Buying an investment property to make extra income can seem like a no-brainer. But it’s not as easy as simply making the initial investment and waiting for the cash to roll in. Due diligence is essential both before the initial purchase and throughout the rental process. These vacation home investment insights will help you not only profit from rental income, but ensure your vacation rental investment stands as an asset in the longer term.
Is a vacation home a good investment?
It certainly can be. But if you’re considering buying a vacation home, the first thing you need to clarify is what exactly you’re buying it for. OK, it’s a vacation rental investment—but are you also going to use it as a vacation home yourself, or is it purely to make money? You might be looking for a place to enjoy on vacation yourself, as well as capitalizing on its vacation rental investment potential.
Before you even start looking to identify a property for a vacation rental investment, ask yourself:
- Am I going to stay there myself?
- How much of the year will I occupy it, knowing that it makes no money at that time?
- If I do stay there myself, will I be going on vacation during peak periods, when it should be maximizing its rental potential?
- If it doesn’t pan out or my circumstances change, what are my options?
The #1 rule of vacation rental investing: Location
When you have a clear idea what you’re buying a vacation home for, you have to think carefully about where. Properties in high-demand tourist areas will obviously command more reliable and higher rental fees, but the initial investment will be substantially higher. If you go off the beaten track, you have to consider whether it’s close enough to amenities to still be attractive—the reality of a cabin in the wilderness can sometimes be a long way removed from the romantic ideal.
Then there are the post-purchase considerations. If it’s a long way from where you live or from any other rental investment properties you own, how are you going to manage it? Similarly, maintenance might be more expensive if the contractors in the immediate area charge travel fees. Always keep an exit strategy in mind, too. It’s important to do your research on the market in the area you’re considering, so you know how attractive your vacation rental investment property (or properties) are to potential buyers if you choose to sell later.
You can use tools like Zillow.com to get an idea of market values, what’s available for sale or rent, and current rental prices in any area. Make the most of the information that’s out there to inform your decision and investment strategy.
Predicting your vacation rental’s income potential
So you’ve done the due diligence on the vacation rental investment property itself and identified the right place in the right area. Now you need to calculate your income and expenses very carefully. This is always more complex than it looks, but there are some useful resources to help you do it right. Sites like AirDNA offer market insights that are invaluable to anybody considering buying an investment property.
Meanwhile, AllTheRooms provides analytics that are equally useful to both managers of a portfolio of vacation rental properties and the owner of just one. Need market information from further afield? Wheelhouse provides market intelligence worldwide. There’s also KeyData which provides real-time data on the vacation rental investment property markets that will integrate with your own Property Management System.
For an introduction to the metrics that matter, particularly the “Big 3” vacation rental analytics ratios, check out our Introduction to Analytics for Vacation Rental Managers. RevPar, OR and ADR may seem like jargon if you’re new to vacation rental, but experienced vacation rental managers know that these are all important metrics in accurately assessing your financial position.
Need help sorting out which analytics provider is best for your unique market? Get in touch, we’ll help you figure it out.
Calculating expenses and recurring costs
The recurring costs will start to add up once your vacation rental investment property is open for business. Consider the following factors when buying an investment property:
- Management fees. These can vary from region to region. Read our free guide to short-term rental management fees for some useful insights. Nothing beats hard numbers though. Once you familiarize yourself with management fees, start making some phone calls to get accurate estimates.
- Furnishing the property. As well as the initial purchase cost, furniture in vacation rental investment properties tends to wear out quicker than in a home that’s lived in and carefully maintained by its owner. High-wear pieces, specifically couches, will wear out fast.
- Cleaning and turnover. Whether you own just one or a portfolio of properties, they’ll need professional cleaning between each reservation. You may feel you could turn over a single property yourself if it’s nearby, but consider the value of your own time and whether you can fit that commitment within your existing obligations. Cleaning costs vary from region to region. So once again, before diving in and investing, make some phone calls.
- Consumables. Cleaning materials, soaps and shampoos, towels, bedding, etc. All these need replacing much more frequently in vacation rental investment properties than long-term rental properties. You’ll also want to factor in welcome baskets and other gifts you’ll leave the guest.
- General maintenance costs. Unpredictable, but again typically higher than your own home or a long-term rental.
It may seem like we’re sweating the small stuff, but it’s imperative you do the work and get informed. For example, just as with management fees, don’t assume that consumables cost the same where your vacation rental investment property is as in your hometown. Make sure you have all the costs clear in your mind before committing to any purchase. Spend the extra hours making phone calls and don’t assume a price or cost you saw in a Facebook group for vacation rental owners applies in your area.
Where can you make some savings?
There are some financial advantages to vacation rental investment property ownership. If your portfolio qualifies as a business, some expenses can be written off. Hostfully also has some helpful hints on how to cut back on expenses without harming your guests’ experience. Just remember that, compared to a long-term rental, vacation rentals have expenses that at one point you won’t be able to cut (as tempting as it may be). That’s because you’re dealing with guests. So if you cut too far on say, consumables, but have a luxury or high-priced rentals, your reviews might take a hit. There’s a fine balancing act when it comes to savings vs the guest experience. As an investor, it’s best to over estimate these costs.
You might also want to consider tiny house vacation rentals, or getting a few glamping structures (domes, luxury tents, yurts). Both tiny homes and glamping sites have a much lower upfront cost than traditional real estate. For example, a fully furnished tiny house costs around $50,000, a luxury yurt about $20,000, or a geodesic dome $30,000. Because of their novelty and that they are much easier to advertise (think of how ‘Instagrammable’ these properties can be) and service (small square footage) the profit margins and returns on investment can be really interesting.
Have you considered alternatives to investing?
Becoming a professional vacation rental operator doesn’t necessarily mean you have to buy a huge portfolio of properties. You can make a decent living with a strategy involving arbitrage with regular rentals. Or alternatively, you can become a short-term rental manager where you handle the day-to-day Airbnb operations of properties owned by others.
You’ve taken the plunge. Now get the advertising right.
Even if you’ve done your due diligence on everything else, you don’t want your vacation rental investment sitting empty. Potential guests need to know it’s out there and available. You need to know the channels that have the most reach and target the right audience, wherever your vacation property is located. Whether you market a vacation rental investment property correctly can be the difference between making a loss and a healthy ROI, regardless of how pretty the property is. Check out this report on multi-channel distribution for vacation rentals to help you maximize rental income and minimize vacancy.
Boost your reach with word of mouth
Marketing alone can’t make your guests love their stay. Don’t lose sight of the fact that a strong guest experience can boost your income with services and amenities they’re prepared to pay extra for. What’s more, you’ll save money on advertising in the long term by boosting reservations through word of mouth. That said, if you want word of mouth reservations, you’ll need to designing your own rental website. This will let you target and retain a pool of loyal repeat guests. It’s one way to create independence from listing sites and Online Travel Agencies.
Conclusion: Do it right
Vacation rental investment done right is a great way to make money and provide you with a long-term asset. There are plenty of tools out there to help you, but be sure to make some phone calls, get a range of quotes and take an informed decision.