Thinking about investing in a vacation rental? Especially if you haven’t invested in real estate before, you might find yourself a bit discombobulated. There’s a lot to consider — and a lot of conflicting recommendations.
In 2009, I cofounded a technology-backed vacation rental management company. I’ve also personally invested in vacation rentals, so I’m familiar with the questions and concerns that buyers have.
Naturally, your priority as an investor is to land a property that will deliver healthy returns in exchange for minimal risk. Plenty of prospective investors look to vacation rentals as their first real estate investment vehicles, and many more focus on short-term rentals exclusively. Both are great strategies, as vacation rentals can deliver immense benefits whether you’re a veteran investor or not.
The two most common questions I hear are: Where should I buy? and When should I buy? Let’s answer those right now.
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Where Should I Buy?
Generally speaking, drive-to markets are more recession-proof than fly-to markets since driving a few hours is less expensive than flying across the country. In a downturn, families that previously would have flown to Hawaii may instead opt to drive a few hours to the coast. In fact, we founded our company in 2009, right in the depths of a recession — but our strong drive-to portfolio allowed us to thrive.
Unsophisticated markets — that is, markets in which the majority of vacation rentals are managed by individuals, rather than professional management companies — also represent a strong opportunity for prospective buyers. If you’re working with an experienced vacation rental management company, your property will have an edge over others in the market.
Finally, look for a friendly regulatory environment. Some communities enforce strict barriers to short-term rentals in their communities. Avoid those. The lower the barrier to entry, the sooner you can start making money.
When Should I Buy?
The vacation rental industry is highly seasonal: More people go to the beach during the summer and head for the slopes in the winter. You can recover a lot of your cost outlay if you time your purchase to take advantage of peak season in your area. Buy a beach house in January so you have time to get it up and running before June. Conversely, if you’re shopping in a winter market like Tahoe or Aspen, make your purchase in August or September.
This will give you time to make any necessary repairs or renovations, create a listing, and start building your home’s brand in advance of the busy season. Plus, sellers renting their vacation home are more strapped for cash during the slow season, so your offer is more likely to appeal to them.
If you’re purchasing a larger home, try to close an additional month or two before peak season. Vacation rentals that can accommodate more people usually have longer booking windows because most groups plan gatherings further in advance.
What Should I Buy?
Experts advise choosing a vacation property on the beach, near a lake or river, or near a mountain recreation area. A home that’s within a few blocks of a thriving urban scene is also worth considering.
Bear in mind that micro-location matters, too. Be on the beach, not near the beach. Breathtaking views and easy accessibility will make all the difference. And be sure to keep those breathtaking views in mind when positioning furniture and hot tubs.
Will your rental be accessible year-round? The hiking might be incredible during the summer, but if the road is impassable from November through May, you’ll miss out on a lot of potential income. That said, even if your home is situated in a place with “year-round” tourist traffic, be aware that crowds — and income — will always fluctuate with the seasons. Even attractions like Disneyland don’t have the same number of visitors every month of the year.
Think about how many guests the property can accommodate. Sleeper sofas and bunk beds add value to your home, as they’ll allow you to welcome larger groups of guests.
What Should I Do Before I Buy?
Once you have a sense of where and when you want to buy, make sure you understand the costs — in both time and money — inherent in owning and managing a vacation rental.
Interest rates on fixed payments are low right now, so lock in these rates while you can. I caution against adjustable interest rates because they’re riskier in the long run, no matter how attractive they may seem.
Related: How to Make Your Dream Vacation Home a (Profitable) Reality Now
You’ll need insurance for your vacation rental, and disaster insurance is usually pricier in vacation markets. I recommend working with a tax professional since owning a second home can complicate your tax situation. The good news is that many of your expenses will be tax-deductible.
You’ll also need to set up utilities; furnish and decorate your home; and coordinate housekeeping, yard work, and maintenance. A good vacation rental manager can also help take the hassle out of this process. Naturally, if your new property is already running as a short-term rental or if you bought it furnished (not uncommon among vacation home listings), you can skip some of these steps.
Instead, focus on improving the property. Upgrade the fixtures and the mattresses, install a hot tub, and bring in a sleeper sofa to accommodate extra guests and earn extra income.
A vacation rental makes a rewarding investment, both personally and financially. When your property isn’t earning money for you (and supporting local businesses and workers in the process), you can enjoy it with your friends and family. It’s truly a win-win.
What areas are you looking at for potential vacation rentals? Any questions about the vetting process?
Be sure to leave your comments below!