Updated : Feb 9, 2025
Vacation Rental is a booming industry, with more travellers opting for this alternative to hotels. In addition, the growing trend of working from home and digital nomads has allowed people to work from anywhere in the world. The growing popularity of vacation rentals is a good reason to consider vacation rental investment.
According to Airbnb, vacation rental hosts raked in over $57 billion in just one year, showcasing the lucrative potential of investing in vacation rentals. Airbnb has over 5 million hosts and over 7.7 million active listings worldwide. In the fourth quarter of 2023, their active listings expanded by a notable 18% compared to the same period in 2022.
Why to Investment in Vacation Rental?
Investing in vacation rental properties offers a blend of financial potential and personal flexibility that’s hard to beat. Imagine owning a property that not only generates rental income but also doubles as your own vacation getaway whenever you fancy a break. With platforms like Airbnb and Vrbo revolutionizing travel experiences, the demand for unique accommodations is soaring. In 2023, the typical individual vacation rental listing brought in an average annual revenue of $26,024.
Beyond rental income, vacation rentals often appreciate in value over time, offering both short-term gains and long-term wealth building. Moreover, in uncertain economic times, people still prioritize vacations, ensuring a steady demand stream even during recessions. So, if you’re looking for an investment that combines financial stability with the perks of personal enjoyment, vacation rentals might just be your ticket to success.
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
When it comes to investing in vacation rentals, location is key. You’re essentially committing to that spot for the long haul, so you’ve got to be sure it’s the right fit. Start by brainstorming cities you’re eyeing for your investment. Consider the region within each town, considering factors like seasonal popularity, rental demand, local regulations, and the type of property you’re interested in.
When considering pure investment potential, focusing on the hottest markets offering the highest profit margins is wise. Once you’ve narrowed down your options, dive into market analytics using tools like PriceLabs Market Dashboard to make informed decisions.
Remember that your chosen location should be appealing and convenient for guests. Think about what amenities you’d like nearby – whether it’s a beach for a seaside escape or the bustling city centre for an urban vibe. By choosing the right location, you’re setting yourself up for success in the vacation rental game.
2. Get Pre-Approved for Loan
Many investors need financing for their new rental properties, and fortunately, there are various options available, ranging from short-term to long-term solutions.
Conforming Loan: This option is popular for vacation rentals because the qualification criteria aren’t as stringent as those for primary residences. Typically, a good credit score (680+) and a down payment of around 20% are common requirements.
Portfolio Loan: Investors with multiple properties or multi-unit property often opt for portfolio loans. These loans typically have more flexible qualifications compared to other types of financing.
Multifamily Loan: Used for 2-4 unit vacation properties or apartment buildings with more than 4 units, multifamily loans encompass various options such as conventional mortgages, government-backed loans, and short-term multifamily loans.
Short-Term Loan: Ideal for investors needing quick cash to purchase a vacation property before securing long-term financing, short-term loans include options like bridge loans and hard money loans.
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 you plan 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
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 fee, restocking supplies, hosting fees, or property management fees.
Then, tally how much you will need to earn per month to break even and see how much you need to make to generate a profit. To calculate your cash flow, subtract your expenses from your potential rental income.
A property with a positive cash flow is worth investing in. To make this task easier, you can use an Airbnb calculator to generate useful cost and potential rental income metrics.
5. Hire an agent to Negotiate Property Prices
Your agent’s knowledge can really make a difference in your negotiations. If they understand the local vacation rental market well, they can guide you on whether you’re offering the right amount for the property. It’s all about finding that sweet spot—not too high and not too low. Having a good idea of the property’s potential as a vacation rental is crucial for making a strong offer.
It’s also a smart move to get a home inspection done by an expert. This way, you’ll know exactly what you’re getting into. They can point out any issues or defects in the property, helping you make informed decisions about how to proceed. After all, you want to make sure you’re investing in a property that’s worth your money and effort.
6. Finalize a Property Manager if you are not planning to manage it yourself
It is common for people to choose a location for vacation rentals that is different from the city they live in. If you plan to do that while still doing your market research, search for a good property manager.
Some people manage their properties themselves by hiring a caretaker, even if they don’t live in the same city as their rental. On the other hand, some investors prefer hiring a property manager because they can’t handle the work required to manage a vacation rental property properly. People with full-time jobs but extra money in hand available for vacation rental investment usually opt for a property manager.
Bonus Read: Airbnb Management Fees: How Much Do Airbnb Property Managers Charge?
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 popular among travellers, especially after the pandemic. People want to continue travelling 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.
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.
Welcoming Your First Guests
Once you have invested in a vacation rental, you would want to know how to start making money from your investment. While Airbnb hosting tips will help you become a great host that gets good reviews and more revenue. Below are a few steps to get you started:
Ensure Good Guest Communication
Maintaining prompt and efficient guest communication is essential for maximizing your Airbnb ranking and vacation rental income. Response rate and response time significantly impact this metric, highlighting the importance of being a responsive host. Fortunately, automation tools offer smart messaging features and templates to streamline communication processes.
Offer Self-Check-In:
Providing a self-check-in option eliminates the need for constant availability to welcome guests in person. This not only saves you time but also offers flexibility to guests, allowing them to arrive at their convenience. With self-check-in, guests can unwind at their own pace after a long journey, contributing to a more relaxed and enjoyable stay.
Create a Welcome Book and Letter
Enhance guest comfort and satisfaction by providing a comprehensive welcome book containing essential information and local highlights. Additionally, sending a personalized welcome letter showcases your hospitality and care as a host, fostering a positive impression and memorable experience for guests.
For example, your welcome book can include details about nearby attractions, recommended restaurants, and house rules, along with a warm greeting and gratitude in your welcome letter.
