Vacation Rental is a booming industry, with more travelers opting for this alternative to hotels. In addition, the growing trend of working from home and digital nomads has given the flexibility to people to work from anywhere in the world.
Due to this, Airbnb saw a massive increase in demand in the fourth quarter of 2021. Since it is a booming industry, it is no surprise that you are looking into vacation rental investment.
This blog has covered the steps to investing in a vacation rental, the pros and cons of investing, and how you can do the market research for your potential locations using the PriceLabs Market Dashboard.
Steps to follow for a profitable vacation rental investment
Investing in a vacation rental can look like a daunting task. However, taking things one step at a time and doing your due diligence with market research significantly reduces your chances of making any mistakes. We have broken down the process into comprehensive steps that you can easily follow.
1. Finalize the location
The first rule to investing in real estate is to be extremely sure about the location. You’d have to be stuck with that one thing for a long time.
You can start your market research for vacation rental investment by listing cities you’d want to invest in and zeroing in on each town’s region. You need to finalize the location based on its seasonality, market demand, and supply for vacation rentals, local rules, regulations, the type of property you want to invest in, and if there is demand for that in your preferred location, etc.
Then, using PriceLabs Market Dashboard, you can check the market analytics for each area to move forward with your vacation rental investment. I will cover more on that in the following sections.
When selecting a location, you should ensure that it is a desirable, pleasant, and accessible location. If all the desired amenities are nearby, it will be easier for you to attract guests. For example, you can buy a property near a beach if you choose a beach town as your location. You can also choose to invest in a property in the city center if investing in an urban location.
2. Get Pre-Approved for Loan
Getting your finances sorted and your loan approval doesn’t need to be a second step. You can get started with the loan approval process when you invest in a vacation rental property. While you are still researching your ideal location and mapping your business plan and goals, you can also choose how you are going to secure your finances. This will be a safe bet because you don’t have to go ahead with the loan if you choose not to move forward with your vacation rental investment.
Most investors would require seeking out a source of financing to make the purchase. If you are one of them, you have multiple options ranging from short-term to long-term financing. Here are some of the possible options that you can look into:
- Conforming Loan: This is a popular option for vacation rentals because the criteria for qualification are not as strict as those for a primary residence. A good credit score (680+) and a down payment of around 20% are standard.
- Portfolio Loan: Portfolio loans are often used by investors with either multiple properties or one multi-unit property. Qualifications for these loans are more lenient than other types.
- Multifamily Loan: Multifamily loans are taken to finance 2-4 unit vacation properties. They are also used to finance apartment buildings with more than four units. Portfolio loans fall under this umbrella, in addition to conventional mortgages, government-backed loans, and short-term multifamily loans.
- Short-Term Loan: A short-term loan is a great option for investors who need cash to purchase a vacation property before securing long-term financing. Bridge loans and hard money both fall under this category.
3. Conduct In-Depth Market Research
After you have created a list of all the potential locations you’d want to invest in and secured a loan approval, it is time to work on understanding the various markets that you are planning to invest in. When doing the market research, you need to analyze the market on the below-mentioned parameters:
- Supply and demand for vacation rentals in the market
- The seasonality trends of the location
- Local restrictions and regulations on vacation rentals. Every market has different rules for short-term rentals. Some cities have banned short-term rentals altogether, and some have heavy restrictions and extensive licensing to permit the operation of Airbnbs and short-term rentals, like Berlin, Barcelona, etc.
- Average Nightly Charges for the kind of property you are looking to invest in.
- The average occupancy rate of vacation rentals in your market
PriceLabs Market Dashboard helps you analyze a particular market based on several KPIs, including everything mentioned above (except the local regulations, which you can find out with a quick google search) and much more. In the following sections, I will discuss how you can use PriceLabs Market Dashboard at length.
4. Calculate your expected income and expenses
If the property you are researching shows potential rental demand, you can begin calculating your ROI and expenses. This means you need to calculate how much it will cost to manage the property and how much you can earn from it.
Make a list of your monthly expenses and tally the different costs. Remember that there will be costs relating to cleaning, restocking supplies, hosting fees, or property management fees.
Then tally how much you will need to earn per month to break even. Also, see how much you need to make to generate a profit. To calculate your cash flow, you will need to subtract your expenses from your potential rental income.
A property that has a positive cash flow is worth investing in. To make this task easier, you can use an Airbnb calculator to help generate useful cost and potential rental income metrics.
