A short-term rental property that more than pays for itself sounds fantastic, but if you’re going to make a vacation rental property profitable, careful planning is essential. Our experience and expertise mean we know what it takes to start a vacation rental business, and we’ve got five top tips to get you started.
Why start a vacation rental business?
Let’s address the potential of vacation rentals in 2022. As we learn to navigate Covid-19 many people are ready to get back to their normal lives which means traveling for many. There was a 22% increase in vacation rentals instead of hotels due to the personalized vacation that vacation rental owners can provide. Using this trend to make some extra income with your second home isn’t a bad idea but will take some planning. Long-term rentals are attractive due to the steady flow of income and not being a full-time business owner. However short-term rentals will make you more money nightly on average and you can still use your second home for your own vacation. Before you write off any options use the following steps to make the right choice for you.
1. Do your homework
Nobody is born an expert and there’s a lot to think about when you buy or invest in any real estate. For example, consider how much similar properties in the area are charging, and what type of vacation home is in demand. Consider how you can differentiate your vacation rental property from the norm to stand out in the vacation rental industry.
Don’t lose sight of the broader picture, either—you can also learn more about remote vacation rental management and the state of the industry globally by consulting our 2021 Stats Report.
If you already have a vacation rental property
That’s a great start! But you must still consider if your vacation home is the right type of property, in the right place, and suitable for turnaround between guests. These considerations should guide your decision on renting all year round, or during peak seasons only.
Being a homeowner is not the only qualification of a short-term rental business. If you own one property, it can still be the basis of a future vacation rental business. But are you going to live there yourself and let it only during the vacation season, or are you going to look for an investment property?
Here are two points to consider if you’re a homeowner (or have a second property):
- Your home will have to be depersonalized enough that it appeals to every potential client
- Rental income will have to more than cover your base operating expenses in that time if you’re not considering buying more property.
If you’re thinking of buying a short-term rental
It’s easy to get excited when you’re looking to buy property, but a cool, analytical approach is essential here too. Search areas that are already popular with tourists—are there attractions or amenities nearby that make it a more attractive proposition? It may be pricier, but if there is a steady supply of tourists year-round, it’ll be worth it.
But keep an open mind. Some vacation rental property guests are looking to get away from the beaten track, to somewhere undiscovered and quiet. This can make the initial investment lower, too. So tourist hotspots are not the only choice.
Rental arbitrage is a viable option
Not having the capital to invest in multiple properties doesn’t have to stop you from starting a vacation rental business. Why not consider rental arbitrage? Instead of buying a property, you can rent one long-term, then sublet it to your guests. Be sure you’re familiar with local regulations and have the property owner’s consent.
Start a short-term rental management company
Don’t have the funds to buy a property or furnish an arbitrage business? No problem. Since the pandemic, there has been a flood of second homeowners who have purchased properties in desirable vacation spots. These owners use the properties a few weeks and weekends a year.
To offset their mortgage payments, second homeowners rely on vacation rental income. But because they don’t have time to manage an active vacation rental listing, they rely on property managers specializing in hospitality to do it for them.
Typically, a short-term rental management company will take 20-30% of the income generated by a property. And because the homes already come furnished (and any amenity upgrades are paid by the homeowner), your upfront costs are extremely low.
Note that there’s a downside to starting a vacation rental management company. If you haven’t successfully managed an Airbnb or short-term rental, it may be hard to sign on with new property owners. After all, you’re asking them to trust you with a high-priced asset like a second home. To get around this, you’ll need a few quick wins. Perhaps start by managing a room in your home, or getting at least one Airbnb arbitrage rental successfully run.
2. Which business model will work for you?
With multiple options for ownership, property management, or arbitrage, think carefully about which model will work for you.
The savvy solopreneur
The hands-on approach can work well if you have the time. Your list of duties is going to be time-consuming:
- Handling inquiries
- Promoting the listing
- Greeting and looking after your guests
- Cleaning, repairing, and maintaining the property
- Following up with your guests for reviews
The team builder
You have a network you can rely on to get the business off the ground. Unlike the savvy solopreneur, you’ll be able to rely on teammates (or other investors) to help you with the day-to-day.
Alternatively, the team builder can bring in subcontractors under a profit-share model to save on paying upfront salary costs. Profit-share can be a good way to get a vacation rental business started without huge upfront costs.
The shrewd subcontractor
Ideal for remote vacation rental management. If you’re not going to have time to be a full-time vacation rental owner, a property management company can take care of a lot of duties. Depending on the agency, you can outsource everything from marketing to day-to-day operations.
Be sure to run the numbers carefully here. You have to know that the time you’ll gain in handing the management over to a third party is worth the extra expense of an agency’s fees and commission.
