The Ins and Outs of Owning a Vacation Rental [Full Overview]

One of the major concerns that potential hosts have at the moment is if owning a vacation rental business is still lucrative in the post-pandemic world. The good news is that the future of the industry looks promising with occupancy rates already increasing.

Melanie Fish, a Vrbo travel expert, shares this optimism. Vrbo conducted a survey at the beginning of 2021, and the results revealed that over 80% of US families that participated in the survey have already made travel plans for the coming year.

One thing is clear – people’s desire to travel and (re)connect with family and friends is strong. So, if you are interested in buying a property and transforming it into a vacation rental, you can rest assured knowing that you have a target audience of hungry travelers ready to take to the road.

Is Owning a Vacation Rental Profitable?

With the right property and strategy, you can generate a steady stream of income and charge higher rates than traditional long-term renting. According to data that Earnest, a technology-enabled fintech lender, gathered, Airbnb hosts, on average, can make more than $900 per month.

Moreover, their data also showed that some hosts make more than $10,000 per month. So, there is the potential to earn much more than the average monthly income.

With regards to the average nightly rate, iPropertyManagement’s data estimates that vacation rental owners can earn on average $185 per night. However, other data suggests that the average nightly rate can be as high as almost $1,000 per night for a family-sized rental.

At the end of the day, the potential to turn your property into a profitable large-scale business is definitely there. If you know where to buy and how to market it to the right target audience, you can enjoy all the benefits that owning vacation rental properties can offer.

What Are the Pros and Cons of Owning a Vacation Rental Property?

While owning a vacation rental property is a pleasant experience more often than not, just like with most things in life there are cons that you need to take into account as well. So, if you are considering investing in a vacation rental property, here are the main pros and cons that you need to weigh up.

Vacation Rental Investment: Pros

1. More lucrative than traditional real estate investing

Compared to long-term rental properties and traditional real estate investing, vacation rentals can generate bigger revenue. Not only are guests willing to pay more for a well-furnished vacation rental, but hosts can also adjust their pricing throughout the year.

This way, they can take advantage of high-season prices and special occasions like festivals, sports tournaments, and business expos.

What is more, hosts also have the opportunity to offer extra services at a fee. From transportation to laundry services, there are many different types of services that your guests will be only too happy to pay for as an add-on.

2. You’ll be able to use your vacation home for your personal getaway

From time to time, you will also be able to use your property for your own getaways or special events like a family reunion. While this should not necessarily be your main goal for owning a vacation rental, it is an attractive advantage nonetheless.

Depending on the location, your vacation property could also possibly become your retirement home down the line, making it a valuable fixed asset for your portfolio.

3. More control over your property than with traditional renting

By going the short-term rental route, you will have more control of the condition of your property, its availability, and the rates. As you have not signed a long-term contract, it is much easier to block a weekend for yourself or increase the rate over weekends.

Moreover, while more turnovers mean more work, it does give you the opportunity to inspect your vacation home regularly. After all, a stitch in time saves nine!

4. You’ll be able to take advantage of tax write-offs

Running a vacation rental property also presents some tax benefits. While you will have to pay taxes, you can also deduct property-related expenses if you’ve been renting out your vacation home for 14 days or more in a year. From hosting fees to utility bills, there is a long list of expenses that you will be able to write off.

Vacation Rental Investment: Cons

1. Property management is not a walk in the park

Owning a vacation rental requires your continuous attention. For every guest, you need to ensure that it is clean and everything is in working condition. Also, as the chances of wear and tear are higher, it can require more maintenance than a traditional real estate investment.

2. You might have to deal with difficult guests

While Airbnb puts certain measures in place to help you screen your potential guests like verifying IDs, from time to time, you might have to deal with a difficult guest. This can lead to property damage or tarnish your relationship with your neighbors.

On the bright side, you won’t encounter problematic guests often. Moreover, to prevent difficult guests from staying at your rental, you can consider charging a security deposit or asking your guests to sign a vacation rental agreement.

3. Rental income might be irregular

As mentioned earlier, short-term rentals are generally more profitable than long-term rentals, but you will have periods when your occupancy rate and income will be lower. It is not a secret that vacation properties are susceptible to seasonality.

Therefore, you should research how seasonality may impact your business before you buy a property in a specific location. You should learn when your high season is so that you can make the most of this period.

That being said, it is not always the case. For instance, if a property is located in an area that is popular all year round, it can generate profit consistently.

4. Expenses will be higher than with traditional renting

Investment property loans generally have higher interest rates than usual mortgages. They also require bigger down payments than your primary residence. So, you will have to pay more to finance a short-term rental property.

In addition, as the property needs to be furnished and look pristine, there are also other extra expenses a short-term rental owner might face. To ensure your property produces a positive cash flow, you should take into account the following expenses associated with vacation rentals:

• Utilities
• Property management fees*
• Occupancy taxes
• Cleaning
• Maintenance
• Supplies
• Short-term rental insurance premiums (which are usually higher than homeowners insurance)
• Kitchen utensils and appliances
• Wi-Fi
• Towels
• Bedding
• High-quality furniture
• Decor

*If you want to lower your expenses, you do not have to hire a property manager. A property management company can charge quite a pretty sum.

