Vacation rental - how to begin?

Question

Not sure if this is the best forum to post this question or not but here goes.

In the "dream big" category, I am considering whether I can/should consider and/or pursue a property in a tourist destination.  The property is vacation rental listed at $3.2M with a 6% cap rate.  Info states that it brings in over $29K/month.  There are 3 rental units on the property - a 5 bed, a 3 bed and a 1 bed.

My limited experience to date is with residential SFHs.  I have the opportunity for a work related relocation to this tourist destination.  I am unsure how to begin my due diligence on this property without looking like a complete novice.  I would like to see the financial details so that I can get a better feel for the reality of this before I spend a lot of energy digging deeper.  Is it common to just come right and ask for income/expense information in the first contact on a deal like this or will that immediately flag me as an uneducated newbie in this aspect of real estate investments?  What is the best way to get this dialogue started realizing that making this happen is likely an extreme long shot?

Thanks!

Keith Courtney · Answer

Great information from Kim H. above.  To add a little bit more . . .

I would not be embarrassed at all about asking for financial data upfront.  I am involved with buying vacation homes here in Central Florida.  Each time I am looking at a new purchase, one of the first things I ask for are the expense numbers and rental income numbers.  Ask for numbers from the past couple of years and also ask for what is on the books for future rentals.

Don't forget to also analyze the property from an asset investment standpoint.  In other words is it not only a potentially good rental income producer, but also will it appreciate in value.  Are you going to be able to buy it a good price?

I hope this helps.  Good luck.

Account Closed · Answer

Hi @Burke B. I am not an expert investor, but I do have some experience, somewhat accidental, with a vacation rental.  We owned a vacation rental for about 6 years and I would say it was mostly a successful venture.

Yes, ask the sellers (or their listing agent) for the income and expenses for the last few years.   If you have a chance, I would also recommend talking with the neighbors.  Our neighbors ended up being the biggest "expense" for our vacation property.... they were crazy and didn't like living next door to a rental property so they did everything they could to make our tenants unhappy, although most ended up enjoying their vacations anyway.

I would also take a look at Homeaway.com and VRBO.com for other rentals in the area you are looking at.  Check out their rental calendars and call the owners and ask questions.   How often are they vacant?  How much do they charge? What are the other fees (security deposits, cleaning fee, extra guest fees)?  We found that we only rented our property from May to August, so we had an 8 month vacancy (although occasionally we would find a longer term tenant during the off months).   Try to find a year-round tourist destination.

Also, find out how the rentals in the area are managed.  We managed our own (had a resort lock on the front door so I could give an automatic code to the tenants upon arrival, which would lock out at check out) and had a fabulous cleaning lady.  You need to have reliable help, especially for cleaning, or you won't get good reviews and visitors won't rent again.  I think our cleaning lady was the key to our success!

You also need to check out the HOA, if there is one.   Make sure the property can be used for short term rentals.  Sometimes even the city ordinances prohibit vacation rentals.

The final thing I would mention is tenant screening.  You still have to follow fair housing, but you can prohibit parties, un-chaperoned students, weddings, etc. We had a rental agreement with so many rules that when ever someone finally signed it, we knew they were going to be good tenants and take care of our property.  We NEVER had anything missing or torn up at our property... and tenants pay in advance for vacation rentals, along with their security deposit, so that's a bonus!

Good luck and let us know if you end up purchasing!