A-to-Z Guide to Investment in Short-Term Vacation Rental Properties for Beginners
Even though the information on this web page is provided by a qualified industry expert, it should not be considered as legal, tax, financial or investment advice. Since every individual’s situation is unique, a qualified professional should be consulted before making financial decisions.
In this article, we’re going to look at the basics of investing in vacation rental properties for beginners. This guide is created for both newbies and experienced real estate investors.
Read on to discover more on how to start your short-term rental business.
Should I Invest in Vacation Rental Property?
Are Vacation Rental Homes a Good Investment?
Is owning a vacation rental property a good investment? Absolutely. This is one of the easiest ways for some people to start investing in real estate.
Vacation rental home ownership is one of the long-term exit strategies for real estate investors that benefits from a recurring income stream and the property’s value appreciation.
Short-term rentals charge much higher rates than long-term leases. Vacation rentals are used most of the year in a properly selected location.
Even in locations with a preferred “season,” in- and out-of-season rents can still total a yearly income that is higher than annual leases. This creates a stronger return on investment.
Often during economic recessions, vacation rentals remain strong.
Your tenants are paying for your investment, and you can ultimately wind up with a retirement home with no mortgage.
Depending on your preference, this may impact your decision on whether to buy a single-family vacation home versus a condo.
Many suitable vacation homes are not part of an HOA, which reduces costs and restrictions.
If the local vacation market softens, you’ll need the option to rent your property long-term (annually). Many investors believe that a single-family property is more desirable for long-term renters.
Are Vacation Condos a Good Investment?
Buying a vacation condo is a great way to start investing. These long-term investments are easy to understand.
In markets with a good supply of condos, these properties are often more affordable than single-family houses.
Purchasing a vacation rental condo as your second home provides better financing options. However, some lenders require a second home to be a certain distance from your primary residence.
Condos are a good passive investment. They are managed by third-party associations that take care of the ongoing maintenance of the exterior of the building(s) and the surrounding grounds.
These costs are built into the association fees paid by the property owners making them easy to budget.
A well-managed condo association also holds adequate reserves for periodic major repairs such as exterior painting or replacing the roof.
That takes one more thing off of your hands. Investigating the association and its financial records is an important part of your due diligence.
Rents for short-term stays are much higher than the rental rates for long-term renters.
Owning a vacation condo in an area that has good off-season business will greatly enhance your return on investment.
What Does a Vacation Rental Property Management Involve?
Effective vacation rental property management can multiply your bookings and income tenfold.
For starters, vacation rental management refers to the administration and supervision of the property.
It involves tasks such as handling bookings, maintenance, cleaning, and ensuring that guests enjoy their stay.
One crucial management task that many owners forget is marketing the vacation rental. A vacant rental means you’re losing money since it’s not generating any income for you.
You must market your vacation rental to get more bookings.
Luckily, there are various listing platforms, such as Airbnb, VRBO, HomeAway, and Booking.com, that you can use to market the property.
But in short, a professional property manager will carry out the following tasks:
- respond to inquiries and messages
- set appropriate rates
- handle bookings and cancellations
- collect payments
- handle check-ins and checkouts
- schedule maintenance and repairs after bookings
- restock property supplies
- write guest reviews
- market the vacation rental
Hiring a property manager is especially important when you have a few vacation rentals under your portfolio.
Before selecting a company, make sure to prepare the right interview questions to ask a property manager before hiring.
How to Buy a Vacation Investment Property
Here are some of the things all real estate investors should be aware of before putting their money in short-term rentals:
Where to Invest in Vacation Rental Property?
Choosing from the best vacation rental investment markets is the major pillar of any real estate investment.
The property’s location is its most important feature. You can change everything about the property later on, except this.
The best place to invest in real estate for vacation rentals is in or near tourist hotspots. This means close to beaches, ski resorts, national parks, golf courses, or theme parks.
Business hubs also make great locations for short-term rentals, such as corporate housing, due to traveling professionals.
Before purchasing the property, we recommend you visit the area yourself and have a feel of what it’s like to stay there.
If possible, stay near the property you are considering purchasing. You want to ensure that the location gives your guests the ultimate experience.
Also, consult with a local investor-friendly real estate agent. These professionals are familiar with the local vacation real estate market and can help you understand where to buy a vacation home for the best return on investment.
Let’s look at the best areas where to buy a vacation home for the best return on investment.
