A short-term vacation rental property can be a very profitable investment. However, careful consideration and serious research should be done prior to embarking into this endeavor, in order to avoid some costly mistakes. Most importantly, find out if owning a short-term vacation rental is right for you. Once you know you can do it, focus on making it happen so that you can enjoy the rewards of a profitable long term investment.
There are five initial steps that you will need to take in order to find a profitable vacation rental property:
1.- Establishing Your Budget
Knowing what your budget is prior to starting the long process of searching and researching is critical. At this initial stage you will need to determine what type of financing you will be using and be pre-approved for a mortgage. Keep in mind that most traditional lenders do not lend for short-term vacation rentals, only for long term rentals. So you will need to take that into consideration. The type of financing can come from the following sources:
- Mortgage to Purchase a Property: Most traditional lenders won’t lend for short-term vacation rental properties, because they require at least 1 year of rental income from short term rental. There are some lenders in the market that do offer financing for these purpose, but interest rates may possibly be higher than conventional as well.
- Take a cash-out refinance on current property: Taking out the cash for the purchase of your vacation rental from the the equity of your existing home is a good option. Mainly because the mortgage rate for primary residence is the lowest, which in turn means that you will be able to get a higher return from your investment.
- HELOC: This option allows you to take cash out of your home, but it may be a lot more risk involved because rates are adjustable.
In addition, your source for purchasing a property may come from the sale of another property. If are doing a 1031 exchange, be sure to watch this video on “1031 Exchange Tips for Reinvesting in Short-Term Rentals.
Disclosure: There are some affiliate links below and made commissions for purchases made through links on these posts, but this are all products that I highly recommend. I won’t put anything on this page that I have not verified or personally used.
2.- Research the Area
There are many factors in an area that are very important to consider:
- Restrictions: Typically if you are buying within the city limits of an area, there is a good chance that the city may not allow new applications to start a vacation rental, or have some kind of restriction. Therefore, you will want to make sure that you contact the city to find out whether that is the case. In order to avoid investing in an area that either has restrictions or any kind of entry barrier, try looking for traditional vacation home areas. Specially those closer to National Parks, State Parks, Beach, Rivers, Lakes, Ski Resorts or other popular attractions.
- Market Saturation: The city or county should be able to tell you how many vacation rentals are in a certain area. But you can do some of this research yourself, by simply searching on the travel platforms available for short-term vacation rentals such as: Airbnb, VRBO, Booking & Expedia.
- Check out Competitors’ Calendars: While you are checking out your competition on the travel platforms, take a look at their calendars. Are they booked in a consistent basis? check out what part of the year is the most popular (seasonality).
- Finding Tourism Data: Finding tourism data for the particular area you are planning to invest on is key. By analyzing tourism data, you will also be able to determine seasonality so that you can set budget accordingly.
- Pricing Tools: There are a couple of great pricing tools available to help you in your research. I highly recommend AirDnA for getting a good idea as to how you should price your vacation rental. I also recommend Mashvisor for obtaining information on market insights for the property you are planing to invest on.
- Check out Competitors Nightly Rates: As you are checking your competitors’ calendars, take a look at their nightly rate and compare it with the amount of days that they are actually booked. Also, if you do an initial search on a travel platform site such as AirBnB without any dates, you will learn what the base nightly rate is. Then compare it to the nightly rate for a particular date and if the price is more than the base rate then it’s a good indicator that there is higher demand for the days that you have chosen or less demand if vice versa.
- Estimate Your Expenses: Aside from your Mortgage payments, taxes and insurance, you will be responsible for utilities, internet service, furnishing, supplies such as bedding, towels, toilet paper, coffee, dish soap, hand soap, yard work, etc. These expenses impact your bottom line. Please see the AirBnB Check list of Must-Haves that I recommend and currently use on my vacation rentals. For a short-term vacation rental income statement spreadsheet to track your expenses and calculate a Cap Rate, click here.
4.- Hire A Real Estate Professional
An excellent real estate professional will help you get the most for your money and negotiate with the sellers the best terms for your particular situation.
- Set a budget aside for repairs/upgrades (or ask the seller to do some of them prior to closing): Within the terms of an offer, your agent may advice to ask the seller to fix certain things prior to closing or a credit in lieu of repairs. This is common practice. Although in a seller’s market, this can be a little more difficult to accomplish, but it can still be done. If you end up having to offer more than asking price, the repairs can be requested within the offer for either the seller to split the cost or cover the whole amount.
- Set a budget aside for furnishing and initial supplies: If you can purchase a home completely furnished, more power to you. However, planning ahead by setting a budget aside for new furnishing and initial supplies can go a long way.
5.- Prepare the Property
Once you purchase the property, you will need to follow these five tips so that you can be well on your way to making money on your vacation rental:
- Tackle any repairs needed: Whether you do it yourself or hire a contractor, you will want to make sure that you get any repairs or remodeling done before you place your vacation rental on all the travel platforms. Because your home will not only show better, which means that you can charge a higher nightly rate, but you won’t have to inconvenience your guests or block dates for repairs, which means less income.
- Stage your Home for Success: You will want to make sure that you properly stage your home for success. Timeless furniture will have the best impact. Mid-century modern furniture has the best appeal. You can mix some vintage and modern furniture for a more welcoming and timeless setting.
- Make Use of Smart Devices
You will want to make sure that your guests can easily check in and out with a keyless smart lock. I highly recommend the Schlage Encode Smart Wi-Fi Deadbolt, which I use for my vacation rentals. They come with an app, so that you can assign a code to each guest. I like to assign the last 4 digits of the guest’s phone number. The code can be set for only the time that the guest is booked for. In addition, a video camera for your front porch is highly recommended as well. I like the Ring Spotlight Cam Battery HD Security Camera with Built Two-Way Talk and a Siren Alarm, because you can see, hear and talk through it. It’s a good way to create a layer of protection for your guests and your investment. Finally, a lot of homeowners like to use a Google Nest Thermostat to monitor heat and AC. We all know how expensive the energy bill can get to and often times guests forget to turn off the heating or air conditioning system, resulting invery high utility bills.
- Set up Cleaners & Yard Maintenance crew
Interviewing several cleaners and yard maintenance companies ahead of time, will certainly help you get the stress off your shoulders. Specially if you don’t live nearby, you will need reliable cleaners. They will be your eyes and ears. So it’s extremely important that you establish as connection with them ahead of time.
- Purchase Initial Supplies
A comfortable home that is well stocked with comfortable bedding, enough towels and kitchen supplies, means better reviews. Take a look at this check-list of must-haves basic supplies for your vacation rental.
The Bottom line is that if you are doing homework and keeping out emotions out of the process, you will be well on your way to making money from your investment by following these initial simple steps.
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