This is part three of a series of posts describing how vacation rental properties or short-term rentals are disrupting normal cycles in single family residential markets and how they offer new investing alternatives.
In part one, I recapped some of the recent market history, including market drivers. In the second part, I covered information on how short-term rentals—particularly vacation rentals (VRs)—can provide higher returns.
I also pointed out that investors in this segment need a set of skills and a team, just like with single family residential (SFR) rentals, multifamily rentals, and fix and flips. However, the necessary skills and team players aren’t the same.
In this installment, I’ll dive deeper into those components. What skills are needed exactly? And who specifically do vacation rental owners need on their team?
I’ll also talk about how rapid changes in the industry are creating new and different kinds of supporting businesses.
What Skills Are Needed to Thrive in the Vacation Rental Industry?
No matter which kind of real estate you specialize in or prefer, there is a characteristic set of things you need to know, skills you need to have, and other people and businesses you need on your team. So let’s look at the skill sets needed to be successful in investing in the high return vacation rental space.
Short-term rentals of any kind, but especially vacation rentals, require skills and team players that overlap that of single family rentals and fix and flips. However, there are significant differences.
What Are the Similarities?
Vacation rental owners need to have property acquisition skills—just like all other types of real estate investors. Whether you operate in an area where you can develop from the ground-up, have to exclusively buy existing properties, or can operate in between those poles, you can’t invest without acquiring a property.
Once acquired, you likely still need to improve the property and add value to it in order to get the best returns. So, some kind of build or renovation, whether it’s a simple spruce up or an involved renovation, will more often than not have to happen.
When a property is market-ready, you’ll need to list or advertise it—whatever’s necessary to get it occupied. And finally, there’s maintenance and operations, followed eventually by disposal or resale.
As for your team, you’ll need the occasional services of a real estate attorney, title company, insurance agent, and realtors. You’ll still need handymen, general and non-general contractors, and the services of maintenance people, too. If you don’t want to manage your rentals yourself, you’ll have to choose the right management company, as well.
What Are the Differences?
Let’s start at the top.
Acquisition. First you’ll need a property conducive to short-term renting—location considerations are vastly different with VRs compared to SFRs. When people are traveling for pleasure or business and want to stay in a vacation rental, location is important to them (just like it would be if staying at a hotel).
Different kinds of travelers have different preferences, to be sure. But it’s clear an investor can’t pick just any house anywhere and expect it to perform well as a vacation rental.
Cost is another consideration. While you can expect higher returns from a VR, that doesn’t necessarily mean you should spend more. There’s been observably interesting, and in my opinion, risky behavior within the space as of late.
Some investors are evaluating VR properties in a different way than they would SFRs. When the numbers don’t work, they plug in a different set of assumptions for treating it as a vacation rental. By changing the assumptions around income and grossing up some of the costs, sometimes that property that didn’t work as an SFR suddenly seems like it will work as a VR.
And that would be fine if the property was in the right place, had the right character, and so on to be a vacation rental, and if the investor knew their stuff when it came to the correct assumptions to make about vacation rentals.
But far too often we’ve seen an investor buy with the intention of short-term renting and then failing in running it as a vacation rental.
Maybe they used to rent it out full-time prior to trying short-term. But the property didn’t work as an SFR either. It didn’t cash flow.
So now that investor failed to make it a cash flowing VR, and they can’t just revert to renting it out full-time, because that didn’t work either. That’s a big ouch!
This leads to several other considerations around short-term rental properties.
Character. Travelers, by and large, don’t want to stay in a place that looks just like any other house, condo, or apartment. It should feel like home, but not be like home.
The character of the property is important. Let’s talk about the exterior to start. Part of this is location, even micro-location, and curb appeal. By micro-location, I mean where is it on the block? Is it in the back of a large condo complex, or is it near the front? Is it near the street? Having a high walkability score (being in close proximity to attractions) is important.
If it’s in a place where there are amenities, such as pools or exercise rooms, is it near or far from those? What do the views look like out the windows? Is the entrance area inviting? Is parking nearby?
Part of the appeal is the floor plan, and part of it is decorating, as well. And equipment. And amenities… and on and on.
The topic of character as it applies to vacation rentals warrants an entire article by itself.
Improvements. Moving along to improvements or renovations, there are a different set of requirements here. You can’t renovate a place for short-term renting in the same way you would for a full-timer. Think more like a really high-end fix and flip but with concessions for the short-term rental nature of the operation.
The success of a VR is highly dependent on its “look.” There’s the obvious: a beach house should look like a beach house. And then there’s a wide array of properties that will have to be thought through more in order to ensure they appeal to the target travelers.
Regardless, look is important when it comes to marketing the property. Most people booking vacation rentals don’t have the luxury of seeing the place before they book. So the appeal has to come through in pictures in a convincing fashion.
Of course, the wrong look, photographed well, is still the wrong look. Sometimes you find a property in the right place, but there just isn’t any way to make it right for a vacation rental—at least not with a reasonable budget.
Related is how it’s furnished and decorated (colors, themes, etc.) and how it’s equipped. All of these things need to match the kind of traveler who is going to be visiting.
Another thing to keep in mind: how you furnish, equip, and supply a vacation rental also impacts how it will be managed and maintained.
Of course, it won’t need a lot of maintenance if it isn’t booked much. There are so many elements that must align!
So just how do you attract your guests? How do you market it? How do you price it? Who is going to handle bookings and how are you going to receive payment?
How will you handle guest communications, check-in, and check-out? What about cleaning and re-supply in between guests?
Now the differences in owning and operating this type of property are becoming increasingly apparent. Operating a vacation rental is not like operating a full-time rental.
The additional revenue is hard-earned! VRs require more attention. Marketing and pricing a vacation rental is another skill set you need.
New Resources Have Emerged
This may all sound daunting, but there are resources today to help. The market changes that led to so much growth in the short-term rental market have also led to the rise of a number of new businesses to help owners.
Property management companies of an entirely new breed have popped up over the past few years. These managers specialize in different facets meant to support vacation rentals.
Some used to be traditional property managers who have branched out and added services for vacation rentals. Others are online-only companies that possess the marketing know-how needed for vacation rental success. Still others fall somewhere in between.
There is healthy competition in property management for vacation rentals now, too. At this point, you can choose which set of services you need, and in any decent-sized market, there are likely several options.
On the legal side, many real estate attorneys now provide expertise in crafting a rental agreement or giving advice on the legal aspects of running VRs, as different cities, counties, and states have widely varying regulations.
Some companies specialize in the renovation, decoration, equipage, and staging of short term rentals. And of course, there are a host of online software offerings to manage marketing channels, online booking, and record keeping.
Finally, there are now specialized big-data companies, which gather millions or billions of data points to help you price your vacation rentals (much like hotels have been doing the past few years). They set your pricing based on your goals—whether you want to aim for high occupancy or high prices, or whether you want to fill up quickly or to book last-minute travelers at elevated price points.
There are even a couple of companies that are so confident they can provide better returns if you use their platforms, they will guarantee a certain level of revenue and pay you a check at the end of the year if earnings fall short.
Do you own vacation rental property? In your opinion, what skills do VR operators need that other real estate investors do not?