3 Things You Should Know Before Buying a Vacation Rental
Owning vacation rental property can be a solid investment and a great source of income if handled well. But, there can also be downsides. Avoid the pitfalls by using our vast experience in this area.
Vacation rentals require more management than other types of property, due to high turnover and visitor expectation. And they are typically located in more-expensive areas. Here are some factors to take into account when considering investing in a vacation property.
Looking beyond the finances.
When you research buying a property as an investment, it is tempting to focus just on the numbers and cost of the property. But when considering a vacation rental, you can’t just look at these numbers alone. Location and surrounding amenities is a primary demand for most holiday makers. Since this is a place where you’ll likely spend vacation time and share experiences with friends and family, you want search for the right fit, beyond the financial commitment (more on this below).
Assessing the property by staying over and spending time, prior to making a commitment, can be really beneficial to assessing the value to a vacationer attempting to amplify the holiday mood. Many people purchase a vacation home as a step towards a retirement dream. Obviously you don’t want the decision to be completely emotionally based, but you should look beyond the finances, by putting yourself in the shoes of your holiday maker.
Assess the True Rental Potential
Consider the things that vacationers expect, such as a convenient location, great views, and amenities. Homes located near beaches and mountains tend to be the easier to rent out over the long term. Vacation rentals are typically located in expensive areas and therefore have a higher cost of ownership. It’s important to note that operating expenses for a vacation rental are similar to a hotel, in that you will spend around 60 to 75% of revenue for management and upkeep. Knowing this drawback, most people who invest (and those who stay) in vacation rentals do so because they fall in love with a particular area and want to think of their new property as a second home. If you are counting on rental income to qualify for your mortgage, then you must consider the home’s rental potential.
- Is the place family friendly, or is it designed more as a couple’s retreat?
- Does it have extras such as a fireplace, pool, or hot tub?
- Is the decor up to date?
People are willing to pay a premium if you can offer a unique experience. With regard standard real estate, Forbes recommends creating a financial safety net by setting your weekly rental rate to at least 20% higher than your expected mortgage payments as a way of planning for a 10 – 20% vacancy rate (this can vary depending on location and seasonal demand). This rate can only be expected to increase with rentals attracting the shorter term tenant, such as visitors and holiday makers.
Research Management Options
Vacation rentals are could be considered an ‘away from home’ holiday house for the owners. What that in mind, hiring a property management team is almost essential. The turnover for vacation properties is high, since most vacationers only stay for a few weeks at most. Between every rental you need someone to clean the place, check for any maintenance issues, do laundry and stock supplies. You’ll also need a way to list your property and manage bookings. Traditional rental companies typically handle all of the following:
- Advertising the property
- Keeping the rental calendar
- Tracking and collecting rental fees and taxes
- Providing tenants with keys
- Cleaning and inspection after each stay
You may decide to go with a site like VRBO.com and handle your own bookings to keep costs down. But unless you want to spend every weekend driving to your property, cleaning it, and handing out keys to the next tenant, you will want to hire a manager. Buying a vacation property can be a great way to invest now for future gains, as long as you’re smart about balancing expenses and upkeep against your property’s income potential. You’ll not only have a place you can visit for relaxation year after year, but you can also consider it a planning step towards retirement to your dream location.
Please call us at 760-413-2871 and let’s discuss your dream of buying a vacation rental of your very own.
This post was contributed by Robert Kramers. You can follow him on twitter or check out his website.