The 7 "must-follow" rules for investing in vacation rentals
Despite all of the similarities, there are significant differences between buying that vacation home, and investing into a vacation rental property. And while many purchases are intended for both purposes, the list below is meant strictly for the latter.
1. Purchase Only What You Can Afford
Although purchasing a vacation rental property can be a great way to earn extra income, completely relying on that income to pay the mortgage is a very risky approach. We’ve seen many disasters over the years wipe out completely regions for seasons at a time. It’s OK to invest within your means.
2. Patience is a virtue
Buying a vacation rental property is no small purchase, and acting too quickly can lead to massive financial losses. It takes time to find the right deal, in the right location, and it is so much better to be safe than sorry.
3. Work With A Local Real Estate Agent
While some areas are thriving with amazing deals and offering a wealth of vacation rental management services, others are beginning to see major problems with their local communities, governments, and laws. A good local agent is an invaluable resource that can let you know what you’re getting into so that you don’t get stuck with a property you cant even rent.
4. Research The Comparable Properties
It’s always good to research the comps in the area to help figure out the true value of the property. That being said, it is equally important to do some homework on your competition. Figure out how your new property stacks up against your neighbours, and then find out what the property’s potential yearly earnings are.
5. Ask About The Property’s Past
Try to find out as much as you possibly can about the property itself, and don’t be afraid to ask questions;
- Was it operating as a vacation rental property with an existing client list or is it priced because it has that potential?
- How many months out of the year can you rent the property?
- Has the property been under a maintenance/management contract with a local company?
- Was the previous owner working with a local “Mr. fix-it”? Or did they do all of the work themselves?
The more questions the better.
6. Run the numbers
Buying a vacation rental property is first and foremost an investment decision that should be driven by the potential profits. The fastest way to estimate the profitability is with a cap rate. Be conservative with your revenue estimates, and generous with your expenses.
Many vacation rental properties operate at a cap rate of 1-3% on the account of their seasonal revenue stream. These types of returns are very risky, and aren’t going to make you any real money, with the exception that you’re counting on a significant increase in property value while you hold onto it.
A more practical approach would be to start at a cap rate of at least 10-12%. While vacation rentals with these types of returns can be more difficult to find, they ARE out there. All you have to do is find them.
7. Negotiate To Win
There are many reasons why people sell vacation properties that are already generating revenue or have the potential to do so. But most of them fall under two categories; it was flipped or they need the money. Either way, the seller is probably looking to close a deal faster than you think.
Use this to your advantage. Be bold, and remember; everything is negotiable. Try to get that extra one or two percent on your cap rate, and if it turns out that you couldn’t make the deal fit your financial projections, it might be best to simply walk away.