The travel landscape is changing, and real estate investors are asking, “should I buy a vacation rental home in 2023?” This guide will help. According to Globe Newswire, the global vacation rental industry was valued at $74.64 billion in 2021, representing a 32% percent increase from 2020. And it is only going to go up in 2023. Therefore, with such promising numbers, 2023 is a good time to buy a vacation rental property. Buying a rental property is quite different from investing in other types of real estate. It means that the techniques used to buy commercial real estate are not the same as buying a vacation rental home. In this case, you will need a keen insight into the local market and the projected revenue of the home. Also, with the transition to the post-COVID era, more people are traveling, and it is time for you to cash in on this opportunity. In this article, we will guide you through the step-by-step process of how to buy a vacation rental property and other important things that you should know before making an offer.
How to Buy a Vacation Rental Property
Here are the seven easy steps for buying a vacation rental property:
1. Choose a suitable location for vacation
The location of a property is one of the most important factors that you should consider first—after all, where you choose to invest will have a major impact on your income potential. Do not just select a state or a city to invest in—you should also consider the region or neighborhood within your chosen city.
When you buy a vacation rental property, the most ideal location is the one that is near most tourist spots. Additionally, the best place to buy vacation rental properties is where it’s close to the most basic amenities, including public transport, restaurants, shopping malls, and convenience stores.
7 Best Places To Buy Vacation Rental Property 2022
The best vacation rental properties to buy are those that are appealing to renters. The ideal places are close to attractions such as art museums, national parks, theme parks, casinos, lakes, mountains, and beaches. When choosing a location, you have to consider certain factors such as the number of short-term rental listings available (to know your competition), Airbnb cap rate, occupancy rate, and average monthly Airbnb income.
Before you decide to buy vacation rental properties, it’s also essential to check the local short-term rental laws regulating the state or city of your choice. Make sure that it’s legal to rent out on a short-term basis in your chosen city.
According to Mashvisor’s data, here is a list of seven of the best places in the US to buy vacation rental property in 2022, based on Airbnb cash on cash return:
- Elkton, MD
Elkton is a prominent historical town located near the Chesapeake Bay in Cecil County, Maryland. It is home to the Elk River, which can be seen at the head of the bay. Colonial architecture is prominently displayed all around Elkton, making this a go-to place for those tourists who want to take a step back in time back to the colonial days.
- Number of Airbnb Listings: 13
- Average Monthly Airbnb Rental Income: $5,356
- Airbnb Cash-on-Cash Return: 8.75%
- Airbnb Daily Rate: $211
- Airbnb Occupancy Rate: 76.31%
- Walk Score: 60
- St Robert, MO
St. Robert, home to the Onyx Mountain Caverns National Historic Site, is a gateway community to the United States Army Fort Leonard Wood. Most tourists visiting St. Robert are those who are attending Fort Leonard Wood Soldier graduation ceremonies, conferences, and other special events.
- Number of Airbnb Listings: 17
- Average Monthly Airbnb Rental Income: $2,619
- Airbnb Cash-on-Cash Return: 8.65%
- Airbnb Daily Rate: $110
- Airbnb Occupancy Rate: 66.12%
- Walk Score: 43
- White Settlement, TX
White Settlement in Tarrant County, Texas is home to several tourist attractions, including the Splash Dayz WaterPark and Conference Center, Texas Civil War Museum, White Settlement Historical Museum, and different community parks. This area is also near Fort Worth, where you can find museums for arts, science, and history.
- Number of Airbnb Listings: 35
- Average Monthly Airbnb Rental Income: $3,784
- Airbnb Cash-on-Cash Return: 8.49%
- Airbnb Daily Rate: $162
- Airbnb Occupancy Rate: 63.34%
- Walk Score: 40
- Springfield, LA
Springfield, Louisiana is a historic town located in Livingston Parish, which is close to the national parks and museums. One of its famous tourist attractions is Louisiana’s swamplands. Visitors take a guided swamp tour to see alligators—some enjoy fishing, kayaking, camping, and other outdoor activities at Tickfaw State Park.