In fact, depending on the location of your property, you can expect to pay as much as 40% of each booking to the property manager. Instead, you can manage your Airbnb on your own. While it can be time-consuming, it will also give you more flexibility and control.

Buying a Vacation Rental: How to Find the Best Opportunity for Your Vacation Rental Investments?

Considering the financial and personal advantages a vacation home has to offer, it makes sense why it is regarded as such a good investment. However, much of its success hinges on the work you put in before buying the property.

Unlike your own vacation plans, buying a vacation home for renting out is not a purchase you can make on a whim. Not only should you research the market, but you should also give thought to the financial implications of buying that specific property.

1. Start with the market research

Before you worry about which new expenses you will have and how to finance them, you need to familiarize yourself with the property market. There are several aspects to pay attention to when starting with your market research. The following are the most important factors to get the house-hunting underway:

• Location

Location is the most crucial factor for travelers. So, it makes sense that it should be equally important to you. Proximity to amenities and attractions is key.

Depending on the type of traveler that you wish to attract, an apartment downtown, a property within walking distance to the beach, or a rustic cottage tucked away behind rolling hills will yield better occupancy rates. In short, the location of your property should offer some type of appeal to a specific group of travelers.

• Seasonality and demand

Some locations attract traffic all year round, while others are only busy at irregular intervals during the year. This will impact the demand, and, ultimately, your earning potential. If you prefer a more predictable demand, it is best to focus on urban locations.

Regardless of if you are comfortable with seasonal demand or not, you should take a look at relevant market data of the location to find out what the actual vacation rental demand is like.

• Local laws and short-term rental regulations

Depending on where you decide to buy, there will be local laws and short-term regulations to consider. It is crucial that you carefully study these before you purchase a property.

Also, depending on the type of property you are interested in, you might have to familiarize yourself with HOA rules. These regulations can, for example, impact how often you may rent out your property and you can be fined or taken to court if you ignore them.

• Target guest

If you prefer to host bigger groups over couples or individuals and vice versa, certain features will be more crucial than others. For example, families with kids will appreciate a garden, while honeymooners will value panoramic views.

Not only will the features of the property and its location determine to whom you can market it, but also its furnishings. For example, if you want to attract workationers, the property needs to have room for a comfortable workspace.

2. Estimate your potential expenses and ROI

Once you have identified a property in a location that has enough vacation rental demand and host-friendly regulations, you can start to work out its potential return on investment and identify possible expenses.

Expenses can affect your bottom line. Therefore, to ensure profitability, you need to estimate your expenses vs. potential revenue before you take the plunge of purchasing a vacation home.

You can then add up how much you will need to generate per month for your income to be equal to your costs and what you need to make to earn a profit. This will help you to eliminate properties that are simply not worthwhile investments.

3. Employ analytical tools to make data-driven decisions

It can be difficult to put your personal preferences aside when you are searching for a property that you can use as an investment. This is one of the reasons why gathering data about the market is a key step.

As the data is objective, it will help you identify the investment opportunity that makes the most financial sense. Luckily, there are several analytical tools, such as AirDNA and Mashvisor, that you can use to help you choose the best property.

AirDNA offers vacation rental data, such as rental demand and annual revenue, on millions of rentals across the world. Mashvisor can also help you with market research. With the help of their powerful search engine, you can gain more information on decisive factors such as the average occupancy rate and potential return on investment.

4. Consider how you are going to finance your investment

In the United States, you have a range of options for financing your property. In addition to traditional vacation rental financing, you can also use cash-out refinance, reverse mortgage, and home equity lines of credit.

• Traditional vacation rental financing

This is the standard way that most people finance their real estate investments. By going this route, you will apply for financing for your vacation rental property via a credit institution or bank. If the application was successful, you will make an initial payment (your down payment) and then repay the rest of the loan in monthly installments over a period of 15 or 20 years.

• Cash-out refinance

If this is not the first property that you will be buying and you boast a good credit score, cash-out refinancing is a reasonable option. With this approach, you will refinance a bigger mortgage. You will then take out the difference in cash and use it as a down payment on your new vacation rental property.

• Reverse mortgage

Reverse mortgages are more suitable for elderly property owners older than 61. Unlike a regular mortgage, you will still get access to the full amount, but you do not have to pay monthly installments. Instead, you will pay back the loan when you move or sell the property.

One major drawback of this approach is that the outstanding mortgage interest will continue to increase. This means that if the loan goes unpaid for longer, the entire loan balance will be higher as the interest will be more.

