A vacation rental investment can be a lucrative endeavor with the help of a defined business model and clear plans of action to follow. However, investing in a vacation rental property does come with unique challenges, and you may wonder if owning an Airbnb is still profitable.
Short-term rental investing also differs from 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 profit margins and more room for growth and scaling. With good planning and relevant market research, anyone can reap the benefits of buying a vacation rental property.
In October 2020, Airbnb hosts earned over $110 billion in rental income around the world. It’s clear that investing in a vacation rental can be rewarding with the right combination of factors and consistent work. Read on to discover the key to a successful vacation rental investment, as well as how to make money on your investment property.
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 after investing in a short-term rental will depend on a variety of factors. This can include the location, nearby attractions, seasonality, and the management strategy used for it. For this reason, you should follow a logical, step-by-step guide to ensure you know everything about a property before you invest in it.
The location of a property is one of the most crucial factors in determining its value. You can renovate and uplift a property, but its location cannot change. 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 a property 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 a property’s cost, the property still needs to be in a reasonably safe and attractive area to draw in guests.
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 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 vacation rental demand of an area. It’s a good idea to review relevant market data of any location you are considering purchasing a property in.
When it comes to vacation rental properties, the income you generate on them will be very dependent on the seasonality. A property 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.
A property located 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.
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 a property that shows a higher potential occupancy rate. Things like the rental’s size, number of bedrooms, and amenities can potentially help to boost a property’s occupancy rate.
If the property 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.
Make a list of your monthly expenses and tally the different costs. Remember that there will be costs relating to cleaning, restocking supplies, hosting fees, or property management fees.
Then tally how much you will need to earn per month to break even and how much you need to earn to generate a profit. Minus your expenses from your potential rental income to calculate your cash flow.
A property that has a positive cash flow is worth investing in. To make this task easier, you can use an Airbnb calculator to help generate useful metrics relating to cost and potential rental income.
Market data is essential to help you choose the ideal property for you to invest in. By utilizing smart analytical tools to assist you in making data-backed decisions, you can rest assured that you’re making the best vacation rental investment. Some of the top-rated tools on the market are:
AirDNA identifies short-term rental trends and provides stats on over 10 million vacation homes across 80,000 cities around the world. To use it, type in your investment property’s address into their Rentalizer calculator.
AirDNA will not only provide you with data like rental demand and annual revenue, but it will also offer insight into comparable vacation rental properties in the area.
Mashvisor simplifies the rental research process, shortening it from several weeks to about 15 minutes. Using their vacation rental search engine, you can type in any city or town you might be interested in.
You can then browse through areas and neighborhoods while viewing things like the average occupancy rate, potential ROI, and cash on cash return for properties there. Mashvisor also offers a heat map that shows areas that match the requirements that you input.
AllTheRooms is one of the world’s leading suppliers of data and analytics relating to the short-term rental market. It offers an integrated suite of vacation rental tools such as Precision Filtering, Historical Trends, and Competition Tracking, suitable for hosts, investors, and rental property managers.
With AllTheRooms you can obtain practical insight into your property’s potential and current performance, as well as market trends, and emerging vacation rental hotspots.
It’s a good idea to take some time to draft a comprehensive business plan that covers every aspect of your rental business. Start by answering the following questions to outline your short and long-term business goals:
You can then work on planning things like your management structure, and customer, and competition analysis. Putting everything down on paper will help you track your progress and stay on top of all of your business requirements.
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 these:
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.
If you are aged 62 years or older, a reverse mortgage might be the best option for your vacation rental investment plan. A regular mortgage requires you to pay back the loan in monthly installments. A reverse mortgage 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.
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 mortgage 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 mortgage rates or one with variable rates.
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.
As with any investment, buying a vacation home 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.
The most obvious benefit of owning a vacation rental is being able to earn an additional 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 earn more during the holiday season and on weekends.
Another benefit of investing in a vacation rental is having your own vacation home that you can use any time. For example, you can use the property for any special events such as annual holidays, birthdays, or a personal getaway.
If you rent your property out for at least two weeks per year, it is considered a business. This means that you can write off any expenses related to your property as tax-exempt business expenses.
When you buy an investment property to turn into a vacation rental, keep in mind that it’s also a fixed investment that will grow in value over time. You have the option of selling the property at a later stage and cashing your investment or keeping it as a future retirement home.
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.
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.
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 property walk-throughs for social media. Another must-do is to update your listings from time to time to improve your SEO and listing rankings.
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.
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:
No matter what your goals or challenges are, as a host, you need a cohesive management strategy that will ensure all your business requirements are met while you can focus on business growth and expansion.
Successful hosts around the world are using vacation rental software, like iGMS, which allows them to run their businesses on autopilot. Harnessing the power of automation, iGMS can:
The first thing to do after setting your business up is to identify the type of guest that you want to attract to your rental. 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-bedroomed house? Make a list of everything your short-term rental offers, from size to surroundings, and this will help you identify your target guest.
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. You may find that a certain platform brings you more bookings than others, but it’s still important to follow a multi-channel strategy.
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.
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.
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 businesses. Some of her hobbies include reading, traveling and drinking a good cup of coffee.
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