Many of us are searching for alternative assets to invest in and buying a vacation rental property can be a very attractive option. After all, when you’re not renting it out, you can always enjoy a vacation whenever you want. This alone is a very tempting proposition!
Though, to ensure that it’s worth your time and effort, you need to find the right location first. This is often easier said than done as there are several factors to consider. To help you identify the best place for buying a vacation rental, here are the most important things to consider.
Buying a rental property in the wrong market will affect your bottom line. Thus, it’s crucial that you analyze the different markets thoroughly. The best vacation destinations for investment purposes are the cities that attract many travelers and can deliver a high return on investment.
The most important factors to consider when assessing if a market is hot or not are the occupancy rates, nightly rates and the capitalization rate (or simply the cap rate). The cap rate is the ratio that you get when you divide the net operating income for your property by the market value. Ideally, this percentage should be 10% or more. Anything below 8% is considered a bad real estate investment.
After you have paid for the property, there are many other ongoing expenses that you’ll have to pay. While many of these expenses are tax-deductible, it can be a pretty sum that would impact your cash flow. Examples of expenses that you will have to cover include: property taxes, extra insurance, licensing, business permits and maintenance. If you add up these expenses and realize that you won’t be able to generate positive cash flow, continue the search.
The occupancy rate will have a huge effect on your return on investment. The higher the occupancy rate, the better the chance that most nights will be booked.
Be sure to research the occupancy rate of the city as well as the surrounding neighborhoods. Buying a vacation rental property in an area that boasts an above-average occupancy rate is ideal.
While an area may be hot amongst tourists, renting out on a short-term basis could land you in hot water. The boom in the short-term rental market has meant that many cities have regulations to help safeguard the local housing market. Some cities severely restrict the number of nights you may rent out your property on a short-term basis. Other cities have laws in place that require the host to live on the property. In some instances, short-term rentals might even be banned altogether! Thus, remember to research the regulations and ensure that you actually understand them before buying a vacation rental property.
One of the first steps is to work out how much rental income you should generate just to break even. Luckily there are tools like Mashvisor that can help you to estimate your revenue. There are also many vacation rental forums that you can join to get a better insight into specific real estate markets.
Your vacation rental property should at all times be in tip-top shape. Thus, maintenance will be one of your main priorities. If you intend to take care of maintenance yourself, choose an area that’s nearby.
Though, single-family homes are often better for vacation rentals. This type of property requires more maintenance which could mean that it might be too much for you to handle. So, if you want to entrust maintenance to a property management company, first find out if there are reliable companies that service the area and what the maintenance expenses will be.
Although properties that boast convenience and safety are more expensive, location remains invaluable. Not only does it pay to invest in an area that’s popular amongst tourists, but proximity to local amenities is equally important. After all, you want your vacation rental to stand out, right? Therefore, consider buying a vacation rental property that’s in walkable distance to restaurants and transport and boasts unique amenities like a private rooftop, intimate courtyard or spectacular views.