If you've ever dreamed of owning a vacation home that not only provides personal enjoyment but also generates income, now may be the perfect time to make it a reality. Vacation home sales increased by 16% in 2020, surpassing overall existing home sales by more than triple, according to the National Association of Realtors.
Imagine having your own piece of paradise, where you can escape whenever you please while earning passive income when you're away. So, today, we'll teach you how to buy vacation rental property, from finding the right location to figuring out financing options - with expert tips along the way!
Is Buying a Vacation Rental Property Right for You?
A vacation home can be an exhilarating investment that offers financial benefits as well as personal enjoyment. However, before you get started, you need to decide whether buying a vacation home is for you.
The potential for additional income associated with possessing a vacation rental property is one of the biggest benefits. Renting your property out to guests can generate a steady stream of income, which can assist in offsetting the costs associated with the property and even make you money. Aside from offering tax write-offs, these properties can allow you to build equity.
Additionally, you will be able to access lovely getaway spots at your convenience while controlling precisely when they are available for rent.
There are, however, drawbacks to this type of investment as well. A business owner's responsibilities include paying utility bills, maintenance costs, property taxes, and management fees if an outside manager is required to oversee operations.
A decrease in bookings can also occur during economic downturns as people cut back on discretionary spending. Due to reduced demand in off-peak seasons, an inconsistent cash flow might become apparent. Also, short-term rentals may encounter limitations imposed by local governments or Homeowners' Associations (HOA), making them difficult to accomplish.
A vacation rental property can be lucrative despite these challenges. Besides being a great place to enjoy regular vacations, resort houses can generate passive income as well.
However, prospective owners should also examine their financial situation, capacity, time availability, and risk tolerance. It is wise for buyers to consult respective experts in order to gain a better understanding of market conditions as well as possible obstacles. To ensure long-term success, you should weigh options within reach.
Steps for How to Buy Vacation Rental Property in 2023
The benefits and drawbacks of vacation home ownership have now been explained to you, let's learn how to buy a vacation home in 2023.
Decide the Location
If you want to guarantee consistent profitability, it's crucial to choose a vacation rental home that is located in a desirable location. If you are interested in buying a home near the coast, lakefront, mountains, or other popular travel destinations, use real estate listing sites to research different areas.
Consider factors like rental market conditions, employment rates, weather patterns, and proximity to conveniences before making a purchase offer. Assess demand for vacation rentals in the area by studying tourist preferences:
- Are tourists drawn to this location?
- What attractions are nearby?
- How does popularity fluctuate throughout the year?
- Is there a steady demand for vacation rentals?
While financial considerations are important, neglecting an attractive and accessible location may deter potential renters. Focus also on choosing your preferred type of property, based upon personal tastes, such as bungalows, cabins, chalets, homes, townhouses, and villas. Having all these aspects covered guarantees a smooth buying process, resulting in a happy investment yielding continuous profits.
Conduct Thorough Market Research
After identifying potential locations for your vacation rental property, conduct thorough market research. Understand local regulations regarding short-term rentals and homeowners association rules that may impact renting frequency.
A good investment decision is influenced by how the economy is doing. Appreciation in home prices, mortgage interest rates, and buyer demand influence investment decisions. Inflation trends can also affect the market, so you need to keep track of them.
Lenders also analyze these factors to mitigate risk before approving loans. By being knowledgeable about market dynamics, you increase your chances of securing financing in a good area with proven performance records. You ensure lenders receive an acceptable return while limiting their financial risks.
Incorporating comprehensive research is crucial to making informed purchasing decisions based on current and projected market conditions. Utilizing this information helps you evaluate different variables essential when engaging with vacation rental property purchase opportunities leading toward sustainable monetary outcomes.
Assess Your Risk Tolerance
When considering financing options for your vacation rental property, assess your risk tolerance. Determine a realistic down payment and monthly budget to narrow down compatible lenders and acquisition properties that align with your goals. Avoid using life savings as a loan since there is always a potential for loss.
Remember to set aside additional funds for expenses such as marketing, furnishings, and vacation rental software. Utilize these factors wisely to maximize value while mitigating monetary risks associated with ownership decisions. Fully understanding personal financial capacity leads to attaining sustainable profitability, ensuring worry-free engagements within this unique industry sector.
Calculate Your Expenses
Now that you have identified a potential vacation rental property and conducted market research, it's time to calculate your expenses. This step is crucial in understanding the financial feasibility of possessing a vacation rental property. Consider the following expenses:
1. Property Taxes: Consult with a certified public accountant (CPA) to maximize tax benefits, as these taxes are commonly deductible.
2. Rental Income Taxes: If you rent the property for more than 14 days in a year, you may be subject to paying income taxes on your rental earnings at your ordinary tax rate.
3. Occupancy Taxes: Taxes charged per night by several states or cities range from 1% to 15%. If renting through platforms like Airbnb, tax collection might fall under their responsibility based upon city agreements regarding this matter.