5 Best Places to Invest in Vacation Short-Term Rental Homes
For those who chose vacation rentals as one of their preferred real estate investment strategies, we’ve compiled the following locations to narrow down their research of where to invest in short-term rentals.
This list of the 5 best vacation investment property locations is based on nationwide real estate market analysis conducted by Mashvisor, a real estate data analytics platform.
Phoenix, Oregon is a small town with a population of about 4,000 people. Tourists love visiting the town to taste the delicious wines, enjoy the breathtaking views, and hike in the outdoors.
Here’s the latest Phoenix Airbnb market data:
- Average Cash on Cash Return: 8.51%
- Average Cap Rate: 8.87%
- Average Monthly Rental Income: $2,824
- Average Daily Rate: $111
- Average Occupancy Rate: 75%
- Median Property Price: $466,933
- Average Price per Square Foot: $279
- Average Days on Market: 70
As a short-term rental owner in Phoenix, OR, the state requires you to collect and submit lodging taxes.
This is done by filing revenue returns quarterly. The taxes collected go toward Oregon’s tourism programs.
#2. Edgerton, WI Real Estate Market
Tourists are attracted to Edgerton due to the history and adventure in the community.
Whether visitors want to relax or take on different fun challenges, the city has everything to meet their needs.
This makes it a top destination for the best vacation rental investments. Here are Edgerton Airbnb market data and statistics:
- Average Cash on Cash Return: 7.99%
- Average Cap Rate: 8.16%
- Average Rental Income: $5,210
- Average Daily Rate: $274
- Average Occupancy Rate: 59%
- Median Property Price: $399,872
- Average Price per Square Foot: $204
- Average Days on Market: 48
As you can see, this city offers one of the best returns on investment.
When it comes to laws and regulations, the State of Wisconsin has a law that prohibits municipal governments from banning short-term rentals.
However, the law allows them to enact other ordinances. Call the local authorities to confirm the local rules and regulations before investing in short-term rentals.
This city is a major tourist attraction in Virginia. Tourists throng the city to enjoy historical attractions, such as the Old Brick House, Fort Clifton, and Violet Bank.
Let’s look at the short-term rental market data:
- Average Cash on Cash Return: 7.51%
- Average Cap Rate: 7.70%
- Average Monthly Rental Income: $3,716
- Average Daily Rate: $119
- Average Occupancy Rate: 86%
- Median Property Price: $278,975
- Average Price per Square Foot: $163
- Average Days on Market: 41
With such a high Airbnb cap rate and cash on cash return, you can only expect a strongly positive short-term rental cash flow.
While details surrounding Airbnb ordinances in Colonial Height are quite scanty, we recommend you to check with the municipal government before investing in this location.
One of the main reasons why Old Town, ME is a popular market for Airbnb real estate investors is due to the fact that there are no local short-term rental laws and regulations.
However, the State of Maine requires Airbnb hosts to collect a 7% Vacation Rental Tax. Let’s take a look at the market’s Airbnb statistics:
- Average Cash on Cash Return: 5.74%
- Average Cap Rate: 5.84%
- Average Monthly Rental Income: $4,426
- Average Daily Rate: $215
- Average Occupancy Rate: 57%
- Median Property Price: $269,756
- Average Price per Square Foot: $148
- Average Days on Market: 25
Old Town’s Airbnb cash on cash return and cap rate make it one of the most profitable locations for short-term rentals.
The occupancy rate is above average meaning that you’ll enjoy constant bookings throughout the year.
Oklahoma City is yet another location on our list of the best places to invest in Airbnb properties.
The city has previously recorded one of the fastest growth rates in the Airbnb market. As you’ll see from the data below, the Oklahoma City Airbnb market offers great cash on cash return and cap rate.
However, if you’re to invest in the Oklahoma City Airbnb market, you need to note that you’ll have to pay $2,700 for a short-term rental permit. This high amount could eat into your profits.
- Average Cash on Cash Return: 4.87%
- Average Cap Rate: 5.06%
- Average Monthly Rental Income: $2,394
- Average Daily Rate: $99
- Average Occupancy Rate: 61%
- Median Property Price: $332,512
- Average Price per Square Foot: $163
- Average Days on Market: 56
Conduct a Market Analysis
From the location list, you can narrow your search down to two or more potential short-term rental investment markets.
After this, it’s now time to scrutinize the markets individually to understand the demand and income potential.
