A Beginner’s Guide to Vacation Rental Investing
If you’re looking for some tips on the fundamentals of investing in rental properties, you’ve come to the right place. There is a lot to learn, but we will touch on a few of the most basic aspects of the process. From figuring out the financials to getting your hands dirty, investing in vacation rentals requires a keen mind, deep pockets, and a willingness to accept the good with the bad.
It’s All About the Money
Before you start dreaming about a beach bungalow, you’ll need to sit down and look at your financial situation. You already know that you’ll have to spend money on the property itself, but there are a lot of other expenses, and you’ll quickly become intimately acquainted with the art of check-writing. A few expenditures you can expect include:
- Upgrades and repairs. When you own a property, it’s up to you to keep it in great shape. While certain things, like painting, are inexpensive, you’ll also be responsible for the home’s systems. Considering that an HVAC unit can cost up to $12,000, according to Modernize, you can’t overlook potential maintenance.
- Taxes. You may be eligible to deduct certain expenses from your taxes, but you’ll have to pay property tax and potentially tax on the income earned as a real estate investor.
- Marketing expenses. This ranges from free to several thousand dollars per year depending on the type of exposure you want and the clientele you wish to attract. Airbnb, for example, charges up to 20 percent of your nightly rate plus a few other fees and taxes simply to list and book through their platform.
- Property management/cleaning fees. On top of marketing expenses, a rental management company may charge an additional 20 percent or more of your nightly booking fees to handle renter inquiries and maintenance requests.
Furthermore, you’ll need to have an excellent credit score, and will probably be expected to put down at least 10 to 20 percent since the home will not be considered a primary residence. Even if you were able to use an FHA loan for your first home, which, according to PennyMac, definitely helps when you don’t have a lot of money to use a down payment, you’ll likely have to turn to a conventional loan to purchase a second property. A conventional loan makes sense for lenders since you won’t live in the home, and they are taking more of a risk. However, as Dough Roller points out, if your credit score is 760 or higher, you will be eligible for the best interest rate no matter your loan type, so definitely pay attention to your credit report.
Knowing your own finances is only half of the equation. If you want to get the most favorable return on investment, you’ll have to choose a location that commands a premium, and you’ll have to make your property stand out. For example, if you’re planning on something near Lake Tahoe, your rental should emphasize a water or mountain view if possible. Conduct a market analysis of the area to see how many tourists you can expect in any given year. You’ll also do yourself a favor by learning as much as you can about the vacation rental industry.
There is money to be made buying and renting vacation homes. Something to keep in mind is that you probably won’t make a fortune off of a single rental. Instead, it takes time to build up a portfolio, which is when you will begin to see a significant addition to your income. Remember, all it takes is one property to get started. Considering that some of the world’s most successful real estate moguls started with nothing, your one property already gives you an advantage.
By: Jim McKinley
Image via Pixabay