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Your Vacation Rental Investment: A Complete Walkthrough for Success
Are vacation rentals a good investment? In short, yes. In 2023, Airbnb hosts earned over $4.8 billion in rental income around the world, a 152% increase from the previous year. It’s clear that short-term vacation rental investments are can be a good way to make money in real estate.
Read on to discover the key to a successful vacation rental investment, as well as how to make the most out of your vacation home and maximize your rental income with iGMS.
Pros and Cons of Investing in a Vacation Rental
Short-term rental investing differs from typical commercial real estate investing. A traditional real estate investment offers a more stable, consistent income. A short-term rental investment, on the other hand, offers higher revenue and more room for growth and scaling. With good planning and relevant market research, anyone can reap the benefits of buying a short-term rental as an investment property.
As with any investment, especially those in real estate, buying vacation rentals has its benefits and drawbacks. It’s important to be fully aware of these pros and cons before taking the plunge and investing your money.
Pros
- More income: The most obvious benefit of owning a vacation rental is being able to earn an additional rental income. How much you can earn depends on your rental’s location (a more touristy area means a higher rate), as well as other factors like its amenities and your target guest. You are also able to adjust your rates so you can have increased cash flow during the holiday season and on weekends.
- You have a holiday home available for personal use: Another benefit of investing in vacation rentals is having your own vacation home that you can use any time. For example, you can use the home for any special events such as annual holidays, birthdays, or just to get away for a few days.
- Tax benefits: If you rent your vacation home out for at least two weeks per year, it is considered a business. This means that you can write off any costs related to your property management as tax-exempt business expenses when you file your annual tax return.
- Fixed investment and future retirement: When you buy an investment property to turn into a vacation rental, keep in mind that it’s also a fixed real estate investment that will grow in value over time. You have the option of selling the home at a later stage and cashing your investment or keeping it as a future retirement home.
Cons
- You have to manage the vacation rentals: Renting a holiday home out requires a lot more management compared to traditional renting. You need to oversee the cleaning and maintenance, respond to guest messages, and arrange check-in and checkouts. This can be time-consuming and can quickly become overwhelming if you own and manage several properties on your own. To counter act this, you might consider making use of a property management company.
- Expenses may pile up: There are a lot of costs to cover when owning and managing a vacation rental, and they can pile up quickly. Recurring costs include any listing fees and property management fees if you employ a management company.
Other fees include cleaning costs, maintenance costs from wear and tear, and restocking rental supplies. You need to make sure that your monthly recurring revenue is enough to cover these expenses, especially during the low season. - You need to market your vacation rental to find guests: It’s not enough to create passive listings of your rental property across platforms, you also need to market them. You can use social media to do this by creating business pages for your rental property on Facebook, Instagram, and Pinterest.
You should also create things like videos, slideshows, and walk-throughs for social media. Another must-do is to update your listings from time to time to improve your SEO and listing rankings on platforms like Airbnb. - Income may be inconsistent: It’s highly unlikely that you will earn the same amount of income all year round. A vacation rental property usually generates an inconsistent income due to it having a high season and a low season. It’s necessary to be aware of your rental’s seasonality so you can maximize your earnings during the high season.
Make Sure Your Vacation Rentals are a Good Investment
It’s important to know where to start if you want to invest in a vacation rental property, as it can be easy to jump the gun and dive into an investment that’s not quite right for you.
Finding success when buying a vacation rental will depend on a variety of factors. This can include the location, nearby attractions, seasonality, and the management strategy used for it. Consider the following before investing in vacation rentals:
What is a good ROI on vacation rental property?
If the vacation rental investment you are researching shows potential rental demand, you can begin to calculate your ROI and expenses. This means you need to calculate how much it will cost you to manage the property and how much you can earn from it.
A good return on investment (ROI) for investors in a vacation rental property is generally considered to be at least 10%. This benchmark indicates that for every $100,000 invested, the property owner or investor should expect to earn approximately $10,000 in profit annually. However, the actual ROI can vary significantly based on several factors, including location, demand, and operating expenses.
