations where tourism is thriving.
Look for areas that offer many seasons of rental use. Because the more your vacation rental is rented out, the more rental income you will have. And this means positive cash flow.
Airbnb Regulations
Investing in vacation rentals is profitable when you buy in the right location. But you cannot only look at the number of tourists that visit every year. There is another key thing to consider: the local short-term rental laws.
When you are looking into investing in vacation rentals, you are probably considering renting via Airbnb. While Airbnb makes an accessible option for real estate investors and renters, as a real estate investor, you must be wary of Airbnb regulations as they can be restricting.
Contact the local city council for the most recent laws and regulations governing Airbnb before selecting a location. Make sure the location you pick has the least stringent regulations when it comes to running an Airbnb out of a non-owner occupied rental.
2. Get Your Financing in Order
Now that you’ve chosen a city, find out the median property price for that location. Investing in vacation rentals has been on the rise in the US; the demand for vacation rentals has increased and so has their sale. Due to the competition, it’s important to have your financing ready in order to move quickly on the investment property of your choice.
So, knowing the median property price, how are you going to pay for the property? Can you afford to pay full in cash or do you need to get a mortgage? If you are taking a mortgage, carefully study the lending options that are available to you.
Study the terms of the mortgage as far as interest rate, grace period, and mortgage payments of a few different lenders. Select the lender that will maximize your benefits and make sure to account for the payments and fees in your budget. Moreover, if you are taking out a mortgage, take into account upfront fees such as down payment, appraisal, and loan origination fees and factor them into your budget.
3. Look for Properties for Sale
Where are the best places to buy vacation rental property in the city of your choice? How can you find real estate vacation rentals that yield good financial prospects? When you are investing in vacation rentals, you want to find a property that will have a high capitalization rate (cap rate), Airbnb occupancy rate, and positive cash flow.
In order to do that, you first have to find a profitable neighborhood. With Mashvisor’s Heatmap Analysis Tool, you can find neighborhoods with investment properties that have the highest potential for profit. What is the Heatmap Analysis Tool?
The Heatmap Analysis Tool is an online tool that helps real estate investors find neighborhoods with property listings. The map provides a visual that allows investors to spot neighborhoods with high yielding investments.
Moreover, the tool allows investors to refine and set their search criteria in order to find the best neighborhoods. With the tool, a real estate investor has the advantage to browse locations and start investing in vacation rentals with ease.
Once you find a promising neighborhood using the Heatmap, you can check out all of the listings in that location.
But how will you narrow them down to the best vacation rental investment property?
4. Calculate Potential Income and Costs
When you are investing in vacation rentals, you want to meticulously assess the costs associated with your investment property. Usually, real estate vacation rentals incur higher costs because of the high turnover.
In addition, they can be left vacant in some seasons. So you should carefully assess how vacancy and your operational costs can affect your rental income. Take all of this into account when calculating cash flow. Remember, you always want to have a positive cash flow.
Below is a list of costs that you should be wary of when calculating your potential income.
- Vacation Rental Property Taxes: These include property taxes, rental income taxes, and occupancy taxes.
- Operational Expenses: These include property insurance, Homeowner’s Association (HOA) fees and fees for utilities.
- Management Fees: If you resort to hiring a professional property manager, they will take a cut of your rental income.
- Financing Costs: If financing with a mortgage, include mortgage payments and other upfront costs such as appraisal and loan origination fees in your calculations.
To better assess and calculate the expected returns on your vacation rental, we recommend resorting to a vacation rental income calculator. Mashvisor’s Vacation Rental Income Calculator shows you what rental income you can expect as well as cost estimates based on the location and rental comps. It will show you the cash flow, cap rate, and cash on cash return you can expect from the vacation rental.
For more information about Mashvisor and its tools, click here.
5. Close the Deal and Start Renting Out
You have finally landed on a vacation rental property that will generate you the highest returns. Make sure to carefully study the terms of the contract and work with an agent to close the deal quickly. The investment property is yours now and you are ready to start making money with real estate vacation rentals.
The Bottom Line
Organizing the steps to buying an investment property is crucial to the success of your investment, especially when buying a vacation rental. When investing in vacation rentals, make sure that you study the location (city and neighborhood), how the occupancy rate will affect the property’s cash flow, and the potential rental income. Owning a vacation rental property can be very profitable if you follow these steps!
Are you still wondering how to start investing in vacation rentals? Turn to Mashvisor’s Heatmap Analysis Tool and Investment Property Calculator to ensure deriving the best and most accurate results for your goals.