5. Hire an agent to negotiate property prices
Your negotiations can hinge on your agent’s expertise. You may be offering too much or too little without helpful insights into the local vacation rental landscape. Accurate estimates of the home’s vacation rental investment potential are also key to making a strong offer. As with most real estate, cash makes for a compelling offer.
You should also consult with an expert to get the home inspection done. You must understand any defects of the property you invest in to deal with it accordingly.
6. Finalize a property manager if not planning to manage it yourself
It is prevalent for people to choose a location for vacation rentals different from the city they live in. If you are planning to do that while still doing your market research, search for a good property manager.
Some people manage their properties themselves, even if they don’t live in the same city as their rental, by hiring a caretaker. On the other hand, some investors prefer hiring a property manager because they can’t handle the work required to properly manage a vacation rental property. People with full-time jobs but extra money in hand available for vacation rental investment usually opt for a property manager.
Property managers are well-versed in managing a property, getting them ready for the guests, managing bookings and pricing for the night, and everything in between. They charge a percentage of the booking amount in exchange for taking responsibility for making your vacation rental a success.
Pros and Cons of Vacation Rental Investment
Advantages of Vacation Rental Investment
1. Increased income
The most obvious benefit of owning a vacation rental is earning an additional income. Your rental’s location depends on how much you can earn (a more touristy area means a higher rate) and other factors like its amenities and your target guest. You can also adjust your rates to earn more during the holidays and on weekends.
2. Holiday home available for yourself
Another benefit of investing in a vacation rental is having your own vacation home that you can use at any time. For example, you can use the property for special events such as annual holidays, birthdays, or a personal getaway.
3. Tax benefits
It is considered a business if you rent your property out for at least two weeks per year. This means that you can write off any expenses related to your property as tax-exempt business expenses.
4. The business is recession-proof
Vacation Rentals are usually not much affected by the recession. People continue to travel no matter what. A good example is the boom the vacation rental industry experienced despite the Covid-19 pandemic. The demand slowed during the lockdown, but it immediately picked up pace when movement restrictions were lifted.
5. Profits from rental income and appreciation of property
You will get a stream of income from all the profits you generate from the rental income. As mentioned above, vacation rentals are becoming a popular choice among travelers, especially after the pandemic. People want to continue traveling but limit their peer-to-peer contact to protect themselves against the virus.
You will also gain profit in the future if you decide to sell the property. If you have chosen wisely, then the property will appreciate in value.
6. Hire a property manager, and the property will take care of itself
As mentioned in the previous section, property management companies will take care of everything that goes into making your vacation rental property profitable. You don’t have to worry about the little things. Just keep a check on your quarterly growth and how your property is being taken care of, and that’s it.
Challenges of vacation rental investment
1. If managing on your own, then it can get tedious.
If you are not planning to hire a vacation rental management company or a property manager, then keeping up with the upkeep of your property can turn out to be a tedious task. You will have to follow the Airbnb cleaning checklist, get Airbnb reviews, manage the pricing, market the vacation rental property, and do much more on your own. It is not a piece of cake.
2. Expenses may pile up.
There will be a lot of recurring costs like listing fees and property management fees. In addition to that, there will be other costs about cleaning, maintenance of the house, property upgrades, and restocking of supplies, among others. You may also end up spending some money on marketing as well. Ensure you have accounted for these expenses when mapping out your business plan and calculating average ROI.
You also have to keep in mind that you won’t get bookings every day. In fact, during low seasons, you might find it hard to get any bookings for a more extended period. So to keep your business afloat, make sure that you save enough from the earnings made during high season to cover the recurring expenses during low season.
When you manage a vacation rental business, these expenses can seem a lot, so make sure that you account for everything.
3. Restrictions and Regulations
As mentioned above, some cities have their restrictions and regulations. For example, you may choose to invest in a location where the local government has put a cap on the maximum number of days you can use a property as a short-term rental. Charleston only allows 144 days of short-term rental. For the rest of the year, a vacation rental owner must mandate a minimum length of stay of at least 30 days.
In other cases, there may be extensive licensing involved in permitting you to operate as a vacation rental. Therefore, keeping a tab on them and adhering to them is necessary.
4. Continuous efforts to market the rental to find guests
You have to make a continuous effort to ensure that your rental is visible to as many people as possible. Also, you have to ensure that you post pictures and appealingly write the listing description. A lot goes into marketing your vacation rental, and you’ll have to stay on top of it. Having a vacation rental business guide will surely help you with this.
5. Inconsistent income
Unlike a salaried job and, like most businesses, the income generated from vacation rentals is inconsistent. There will be months when the demand for vacation rentals in your vicinity will be high, and you’ll be able to make more profit than expected. On the other hand, your vacation rental may be left unoccupied for days during low demand season.