- Number of Airbnb Listings: 10
- Average Monthly Airbnb Rental Income: $3,236
- Airbnb Cash-on-Cash Return: 8.46%
- Airbnb Daily Rate: $224
- Airbnb Occupancy Rate: 53.4%
- Walk Score: 33
- Pontiac, MI
Pontiac is a city in Oakland County, Michigan. It is a smaller but beautiful upcoming tourist destination. It is home to several tourist attractions and offers a variety of art and cultural activities that will give you an insight into the city’s history, traditions, and artwork.
- Number of Airbnb Listings: 12
- Average Monthly Airbnb Rental Income: $2,542
- Airbnb Cash-on-Cash Return: 8.34%
- Airbnb Daily Rate: $125
- Airbnb Occupancy Rate: 58.3%
- Walk Score: 79
- Levittown, PA
Levittown is a census-designated place in Bucks County, Pennsylvania. It is recognized as one of the largest suburbs of Philadelphia in Pennsylvania. It is close to tourist attractions such as the Swaminarayan Temple, Historic Bolton Mansion, Driftwood Water Adventure, Sesame Place, and more.
- Number of Airbnb Listings: 15
- Average Monthly Airbnb Rental Income: $4,017
- Airbnb Cash-on-Cash Return: 8.33%
- Airbnb Daily Rate: $132
- Airbnb Occupancy Rate: 73.67%
- Walk Score: 35
- Ladson, SC
Ladson is a census-designated place in Berkeley, Charleston, and Dorchester counties in the state of South Carolina. Tourists would love to see the top sights near Ladson, including Middleton Place, Colonial Dorchester State Historic Dite, Gahagan Park, Crowfield Plantation Lake, and more.
- Number of Airbnb Listings: 16
- Average Monthly Airbnb Rental Income: $3,511
- Airbnb Cash-on-Cash Return: 8.14%
- Airbnb Daily Rate: $156
- Airbnb Occupancy Rate: 62.31%
- Walk Score: 24
2. Know the Local Short-Term Law & Regulations
Each city and municipality has its own short-term law and regulations that vacation rental property owners need to comply with. In some areas such as New York City, you can’t rent out a full residence for less than 30 days (unless the homeowner is also staying in the home). In Santa Monica, renters must live on the property during the renter’s stay—in addition to registering for a business license and collecting a 14% occupancy tax, payable to the city.
Some of these short-term rental laws and rules may seem really strict. However, most areas in the U.S. offer more flexible regulations when it comes to vacation rentals. Before you buy vacation rental properties, it’s best if you can work with a trusted realtor to help you understand the short-term law and regulations in your community.
3. Conduct a Comprehensive Real Estate Market Analysis
As soon as you have determined your potential locations, the next important step is to conduct an in-depth market analysis to closely examine the market and demand. Before you buy vacation rental properties, you should understand that the demand for vacation rentals is different from the demand for traditional rentals. While most traditional renters rent for a long-term basis, short-term rentals are usually seasonal and they have fluctuating demands throughout the year.
A detailed Airbnb data analysis in your chosen location can help you determine the possible income you can earn from a vacation rental. Consider important factors such as the property’s proximity to popular attractions, accessibility, how the tourism demands peak and fall, the potential average income, and if the Airbnb cash flow can offset the operating expenses. Also, consider if the demand is consistent enough to generate sufficient income for the vacation rental investment to be sustainable.
Analyze the vacation trends and know which property types are popular in a particular area, then conduct some market comparison. Determine the comparables so you can have an overview of how the market performs for a particular type of property, depending on the season. It’s also important to know your potential competitors and analyze how they fare. Identify a possible rental price range to determine a reasonable projected income from the property.
Fortunately, our Mashvisor tools, including Mashvisor’s Airbnb revenue calculator, can provide you with the necessary comprehensive market data and analysis to help you get started. Sign up for Mashvisor now and get 15% off.