Factors that influence the value of your vacation home:
Location
When it comes to real estate the golden rule is location, location, location. The location of vacation rentals is one of the most crucial factors in determining their value. You can renovate and uplift a building, you can’t move your vacation home. It comes as no surprise that location should be the first thing you focus on when you start to look at potential short-term rentals to invest in.
You will need to decide if you want to buy real estate in a city, town, or the country. Then you can start to look at specific areas that have potential. Remember that while you should consider the cost, the rental still needs to be in a reasonably safe and attractive area to draw in guests.
Vacation rental demand
After identifying some potential locations, you can find out if they have any vacation rental demand. Keep in mind that vacation rental demand is not the same as residential real estate demand. Take into account the surroundings, access to transport, etc.
Also, consider the overall traffic and popularity of the area. Is it a year-round popular destination, or does it only get busy sporadically throughout the year? All of these elements can influence the the price and vacation rental demand of an area. It’s a good idea to review relevant market data of any location you are considering buying a vacation rental in.
High and low seasons
When it comes to vacation rental properties, the revenue you generate on them will be very dependent on the seasonality. A vacation home located near a lake or the beach is likely to attract more bookings in the summer, while one near a ski resort will be popular in winter. Owning a vacation rental means taking these into account and marketing and planning accordingly so that cash flow doesn’t stagnate.
Real estate in a busy city will likely experience a more even booking rate throughout the year. On the flip side, it will also likely face more competition from surrounding rental properties.
Occupancy rate
The occupancy rate is the number of nights a vacation rental is booked divided by the number of nights available. It’s in your best interest to invest in vacation rentals that show a higher potential occupancy rate. Things like the rental’s size, number of bedrooms, and amenities can potentially help to boost occupancy rate.
How do I calculate the ROI on my vacation property?
Calculating your ROI (return on investment) is a key step in evaluating potential properties to see if they’re a good investment.
To calculate the ROI for a potential investment property, follow these steps:
- Determine Total Investment: This includes the purchase price of the vacation home, closing costs, real estate agent charges, renovation expenses, and any other initial investments.
- Estimate Annual Rental Income: Research similar properties to gauge expected income from rent.
- Subtract Annual Operating Expenses: Calculate your net income by deducting all operating expenses from the gross rental income.
- Calculate ROI: Use the formula:
ROI=(Net IncomeTotal Investment)×100ROI=(Total InvestmentNet Income)×100
For example, if a home costs $300,000 with $50,000 in renovations, generating $30,000 in rental income and $10,000 in expenses, the ROI would be calculated as follows:
- Total Investment = $300,000 + $50,000 = $350,000
- Net Income = $30,000 – $10,000 = $20,000
- ROI = (20,000350,000)×100≈5.71%(350,00020,000)×100≈5.71%
Vacation rentals that positive cash flow are obviously a good investment. To make working this out easier, you can use an Airbnb calculator to help generate useful metrics relating to cost and potential rental income.
Use analytical software tools
Market data is essential to help you choose your vacation rental investments. By utilizing smart analytical tools to assist you in making data-backed decisions, you can rest assured that you’re making the best real estate investment. IGMS offers useful market insights that can help you ensure you make a good investment.
Create a business plan for your vacation rental business
It’s a good idea to take some time to draft a comprehensive business plan that covers every aspect of your rental business. After all, you are looking to make money on this. Start by answering the following questions to outline your short and long-term business goals:
- Where do you want to see the short term rentals business go in the future?
- How many properties do you want to own and in how many years?
- Will you manage all aspects of the business yourself, or will you hire a property manager to help you? Have you accounted for property management fees?
You can then work on planning things like your management structure, and customer, and competition analysis. Write everything down on paper to help you track your progress and stay on top of all of your business requirements.
