Tips to Help You Invest in Vacation Rentals the Right Way

Michael QuanContributed, Education, Real Estate, Side Hustles15 Comments

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vacation rentals

As recently as five years ago, peer-to-peer hospitality services like Airbnb were the shiny new thing in Silicon Valley. Not, they’re just the thing to do if you’re traveling to Palm Springs for the weekend.

And while these services appeal to thousands of renters looking to earn some extra cash, they are also popular among second homeowners who want to help finance their vacation home or investment property. If you want to invest in vacation rentals, services like Airbnb can be extremely useful.

If you’ve been considering investing in real estate, you’re not alone — the property management industry has grown 4.4% between 2012 and 2017. But just because real estate investment is popular, that doesn’t mean it’s easy. So if you’ve decided to invest in a vacation home or rental property this year, how can you make the most of your investment?

First, remember that not everyone has the time, patience, or temperament to succeed in hospitality. So before taking the plunge, read these tips to see if investment properties like vacation rentals are the right choice for you.

Keep Location in Mind

Sometimes, clichés are 100% true. And location really is everything when it comes to real estate investing. This is especially true with vacation homes. About 36% of vacation home buyers will purchase property in a beach area, but wherever you decide to buy, think carefully about the long-term viability of the area (cough, global warming, cough).

Remember: structures can be altered, but the location can’t be changed. So when you begin to look for an investment property, decide on your location carefully. You should consider factors like market conditions, weather conditions, local infrastructure, and nearby amenities. Just because a property is right on the beach doesn’t necessarily mean it’s in the perfect location.

So always keep in mind varying factors that can make a location more or less desirable. Because if your vacation home is in an undesirable location, you’re going to have a difficult time finding people who want to stay there.

House Prep and Repairs

When you do finally decide on a property, it’s important to ensure the house is in good condition for guests. You’ll need to do basic maintenance tasks like cleaning the house (or hiring a maid service), keeping up the landscaping, and making any necessary repairs. Unfortunately, that’s just the beginning.

Many people forget about all of the work involved with maintaining a second home. Even the air ducts need to be cleaned every three to five years. Overall, you want the house to be in tip-top condition. Once the home is in good repair, you may want to consider adding elements to the home to make it more appealing to potential renters.

When it comes to impressing guests, amenities like hot tubs, pool tables, and new appliances are a good place to start if they fit in the budget. Additionally, making small efforts, like folding the towels neatly and adding some plants, can go a long way. In the end, you just want to ensure the house is ready to impress potential guests.

Consider Your Expenses

Investing in a rental property isn’t as easy as buying a house and making money right off the bat. When you choose to invest in real estate, you’re signing up for a plethora of expenses: taxes, utilities, and maintenance costs can all add up pretty quickly. So it’s important to remember that you won’t have just the mortgage to worry about.

When you start renting out the house, make sure you’re filling all available spots. If you want to use the house yourself, consider going in the off-season to leave the busy season open to guests. In addition, always be mindful when cutting costs — you have to balance luxury and ROI. Making money on vacation homes can be difficult, so make sure you’re up for the challenge.

In 2005, I looked at purchasing a vacation rental in Mammoth Lakes, CA and on the Las Vegas Strip.  However, I wasn’t able to cash flow positively no matter how much I twisted the financing – management fees alone ate up to 50% of all incoming revenue, so beware!

Real estate investment is never easy at first. So if you want to invest in vacation rentals, keep these tips in mind before signing on the dotted line.

Don’t Forget Your Contingency Plans

Rental properties can be an excellent way to build your cash flow and overall wealth.  However, like any investment, there are worse possible case scenarios you should consider.

Take, for example, my hometown, of San Diego!  They just passed some legislation that will make it illegal to rent out your vacation home.  Insane, right?!

Although my San Diego property has long-term tenants currently, I don’t want the city to regulate what I do with my property.  In fact, it has the potential to be even more profitable as a short-term vacation rental.

The point is, make sure you know your worse possible case scenario, and ask yourself what you’ll do if it were to happen.  It could be as simple as selling it,  or making it a true vacation home indefinitely.