4. Conduct an Investment Property Search
If you don’t know where to buy vacation rental property, a quick online search can help you get started. There are online platforms that offer quick and easy online searches to help you find vacation rentals to buy. For instance, Mashvisor offers a simplified search tool to allow investors to find Airbnb investment properties and optimize their rental performance.
Mashvisor’s interactive property and neighborhood insights aim to deliver informative real estate analytics so that you can make informed decisions in your investment before you buy vacation rental properties. Our vacation rental data and analysis includes key metrics and essential information that can help you with your Airbnb research, such as:
- Airbnb pricing
- Airbnb rental income
- Rental property expenses
- Optimal rental strategy
- Airbnb occupancy rate
- Airbnb cash on cash return
- Airbnb cap rate
- Airbnb rental comps
- Seasonality trends
- Revenue potential
- Cost assumptions
- Cash flow calculation
- Financial and purchase investment analysis
5. Calculate Your Income & Expenses
Once you identify a potential property, you need to make sure you can afford it and it can generate enough cash flow even during low season and when it’s vacant. You need to know the occupancy rates for a vacation rental in a particular location so you can calculate your potential income. Local property managers, real estate agents, and comprehensive online platforms such as Mashvisor can help you find this information.
Your income will depend on the area where you buy vacation rental. To offset your expenses, most vacation rental investors set their weekly rental rate at 10% to 20% higher than their expected monthly mortgage payments—those in high-demand locations can set their rates even higher. This is why it’s important to do your market research and analyze comparables. It’s important to strike a balance of ensuring that you earn sufficiently each month, but you also don’t want to scare away prospective guests.
Aside from your mortgage, you also need to know the additional costs and other expenses that come with owning a vacation rental property to find out when you can get your Airbnb return on investment. You need to adjust your income to cover more than your expected mortgage and operational expenses, as well as factor in the inevitable downtimes, especially during the off-peak season.
The following are the expenses you need to expect and understand before you decide to buy vacation rental properties:
- Mortgage: This is your expected monthly payment if you decide to take a loan to finance the purchase of your property.
- Closing costs: This is an additional expense when you purchase your property through a mortgage. They typically include appraisal fees, home inspection fees, attorney’s fees, loan origination fees, and title search fees. The total closing cost could range between 3% to 6% of the purchase price.
- Property taxes: These are the taxes paid on property owned by an individual or other legal entity, which are typically tax-deductible. To take advantage of the most tax deductions available for a vacation rental, work with a certified public accountant or find property tax information online.
- Rental income taxes: These are the taxes collected on the average gross annual income on a rental property. Rental income taxes may vary depending on the location of your vacation rental.
- Occupancy taxes: These are taxes that you pay anytime you rent out a bed, room, or any other space but are usually charged to the guests. They are also known as hotel tax or lodging tax, which generally range from 5% to 19% per night, depending on your state.
- Property insurance: This protects your property from theft, fire, floods, earthquakes, and other risks. The type of landlord insurance coverage you need depends on where your property is located, how often you will rent the property, and how often you will use it yourself.
- HOA fees: If investors buy vacation rental properties in a condominium or a home in a planned community with common areas, you will be required to pay HOA fees, which are usually charged on a monthly basis. The amount will vary based on property type, size, location, and amenities.
- Utilities: These include expenses for heating, cooling, electricity, water supply, and gas for cooking. The costs will vary depending on how you and your guests use the property.
- Property management fees: If you choose to hire a property manager to handle the day-to-day operation of your vacation rental, you need to factor in their professional property management fees. These fees vary based on the services provided by the management company, which are usually charged as a percentage of the rent collected.
- Marketing costs: These are the cost you need to pay for advertising your property on both online and offline platforms to ensure that it gets the right amount of exposure.
6. Finance Your Property
The next step for investors who plan to buy vacation rental properties is to decide which financing method to choose. You can typically finance a vacation rental property with a variety of loans, such as the following:
The qualification requirements for a vacation rental property are stricter than for a primary residence but more lenient compared to a traditional rental property. Lenders know that vacation rentals are seasonal and borrowers are not entirely dependent on rental income to pay the mortgage. Typically, a 20% down payment and a credit score over 680 are required.
