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4 Steps to Make a Vacation Rental Property Pay for Itself
Key Takeaways
- You can recover your upfront investment costs in a vacation rental property in as little as 3–7 years.
- Don’t buy a property before conducting short-term rental market research, and there are tools available to help with this.
- Airbnb and Vrbo are good for visibility, but direct bookings give you full control over pricing and branding.
Purchasing a home is one of the most significant debts anyone can take on. Yet, if done correctly, a vacation rental property investment can cover your mortgage payments and set you on the path to financial freedom.
Vacation rental income is actually predictable when you calculate it correctly. Owning a vacation rental property is one of the most accessible ways for people to make extra income or turn it into a vacation rental business.
Property investment enjoys historical stability, especially during times of economic uncertainty and high inflation.
Why Turn a Second Home Into a Vacation Rental
A second home that sits empty most of the year is like a car parked in the driveway that still needs insurance, registration, and maintenance. It's just a liability.
And the value can also depreciate when a property is not in active use. As a vacation rental host, you can write off depreciation for an Airbnb or vacation rental for the period the property is rented.
But you generally cannot depreciate a property that sits empty and is not held out for rent. (Ask your financial advisor how to use tax deductions.)
Besides, 45% of the property owners said they purchased a second property only to generate income by renting it, according to Hotel Tech Report.
Many vacation property owners use rental income to pay off mortgage interest or increase savings in their retirement accounts.
How to Make a Vacation Rental Pay for Itself?
Ultimately, the vacation rental industry differs somewhat from real estate.
A traditional real estate investment offers a more stable, consistent income. On the other hand, a short-term rental investment provides higher profit margins and more room for growth and scaling if you use your investment equity to add more properties.
With good planning and relevant vacation rental market research, anyone can reap the benefits of buying a vacation rental property.
How Fast Should a Rental Property Pay for Itself?
Starting a short-term rental business requires a significant upfront investment, but with proper planning, you can recover your costs within 3–7 years, according to financial planning experts at Dojobusiness. This is shorter than general real estate investments, where the typical timeline is 5–10 years.
The payback period depends heavily on your mortgage and many other factors that determine STR success, including market demand, location, and the marketability of your property.
Start with these investment steps to make more money from your property:
1. Research the Location Before You Buy
Whether you purchase your second home or investment property, have clearly defined property management goals. That includes buying in an area suited to short-term vacation rentals.
You will need to decide if you want to buy a property in a city, town, or the countryside.
Then you can start to look at specific areas that have potential.
Remember that while you should consider a property's cost, the property still needs to be in a reasonably safe and attractive area to draw in guests.
Use real estate investing tools to find the ideal vacation rental property.
Real estate investing tools eliminate the need to do manual market research. Notable market research tools are AirDNA, Mashvisor, and Alltherooms.
A dedicated tool will allow you to identify the best places to buy a vacation home, backed by data, to ensure you make the best vacation rental investment.
Pro Tip # Don’t Ignore Local Regulations
Before buying a property, research short-term rental regulations carefully. Some cities and regions enforce much stricter STR rules than others.
You’ll likely need a permit to operate legally. To avoid headaches later, better focus on areas that don’t cap short-term rentals or impose heavy restrictions.
2. Run the Income and Expense Figures
As a vacation rental owner, you need to establish a good profit margin for your vacation rentals to reduce the period you'll need to pay off your mortgage.
Things like HOA dues, utility bills, snow ploughing, maintenance and property taxes can be additional expenses that need to be paid.
How to Calculate Cash Flow
Before investing in vacation rental properties, you need to understand how cash flow is calculated.
The formula is relatively simple and merely requires an accurate representation of income and expenses.
Cash flow formula:
Airbnb Cash Flow = Gross Monthly Income - Total Monthly Expenses
Here is what you need to determine:
Gross rental income: This is the total sum of rental payments you receive from your tenants and guests + any other source of extra income from the investment property.
Operating expenses: These are the costs of operating a vacation rental property, usually calculated monthly. We discuss these expenses in more detail below.
It's also useful to know these metrics when gauging profitability of your investment:.
Capital expenditures are the one-time expenses that the real estate investor incurs at the start of the venture such as major renovations and upgrades or buying furniture.
