7 Things to Consider Before Investing
in Vacation Rentals
Coming back from summer vacation can leave you feeling tremendously relaxed, motivated, and rested – it can also have you craving for more time away and for the vacation never to end. How about stretching out that time away by relaxing in your own vacation abode?
Not only will that time away bring out the best of you, but it may also come with additional perks.
While purchasing your own vacation rental property may sound like a smart and appealing investment strategy and decision – especially one that could help you generate an increase in cash flow – there are a few things to consider before purchasing a space of your own.
Give thought to these seven factors before you make your vacation rental investment.
Consider the Location of the Vacation Rental
The first thing to consider when purchasing a vacation rental property of your own is the location – namely, where exactly your vacation rental property will be and if it will be a place that renters will want to spend time.
When making this decision, you will need to think about whether your new property will attract more than you, the owner – given that you likely won’t be the only one visiting.
As you start to think about location, think about some of the vacation spots that you are familiar with or have spent considerable time at.
You will also want to consider whether you prefer a rental property that is located in an environment with steady or seasonal changes.
This kind of question will be key, especially once you begin thinking about whether your vacation home can make a profit during low peak seasons or whether you will be forced to add money from your pockets in those stretches of time to make up for income loss when renters are not visiting your rental.
While your vacation rental property can garner you a tremendous amount of rental income and a return on investment, you want to refrain from putting yourself in a scenario where you need to invest your personal money into the property.
Consider Maintenance Costs
If you live a distance from your new vacation rental property, then you already know that getting to your property on short notice or responding to an emergency might be difficult. In order to address this potential issue, experts recommend putting aside some money each year to allocate toward maintenance.
Statistics indicate that each property owner should save approximately 1-2% of the value of the house each year to meet these upkeep expenses. If, however, you can address any repairs on your own – this is even better as it will help you save even more money.
This, however, is only possible if you do not live too far from your rental property. If you live at a distance, however, experts recommend hiring a property management company to help with this issue.
Consider Regulations and Laws
Before you get into the commitment of buying a vacation rental property, you will first need to determine if vacation rentals are even permitted in your area – especially as it relates to regulations for short-term rentals.
In some places, there are active regulations on how many days you can rent out your property.
As such, it would be wise to determine what these regulations are as you would not want to find yourself in a situation where you are investing illegally in a vacation rental, as there are fairly high fines for investors engaging in this practice.
Consider Insurance
Like any property, the next thing you will need to consider is insurance – especially so that you can cover any damages that may occur in the future. In the case of vacation rentals, experts recommend examining your existing home insurance to determine if the details of that policy can be extended to your vacation rental.
However, if you have decided to use your new vacation home to earn money as a rent-out vacation property, then this is considered a “business activity” and will not be covered under your home insurance policy. In these cases, you will likely need to purchase a stand-alone commercial or business liability policy.
Consider if You Would Personally Rent the Property
When considering a vacation property investment, you should also ask yourself whether you will be comfortable renting out your property.
If you are comfortable, then you will need to determine the value of the property and its amenities, and you may even try renting it out for a period of a month to see how well it does. If all things go well, you could also use a short term vacation rental software if you're looking to expand your rental operations.
Consider a Mortgage
If you are interested in investing in a vacation rental, you may need to consider getting a mortgage for a second home – though it is important to note that this process is complicated and might mean that you incur a higher mortgage rate than on your first home.
It is important to know that second home loans do not qualify for FHA or VA loans.
As a result, the mortgage rate for a is slightly higher, and the debt-to-income ratio still applies, given that you will need to provide that you can make payments on both of your properties for 2-5 months in order to qualify for a loan.
Consider Marketing Strategies
Once you have your investment property, you will now need to attract renters to your property.
Experts suggest that in order to do so, you will need to market and list your property on vacation rental websites such as Airbnb, HomeAway, and various social media websites. In addition, if you tap into the expertise of a property manager, they can help you better arrange for the advertising of your property.