If you plan to buy multiple vacation rental properties or finance a vacation property with multiple units, a portfolio loan may be the best option. This is designed for investors planning to buy vacation rental properties who are looking for lower personal qualifications and fewer property requirements.
If you need to finance a two- to four-unit multifamily vacation home or an apartment building with more than four units, a multifamily loan may be right for you. Your options include conventional mortgages, government-backed loans, portfolio loans, and short-term multifamily financing.
There are two options for short-term loans: a hard money loan and a bridge loan. Hard money loans are a good option if you are buying a property that needs to be rehabbed before you refinance it with a permanent loan. Hard money lenders look at the after repair value (ARV) of the property rather than your credit standing. Bridge loans can be used as interim financing, which you can use to finance a property before you get approved for long-term financing.
In most cases, getting a pre-approval for a mortgage is an advantage especially in popular markets because it’s a sign that you are serious about buying the property. A pre-approval letter will also let the sellers know that you’ll be buying a vacation home based on a credible financing offer.
Here are some important requirements for a mortgage pre-approval:
- Identification: Be ready with your identification documents and other necessary information, including your Social Security number, driver’s license, and proof of current address
- Proof of income: This refers to your most recent payslips or records of tax returns
- Good credit: Most lenders require a credit score of 620 or higher. Some lenders approve you for a loan even if you have a lower score—you’ll just be required to make a higher down payment
- Employment verification: If you are employed, most lenders will require the name and contact details of your employers
- Proof of assets: You may also be required to show your proof of assets such as your bank statement, investments in bonds, stocks, retirement savings, mutual funds, and life insurance
How to Buy a Vacation Home With No Money Down
Investors who want to buy vacation rental properties but have little to no money for a down payment may consider the following options:
Get a home equity line of credit (HELOC) or home equity loan
If you already own a property with equity, you can use that property’s equity to finance your vacation rental through a home equity line of credit (HELOC) or home equity loan. This type of financing allows you to take out a line of credit or loan up to 80% of your home’s equity.
Purchase the property through seller financing
Seller financing or owner financing is a form of financing where the seller or owner acts as the lender for the buyer instead of them going to a bank or lender for traditional financing.
Assume a seller’s mortgage
You can buy vacation rental with no money down by assuming a seller’s or owner’s mortgage. Depending on your agreement with the seller, the process is just as simple as buying the property based on the terms of the owner’s current mortgage.
7. Market Your Property
After you buy vacation rental property, the next important step is to plan effective marketing strategies and advertise your property on both online and offline platforms so that it can get enough exposure. This is essential if you want your property to get enough bookings so you can quickly realize your Airbnb return on investment. There are several booking sites—such as Airbnb, VRBO, HomeAway, and VacationRentals.com—that allow vacation property owners to get as much exposure on their properties with minimal fees.
5 Benefits of Investing in a Vacation Home
If you do it right, a vacation rental property can pay for itself over and over again. Below are some other benefits of investing in a rental home:
1. Higher Income
The most captivating benefit you get when you buy your vacation rental property in 2023 is the potential to make more money. As already mentioned above, the average income for such types of investments is $900 per month. But if your home is in a populated and desirable location, that number can multiply fast.
2. Your Own Getaway
Just in case you want to change locations for a while, you can go to your vacation home instead of spending money on someone else’s house. You can use the house for anything you want, like birthdays, parties, get-togethers, and other gatherings. Ensure that you buy a vacation property in an area that you would love to visit again and again.
3. Tax Advantages
If you rent out your vacation rental property for more than two weeks in a year, it is considered a business. It means that you can make tax write-offs on the house. Of course, you still need to pay your taxes on earned income, but you can write off any expenses you incur while trying to improve the home.
4. Protect Your Future
When you buy a vacation rental property, you are not only ensuring that you earn some money today, but you are also securing your future. For example, when you get old and are unable to work, you can still earn money from your house. Also, you can sell it whenever you want, and by that time, the equity on the vacation rental property would’ve risen, making you a handsome profit.
