Your To-do List Before Buying a Vacation Rental Property
Considering the current challenges that the vacation rental industry faces, buying a vacation rental property will possibly be more difficult than normal. In addition to the large upfront sum required, one should also consider other continuous expenses which will make property investors think twice during a time when markets are volatile. So, what do I need to know about buying a vacation rental property? Before you sign on any dotted lines, here is your four-point to-do list before making a vacation rental investment.
Decide on the Location
Think about the type of traveller that you will be trying to attract. Different locations attract different audiences. For example, cultural enthusiasts will find an apartment in the city more attractive, while families with toddlers will be drawn to bigger coastal properties. Whichever the case, the best place to buy a short-term rental is the location that attracts enough travellers.
One thing that matters to all travellers is the proximity to amenities. Ideally, all the amenities should be in walking distance. The proximity of amenities becomes even more important when your target audience is holiday goers.
Though, always keep in mind that cities have their own regulations regarding short-term rentals. As a result, the locations that you have identified might not be profitable for running a vacation rental business and if you purchase in the wrong area it will decrease your profit margin.
Identify the Right Property
The size of the property is not as crucial. That being said, the more bedrooms, the better. If you have your heart set on a one-bedroom apartment, you can still make it work by, for example, adding a sofa bed to create an extra sleeping space. All things considered, the right property is the one that you can afford and is access-friendly to all travellers.
Calculate Expenses and Potential Income
If you need to apply for a loan to finance your vacation rental property, this step is crucial. Though, even if you do not rely on financing, calculating the expenses and potential income will help you to get a better understanding.
Taxes, insurance premiums, and maintenance costs are just a few examples of the ongoing expenses that property owners often forget which could eat away profit margins. The good news is there are many recurring expenses, like cleaning costs and furnishing, that can be deducted from tax. Though, they can still add up to a significant amount that could make it difficult to sustain positive cash flow.
To calculate your potential income, you will have to research the occupancy rate of the location and the surrounding areas, the average nightly rates, and seasonality. If you can, you would want to buy a vacation rental property in a city that has a better-than-average occupancy rate to reassure you that most nights will be booked.
Work with an Agent and Invest in Specialised Tools
As real estate agents boast extensive knowledge about factors like seasonality, potential income, home prices and demographics, consider consulting one before you embark on your property search. Besides, you can also use specialised software solutions that can help you to analyze all the information that you have gathered. For example, you can use a tool like Mashvisor to predict your potential income. If the numbers simply do not add up and buying a vacation rental property is currently not viable, an agent will also be able to advise you about your options to sublet a vacation property on sites like Airbnb.
Make a Verdict – Are Vacation Rentals a Good Investment for You?
If you are planning to purchase a vacation rental property, you need to give thought to political, social and environmental factors. The COVID-19 outbreak has shown that unforeseen events in tourism can make buying a vacation rental property a less attractive option. That being said, it should not as a direct result deter you from investing in vacation rentals. Instead, you can use this temporary lull in occupancy to renovate or decorate.
You should be able to make your investment a successful venture by viewing the potential of your vacation rental as a whole. All things considered, by actively implementing strategies to attract more guests, you will be able to generate a steady stream of supplemental income. What’s more, you will also be able to enjoy your new property (which will most likely only increase in value) whenever you want with your family and friends.
While renting out your property on a short-term basis can generate higher profit as opposed to long-term rentals, this alone will not guarantee that you will be profitable. You need to identify a location that attracts enough tourists and the right type of property. Then, you also need to do the math to see if you will be able to break even.
The prospect of investing in new vacation rentals is exciting. That being said, do not lose sight of the fact that this will not be your main residence. Therefore, set your personal tastes aside and look at the new purchase purely from a business point of view.