3. Write a business plan
A solid business plan is key. In order to have a ballpark idea of your income, you need to calculate likely guest turnover and occupancy rates. Then you can allocate a budget for costs—more on that below. For your business plan, identify the following:
- Your Unique Selling Point. How can you stand out from the competition?
- Your target short-term renters. Who is most likely to book a stay with you? Are your properties in an ideal spot for honeymooners, perhaps? Maybe the local area draws a lot of young families, or it’s a backpackers’ paradise. This is going to affect how and where you market your properties.
- Guest turnover strategy. How do you plan to decrease costs, increase profits, and maximize guest retention?
- Opportunities for growth. How can you improve the property in the future? You may have plans to renovate, or want to include more amenities for your guests. Do your homework first on this—you don’t want to buy a property with plans to extend or divide it for vacation rentals, only to then find out local regulations don’t allow it.
- Marketing strategy. How are you going to get your listings seen on booking channels? Are you going to use social media to spread the word about your vacation rental? Will you create a direct booking site? Marketing your vacation rental property can be more difficult than it seems as they can easily be lost on the big sites.
Keep in mind that like any other business plan each industry is different. Your rental business plan should reflect the industry in the area that your rental sites are in. A mountain home is going to be treated differently than a penthouse in New York. Make sure to do your research specifically for the vacation rental market in your area and create your business plan accordingly.
4. Factor in your costs
Running a rental can be expensive, so you’ll need a clear idea of how much money is going out, as well as coming in. Create a budget for all your expenses; not just initial investments like furniture or redecoration, but ongoing costs such as utilities and turning round the properties. Creating a checklist for ongoing expenses would be very helpful to estimate what your monthly and yearly costs are going to be.
Even the small stuff like cleaning materials and contingency for replacing items due to wear and tear—over time, and multiple properties, this can add up. Everything you can think of must go into cost calculation, as well as the certainty that there will be some costs you didn’t think of.
From the state of the household items to general cleanliness, make sure your property is in good condition for your guests. A guest’s first impression on arrival can be difficult to change, and these standards affect reviews.
Remember that costs such as cleaning can be offset by having a minimum stay for your guests. Don’t forget to budget for items consumed by your guests, too (e.g. toilet paper, lightbulbs). Buying these in bulk may be expensive at first, but in the long run, it will save money.
If you’ve chosen a Property Management Platform, don’t forget to factor this into your budget, too. The right platform is a more than worthwhile investment, as it streamlines operations, increases occupancy, and boosts your revenue.
Hostfully’s award-winning, end-to-end solution handles automated messaging, upselling services, vendor management, pipeline and booking management, channel distribution and so much more.
Your plan should build a picture of your likely income and expenses, and provide a base for financing your vacation rental property business. The wide range of options, from cash-out refinancing to home equity loans, can be difficult to navigate if you don’t know your way around them. So make sure you receive expert advice and can make an informed decision on financing.
5. Make it profitable
There are no guarantees of profitability in vacation rental. Making sure your properties are visible on all the major listing sites like Airbnb, Vrbo, and Booking.com is a good start. But once you’re up and running, you should always have the bottom line front and center of your thinking.
Make smart choices
When it comes to remote vacation rental management, devices like automated locks and smart home technology are ideal. Their efficiency and security means you can spend more time on other tasks. Bookings, access, and even temperature and lighting can be controlled remotely with the right management platform. Check out our blog on remote management for more.
Amenities can pay off
Anything that makes your property unique can really boost repeat bookings, positive reviews and recommendations. Many guests will be happy to pay a little extra for the convenience of breakfast, for example. Keep your eyes open for upselling opportunities, and have a look at our analysis of what services and amenities guests are asking for.
Time is money and you’re ultimately responsible for the profitability of your vacation rental property business. So be sure you have the mechanisms in place to respond to both existing and prospective guests quickly—don’t lose out to a competitor.
You do have to be responsive, but it doesn’t have to be you personally. Automation is a great tool to increase guest experience without being a 24/7 Airbnb host. Everything from check-in to the assignment of cleaners can be automated so you’re not spending time on unprofitable activities. For a business with multiple properties, this is essential.
Use dynamic pricing
Creating a pricing strategy for your short-term vacation rental ahead of time will allow you to plan out your nightly rates. In order to maximize your profits use dynamic pricing to make sure that you are using a competitive nightly rate. During busy seasons, festivals, or big town events rental rates will fluctuate depending on the availability of vacation rentals in your area. However, you don’t want to scare away potential guests by pricing too high so keep in mind what other short-term rentals in your area are charging. Remember that some people plan their vacations up to a year in advance so using a dynamic pricing tool
Invest your time in planning
Like any property purchase or investment, getting into the vacation rental business can seem daunting. So do your research thoroughly, just as if you were buying your own home, and put yourself in a position to make informed decisions.