Vacation rental properties perform very well during a recession. It means that you won’t need to worry about losing your money when economic downturns hit. Most travelers, when vacationing, look for more budget-friendly homes to stay in during a recession. Therefore, when the whole country is worried about losing their investments, you are only worried about not owning enough properties.
Where Should You Buy a Vacation Rental Property?
A major challenge with buying a vacation rental property is knowing where to buy the best properties that will bring in a significant profit. There are places where you can find great vacation rental properties with a good track record of consistent profits. You can buy vacation rental properties from online marketplaces. In online marketplaces, you can find good houses in some of the best locations available. Another great place you should look to buy a vacation rental property is traditional listing services. Most of the properties listed there are done by real estate agents. You can also find an excellent house on Mashvisor. Visit the website and search for the location where you would like your house to be, and the platform will provide the best possible option. Here are some things you should consider when deciding on the location to buy a vacation rental property.
1. Seasonality and Demand
Some vacation rental locations do not attract traffic all year round; they are only attractive to travelers and vacationers during specific seasons. Such properties will bring in more income for you during the high season, but they will be bone-dry during other periods. Focus more on the more popular locations if you want a more predictable source of income. You should still research to see whether a vacation rental property will be able to bring in enough income during its boom season. If the demand is low, you should focus on another property. But if the demand is high, then you can go ahead and buy the house.
2. Local Laws and Regulations
Every location is subject to local and state vacation rental rental legal laws and regulations. You should study them thoroughly before deciding to buy a vacation rental property in a particular location. Also, ensure that you study the homeowner’s rules in the neighborhood. Because depending on the location, there are rules as to how often you should rent, the type of renters allowed in the neighborhood, and other specific rules and regulations.
3. Guest Persona
The location of your vacation rental property will determine the type of short-term renters that you entertain. For instance, families with children will prefer a house with a big yard while couples will prefer one with a good view. Also, the features of the house will be of importance depending on the type of people you rent it to. For instance, if you rent the house out to someone who works on vacation, you will need to provide a small workspace.
4. Potential Income and Expenses
Once you’ve found a vacation rental property in an area with enough demand, you can start calculating your vacation rental earning potential and how much you may need to spend on the house. Costs might significantly impact your rental income. Therefore, before you buy a vacation rental property, you should assess your costs against potential earnings to be assured that you will be profitable. Fortunately, Mashvisor offers a rental property calculator for your vacation rental property analysis. The tool will provide you with the numbers and tell whether you can expect a positive or negative cash flow from its calculations. After that, you should calculate how much you will need to make each month to cover your expenses and make a profit. Doing so will help you eliminate the loss-making vacation rental properties.
5. Tools That Help Find the Best Vacation Home to Buy
Sometimes, it is hard to be objective enough about a vacation rental property to buy, especially when you see a feature you love. It is why it’s important to use a tool that gathers data about the properties in an area. You need something that will let you know if the vacation rental property you want to buy is worth your money. Some tools can help you objectively perform research on any house in the US that you’re looking at and tell you if it’s worth buying. Mashvisor is one such provider of all the necessary and useful tools. The platform will help you make an informed decision and will reduce your research time considerably.
What Is a Good Rate of Return on a Vacation Rental Property?
Firstly, as long as you make a profit from your vacation rental property, you are doing fine. That being said, some returns are better than others. Therefore, what is a good rate of return on a vacation rental property? If you decide to use the cap rate calculator, a reasonable rate of return is around 10%. If you decide to go to the cash on cash rate calculator, a reasonable rate of return is 8%-12%. But even with the said return rates, some investors will not buy a vacation rental home if it comes up with anything less than a 20% profit. However, it all depends on you. If you’re comfortable with an 8% return, you can go ahead and purchase the house. But if you would prefer a 20% return, that’s fine too.
Is It Smart to Buy a Vacation Home?
