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Vacation rentals allow people to be able to visit places for a short time without the expense of actually owning property. This means that travelers can capitalize on prime properties during lower season rates, and it’s easy to find places based off your own personal preferences. With so many options available, how do you know which ones are worth buying? Here is our guide into purchasing vacation rental properties in five simple steps!
Have you ever dreamt of having a beachfront house or a modest cottage in the mountains that you can use for holidays and rent out when you’re not there, allowing you to defray property costs by leveraging other people’s money? For 12 years, I bought a home on a quiet lake and did just that. I could easily cover my costs without needing to rent it on a regular basis. We’ll walk you through five stages to help you purchase a vacation rental home for both enjoyment and profit.
Consider investing in turnkey real estate with Roofstock if you want to acquire a rent-ready vacation home with a property management company already in place. Roofstock allows you to search for homes in over 40 different rental markets that come with current tenants and property managers. This enables you to select the ideal home for you and begin earning rental money right now.
1. Decide on a vacation spot that appeals to you.
People purchase vacation homes to utilize as a second home or to generate rental income to help cover the expenses of ownership. Some real estate investors specialize in holiday rentals and construct portfolios of just vacation rental properties.
Near beaches, mountains, lakes, casinos, or a state or national park, the ideal places are found. When deciding where to purchase a vacation rental home, consider the location, facilities, and nearby attractions. Choose a vacation rental property in a location you appreciate, but also think about how tenants will get to and enjoy the property.
What are the Best Places to Look for Vacation Rental Properties?
The most simple approach to locating vacation rental homes is to do an internet search. You may already have a destination in mind for your vacation home. You might sometimes locate fantastic houses close in your own neighborhood or state. Self-managing a holiday property is simpler when you live close by than if you live far away.
Consider your financial situation. Property prices in high-tourism areas tend to be greater, but they also produce higher rental revenue. That doesn’t imply you have to abandon your current place. If you can’t afford property in the more expensive neighborhood, you may be able to locate something in a nearby town or on the outskirts.
You may also contact a local real estate agent to assist you in your search for a holiday rental.
2. Calculate Income & Expenses
Once you’ve found a possible home, be sure you can afford it, even if it’s empty. Examine the prices of nearby vacation rentals and compare them to your monthly financing and operating expenditures. It will assist you to calculate revenue if you can obtain an estimate of occupancy rates for a holiday rental in that area. Property managers and real estate brokers in your area can assist you in locating this information.
If a property’s monthly operating expenditures are $250, the mortgage, taxes, and insurance are $1,750, and the nightly rental rate is $100, and the occupancy rate is 80%, you may calculate your possible monthly profit as follows:
[($100) x (80%) x (30 days) – [($250) + ($1,750)]] Potential monthly income = 400 dollars
If the home was leased for a full 30 days in most months, it would be cash positive in this case.
If you live in the property part-time, though, you will lower your occupancy rates and revenue. During off-peak seasons, occupancy rates and rent collected both drops, so you’ll need to run a few scenarios to be sure the property is bringing in the money you want.
Let’s go through some of the costs you can face so you can figure out how much it will cost.
Expenses of a Vacation Rental Property
You’ll also have to pay for internet booking fees for your rentals, taxes, insurance, homeowner association (HOA) fees, utilities, repairs, and upkeep, in addition to your mortgage and insurance payments. It’s possible that you’ll have to spend more to advertise for tenants. If you hire a property manager, you’ll have to factor in such expenditures, but they’ll usually cover them as part of your management contract and fees.
Vacation Rental Taxes
- Taxes on real estate are usually deductible. To take advantage of the biggest tax deductions allowed for a holiday rental, consult your certified public accountant (CPA). Property tax information is frequently available online, either on the property’s listing or via the assessor’s online database.
- Rental income taxes must be paid at the end of the year if the property is rented for more than 14 days. You won’t have to pay taxes if you earn less than that. If you do have to pay taxes, your rental income will be taxed at your regular tax rate.