You can start by asking yourself whether you’d spend your holiday in that particular location. Here’s a list of questions to help you through this process:
- Are there any tourist attractions nearby?
- If so, what type of attractions are they?
- How popular are the attractions through different seasons of the year?
- Is the demand for short-term rentals in the location sustainable?
- What vacation trends affect the specific location?
You also want to understand whether the location attracts most people during the winter or the summer.
For example, a property near a ski resort will receive more bookings during the winter, while one near a water park will perform better during the summer.
This helps you know what to expect during the peak and off-peak seasons.
Don’t forget to check what property types are more ideal in your location. You can choose to invest in a log cabin, apartment, cottage, condo, or townhouse depending on the demand in your market.
One essential piece of data to look at while analyzing the market is rental comps. Rental comps are based on how comparable rental properties within the same area are performing.
This data helps you know what you can expect from your investment.
Run the Numbers
Now that you’re done with the market-level analysis, it’s time to get to the property-level review. Of course, you need to have a few subject properties to analyze.
You can now start calculating the property expenses and expected cash flow, as well as the return on investment metrics, such as cash on cash return and cap rate.
Make a list of all property expenses and add all the costs together. Common short-term rental property expenses include taxes, landlord insurance, cleaning, and utilities.
If you’ve taken a mortgage to pay for the property, factor in the monthly payments.
After this, you can tally all the numbers and see how much you’ll need to make every month to make a significant profit.
Calculate your cash flow by taking away the property expenses from the potential rental income.
Since it can be hard to do all the estimates yourself, you can use an Airbnb calculator tool to compute these numbers.
Comply With Laws and Regulations
As we’ve already mentioned, each state and local authority has its laws and regulations governing short-term rentals.
In most states, you’ll have to register your vacation rental business and obtain an annual license. In others, you’ll have to collect occupancy tax from your guests.
Some states also require the host to live in the property. This means you can only lease out an extra unit in your primary residence.
The aim of understanding your location’s laws and regulations is to avoid getting into trouble in the future. For that, consult with one of your local real estate attorneys.
Most states have tough fines for hosts who don’t adhere to the laws. You also ought to ensure that you comply with the local zoning laws and tax requirements.
If your state has set a cap on the number of days you can rent out your short-term rental annually, you can consider renting it out as a traditional rental once you’ve hit the limit.
You can only make profits by getting enough bookings every month. Your nightly rates influence the number of monthly bookings you get.
If your rate is too high, you’ll lose potential guests to your competitors with better rates. On the other hand, if you’re too cheap, you’ll be leaving some money on the table, and it’ll be difficult to break even.
You need a dynamic and strategic pricing strategy to attract more bookings. This will attract more guests who’ll leave you great feedback. So, how do you come up with a dynamic pricing strategy?
First, you need to carry out research. Remember we mentioned rental comps? This is where these short-term rental analytics come in handy.
Looking at this data helps you understand how much your competitors are offering and at what rates.
Ensure you look at leading listings in your neighborhood.
- What amenities are they offering?
- What are their nightly rates?
- Do they have discounts?
Your main goal here is to come up with a reasonable rate so your guests don’t feel like you’re overcharging them.
Secondly, you need to make your prices dynamic. Don’t just set one rate and use it across all seasons.
You can set a higher rate for peak seasons when demand is high to maximize your income.
Once the market has cooled down, adjust the rate downwards to make your guests feel they’re getting a bargain.
How to Buy a Short-Term Rental Property at the Best Price?
At this point, you’ve probably made up your mind to invest in vacation properties. Like all home buyers, you don’t want to get ripped off.
This is why it’s important for you to find properties selling at the best price. How do you find a good deal on a house?
The best way of finding good deals on properties is by purchasing from motivated sellers. Motivated sellers are property owners willing to sell their houses fast and with the least contract contingency.
One sign of a motivated seller is one who’s willing to sell to real estate cash buyers, without depending on the purchaser’s loan approval, or whose property has sat on the market for a long time.
Some sellers become motivated since they need money fast. Others are desperate because of problems preventing them from finding a buyer such as the bad condition of the property that they can’t fix.
Both categories are often willing to sell at a discount.
Buy an investment property in your area by using the HouseCashin’s marketplace. This national online real estate marketplace is created specifically for real estate investors looking to buy properties for under market value listed by motivated sellers.
The platform offers “for sale by owner” listings by motivated sellers as well as wholesale properties offered by real estate wholesalers who have already pre-negotiated them and analyzed their profit potential for you.