Two schools of thought exist when considering if it is smart to buy a vacation home. There are pros and cons to purchasing and renting a vacation home. It will eventually be up to you to decide. We’ve looked at some of the pros of owning a vacation home. Now, let us look at some of the cons of owning a vacation home:
The type of taxes you will pay for your vacation rental home will differ from the one you pay for your current home. Ensure you figure out the deductions your vacation rental property will require and how your income will be taxed.
2. Vacancy issues
The house used for vacation rentals can be vulnerable to break-ins when nobody is occupying it. Some locations offer check-ins for investors who are not around.
3. Additional costs
It’s expensive to own a vacation home. You will have to pay the mortgage and other expenses, which don’t come cheap. Therefore, weigh the pros and cons of investing in a vacation rental property. If you think the pros outweigh the cons, you can buy the vacation property. But if you think the advantages outweigh the disadvantages, you can hold off for now until you feel comfortable investing.
Conclusion: Are Vacation Rentals a Good Investment?
It is an excellent investment if you choose to buy a vacation rental property in 2023. Plus, you can still have a great vacation rental home where you can relax whenever you want. Your property should also be able to bring in a good income for you consistently. Yes, there are some expenses you will incur when you buy a vacation rental home, but if you do your calculations and research well, you will still come out on top and make a profit. That is why you should have a great tool like Mashvisor in your arsenal. Mashvisor can help you find vacation rental properties and also make sure that you do not incur any loss on your investment property. It will do so by performing the necessary research and calculations on your preferred property and then telling you if it is worth your investment or not. With the information the real estate website provides, you can tell when and if to buy a house or when to move on. Therefore, based on the travel stats above, the question of “Should I buy a vacation rental property in 2023” should instead be, “Which vacation rental property should I buy in 2023 that will give me the highest return on my investment”? Sign up for a 7-day free trial of Mashvisor now, followed by a 15% discount on your subscription.
FAQs: Understanding Vacation Rental Investment
1. What Will Travel Look Like in 2023?
The most recent forecast for international travel from US Travel predicts 65 million foreign arrivals in 2023. It means that people are ready to travel, and not even inflation will keep them at home. Research shows that the average American is ready to spend $200 per day on travel. More traveling is expected in 2023 than in the last two years. It is why you should look to buy a vacation rental property for the thousands of Americans looking to go on vacation. Also, since more jobs are going remote, employees get more opportunities to travel anywhere they want and still get their work done. Seventy-one percent of Americans believe that planning for travel is tedious, and another 43% say that they prefer to use a travel advisor. Mashvisor can help you get more travelers to your vacation rental property. You will find out how later in this guide.
2. Is the Vacation Rental Business Profitable?
If you follow the necessary steps needed to buy a vacation rental property, you will reap the many advantages of investing. One of the massive advantages is the consistent cash flow. Platforms for renting homes like Airbnb and VRBO are excellent ways to enjoy a consistent cash flow when starting an Airbnb business. According to research, when you buy a vacation rental property, you can earn an average of $900 every month. The amount is a conservative estimate. According to the latest data, some rental properties make as much as $10,000 every month. It means that there is a strong chance that you can earn far more than the average income when you buy a rental home. You can also take advantage of the tax benefits that come with buying a rental home. According to existing tax laws in some US states, your rental property is considered real estate if you rent it out for at least two weeks in a year. It means that you can write off some of the expenses you incur on your vacation property, which will, in turn, boost your average income. In the end, though, there is a possibility that you can turn your rental home into a major income-generating business. You can enjoy all the advantages that come when you buy a rental property. But it is only possible if you use the right tool to locate and buy the best and most profitable vacation rental properties in 2023.
3. Should You Hire a Property Manager?
Once you buy vacation home property, you have the option to manage it yourself or hire a professional property manager to do it for you. As mentioned, property managers charge fees and a percentage of the rent for their services. You should consider this especially if you need to minimize your overall cost. If you choose to manage the property yourself, it’s best if you live close to the property. You may also need to hire care maintenance, cleaners, and other helpers, especially during the peak season.