Final Thoughts

Owning rental properties can be both rewarding and fun.  However, it may take more time and attention than you’re willing to put in.

If that’s the case, you could consider more passive real estate investment plays like RealtyShares, CrowdStreet (which my friend, Dom, has written about), or Fundrise (which another of my friend’s, Eric, has written about)… there are a lot of them these days… point being, you have choices.

Know what you’re getting into, and then go for it!  You’ll likely do much better than my first ever deal.  😉

Readers, would you invest in vacation rentals?  Do they warrant the extra effort, or are classic long-term rentals the better play?

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15 Comments on “Tips to Help You Invest in Vacation Rentals the Right Way”

  1. Thanks for the tip about keeping location in mind. My dad really wants to invest in some rental properties. He would really like to get some loans from a professional so that he can finance it.

    1. Financing is definitely a big consideration and factor with cash flow. If a traditional bank won’t accept you, then you can always look at other real estate investors as sources for capital.

  2. It makes sense that you would want to look into a vacation rental run by a smart service. Knowing that they are keeping cost-quality in perspective for the customer and the management. I have been thinking about getting a vacation rental for a while now and might like to keep this in mind.

  3. One of the most important things to attend to when looking for a vacation rental is location, location, location! Renting down by a beachfront or by a lakeside is actually a good idea since both locations are close to water and a lot of water-related activities happen like sailing, fishing, paragliding, and jet skiing. If I had the chance to own a vacation rental unit, I would really rake in the money when summertime comes since a lot of people want to cool down by the water’s edge.

  4. I agree that when renting out a vacation home, you need to make sure that it is well taken care of and clean. I know when I rent out a vacation home, I only stay in places that are clean and in good condition. My best friend is thinking about investing in a vacation home to rent out, and I will definitely pass on this great advice to her.

  5. I think that cleanliness is one of the most important factors in a vacation home. I agree that hiring a vacation home cleaning service will make your life much easier. Thanks for also bringing up landscaping and handyman services, I hadn’t thought of that.

  6. Very informative article and great for anyone interested in having Investment property. So many people do not count all the potential costs and or worst case scenarios. I was going to add the idea of hiring a property management company as well and I was happy to see someone has already made that comment. Thanks for sharing.

  7. Really great information Michael! Thanks for posting. It is important to consider the financial impact of insurance coverage when purchasing a vacation rental. Insurance premiums can significantly affect any income you expect to make. Needless to say, by having a trusted, experienced insurance agent to provide this sort of information will help avoid potential pitfalls. There could be things that sites like Airbnb doesn’t cover.

  8. A worth reading article. Factors critical for the real estate investment should be properly considered prior to the investment. Investment in vacation rental property could assure steady cash flow. However, the location of such property plays a key role to generate more profit. Apart from this, such property needs regular maintenance. So, a reliable property management company of that very locality should be hired for the maintenance of such property.

  9. I bought a long distance property to airbnb because like Scott said…the cash flow has good potential. The problem was my execution as I trusted too much in my property manager. I would have liked a property closer by but I live in NYC and I just can’t afford one around these parts…plus it’s highly regulated. In any case, my property manager dropped the ball and I had to fire him. I still do see the great potential with short term rentals. I mean my listing had no pictures and I still had a good amount of bookings. Even some poor reviews didn’t deter some people because there was so much demand!

  10. Really good information here, thanks for sharing. Last year we added AirBNB vacation rentals to our real estate portfolio, located in Costa Rica.

    The cash flow from these properties has good potential compared to our other long term rentals, but there is risk involved because the startup costs can be high as well as the ongoing costs. We have definitely experienced that. Also, property management for vacation rentals can be very expensive. The numbers are just less predictable for STR vs LTR, but if you can get good occupancy (with good photos and good reviews), the cash flow will come.

    I would only add that it is important to keep seasonality in mind, because there may be months during the year where there is little demand, cutting into your cash flow.

    1. That’s awesome, Scott! Great to learn about your firsthand experience. Costa Rica is a beautiful country I hear (I’ve visited as close as Belize).

      And, YES, seasonality is a huge consideration… I definitely should have added that.

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