Request Reviews
Positive reviews are instrumental in attracting more bookings and increasing your rental’s visibility on listing platforms. Encourage guests to leave reviews by politely asking for feedback in a departure message. Remember, even negative reviews offer valuable insights for improvement and can ultimately enhance your rental’s reputation and profitability.
In summary, by prioritizing efficient communication, offering convenient amenities like self-check-in, and soliciting guest feedback, you can optimize your vacation rental business for increased bookings and revenue generation.
PriceLabs Tools For Vacation Rental Investment
If you’re seeking to make well-informed decisions before you invest in a vacation rental, PriceLabs stands out as your top choice. Here are some key tools offered by PriceLabs that can significantly enhance your decision-making process:
Revenue Estimator PRO:
The Revenue Estimator PRO tool is tailored to assist you in estimating the potential income your property can generate, offering valuable insights for making informed investment decisions.
With Revenue Estimator Pro, you can access instant reports that provide essential information such as monthly projected revenue, average daily rates (ADR), and occupancy rates. This data empowers you to set competitive pricing strategies and make informed decisions during the launch phase of your vacation rental investment.
Imagine you’re about to launch your new vacation rental property. Revenue Estimator Pro eliminates the guesswork by providing detailed projections, including monthly revenue estimates, average nightly rates, and expected occupancy rates. Armed with this information, you can confidently set the right prices from the outset and maximize your potential revenue stream.
Bonus Read: Unleashing the Power of Revenue Estimator Pro for New Property Launches
PriceLabs Market Dashboard
PriceLabs Market Dashboard serves as a powerful tool for investors looking to make informed decisions in the vacation rental market. By providing comprehensive insights and analytics, this dashboard enables investors to assess various factors critical to investment success. For instance, it offers data on average revenue, average daily rates (ADR), occupancy rates, and booking trends, allowing investors to gauge the potential profitability of different markets and properties. Additionally, the Supply and Demand graph provides valuable information on booking trends and market stability, helping investors identify lucrative opportunities and assess market conditions before making investment decisions.
Moreover, PriceLabs Market Dashboard offers a detailed summary table that presents average pricing for different types of listings and insights into booking behavior, such as the average length of stay and lead time before bookings. This information equips investors with a deeper understanding of market dynamics and helps them tailor their investment strategies accordingly. Whether investors are evaluating potential markets, analyzing competition, or fine-tuning pricing strategies, the tool serves as an indispensable tool for making data-driven investment decisions in the vacation rental industry.
World STR Index
The World STR Index by PriceLabs serves as an invaluable tool for investors navigating the complexities of the vacation rental market. By offering a comprehensive overview of short-term rental market performance worldwide, this free resource by PriceLabs empowers investors to make informed decisions based on real-time data and insights. With metrics spanning from 2021 to the upcoming year and refreshed monthly, the index provides investors with a dynamic understanding of market trends and patterns, enabling them to stay ahead of the curve.
One of the primary advantages of the World STR Index lies in its comparative analysis capabilities. Investors can leverage the tool to compare year-over-year metrics such as active listings, occupancy rates, Revenue Per Available Room (RevPAR), and Average Daily Rate (ADR). This comparative analysis not only sheds light on current market conditions but also allows investors to identify emerging trends and potential investment opportunities. Additionally, the index’s pacing feature enables investors to anticipate future market dynamics by comparing upcoming year metrics to the previous year, providing valuable insights into projected occupancy, ADR, and RevPAR. Overall, the World STR Index equips investors with the data-driven insights needed to make strategic investment decisions and maximize returns in the dynamic vacation rental market.
When is the Best Time to Buy?
While some experts advocate for buying during the slow season to secure better deals, others propose a different approach: purchasing during the peak season. This strategy allows you to immerse yourself in the property as your potential guests would, offering firsthand insights into its selling points and potential pitfalls.
Consider this scenario: imagine buying a vacation property nestled in a serene mountain village. While the area may appear tranquil during the warmer months, it transforms into a bustling hub of winter sports enthusiasts during the colder seasons. If you had purchased the property in the summer, you might overlook crucial details such as the importance of maintaining a clear driveway in icy conditions or the necessity of upgrading the heating system. Experiencing the property during peak season provides invaluable firsthand observations, enabling you to address any issues promptly and enhance the guest experience. Ultimately, the decision on when to buy your vacation rental hinges on your priorities and preferences, but experiencing the property during its busiest times can offer valuable insights for ensuring its success in the long run.
Key Takeaways:
- Pros and Cons of Vacation Rental Investment: Investing in vacation rentals offers the potential for increased income, personal flexibility, and tax benefits. However, challenges such as managing the property, recurring expenses, and regulatory restrictions must be carefully considered.
- Steps to Follow for a Profitable Vacation Rental Investment: Finalize the location based on market research, get pre-approved for a loan, conduct in-depth market research using tools, calculate expected income and expenses, hire an agent for negotiation, and finalize a property manager if necessary.
- Using PriceLabs Market Dashboard: The tool provides comprehensive insights into vacation rental markets, including data on average revenue, ADR, occupancy rates, booking trends, and supply and demand. This tool helps investors analyze market potential, identify lucrative opportunities, and fine-tune pricing strategies.
- World STR Index by PriceLabs: The World STR Index offers real-time data and insights on short-term rental market performance worldwide, allowing investors to compare metrics, analyze trends, and anticipate future market dynamics. This free resource empowers investors to make informed decisions and maximize returns in the dynamic vacation rental market.
- Best Time to Buy a Vacation Rental: While opinions vary, experiencing the property during peak season can provide valuable insights into its potential and pitfalls. By immersing yourself in the property during its busiest times, you can address any issues promptly and enhance the guest experience, ultimately ensuring its success in the long run.
