Vacation rental properties are not for everyone, but if you’re considering the option, there is a lot you should know before making your purchase. This blog post will provide an overview of what to know before buying a vacation rental property and what questions to ask yourself when evaluating this type of investment.
Table of Contents
Buying Vacation Rental Property: Things to Know
Guide: Buying a Vacation Rental Property
Costs of Owning
What are the costs of owning a vacation rental property?
Property Management companies manage most vacation rental properties, and therefore, there is a management fee. Usually, this ranges from 8% – 12%. This covers the cost of marketing your property to clients via third-party websites/agencies, cleaning your property between guests, doing check-ins on sites like Airbnb ahead of time to help educate guests about their stay, and more. In addition to that major cost, you will also have some standard costs such as insurance coverage for things like damages incurred by guests or the need for an occasional new roof. Those costs average out around $400-$500 annually, depending on where you live.
If you manage the properties yourself then you will need one of the best property management software for landlords, so that you can efficiently track what is happening and take the action on time.
Estimated Profit
How much can you make renting out your vacation rental property?
This question can be very difficult to answer, but the general rule of thumb for vacation rental properties is 20% – 25%. Suppose you are working with an experienced Property Management company or real estate agent. In that case, they will help ensure that you get market value rates.
Some factors might impact your ability to receive top dollar, including your location, the time of year you list your property for rent, and other factors.
Tax Implications
What are the tax implications for owning a vacation rental property?
This varies depending on your location, but you will be taxed at the rental portion of your property as a general rule of thumb. This will be determined by how much time you spend there and whether it’s considered a personal residence or not.
It would help if you also considered taking advantage of depreciation for tax purposes which allows you to write off some of the costs associated with owning your property.
It would help if you took advantage of tax deductions for cleaning supplies, utility bills, and other expenses. But, again, consult your accountant to determine which applies best to you!
Repair and Maintenance
Who is responsible for maintaining and repairing your vacation rental property?
You are! Although you will have some help from your Property Management Company, owning a vacation rental property is an important aspect. You’ll want to make sure that any appliances or systems in place function properly so there aren’t any surprises during the middle of someone’s stay.
It would help if you also considered having a plan in place for things like re-caulking the bathtub, painting rooms or structures that are damaged on their own (like fences), and other aspects of maintenance. Ensure you have enough funds available to address any issues promptly, so your guests aren’t impacted!
Consider using our Fix and Flip calculator to decide if the project is feasible or not.
How to Finance
Can I finance my purchase with an interest-only loan or mortgage?
This depends on your lender. For the best chance at qualifying, you should have a 20% down payment and be able to prove that you can afford monthly mortgage payments (including taxes and insurance), which will likely result in an interest-only loan or mortgage for many people.
Before making this type of purchase, make sure to research the area you’re considering. Ensure there is an adequate amount of demand for vacation rentals in your location and consider things like crime rates and property values/costs before making a purchase commitment.
Remember, this will be part of your asset allocation, so make sure it fits within what you’ve already determined to be your comfort zone.
Location
Should you buy in a resort area or off-season location?
This is a very important consideration that can have a significant impact on your return. You will likely find more demand for rental properties in high-demand areas. Still, you’ll also pay more upfront and potentially lose out on some of the benefits if they aren’t available year-round.
If you’re considering an off-season location, make sure to do your research and consider things like the weather, local events, and attractions that might impact demand for a vacation rental property.
You can also use sites like Airbnb to determine whether or not there is sufficient interest in a location before investing too much time or money into it!
This one isn’t necessarily easy as you’ll need to determine the quality of other vacation properties in your area. Still, it could be very beneficial to consider what you feel is important for potential guests.
This should include proximity to popular attractions or amenities (like restaurants), parking availability, and the number/types of bedrooms/bathrooms available. You can also consider including general information about the neighborhood or location on your website to help people make a more informed decision about where they want to stay!
Which Type?
What type of property should you buy?
While there are many options for vacation rental properties, the most popular types include single-family homes, condos/townhomes (often part of an HOA), and multi-unit buildings. Each comes with its pros and cons, which you’ll want to consider carefully before making your purchase.
The size and layout of the property will help you determine which type is best for your investment. For instance, if you’re looking to rent out the whole house, then a single-family home might be right. Still, multi-unit buildings or condos/townhomes can also work well too, depending on demand in your area!
It would help if you also considered the property’s age and how renovations will impact your return. For example, if you’re looking to buy an older single-family home, make sure that any updates are done carefully, so they don’t go too far in one direction or another (like modernizing a kitchen but leaving out character).
It’s also important to consider community amenities when choosing your property type. If you’re buying a condo or townhouse, for example, consider other amenities like pools to make them more attractive to guests!
If you plan to renovate before renting the property out (which is often advisable), remember that they should be financed within what you can afford and won’t impact rent costs enough to drive guests away.
As you can see, there are many considerations to make when purchasing a vacation rental property! First, make sure that the investment fits within your overall plan and allows you to set yourself up for financial success in the long term.
Conclusion: Decide based upon your goals!
Remember that vacation rental properties are meant to be long-term investments. So while you may want some short-term returns, it’s important to consider what will make for the best return over time. This means keeping rent prices competitive with other local options while considering how renovations or updates might impact them!
While it’s certainly possible to purchase a vacation rental property to sell it later, this isn’t always advisable. Many buyers end up losing money by buying at a high price and then needing to sell for less due to low demand in an area or over-renovation that makes future guests unhappy.
In many cases, you’ll find better success by renting the property out for a few years and then selling it when you’ve reached your financial goals. But, of course, this means that any renovations or updates should be done carefully, so they don’t go too far in one direction or another (like modernizing a kitchen but leaving out character).
When considering what to do with a vacation rental, consider whether you’re looking for short-term returns or if you’re prepared to wait until the property has increased in value before selling it. This can impact your renovation plans, rent prices, and how much of a return on investment (ROI) you want to see!
As you’ve seen through these considerations, there are many things to consider when deciding whether a vacation rental property will be a good investment! Make sure you’re prepared for the long-term and that your goals match what makes sense from an ROI perspective.
For any kind of help related to vacation rentals, you can ask at our community section.