• Home equity lines of credit

Homeowners with sufficient equity in their current property can also use a home equity line of credit to purchase a second vacation rental property. This way, the current mortgage rate will remain unchanged, while a separate mortgage with different Ts & Cs will be taken out. You can then decide between a variable mortgage rate or a fixed one for the second home mortgage.

How to Set Up Your Short-term Rental Business for a Long-term Success?

1. Streamline your hosting operations with vacation rental software

Vacation rental software is a type of PropTech (short for property technology) tool that helps hosts and property managers to manage their vacation rentals conveniently via a single platform. With the help of automation, you can adjust your properties’ availability, reply to guests, automate cleanings, and a lot more.

It does not matter if you have only one property or a bigger portfolio, vacation rental software helps you to save time, money, and energy. All in all, it makes it easier to reach your business targets.

For example, iGMS, one of the leading vacation rental software solutions, can help you with a long list of routine tasks, such as:

• Managing multiple accounts and listings on the top OTAs from a single interface
• Synchronizing reservations across multiple platforms to eliminate the risk of double bookings
• Organizing messages into a single feed with a unified inbox
• Processing payments securely via integration with Stripe.
• Creating essential reports on your business results within minutes
• Adjusting your pricing in a smart way through integrations with PriceLabs, DPGO, and Wheelhouse

Sign Up Now

2. Use dynamic pricing

As mentioned earlier, one of the major advantages of investing in a vacation rental property is that you can change your pricing more often in response to seasonality and other factors. To make the most out of this, you need to go beyond setting different rates for your low and high seasons. This is where dynamic pricing enters into the picture.

In short, by using dynamic pricing you can rest assured that your listing’s pricing changes in real-time in response to different fluctuations in the market. So, if there is even the slightest change in demand and supply, events in the area, etc., this pricing strategy will ensure that your rates get adjusted for maximum revenue.

Needless to say, dynamic pricing is not a strategy that you can apply manually. You will need the help of a third-party tool. Luckily, there are several reliable dynamic pricing tools available today. The most popular tools are those that offer integrations with vacation rental software solutions.

This way you can automate your routine tasks and set the optimal nightly rates conveniently. For example, if you are using iGMS, you can use DPGO or PriceLabs to ensure your pricing remains competitive without you having to do the math yourself.

3. Advertise your property on multiple platforms

In this industry, a multi-channel strategy works better. By listing your vacation rental on several booking sites, you can increase your exposure. This, in turn, will help to improve your occupancy rate and potential income.

Airbnb, Vrbo, and Booking.com are the three main platforms where hosts can list their properties. While you will likely find that you have more success with one of these platforms than the others, it is still better and safer to list on multiple platforms to avoid placing your valuable nest egg in only one basket.

Airbnb

Airbnb is arguably the most popular and well-known platform. It is particularly suitable for properties in popular urban areas. Also, compared to other vacation rental sites, Airbnb is better known for offering unique accommodation, making it a firm favorite among millennial travelers.

Vrbo

Vrbo is better suited for more traditional accommodation that is geared towards families and bigger groups looking to book a longer stay. Unlike Airbnb, you may also not list shared accommodation on its platform.

Booking.com

Booking.com remains one of the most popular online travel booking platforms. Boasting more than 28 million listings across the world, it attracts millions of daily visitors.

Generally, it is most popular with more mature travelers who value convenience and location. While the setup process is more intricate, it is still a good platform to expand to, especially when you consider all the site traffic it gets.

4. Get to grips with vacation rental marketing

Even with a multi-channel listing approach, you will still need to pay attention to additional marketing to ensure the success of your vacation rental business. After you have created a listing that stands out, you can reach out to your target audience via vacation rental forums and social media.

Some hosts have also had luck by working with lifestyle bloggers or influencers. For example, by allowing them to stay at your property for free, they, in turn, can create and share content with their followers on social media.

5. Build a network of contractors to outsource regular tasks

Even if you will not be operating your property remotely, a reliable network of contractors is indispensable. With cleanliness becoming more vital to guests, it is better to outsource this regular task to a team of professionals that are knowledgeable about hygiene standards.

A network of contractors will also be able to help you with repairs and general maintenance. This type of work usually requires specialized knowledge and skills that you likely won’t have. Even if you feel comfortable with some of these tasks, in some instances it will require immediate attention which you might not be able to do.

6. Create your business website to get direct bookings

While platforms like Airbnb, Vrbo, and Booking.com are convenient, many hosts choose to create a business website as well. In fact, direct bookings are becoming increasingly popular among travelers who are searching for a more personalized experience. So, instead of booking via a platform, they are more open to the idea of contacting the host directly.

Moreover, your own business website offers you another way that you can reach your target audience. By including links to your social media channels, your business appears more professional, without losing the personalized touch.

The best news is that creating your own business website does not have to be more work. For example, with the help of the direct booking widget of iGMS, you can receive bookings through your business website and manage them as regular bookings. Moreover, thanks to the integration between Stripe and iGMS, you will also be able to receive payments for direct reservations.

Automate Now