Real estate has been one of the oldest means for people to build wealth and attain ultimate financial freedom. In fact, most millionaires today get their start via real estate. Today we’re going to look at the best way to buy a vacation rental property.
However, the business of real estate can be difficult, especially if you are new to it. Now, one good way to get started is to buy a vacation rental property. This approach is ideal for individuals who do not yet have a huge capital for major investments and want to earn passive income.
But how do you know you are making the right steps and choices? Let this article serve as your guide.
How to Invest in a Vacation Rental Property: 7 Essential Factors to Consider
Like buying any other type of real estate asset for investment purposes, there are things that you need to take into account when investing in vacation rental properties.
1. Location
First of all, you want to make sure that you are buying a property in an area that is convenient for travelers and holidaymakers. It should be in a place where there are a lot of attractions and activities that your guests can enjoy.
Aside from the convenience and attractions, your chosen location should also be safe. A place with a low crime rate will give your guests the peace of mind that they are secure. Then they’ll be more likely to come back to your vacation rental at the end of the day.
Most importantly, it should have good weather for most of the year, so you can ensure steady bookings. So, before you invest in a particular area, make sure you have done some research on it.
2. Condition of the Property
The next thing you need to consider is the condition of the property itself. It should be in good shape, so you will not have to spend a lot on repairs and maintenance.
Ideally, it should also be furnished with all the necessary amenities and facilities that guests might need during their stay. Of course, it should also meet all the safety standards set by the government.
With that said, you can hire a professional property inspector to check the condition of the property before you buy it. This way, you can be sure that you are making a wise investment.
3. Type of Property
When it comes to vacation rentals, you will have several options to choose from. And, each type of property has its own set of advantages and disadvantages. Keep in mind whether you’re looking for a traditional rental that usually rents by the week, or a short-term rental property using a service like Airbnb or VRBO.
For example, a beach house would be highly in demand, but it would need more attention for maintenance. Naturally, this type of property would be more susceptible to the extreme conditions brought by the sea and the sun.
On the other hand, a condo unit would be easier to manage and maintain. However, your guests will have to share common areas with other people, which can be an issue for them.
Regardless, the most common types of vacation rentals that you can buy today are beach homes, mountain cabins, condo units, and city apartments. Your choice would first depend on how much you are willing to spend. Then you want to include whether you’ll manage the property yourself or hire a firm.
4. Capitalization Rate (Cap Rate)
This metric tells you the potential return on investment (ROI) of the property and gives you an idea of how much profit you can make from your vacation rental in the long run.
To calculate the cap rate, you can divide the net operating income by the purchase price of the property. For example, if an existing investment vacation property has a net operating income of $50,000 and it is being sold for $500,000, then its cap rate would be 0.1 or 10%, which is quite a good number for starters. This gives you healthy returns and enough money to spare for the monthly mortgage payments and other expenses that your property might incur, such as repairs and maintenance.
5. Operating Expenses
You should also take into account the operating expenses of your vacation rental property, such as mortgage payments, repairs and maintenance, marketing and advertising, insurance, and property taxes. To get an estimate of these expenses, you can ask for a profit and loss statement from the previous owner.
Of course, you should also remember that there will be some vacancy loss since no property is ever 100% occupied all year round. So, when calculating your operating expenses, make sure to factor in this vacancy loss so you won’t be surprised when it happens.
6. Local Rental Laws and Regulations
When buying a vacation home to rent out, you should remember that there are laws and regulations that you need to follow. Things like zoning regulations.
You should also check if there are any restrictions on short-term rentals. For example, some cities only allow properties to be rented out for a minimum of 30 days. So, before you buy a property in a particular area, make sure you are aware of the local rental laws and regulations. Not following these policies can result in costly penalties, so it’s best to comply with them altogether.
7. Your Long-Term Goals
Last but not least, you should think about what you want to do with your vacation rental property in the fullness of time. Are you planning to hold on to it or do you plan to sell it after a few years? Or perhaps, you would want to use it as a retirement home in the future or pass it down to your children?