Decide how you will finance the investment
With your business plan and goals mapped out, you now need to decide how you will secure financing to purchase your investment property. There are a variety of options available in the US, such as:
Cash-out refinance
If you have built up significant equity in your primary residence, you can use a cash-out refinance to invest in a vacation rental property. By refinancing a larger mortgage, you can take out the difference in cash and use it as a down payment on your rental property. To be able to do this, you will need to have a good credit score on your side.
Reverse mortgage
If you are aged 62 years or older, this might be the best option for your vacation rental investment plan. A regular plan requires you to pay back the loan in monthly installments. This option gives you access to the full amount and doesn’t need you to pay it back until you sell the property or move out.
However, keep in mind that the entire loan balance will be due once you make this decision. The mortgage interest owed will also continue to increase the longer the loan goes unpaid.
Home equity lines of credit
If you have adequate equity in your current property, you can choose to take a home equity line of credit to buy a vacation rental property. This option allows you to leave your current rate as is while taking on a separate mortgage with different terms and conditions.
You have the option to choose between a credit line with fixed second home rates or one with variable rates.
Traditional vacation rental financing
This option is the conventional path to financing a property, whether it’s used as a vacation rental or not. You can obtain financing for your vacation rental property by applying for a loan from a bank or credit institution. You may need to pay a down payment upfront and then pay the balance in monthly installments over the next 15 or 20 years.
How to Successfully Manage Your Vacation Rental Investment
Preparing your property to receive guests is just the first step to making your investment work to your advantage. Follow these to-do’s to set up your business for success: After you have set up your property to receive bookings, the real work to make your vacation rental investment a success begins:
1. Maximize your vacation rental business growth and scaling
No matter what your goals or challenges are, as a host or property manager, you need a cohesive property management strategy that will ensure all your business requirements are met while you can focus on business growth and expansion.
2. Identify your target guest
The first thing to do after setting your business up is to identify the type of guest that you want to attract to your vacation rental properties. You can use your property’s features to help you come to this conclusion.
Is your property near the beach or in a bustling part of the city? Is it an apartment or a 3-bedroom house? Make a list of everything your short-term rental offers, from size to surroundings, and this will help you identify your target markets and guests.
3. List your property on multiple platforms
Visibility is key to maximizing your bookings. To ensure your property reaches as many people as possible, you should rent the home out on multiple platforms. While Airbnb may be one of the biggest names out there, to make money you should cast a wide net. You may find that a certain platform brings you more bookings than others, but it’s still important to follow a multi-channel strategy.
4. Keep an eye on your competitors
You should also be keeping a constant eye on what your competitors are up to. Try to monitor their pricing strategy, cleaning fees, special deals and packages they offer, and marketing strategies they use. Thus, you will be able to ensure that what you offer is in line with your surrounding competition. If you don’t, they may end up receiving reservations that could have been yours.
5. Build your own website for getting direct bookings
Another way to reach new guests and increase your occupancy is to create your own business website to receive direct bookings. Having a business website formalizes your business in a more concrete way than just having listings.
You can include information about your property on your website, as well as additional photos, and links to your social media channels. Also, you will have access to guests’ data which will enable you to make them recurring visitors by means of vacation rental marketing. iGMS can make this simple with our website builder, so no coding experience is required.
Final Thoughts
Vacation rentals can be a great way to make money for wise investors. However, investing in a vacation rental property does come with unique challenges compared to more traditional real estate investments, and you may wonder if owning an Airbnb is still profitable.
But if you make sure to research and plan, you can ensure a good real estate investment and turn your short-term rental into long-term income. Ultimately, you can take control and leverage tools to make rentals a good investment for you.
About the Author
Phoebe Gunning is a content writer in the Marketing Department at iGMS. She is passionate about the vacation rental industry, notably helping hosts make the most out of their vacation rental properties and businesses. Some of her hobbies include reading, traveling and drinking a good cup of coffee.
