How I’m Earning an 8% Cap Rate With My Vacation Rental

In 2014, I bought a vacation rental on the Oregon coast. In my first full year of ownership, I earned more than $35,000 in net rental income. Vacation rentals can be lucrative, headache-free investments, as well as amazing assets for you and your loved ones.

Here’s how I went about making my investment.

Where and When to Buy

When you’re looking for a vacation rental, focus on drive-to markets where housing prices are depressed or recovering slowly. Drive-to markets are easier and cheaper to get to, so they’re more recession-proof and more appealing for last-minute bookings. My property had been on the market for several months when I bought it, so the seller was motivated to accept when I offered less than the list price.

I chose a 3-bedroom, 1-bathroom house in Rockaway Beach, Oregon — about a two-hour drive from Portland. The oceanfront property includes a separate guest house and an additional undeveloped lot.

Keep an eye out for homes that can accommodate extra guests with guest studios, basement apartments, and in-law quarters. My two-in-one home makes an attractive vacation rental since the main house and the guest studio can be rented either separately or together. In high-demand periods, I can capture more peak revenue by renting the units separately.

Related: 6 Way to Impress Your Vacation Home Renters With Top-Notch Service

If your rental doesn’t have multiple units, you can increase the number of guests you can accommodate by adding fold-out sofas and bunk beds.

I put $100,000 down on the property and spent an additional $22,000 furnishing the home and outfitting it with appliances. This included a hot tub, the cost of which was amortized over five years. Adding a hot tub (which usually will run you $3-5K) was a priority for me since I knew it would help maximize ROI by allowing me to generate more bookings, justify higher nightly rates, and enhance guest experience.

Once a guest has decided to stay in a vacation rental, they typically begin narrowing their search parameters to find the best possible house for their needs. Amenities like hot tubs and fold-out beds and property features like ocean views help your home stand out in filtered search results. Allowing pets won’t cost you a dollar and expands your reach immensely.

Location, Location, Location

My vacation rental is right on the ocean, which was a key factor in my decision to buy it even though it made my insurance more expensive. As with hot tubs, many prospective guests filter their searches so that they only see oceanfront homes, meaning that non-oceanfront properties are essentially invisible.

Your vacation rental investment will be more successful if you educate yourself about the location, the market, and the costs involved before you buy. Consider proximity to local attractions — like a lake, a ski resort, or an amusement park — as well as to popular events. Convenience is a crucial factor when prospective guests decide which home to book. On that note, make sure your home is physically accessible in all seasons. If the road to your home is impassable during the winter months, you’ll miss out on a lot of potential income.

Be sure to gather real numbers on insurance and property taxes based on the home’s location (e.g., an oceanfront property demands higher insurance costs). I recommend talking through these variables with an expert, like a financial planner or a professional vacation rental manager before you sign on for costs that might be higher than you expect.

Show Me the Money

In 2015, its first full year in operation, my $410,000 Rockaway Beach house brought in more than $35,000 in profits. Here’s how I got there.

My rental generated $86,000 in gross rent in 2015. Of that, 35% went toward the management fee, which includes marketing, rate optimization, guest services, housekeeping, maintenance, and everything else involved in the day-to-day operation of a vacation rental. Working with a reliable management service saves you the hassle of those midnight calls from guests who’ve locked themselves out of the house or can’t connect to the internet.

A further $5,000 went toward insurance costs, including flood insurance, while repairs and supplies cost me $2,300. I usually recommend setting aside about 5% of your gross rent for these costs. Property taxes set me back $3,345, and utilities for 2015 totaled $5,287. I spent an additional $350 on lawn care in 2015 and $4,400 on furniture.

This left me with net rental income of $35,218 in 2015, with a cap rate of 8.6% after fixed and variable expenses (excluding interest).

My vacation rental investment has been successful in large part because I did my homework first. I bought while the housing market was still recovering, sought out a home with multiple units so I could accommodate extra guests, and added features like a hot tub to enhance guest experience. I also decided to allow pets in order to attract guests with four-legged companions, and I opted for an in-demand location even though it increased my insurance costs.

When people stay in vacation rentals, they’re paying for the experience, so your home should be optimized to provide the best experience possible. Investing with that in mind has resulted in a rewarding, recession-resistant asset that I can enjoy with my family and friends whenever I want.

If you’re investing in vacation rentals, where did you buy and why? What kind of cap rates are you seeing?

Let me know your experiences with a comment!

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