6 Steps to Eliminate Risk When Investing in Vacation Rentals

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Jumping on the vacation rental bandwagon is tempting. After all, plenty of neighbors, friends and family members that you know are profiting from this organic travel movement.

But because the industry is so new, it lacks a vast gamut of resources, tools and services for serious investors — access that has been around in the residential and commercial real estate arenas for decades.

Fortunately for us, there are indicators that, when pieced together creatively, help form a much clearer picture of potential ROI and take most of the guessing out of your vacation rental investment.

6 Simple Steps to Eliminate Risk When Investing in Vacation Rentals

Step 1: Choose the Right Destination

Vacation rentals fall under the travel umbrella, meaning your success will be directly tied to local tourism trends. For this reason, it’s ideal to choose a city or town that attracts visitors from near and far, or one that’s on the development upswing. High and low tourist seasons will directly influence your bottom line, so be sure to narrow down your search to a region that is as forgiving as possible.

Step 2: Determine Market Supply

One of the strengths AND weaknesses for new investors in the the VR industry is that a small handful of platforms pretty much represent all the inventory in any given market. Knowing this — that all vacation rental properties in a given region will be listed on one or two centralized websites — makes research on supply pretty straightforward. Simply head over to VRBO (to learn more about how to rent your place and list for free on VRBO, click here), HomeAway (click here to list your place for free on HomeAway—only pay when you get a booking) or Airbnb.com and do a rental search for your area of interest. Immediately, you’ll get a list of all your potential competition, pricing and occupancy rates.

Step 3: Identify Market Price Points

Knowing what you know from Step 2 (above), begin examining the price per night of different and comparable homes to get an idea of the market average. Assuming you begin by charging a bit less than the average, you at least know the rate has been market-tested and traveler-approved.

Step 4: Identify Estimated Occupancy Rates

All the listing sites mentioned above also have live calendars for each property, where a traveler can see if the unit is available either tomorrow or six months from now. While the average occupancy rate of any given vacation rental can take a few minutes to calculate, this window gives us tremendous insight into what our own occupancy level (assuming we invest in a similar property) can realistically hit. Of course, properties in operation longer can have deceptively higher occupancy rates (thanks to repeat guests) than those just starting out, so be sure to check how long the owner/manager has been listing for closest predictions.

Step 5: Identify “Top-Selling” Features

Now that you have determined price per night and occupancy standards for your area of interest, you can begin looking at the features of the properties that appear to be most lucrative. Bedroom count is a good one. For instance, a 5-bedroom home at the beach may be much more profitable than a 5-bedroom home in a city center. Or if beach retreat area has very few 5-bedroom homes, this can be a market niche worth exploring.

Other features such as proximity to landmarks and beaches, pools and hot tubs, and luxury amenities such as plasma TVs can help you gauge what a successful vacation rental in that area looks like on paper.

Step 6: Project ROI

Armed with the knowledge of how much competition is on the market and how successfully they appear to be doing, an investor can pretty accurately project the return of a similar vacation rental property. Of course, successful properties take time, care and dedication to build out sustainably. Add in marketing and management costs, and you can get quite a good idea of whether the investment is a sustainable one.

Conclusion

Getting started in the vacation rental game can be a bit risky because the industry is so new and data trends are not well enough established. But being new to a market is also the time when profits and rewards can be at their peak.

Hack the transparency barriers by using the big listing sites as a litmus test as to what’s selling and for how much.

Then find your sweet spot and hit the ground running.

Are you in the vacation rental business? How do you gauge markets and competition?

Leave your tricks & tips below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.