Investing in Vacation Rentals

The popularity of investing in vacation rentals is notable, and many people invest in vacation rental properties for different reasons. A vacation rental is unlike many other real estate investments that you may be familiar with. This is because of the short-term nature of the leases. A closer look at the pros and cons associated with owning and running a vacation property may tell you if this is the right type of real estate investment for you

Why Invest in Vacation Rentals

There are many reasons why investing in real estate may make excellent sense for you. Many people invest in a short-term rental property because they want to enjoy the use of the property themselves.

They want to do this at least part of the year, such as when they are taking a family vacation. Your vacation rental will give you a dedicated and affordable place to stay while you are on future vacations.

Rental properties can be an excellent source of income and may potentially be more profitable than long-term rentals. Some people invest in a vacation rental property because they later plan to use the property as their permanent retirement home.

By buying the property before retirement and leasing it out, they are using rental payments to pay for at least some of their retirement home’s purchase price.

What Vacation Rentals to Invest In

The best vacation rental property is one that is very profitable for you to own and operate, and this usually means that the home is appealing to vacationers. The location of a rental home is imperative, and you need to choose a destination that you are familiar with and enjoy visiting yourself.

If the property is close to popular attractions within that area, that is a key selling point that can help you to attract more tenants and perhaps charge a higher rate regularly.

However, verify that you are not spending too much for the rental home’s sales price. In many hot vacation rental markets, there may be a risky real estate price bubble.

Other features to look for when investing in vacation rentals include:

• Great amenities, if you are buying a vacation condo.
• An ideal layout for the type of vacationer the destination would attract.
• A property that has building materials that are easier to maintain, such as hard floor surfaces as opposed to carpeting.

How Much Is a Vacation Rental Worth

There are many factors that can affect the value of a vacation rental home or condo, and prices in any rental market can potentially rise or fall.

When investing in real estate, you should be aware that condo prices generally appreciate much slower or even stagnate when the majority of the units in a building are used as short-term vacation units.

Understanding how many units in a condo are owner-user versus rental units is imperative to your property’s value.

Keep in mind that there may be some variation in this between buildings that require at least a one-month lease from vacations versus those that allow a week or less as a minimum stay.

The overall market values as well as the appeal of the destination as a vacation spot can also affect the value of vacation rentals. The price of vacation rentals is largely dictated by the amount of money that these units can lease for.

Owners need to ensure that the market rental rates are high enough to support the generation of a profit given a reasonable occupancy rate.

Therefore, the ability and willingness of vacationers to pay a higher rental rate in a specific market may be a limiting factor related to the value of a vacation rental property.

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How to Invest in a Vacation Rental

If you have decided that investing in vacation rentals is the right financial move to make, you may be wondering what steps you need to take to make a smart investment.

Consider walking through these important steps when investing in vacation rentals to enjoy a streamlined approach to the process.

1. Determine the amount of money you want to spend as a down payment and closing costs

Remember that you may also need to consider the cost to furnish the unit and to run the property until it begins turning a profit. Therefore, ensure that you have a reasonable cash reserve available after the down payment and closing costs have been paid.

2. Explore the lending options available

With most long-term rental properties, you can expect lenders to require approximately a 20 to 30 percent down payment.

With a short-term vacation rental, this may be even higher, and you could feasibly expect to pay between 30 to 40 percent down in some cases. It may be helpful to get pre-approved for financing before you start looking for a vacation rental to purchase.

3. Choose your vacation rental market

When investing a vacation rental, it is imperative that you choose a great market. This should be a market that you have personally visited several times and enjoy visiting. It should also be a market that has reasonable real estate prices.

4. It may be best to hire a real estate agent

A good real estate agent will guide you in the selection of the right rental property for your budget. Consider looking for a real estate agent who is familiar with the local market and who has experience with vacation rentals.

The best real estate agent may be able to assist you with finding local vendors for property management and other required services.

Is a Vacation Rental a Good Investment?

You may be wondering if investing in vacation rentals is a smart idea for you to make. There are both pros and cons associated with vacation rentals to consider.

Pros

A vacation rental in a hot market may produce year-round income. This is an excellent way to bolster your income. Additionally, it can potentially pay for the home that you plan to live in later in retirement.

When investing in vacation rentals, you will also have a dedicated and affordable place to stay in. However, when you are in the unit, it will not be producing income for you.

Cons

The primary downside associated with investing in vacation rentals is the potential for the real estate market to decline. This includes in the area of both sales and vacation rental rates.

You should also be aware of the regular make-ready and repair costs that comes with owning a vacation rental. This type of real estate investment can have high operating costs because of the transient nature of the tenants.

Is investing in vacation rentals right for you? This is a decision that each investor will need to make individually. You should take into account the personal needs and goals as well as current and future financial circumstances. If you do decide to invest in a vacation home, carefully analyze the market and the financials for a specific home. Make a wise, informed buying decision. By taking these steps, you can more confidently invest your funds in a beautiful vacation home.