4. Property Insurance: Vacation rentals require specific insurance coverage that protects against risks associated with renting out properties. Coverage should include structure, damage contents, and liability whilst covering income loss. Premiums can vary depending on location and need(applicable if hurricane-prone, mudslide, or flood region).
5. HOA Fees(if applicable): Homeowner association fees cover common area maintenance or management costs. Expenditures might involve ground upkeep, pool or trash actors, gate security guards, and janitorial payments. Other utilities for shared facilities could also be included. If rented, HOA fees remain eligible for deductions accordingly.
6. Utilities: Utility fees encompass heating or cooling, internet access, and water and electricity usage. Estimate monthly expenditures based on different seasons and types of guests accommodated.
7. Management Fees(optional): Property managers oversee operations, sometimes necessary when owners reside far away. Their rates generally range between 12%-50%, higher than long-term leases due to irregular flow seasonal nature. Unstable occupancy involves higher workloads, increasing costs considered licensing, strategy planning, and frequent tenant turnover.
In addition, you must factor in financing costs of mortgage principal and interest payments. The inclusion will most likely consist of appraisal, value assessment, and loan origination expenses. If your vacation rental property is subject to local regulations, a licensing fee may also apply.
It's important to meet IRS requirements, considering renting out the proprietary for at least 14 days per year. That's because time spent on personal enjoyment and the number of rented dates determine eligibility for a tax deduction. Regularly reviewing occupancy levels ensures a profitable experience.
Calculate Your Expected Income
Now that you have determined your expenses let's calculate your expected income from the vacation rental property. Such an estimate will give you a clear understanding of whether owning this property is a profitable business venture or not.
To estimate your potential monthly income, input the following into an equation:
- Nightly rental rate: Set an appropriate rate based on market research and competition.
- Occupancy rate: Estimate how often the property will be occupied throughout the year (considering high and low seasons).
- Monthly operating expenses: Include all costs outlined earlier, such as utilities, insurance fees, taxes, etc.
Moreover, you will have to consider the following as well.
- Number of days rented per month
- Mortgage payments, including principal and interest, along with taxes and their respective detailing
After getting all the values, the formula for Potential Monthly Income becomes:
Potential Monthly Income = [(Nightly Rental Rate) x (Occupancy Rate) x (# of Days)] – [(Monthly Operating Expenses) + (Mortgage Payments + Taxes and Insurance)]
However, since revenue might fluctuate depending on seasonality, certainty during peak periods varies. Summer could see beach properties being popular and winter attracting ski resorts. You need to anticipate these fluctuations in occupancy levels accordingly. Be aware of financial projections ensuring overall success across various economic landscapes and sustained outcomes leading to profitability.
Close on the Purchase
Once you have determined that your potential vacation rental property will be profitable, it's time to move forward with financing the purchase. There are several options available for financing a rental property. Hence, consulting with a mortgage professional is essential in determining the best approach.
One common method of financing is through traditional vacation rental financing. Such a method involves applying for funding from a bank or credit union and making an initial down payment followed by monthly installment payments over 15 or 20 years.
Another option is obtaining a conforming loan specifically designed for vacation rentals. The qualification criteria are typically less strict than those for primary residences, requiring a credit score of over 680 and at least a 20% down payment.
For properties that have two to four units or apartments with five or more units, multifamily loans can be considered. These loans often offer competitive terms ranging up to 35 years.
If immediate cash is needed before securing long-term financing, short-term loans such as bridge loans or hard money loans can provide temporary solutions until permanent funding becomes available.
After securing suitable financing arrangements, closing on the purchase follows similar procedures as any other investment property transaction. Price negotiation occurs between buyer and seller while paperwork regarding ownership transfer gets signed once loan approval has been granted by the bank.
Promote Your Property
Once you have purchased a vacation rental property, the next step is promoting it to potential guests. The most effective way to market your property is by listing it on popular vacation rental websites. These platforms offer maximum exposure and can significantly increase your occupancy rate and potential income.
- Vrbo: With an ideal choice for advertising your property, Vrbo, you can manage the listing yourself or hire a property manager to bear it for you. Keep in mind that there's an annual subscription fee of $499, along with booking fees. However, this subscription includes helpful features like Vrbo's reservation manager and calendar system.
- Airbnb: Another well-known platform where travelers search for accommodations worldwide is Airbnb. By creating a detailed listing with attractive photos and accurate descriptions of conveniences, you can maximize exposure on Airbnb's website. It charges service fees based on either split-fee or host-only fee structure models.
- Booking.com: With millions of listings available in multiple languages 24/7 globally, Booking.com is an excellent option for reaching diverse audiences seeking accommodations. At the same time, it provides added peace of mind through its liability protection program.
- Rent Like A Champion: Rent Like A Champion caters especially well if residing close to college towns or rural areas, hosting frequent events such as major sports games (college football or Indianapolis 500). It serves as bridge-cum-platform embracing homeowners across niche markets, catering to temporary occupants exclusively during appropriate periods driven by promising financial opportunities.
