Are you looking for an amazing investment opportunity that isn’t completely at the whims of a fluctuating stock market?
Consider a vacation rental investment.
Owning a rental property can offer huge financial rewards.
It’s crucial though that you first know both the ins and outs of managing such an opportunity.
Can You Afford to Invest?
Before you take the plunge, be sure that you’ve got the capital at the onset.
You can expect a down payment of at least 20% of the rental property’s purchase price. So unless you’re flush with capital, you’ll want to be sure you meet the eligibility requirements for a loan.
At a minimum, you’ll be expected to be able to cover the monthly mortgage with rental income left over. Keep in mind that you’re responsible for paying the mortgage regardless of whether your renters paid you.
Factor in All Expenses
You need to consider both your annual and one-time expenses. To determine these, ask yourself the following questions:
- What are the projected vacancy costs (typically 5 -10 % of the annual rent)?
- Which utilities will the renter be required to pay (if any)?
- How much will you have to pay for property and liability insurance?
- What are the real estate taxes for that area?
- Will you need to pay for a management company?
- How much can you expect to pay for professional services including accountants, and attorneys?
- What should you allot for potential repairs?
- Are you in compliance with lead paint and asbestos regulations?
Once you’ve decided what to charge for rent, calculate the annual return you can expect from your property. This figure is determined by dividing the net income by expenses.
The result is your capitalization rate. If you’re looking at a healthy figure, you may want to consult an accountant to figure out the next steps.
The Benefits of Owning a Vacation Rental
With the introduction and wild popularity of platforms like Airbnb and VBRO, millions of people have taken to owning vacation rental properties.
There are definitely some attractive perks.
1. Extra Income
If your property is in a particularly hot spot, you can make some serious money on rental platforms.
Though most people have heard of Airbnb, other platforms are gaining in popularity. You can also use HomeAway, Booking.com, FlipKey, HouseTrip, and Kid and Coe are just a sampling of the dozens.
If you rent your vacation property for more than two weeks, it’s considered a business for tax purposes. So even though you’ll have to pay taxes on the income it brings in, you’ll also be able to write off a lot of the expenses.
Almost any expense incurred as an “ordinary and necessary” cost of doing business can be deducted. This includes cleaning costs, insurance premiums, property management fees, mortgage interest, and hosting fees charged by Airbnb and other platforms.
There are additional deductions. Your financial advisor or accountant can help you to maximize them.
3. Your Own Vacation Getaway
When it comes time for you to take off on vacation, you’ve already got a destination. And you get first pick of the times.
Since it’s your property, you can use it for whatever purpose you choose. So consider buying property in an area that you’ll want to visit more than just once per year.
4. Nest Egg/Future Retirement Home
If you properly invest the extra income you make from your vacation home, you’ll build long-term wealth that will help you ease into retirement.
When it comes time to sell it, you can use the money to help cover any costs you incur during retirement. Or you may even decide to keep the property and call it your new home.
Whatever the case, it’s a win-win situation.
The Challenges of a Vacation Rental Investment
Beyond the silver lining, there are a few hurdles and drawbacks to consider.
For many, these are easy enough to handle. But it’s important going into it to know the work involved.
1. Compliancy With Rental Regulations
Thoroughly research the area where you wish to buy your vacation rental property. Be sure to study the local rental policies before making any moves.
Many areas have strict regulations around rentals. This is especially true for short-term rentals.
While you may need to get a license in order to operate your rental property, other communities ban short-term rental activity altogether. For those who do allow it, you’ll need to be familiar with the rules about how long or often you can rent it.
A good place to start to determine if this will be an issue is with the city’s building committee and any HOAs in the neighborhood.
2. Managing the Property
There are two options when it comes to property management.
You can either take on the management yourself, or you can hire a professional property management company.
If you’re doing it yourself, you’ll need to live near the property. Anticipate the time and cost of cleaning, prepping, and restocking the property between every guest.
Hiring a professional property management company will free you from these duties. But they’re far from free. Expect to pay a sizable fee for a good company.
3. Finding and Marketing Guests
Obviously, you can just sit back and wait for guests to flow into your property.
On top of listing your home on rental platforms, you’ll need to optimize those listings so they’re getting to the right audience. Be sure to price the property appropriately for the market it’s in.
Also, to continue to draw guests, keep up with furnishings and decor that are on-trend. Many vacationers will veer away from properties that look dated.
Finally, be prepared to offer discounts during seasonal lulls. A lowered income for a few weeks here and there is better than no income at all.
Are You Ready to Invest?
As long as you know what you’re doing, you could make a significant income from your vacation rental investment.
So if you’ve got your finances in place and are ready to start looking, contact us today. We’ll help you find the perfect vacation property to fit your needs.