Cash-on-cash return is a metric that shows how much actual cash profit your STR generates compared to the cash you invested.
Consider what you’ve invested upfront when estimating profitability.
List All Operating Costs
Here are some critical income and expenses considerations to include when working out your budget:
- Management fees
- Property maintenance
- Repairs, cleaning, and year-round maintenance
- Insurance and taxes
- Accounting fees
- Marketing and paid advertising
- Appliances and supplies
- Furniture
- Vacancy periods
Maintaining a cash reserve of 3-6 months of operating expenses is advisable for managing unexpected costs.
Many property owners manage their property themselves, which can drastically lower management fees. You may be only paying a cleaner and occasional maintenance and repairs.
Pro Tip: Use the tax advantages that come with vacation rentals
Vacation rental properties come with several tax advantages that can help boost your returns.
If you rent out your second home for more than 14 days a year, you are eligible to write off some, or all, of your rental expenses.
You are eligible for tax deductions on expenses like repairs, maintenance, and mortgage. Be sure to ask a tax advisor to make the most of these benefits and ensure you stay compliant.
3. Develop a Pricing Strategy
Your pricing strategy can hugely impact your vacation rental's booking calendar and the overall profitability of your home.
It would help if you offered more value than your competitors to win over new guests.
Research and analyze listings in your area to see how they compare to your rental in terms of:
- Property size
- Location
- Amenities
- Reviews
- Cancellation policies.
Reference all the advantages and unique features of your vacation rental to attract future guests.
Most importantly, you want to avoid vacancies and incentivize guests with discounts on length of stay.
But don't run the risk of applying aggressive minimum stay rules. Industry data shows that travelers are looking for flexibility, and potential guests could overlook your listing for one that seems easier to book.
Pricing your vacation home correctly during the different seasons is one of the quickest paths to higher overall performance. Dynamic pricing strategies are recommeded for vacation rental homes. It means adjusting prices sligtly based on demand and seasonality.
4. Market Your Home Strategically
As a host, you might wonder where to list your investment property for the best results.
The rule of thumb is to list on the top vacation rental sites to maximize audience reach and exposure to travellers looking for a stay.
For instance, Airbnb and Vrbo are two of the top trusted vacation rental sites.
List on Airbnb
Airbnb has the largest community of vacation rental hosts and offers over 8 million listings across 240+ regions and countries worldwide. Airbnb has the best brand recognition among hosts and guests in the short-term rental market.
List on Vrbo
Although Vrbo has a lot in common with Airbnb, there are some major differences. While you can list different properties on Airbnb (including shared rooms, cabins, beach houses, and treehouses), Vrbo only allows hosts to list private spaces. If you have a spare room to rent, keep in mind that you can't advertise it on Vrbo.
Other Ways to Market Your Vacation Rental
Niche platforms
These are specialized vacation rental websites that target specific traveler types or interests. For example, Plum Guide caters to luxury stays, Kid & Coe focuses on family-friendly homes.
Direct booking site
Your own website allows guests to book directly, avoiding platform fees and giving you full control over pricing, promotions, and branding. You can make a direct booking website with iGMS at no additional cost.
SEO (search engine optimization)
Using the right keywords and the right signals to ensure your home and your direct booking website are well represented on search engines.
PPC (pay-per-click) ads
These sponsored ads appear at the top of search results, targeted to appear when your guests search for precise keywords.
Display ads
You know those banner ads that follow you around the internet? You can opt for those too.
Facebook ads
When we know a guest is looking for homes in your area, a pic of your beautiful property could end up right in their newsfeed.
Organic social
Your unique homes can be featured on soical media, reaching hundreds of thousands of interested travelers.
How PMS Helps Vacation Rental Owners and Property Managers
Don't let managing multiple listings eat up all your time. To maintain full control over your business, consider using vacation rental software.
A solution such as iGMS has integration with Airbnb, Booking.com, and Vrbo and allows you to manage all the major aspects of your business hassle-free.
With iGMS, you can:
- Synchronize your bookings on different OTAs and manage them via a single dashboard
- Automate cleanings, set tasks, and manage your team efficiently
- Automate guest communication and get all your messages displayed within a unified inbox
- Create a professional direct booking website in minutes