- Personal Site: Want to make your vacation rental stand out? Create a dedicated website! It gives renters a closer look with photos and videos. Plus, it brings in leads that suit your property, giving you an edge over regular platforms. It opens up more opportunities, establishes an online presence, and builds trust with potential guests. All of this boosts your earnings and makes your property more visible. You can even showcase your property on a YouTube channel. It's a perfect addition to your Airbnb or VRBO listings and Facebook posts. So, go ahead and get started!
Rent After Performing a Verification Check
The last thing to do is rent your property. When renting out your vacation rental property, it's crucial to screen potential renters to ensure a smooth and secure transaction. Follow these tips:
- Adhere to the Federal Fair Housing Act and state laws.
- Review basic profile information like phone number, email address, age, and occupation.
- Confirm the renter's identity by checking their social media accounts.
- Look for an "ID-verified" badge when choosing a renter.
- Finally, read reviews from previous renters before making any final decisions.
What to Know Before Buying a Vacation Rental Property?
Before purchasing a vacation rental property, there are several important factors to consider. Here's what you need to know:
Fluctuations in Real Estate Value
In popular vacation spots, real estate values tend to grow over time due to increased demand. A real estate investment decision should be made after assessing the current state of the real estate market and determining whether listing prices are inflated or if a housing shortage exists.
Tax Breaks For Mortgage Interest And Property Taxes
Vacation rental properties can provide tax benefits if used as a second home. If you qualify, you may be able to deduct mortgage interest and property taxes:
- Property Tax Deduction: You can deduct state and local property taxes but within limits of $10,000 per return or $5,000 if married but filing separately.
- Personal Residence Mortgage Interest Deduction: Eligible for up to $750,000 deduction when married, filing jointly, or single; $375,000 when married and filing separately.
- Rental Property Mortgage Interest Deduction: Income from renting your vacation home qualifies as rental income if rented more than 14 days annually—allowing breaks on mortgage payments.
Consider these tax advantages before purchasing your vacation rental property.
Being Aware of the Financial Investment
If you plan on buying a property in a popular vacation spot, you should set a realistic budget. Talk to your real estate agent about median sale prices and how much you will need to make your down payment. Determine whether it is financially worthwhile to invest in the property by evaluating any potential remodeling or maintenance work that may be needed.
You Must Properly Maintain the Property
Proper upkeep of your vacation rental property is essential, whether you choose to rent it out or use it yourself. Decide if you'll handle maintenance or hire someone. Ensure you have the financial means for upkeep costs. Discuss with your mortgage lender about using the property as a short-term rental and any requirements they might have regarding property management services. Keeping up with regular maintenance will ensure a positive guest experience and protect your investment in the long run.
Invest in Improving the Property
Before buying a vacation rental property, consider if you have the finances to improve it. Renovating your future vacation home can align it with your needs and attract potential renters. Ensure that any renovations meet local regulations and consider the specific preferences of your target audience, such as making the property more accessible for retirees in popular retirement areas. Investing in improvements will increase appeal and potentially lead to higher rental income or personal enjoyment of your dream vacation home.
Tips for Buying Vacation Rental Property
To succeed in owning and operating a vacation rental business, consider the following tips:
- Find your niche market: Targeting a specific demographic allows you to cater to their needs. Highlight unique features that would attract them, such as family-friendly amenities for families with children.
- Decorate on a budget: Dollar stores offer cost-effective items like candles and bathroom organizers. These small touches enhance the guest experience without breaking the bank.
- Gather positive reviews: Positive reviews are crucial for building trust among potential guests. Utilize property management systems to automate review requests from departing guests.
- Use channel managers: Listing your property on multiple platforms increases visibility and occupancy rates. Streamline operations by using channel managers or Property Management Platforms (PMPs) that automatically update calendars across all listings.
- Screen guests carefully: Automating guest screening can help protect your property by verifying IDs, collecting security deposits, and asking relevant questions during the booking process.
- Pricing strategy matters: Research local competition when determining rates instead of solely relying on platform recommendations; ensure prices cover expenses while providing reasonable returns; optimize pricing through dynamic pricing apps where necessary.
- Give attention to first impressions: Focus on the curb appeal of your property, including lighting options ensuring easy access at night time. Consider creating welcome packs and adding fresh flowers/digital guidebook.
- Know regulations: Be aware of the Homeowners' Association (HOA), municipal or state laws, and rules governing vacation rentals, especially in urban areas, which are critical to avoiding fines or legal issues and securing compliance. This way, you can operate within limits, maintaining high-quality standards, appropriate guidelines set forth, collected criteria to promote healthy longevity, and safeguarding future financial opportunities.
Ending Thoughts
In conclusion, purchasing a vacation rental property can be a lucrative investment and provide an additional source of income. Consider factors such as location appeal, local regulations, financial commitments, potential rental income, and tax benefits before buying the property you're interested in.
Excelsior Realty is here to help you find your dream vacation rental property tailored to your specific needs and preferences. Our years of experience in the market ensure that we have the knowledge and resources to guide you through every step of the process. Contact us today for expert advice on how to buy your ideal vacation rental property.
