Vacation Rental Investment 101

The short-term rental business could be highly profitable as this industry is growing fast last years. Before buying a property it's essential to be informed with vacation rental investment pros and cons. Read the guide with the most valuable information on vacation rental investment you need to know!

The vacation rental industry is experiencing massive growth. In 2019, revenue in the vacation rental industry is expected to reach $167 million by the end of the year. Thanks to an abundance of short-term vacation rental platforms and rising home prices in many top tourist destinations, many real estate investors have an interest in vacation rental investment properties. As a result, it’s no surprise that 72% of vacation property owners and 71% of investment property owners think that now is a great time to buy.

However, buying a vacation rental property comes with its own set of risks and rewards. So before you buy your first or next vacation rental property, here are some common questions and answers to help you learn more about vacation rental investment.

Why Are Vacation Rentals a Good Investment?

vacation rental investment

A study done by Technavio found that the global vacation rental market is expected to grow by more than 7% annually from now until 2021 when its total worth will peak at $194 billion. As an added bonus, vacation rental properties come in all sizes and price points, ranging from studio apartments to mansions on the beach. This means that there are plenty of opportunities for you to make money from a vacation rental investment.

While there are pros and cons to owning a vacation rental, the biggest benefit of vacation rentals that makes them worth the investment is that you have the potential to make more money than with long-term rentals. Vacation rentals are in high demand in certain locations, which means that you can charge a premium for your property without losing bookings to your competitors.

In addition, it’s possible to turn short-term renters into recurring revenue if they choose your property as their preferred accommodations every time that they decide that they go on holiday to your location. All you have to do is let your guests know that you would be happy to see them return again in the future to open up potential recurring streams of revenue.

What Are the Hidden Risks of Investing in Vacation Rental Properties?

For every possible benefit, there is to buying a vacation rental property, there are also hidden risks that you should be aware of. Here are some of the most common risks that may impact your vacation rental income:

Vacation Rental Markets Are Often Seasonal

Owning a vacation rental doesn’t mean that it’s always going to be easy to find renters. In many vacation rental investment markets, the occupancy rate tends to vary seasonally. As a result, you may face stiff competition in attracting tenants during the high season while you may not be able to find enough renters to keep your vacancy rate down during the low season.

Therefore, it’s essential that you perform a vacation rental market analysis before you purchase a vacation rental property. Before you buy, figure out the exact amount that you’ll need to bring in each month in order to have a positive cash flow. In order to create an accurate forecast, you must take the seasonal fluctuations in accommodation pricing into account, as well as, your regular property expenses.

Housing Regulations and Illegal Short-term Rentals

It might seem like a good idea to buy investment vacation properties in the same location where you see other properties being listed on Airbnb. However, you might be buying on false assumptions. That’s why it is a good idea to check local regulations, including short-term rental laws and city zoning rules before you invest.

Some locations do not allow short-term vacation rentals. In addition, you may also be required to obtain certain permits, as well as, pay occupancy taxes. These obstacles could make your operating expenses for your vacation rental significantly higher than you had anticipated

Unforeseen Events That Impact Tourism

Your income from your vacation rental investment is only as good as the strength of the tourism market in the area where your property is located. Any unforeseen events, such as geopolitical concerns, severe weather, a health scare or even a recession, could have a dramatic impact on your rental income. Such events can cause tourism activity to fluctuate with very little advanced notice.

Purchasing comprehensive business insurance in addition to homeowners insurance can help you mitigate some of these risks. A good insurance policy could be the difference between you losing everything if something goes wrong and seeing the event as only a minor setback in your business.

How Do I Predict Profit Margins for My Vacation Rental?

vacation rental income calculator

Using a vacation rental income calculator is the best way to optimize your pricing strategy to ensure that you cover your expenses each month and you can turn a profit. These tools use billions of vacation rental pricing points and real estate comps to provide accurate estimates of short-term vacation rental revenue and predict trends.

One popular tool to consider is Mashvisor. With a vacation rental income calculator, you can calculate key return on investment metrics including the cash flow, cap rate, and cash on cash return. Tools like this also provide access to real estate comps, which are vacation rental properties that are similar to yours that were recently sold in the same area.

The short-term rental industry changes fast. As a result, the best place to buy a vacation rental property today might not be the best place tomorrow. Using a vacation rental income calculator will help you to determine if a vacation rental investment property is worth investing in for the long term.

How Do I Identify the Right Vacation Rental to Buy?

The first step to ensuring that a vacation rental property is right for you is to envision your ideal renter. Then find a vacation rental investment property that fits this type of renter and also blends in well with the rest of the neighborhood.

When it comes to vacation rental investment properties, it’s also a good idea to avoid fixer-uppers. A property that requires a lot of repairs is going to become nothing more than a money-pit when you are required to put a lot of time and money into making it suitable for renters. Remember that during the times that you spend fixing the house, your property won’t available to rent.

How Do I Increase My Profits From My Vacation Rental Investment?

 investment vacation properties

Finally, once you’ve selected a vacation rental investment property to buy, the next step is to maximize your profits if you want to increase your income. There are many ways to increase the profits from your vacation rentals. Here are three of the best:

  • Improve your property by adding extra beds so that you can accommodate more people in your listing.
  • Make your listing kid and pet-friendly to attract families and groups who are traveling together.
  • Offer experiences so that your guests can get to know their vacation city better.

Vacation rental investment can be highly lucrative. However, it’s important that you perform due diligence so that you know your market and have a good understanding of the financials before you take the leap. By making sure that you are prepared, you may find that your decision to invest in vacation rental properties is one that will pay off in the long-term.

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