So lately you have been dreaming about owning a vacation rental? Maybe you have seen the commercial from Homeaway that makes it seem so easy. Here are a few things to consider before buying your first vacation rental.
Can you Afford a Vacation Home?
The best vacation rentals are located in some of the most sought after locations. This means they are not inexpensive to own. Mortgage payments, property taxes, insurance and utilities will all add up. Hopefully you will have rental income to at least offset these expenses. Ideally you should be able to comfortably cover all your expenses even in a down year. Real Estate is not considered a liquid investment, so it may be difficult to get your money back out of your vacation home quickly.
Familiarize Yourself with Local Rules
There are several things you need to know before purchasing a vacation rental. Many cities have zoning or other guidelines restricting or limiting short term rentals. Many HOAs and condominium associations may do the same thing or even require that you use their in-house rental program. Engage a local, competent real estate agent to help navigate this issue.
How Often do you Plan to Use Your Vacation Rental?
As I have said before, getting personal enjoyment from your vacation rental investment is one of the main advantages of owning. It is easy however, to fall in love with your new house and use it too much. This can have a negative impact on your rental income and also can have income tax implications. Alternatively, if you never use your vacation rental yourself, what is the point of owning it? It is good to set goals for your vacation rental and tailor your usage to meet these goals.
Assess the Location
The old real estate adage “location, location, location” rings especially true for vacation rental properties. Your future vacation rental needs to be in a location that is in demand. You can have the nicest vacation home and the best marketing, but none of that will matter if renters do not have a reason to visit your area. Think about what makes the area unique. Beaches, lakes and ski resorts are the most obvious vacation rental markets, but there are many other attractions that can draw visitors. If you have a hard time answering this question, then perhaps you should look elsewhere.
Would you Rent it?
This is the simplest question, yet it is the first question I ask of owners when they are thinking about moving to me from another vacation rental manager. Typically they are disappointed in their rental income returns.
Once you have zeroed in on a home, ask yourself if you would rent it. Does it have any special characteristics that would appeal to renters or is it like every other home on the market? There are some things to do to make it stand out if it doesn’t stand out naturally. Update the furniture, repaint, add new decor, adjust the price so that it is an excellent value.
Vacation rentals can be very competitive depending on the market you are in. Make sure you put yourself in the guest’s shoes and do a realistic assessment of where your property will stand in relation to your competitors.
Make Sure to Consider all the Costs
Many expenses associated with owning a vacation rental home are obvious. You will obviously have a mortgage, property taxes, utilities, insurance and you will have to pay your property manager if you hire one. Another big item to consider is maintenance and refurbishing. Your property will inevitably have wear and tear which can range from repainting to a new air conditioning unit or new roof. There are also additional recurring costs such as pest control, pool cleaning, lawn mowing. Factor these costs into your budget when determining if a vacation rental is right for you.
Take Steps to Protect Your Investment
Owning a vacation rental can be a significant investment. You will want to take steps to protect that investment while also hedging risk for yourself. Talk to an insurance company about what types of coverage you should have in place. Look at the home and note any potential concerns affecting guest safety before buying.
Also consider asking your guests to purchase Vacation Rental Damage Protection when they book. This will cover your home from accidental damage and will typically provide much better protection than a security deposit.
Prepare for a Rainy Day
Ideally you will earn enough income to cover the costs of owning your vacation rental home every year. Keep in mind that factors outside of your control can affect your rental income. Weather or natural disasters, economic influences and traveler sentiment all affect the hospitality business every year. You need to be prepared to deal with the ebb and flow.