- Occupancy taxes: Also known as hotel or lodging taxes, occupancy taxes vary from 5% to 19% each night, depending on your state. Guests are often charged these taxes by vacation rental landlords. These might be in addition to any applicable state lodging taxes. If your city has joined up with Airbnb to collect taxes, it may do so for you if you rent your home via them.
Insurance for your home
Make sure you have the appropriate homes insurance for the sort of property you have and how you want to use it. If a tenant is injured or destroys the property, a standard second home coverage may not protect you. Based on usage and occupancy, you’ll need either a homeowner’s or a landlord’s insurance coverage. The sort of insurance you need is determined by how often you will rent the property and how frequently you will utilize it. If you live in a flood zone, ask about flood insurance.
HOA Fees
You will be liable for paying HOA fees if you buy a condo or a house in a planned community with shared facilities. These costs vary depending on the kind of property, its size, location, and amenities. HOA costs are normally paid on a monthly basis, although they may also be paid on a quarterly basis. The fees may be tax deductible if you rent the property.
Utilities
Include heating, cooling, electricity, and cooking gas expenditures. You may receive a broad estimate of these prices from the seller and local utility providers before you purchase a house. The price depends on how you and your visitors utilize the property.
Fees for Management
If the vacation rental property is located distant from their home location, some owners engage a property manager. These prices vary depending on the management company’s services. The average charge is 28% of the total vacation rental profits. Because the rental revenue is erratic or seasonal, and the property management business has more work to perform with more frequent tenant turnover, the costs are higher than the normal rates of 4% to 10% for long-term rentals.
Costs of Financing
If you finance your vacation investment property, you need to include your monthly mortgage principal, interest, and private mortgage insurance (PMI) payments into your costs. If the property has 20% equity, you aren’t required to pay PMI. Also, calculate the Costs of Financing including the appraisal, loan origination fees, and closing costs.
Investing in Vacation Rental Properties: How to Make Money
Advertising on Airbnb, Vrbo, and other online vacation rental platforms are popular methods to generate money with holiday rental homes. Local periodicals in several high-tourism regions provide advertisements for holiday houses. A property management firm will promote your property for you if you employ them.
Airbnb
Airbnb is a website that allows you to rent out your holiday home to travelers searching for a cheaper alternative to hotels. You may add a description of the home’s facilities, the number of bedrooms and baths, and any other features to a property listing. Include images shot throughout the day for the optimum lighting in your listing.
Every time a booking is finalized on Airbnb, a service fee is charged. The service cost varies from 3% to 5% of the total. If the area demands it, taxes are included; nonetheless, the service cost is computed from the booking subtotal before fees and taxes are applied. Fees are removed from your payment automatically.
Vrbo
Vrbo (Vacation Rental by Owner) is a classified ad website. You have the option of managing the property yourself or hiring a property manager to help you advertise it on Vrbo. Vrbo charges a $399 yearly membership for long-term rentals and an 8 percent booking fee if you self-manage your listing or a 13 percent booking fee if you want Vrbo to handle your listing for you. The fees are removed from the rental revenue automatically.
3. Get the Vacation Rental Property Funded
A Loan that complies with the law, a loan from a portfolio, a loan for a group of people, or, in certain situations, a Loan for a limited period of time such as a hard money loan or a bridge loan are used to fund vacation rental properties.
Loan that complies with the law
Lending qualifications for a Loan that complies with the law on a vacation rental property are more lenient than for a standard rental property but stricter than for a primary residence. Lenders know that borrowers will be living there for part of the year and not entirely dependent on rental income to pay the mortgage. A 20% down payment and a credit score over 680 is typical. If you’re buying the property as a second home, to qualify for low-interest rates, the lender may restrict your renting it to vacationers for a year.
Loan from a Portfolio
A Loan from a Portfolio can be used by an investor who wants to finance multiple properties at once. It also can be used to finance a multiunit vacation property. A loan from a portfolio usually offer lower personal qualifications and fewer property requirements.