These are important questions that you need to answer when making your final decision. After all, buying a vacation rental property is a big investment, and you should make sure that it is aligned with your long-term goals.
By keeping these factors in mind, you can start on the right track to becoming an owner of a vacation rental. You can also visit How To Pick The Right Vacation Rental Investment to gather more information that you can use.
Buying Your First Vacation Rental Property: Step-by-Step Process
Now that you know what to consider when investing in a vacation rental, you can proceed to purchase your first property. Here are the steps that you should follow.
Step 1: Get pre-approved for a mortgage loan.
This will give you an idea of how much money you can borrow to buy a vacation rental property.
When taking out a mortgage for this type of investment, your lender would most likely require a higher down payment than they would for a traditional residential rental property. This is because investment properties aren’t as reliable as a primary mortgage to the lender. This is in part due to the vacancy potential.
To get a good chance of being approved, make sure to have a strong credit score and proof of stable income. It will also help if you already have a solid business plan in place. This shows your lender that your mortgage application is worth considering.
Step 2: Hire a real estate agent.
This is always a smart decision, especially when you buy a vacation rental in a place that you are not familiar with. A good real estate agent will have the local market knowledge that you can leverage to find the right property that meets your investment criteria. Share with them your budget and the type of property that you are looking for. Then they will guide you through the process.
Apart from that, your agent will handle the negotiations on your behalf, ensuring that you will get the best deal possible. They will also do all the legwork for you, from looking for properties to getting the paperwork done, which gives you more time to focus on other important things in life.
To find agents that you can trust, ask for recommendations from family and friends or do an online search.
Step 3: Check the properties in person.
Along with your agent, you should visit the properties that they recommend to you. During this step, you should not only focus on the physical aspects of the property but also its location.
You should ask yourself if it is situated in a desirable vacation spot. Is it near popular tourist attractions? Is it accessible by public transportation?
If there are any repairs that need to be done, you should remember to factor them into making your offer, as this will affect your revenue later on.
Step 4: Make an offer.
By this time, you should already have a property that you’re interested in. The next step is to make an offer to the seller through your agent.
Your offer should be based on the current market value of the property and its potential earning power as a vacation rental. It is also important to consider your competition, as there might be other investors who are interested in the same property.
If everything goes well, the seller will accept your offer and you can proceed to close the deal.
Step 5: Close the deal and move in!
After all the paperwork has been signed, you are now officially an owner of a vacation rental property. Congratulations!
Marketing and Managing Your Vacation Rental Business
Vacation rental real estate investing does not end when you have purchased your first property, though. You still have to market and manage it properly to ensure that it will be a success.
Here are some tips on how you can do that.
- Create a website for your vacation rental business. This is where you will put all details of your property and your rates. You should also include photos and descriptions to give potential guests an idea of what they can expect.
- Use social media platforms to market your property. Create accounts on popular sites, like Facebook, Instagram, and Twitter, and post regular updates about your vacation rental. Make sure to use relevant hashtags so that people who are interested in renting a vacation home can easily find you online.
- Advertise on listing sites. There are many websites dedicated to helping people find vacation rentals, so make sure to list your property on as many of them as possible.
- Be responsive to inquiries. When potential guests contact you about renting a vacation home, make sure to reply to their inquiries as soon as possible. This will show them that you are professional and serious about running your business.
- Provide excellent guest services. Vacation rental businesses thrive on positive reviews, so it is important to give your guests the best experience possible. Respond to their needs promptly and address any concerns that they may have during their stay.
By following these tips, you can be well on your way to having a successful vacation rental business!
The Bottom Line
When you buy a vacation rental property, you are not only giving yourself a fun means of earning passive income, but you are also giving yourself a chance to meet new and interesting people from all over the world. With a little bit of planning and effort, you can be sure that your vacation rental business will be a success!
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