What is a Vacation Rental?
An Essential Property Management Term
A vacation rental is an investment property rented out for short periods of time, typically less than one month. Vacation rentals have become an increasingly popular investment strategy, and for good reason: the number of vacation renters is expected to hit 57 million by 2023, according to Statista.
How Much Can I Earn With a Vacation Rental?
The amount you can expect to earn with your vacation rental varies depending on the property, where it’s located, its amenities, etc. But according to the Evolve Vacation Rental Network, 1-bedroom vacation rentals in the 50th percentile earn about $38,490 per year, while a 3-bedroom brings in $98,688.
Vacation Rental vs. Residential Rental Management
There are many differences between vacation and residential rentals, starting with their expected term length. Often, residential rentals are leased for six months to one year, if not longer. They may sport a month-to-month lease agreement, but rarely will a residential rental have a shorter term.
On the other hand, vacation rentals are typically short-term rentals, meaning they’re leased for a month or less. As such, most vacation renters don’t pay for utilities.
Also, vacation rental owners must have a significant understanding of their local market and projected revenue, since it’s expected that the property will have vacancies throughout the year.
How to Buy a Vacation Rental
Fortune Builders lists four steps to investing in vacation rentals:
- Do your research. The location of your vacation rental is key to your success. Choose your spot, beginning with the city and region within said city. Research the local market conditions, employment rate, weather, demand, inventory, and proximity to attractive amenities.
- Conduct an in-depth market analysis. Once you have one or two prime locations, examine the market and demand even more closely. It’s important to consider whether you’d want to vacation in the area yourself, along with practical things like the types of attractions nearby and the seasonality of that popularity. There must be consistent demand for the vacation rental investment to be considered sustainable. Then, start comparing vacation rentals in the area to understand how the market performs.
- Understand the rhythm of vacation rentals. Your vacation rental’s income is likely to be highly seasonal. For example, a house near a ski resort will see more interest in the winter than the summer. You also need to establish your expected monthly expenses, factoring in any furnishings and regular cleanings. Plan to put at least 25% down if you’re financing your purchase, and expect a higher interest rate since you’re more likely to let your vacation rental’s mortgage lapse than your own.
- Calculate your expected income and expenses. Dig deeper if your selected market reflects inherent demand and your research indicates a promising, consistent cash flow. Fortune Builders notes that the weekly rental rate will certainly be contingent on the area, but most landlords charge 10-20% higher than their expected monthly mortgage payments. Make sure to factor in downtime; estimate a 25% vacancy rate to account for the times that your property sits empty. Once you know the property is right for you, secure preapproval and make an offer!
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