Loan for a group of people
A Loan for a group of people is used to finance a multifamily vacation property with two to four units or an apartment building with more than four units. There are four types of Loans for a group of people: conventional mortgages, government-backed loans, Loans from Portfolios, and short-term multifamily financing. Each type of loan has its own lending criteria.
Loan for a limited period of time
A bridge loan is a loan for a limited period of time that can be used as interim financing. For example, if you find a great deal on a property and want to buy it before you have long-term financing in place, a bridge loan could work. These loans generally have more lenient qualifications than Loan that complies with the laws.
A hard money loan is another option. This is a great option if you need to remodel or season a home before refinancing it with a permanent loan. Hard money lenders provide loans based on the property’s after-repair value (ARV) rather than the borrower’s financial situation.
4. Enlist the help of operational services
You may either manage your vacation rental property yourself or hire someone to handle it for you after you’ve purchased it. If you’re going to handle the property yourself and live a long way from it, you’ll need to hire lawn care and cleaning services. If you have a pool, you will want the services of a pool cleaning and maintenance business.
If your vacation home has a homeowners’ association, they’ll take care of the outside and common spaces for you. When you engage a property manager, they are usually in charge of the day-to-day operations.
5. Advertise & Manage the Vacation Property
To expose the property to vacationers, you or your property manager might publish its availability on the websites we discussed previously. Block out the days you wish to utilize it when listing availability so no one else may hire it during that period.
If you maintain your home yourself and live far away from it, you’ll need a mechanism to allow service employees and visitors access. Some property owners have a keypad that tenants use to gain entry and then reset after each usage. You may also engage a property management business to manage the property for you, which will save you time since you won’t have to be involved in the day-to-day operations.
Benefits of Owning a Vacation Rental Property
One of the advantages of buying a vacation rental property is that you may deduct a percentage of your Residential Property Taxes, HOA fees, and mortgage interest charges from your taxes.
Residential Property Taxes
The IRS considers your vacation home to be a rental property if you rent it out for more than 14 days a year. It is, however, deemed a personal home if you utilize the property for more than 10% of the days it is leased. You may deduct real estate property taxes from your income taxes, but you should engage a CPA that understands the distinctions between a vacation rental property and a personal residence, especially when a second house is also utilized for vacation rental revenue.
HOA Fees
Only if the vacation rental property is leased for 14 days or more per year are HOA costs deductible. Aside from that, the property is treated as a second residence, and the fees are not tax-deductible.
Expenses for Mortgage Interest
Expenses for Mortgage Interest have similar guidelines to Residential Property Taxes when it comes to tax benefits and deductions. You can deduct 100% of mortgage interest under the second home rule if you rent the property for 14 days or less per year. This applies to properties up to $1.1 million. If you rent the property for more than 14 days, you can deduct mortgage interest from your rental income.
The Benefits and Drawbacks of Purchasing a Vacation Rental Property
Buying a vacation rental property can provide a place for you to vacation while offsetting some of the property expenses with rental income when you’re not using it. Short-term rental rates are usually higher than long-term rental rates, but maintenance expenses, utilities, advertising, and Fees for Management can quickly add up.
The following are some of the advantages of purchasing vacation rental property:
- A vacation rental property may be used to augment your income.
- Rental revenue might help to defray property and vacation costs.
- Tax deductions are available to you.
- The property’s worth may increase.
- You have complete freedom to enjoy your holiday rental home whenever you wish.
The following are some of the disadvantages of purchasing vacation rental property:
- Regardless of whether the property is leased or not, you will be responsible for paying property taxes, upkeep, and utility bills.
- It’s possible that you’ll have to hire a property manager to handle the day-to-day operations.
- During economic downturns, vacation rental properties are frequently hurt harder since consumers often cancel or cut down on trips to save money.
- Renters are frequently seasonal, and off-peak seasons provide lower per-night rent, thus cash flow might be unpredictable.
Conclusion
Purchasing a vacation rental property may be a terrific opportunity to invest in real estate, offset some of the costs of homeownership, and enjoy your favorite vacation area from the comfort of your own second home. These properties may bring in high rentals, but they are often seasonal, and they come with a lot of expenditures.
