As a vacation rental property investor, you need to know where to begin so that you don’t end up with an investment that isn’t quite right for you.
A number of variables come into play when determining whether or not an investment in a short-term rental is a success. There are many factors to consider, including the location, the surrounding attractions, the season, and the management strategy. In order to avoid making a mistake, it is imperative that you follow a logical, step-by-step process to thoroughly research a property before making an investment.
1. Investing in vacation rentals requires a great deal of research.
Location
In determining the value of a property, location is one of the most important considerations. The location of a property cannot be changed, even if it is renovated. No surprise that location is the most important consideration when looking at short-term rental properties as an investment opportunity
Choose between buying a home in the city, a small town, or out in the country. Then, you can begin to focus on specific areas that have the potential to yield great results. Remember that even if a property costs a lot, it still needs to be located in an area that is safe and appealing to visitors.
Demand for vacation rentals
Once you’ve narrowed down your options, you can see if there’s any interest in vacation rentals in those areas. Vacation rental demand is not the same as the demand for residential properties. Consider the surroundings, transportation, and other factors.
Taking into account the general traffic and popularity of the area is also important. No matter when you go, is it a year-round tourist attraction that attracts many visitors? All of these variables can have an impact on the amount of demand for vacation rentals in a particular area. When looking to buy a home in a new area, it’s a good idea to check out the local market data.
In-season and off-season
Seasonality plays a large role in determining the amount of money you can make renting out vacation homes. A property near a lake or the beach is more likely to be booked during the summer than a property close to a ski resort.
Bookings for a hotel in a busy city will probably be more consistent throughout the year. On the other hand, the surrounding rental properties will be a greater threat to its rental income.
Rate of vacancy
How many nights a vacation rental has been booked divided by the total number of nights available is called the occupancy rate. Investing in a property with a higher potential occupancy rate is in your best interest. Occupancy rates can be boosted by factors such as rental size, number of bedrooms, and amenities.
Return on Investment (ROI) and Expenses
You can begin calculating your return on investment and expenses if the property you’re looking at has a reasonable amount of rental demand. The cost of managing the property and the amount of money you can make from it must be taken into consideration.
Tally up your monthly expenses and divide by the number of months. Remember that cleaning, restocking supplies, hosting fees, or property management fees will all add up to a significant amount of money.
Make a list of the monthly expenses you’ll incur and the monthly profits you’ll make. Calculate your cash flow by subtracting your expenses from your potential rental income.
Investing in a property with a positive cash flow is always a good idea. This task can be made easier by using an Airbnb calculator to generate useful metrics relating to costs and rental income.
2. Utilize software tools for analysis.
To make an informed decision about where to invest your money, you need to have access to market data. You can rest assured that your vacation rental investment will be a wise one if you use data-driven analytical tools. The following are some of the most highly regarded tools:
AirDNA
More than 10 million vacation homes across 80,000 cities around the world are available for short-term rental through AirDNA. In order to use it, enter the address of your investment property into the Rentalizer tool
The information you’ll get from AirDNA includes information on nearby vacation rental properties, as well as statistics on rental demand and revenue per year.
Mashvisor
With Mashvisor, you can do your rental research in 15 minutes instead of several weeks. You can search for vacation rentals in any city or town using their vacation rental search engine.
You can then look at the average occupancy rate, the potential ROI, and the cash on cash return for properties in different areas and neighbourhoods. An additional feature of Mashvisor is the use of a heat map.
AlltheRooms
AllTheRooms is one of the world’s leading short-term rental market data and analytics providers. Precision Filtering, Historical Trends, and Competition Tracking are just a few of the features that make it a valuable resource for vacation rental owners, investors, and managers.
Discover how well your property is performing in the current market, as well as emerging hotspots for vacation rentals with AllTheRooms.
A business plan for your vacation rental company should be developed.
It’s a good idea to spend some time putting together a detailed business plan for your rental company. Identifying your short- and long-term business objectives can be as simple as answering the questions below.
3. What is your vision for the company’s future?
Do you want to own a certain number of properties, and how many years into the future?
Will you be in charge of every aspect of the business, or will you enlist the help of a property manager?
After that, you can start thinking about things like your organizational structure, your target audience, and your competition. The best way to keep track of your progress is to write it all down in a spreadsheet.
4. Decide how you’re going to pay for it.
To purchase your investment property, you must now determine how you will raise the money for the purchase. In the United States, a wide range of choices are available, including the following:
Refinancing with a cash out option
You can use a cash-out refinance to invest in a vacation rental property if you have built up significant equity in your primary residence. You can use the difference in cash from refinancing a larger mortgage as a down payment on a rental property. Having a good credit score will be necessary to accomplish this goal.
The reverse mortgage
This option may be best for people over the age of 60 who plan to invest in vacation rental properties. In a traditional mortgage, you must make monthly payments to repay the loan. A reverse mortgage allows you to access the full amount of the loan and does not require you to repay it until you sell the property or move out of the property.
However, bear in mind that once you’ve made this decision, the entire loan balance is due. The amount of interest accrued on the mortgage will rise in direct proportion to the length of time the loan is left unpaid.
Lines of credit secured by your house
A home equity line of credit can be used to buy a vacation rental property if you have enough equity in your current home. It is possible to maintain the terms and conditions of your current mortgage while taking out a new loan with different terms and conditions.
You have the option to choose between a credit line with fixed second home mortgage rates or one with variable rates.
Conventional financing for vacation rentals
When it comes to financing a vacation rental property, this is the most common route. Applying for a loan from a bank or credit institution can help you fund your vacation rental property. Paying a down payment and then making monthly payments for the next 15 or 20 years may be required.