6. Extra financing
You may need extra money to finance your vacation rental. This is because vacation rental homes are usually charged higher interest by banks and require more significant down payments than regular homes.
How to Use PriceLabs Market Dashboard to Analyze Vacation Rental Markets for Investment Potential
If you have reached here, I assume you have made up your mind about getting into the business and investing in a vacation rental. PriceLabs Market Dashboard helps you make that critical decision by giving you an in-depth data-backed analysis of the chosen market’s important KPIs.
Two types of investors can use PriceLabs Market Dashboard. You can use PriceLabs if you are:
1. Someone who hasn’t decided what kind of property and amenities you are willing to invest in
Some investors don’t have a cap on the capital available and are open to investing in luxury properties and basic one or 2-bedroom apartments. If you are one of them, you can use the Market Dashboard by creating general dashboards for your preferred areas. You can follow the below-mentioned steps to create a market dashboard for different regions and see trends in various markets.
- Create a general dashboard for your preferred locations
- Change filters and analyze the dashboard per room type.
- Select a smaller radius if you know the exact area you want to invest in. If you don’t, then set a bigger radius.
- Select some main KPIs like RevPAR, ADR, occupancy, and revenue to look at
2. Someone who knows the location and amenities you wants to offer, eg. high-end properties
You may be one of those who have a clear understanding of what you are willing to invest in. You know the bedroom count they want to purchase and what amenities they are eager to offer.
This usually happens when an investor wants to invest in a luxury property; however, that may not always be the case.
You can learn how to create a market dashboard and create your own with specific details about your potential rental. Make sure to:
- Create a Comp set with amenities, location, bedroom count, etc., that you have in mind.
- You can also look through the ‘Desired Amenities’ graph or create multiple compsets for pool, hot tub, beachfront, pet friendly, etc. and compare revenue for similar listings with different amenities. This will help you determine which amenities get more bookings than others in specific markets to invest accordingly.
- More thorough analyses are required if you want to invest in high-end properties.
How to use Market Dashboard to make your investment decisions
Once you have created your comp set, you can focus on these below-mentioned graphs below to help you understand various aspects of the vacation rental market. PriceLabs Market Dashboard provides several useful insights that will help you make more informed decisions.
1. Market Summary
The Market Summary includes everything vital that you need to analyze when investing in a chosen market.
- The Average Revenue graph will tell you what the vacation rental owners earned on an average. You will understand what you will potentially make and if it is worth the risk.
- The Average RevPar graph will help you understand how much revenue you earn per available room. This is different from average ADR because ADR tells you how much the listing charges per night, but RevPar helps you understand your ability to fill the listing at a given ADR.
- The Average ADR graph will show you how the listings are being priced daily.
- By looking at the Average Occupancy graph, you will learn if the vacation rentals are being booked at a desirable rate or not. There may be a lot of listings priced at a reasonable amount, but if the occupancy is significantly low, you might not earn that well.
- The median booking Window and Median Length of Stay help you understand how long the vacation rentals are being booked and how much in advance.
2. Supply and Demand
The Supply and Demand graph is as simple as it gets. It tells you the number of bookings received within the selected period and how many active listings are present in the market to meet that demand. The graph will help you understand the market’s stability and if it is worth investing in.
3. Summary Table
The Summary table will help you understand the average price the market is being booked for different listing types. As you can see, the table provides a general overview of how many listings are active for different bedroom sets and what they are being priced at on a nightly, weekly, and monthly basis.
This information will help you understand if getting into the short-term rental business will be more profitable than the mid-term rental business.
The table will also show the average Length of Stay and the average lead time before bookings are made. You will understand if it is a short-term or mid-term rental market. The local rules and regulations may also affect the popularity of mid-term rentals since some governments mandate a minimum of 30 day stay period.
4. Day of Week Occupancy
The above graph will give you a general idea about how many bookings you will receive during the week and over the weekend. This will help you get a general sense of the market demand during the selected time frame. The weekly need for rentals may vary according to different seasons. The Supply and Demand graph will give you an understanding of the high and low seasons. Using this graph, you can select the time frame of low and high seasons consecutively and see which days of the week usually get booked.
The Amenities graph shows both the standard amenities preferred in the selected area and the amenities that guests desire. Since you are purchasing a new rental, the above graph will show what to look for in a property. It will also help you estimate how much extra it will cost you to provide specific amenities and what kind of ROI you will get.