Vacation Rental Investment Property

Last updated on April 29th, 2023 at 08:57 pm

Last Updated on April 29, 2023 by

Perhaps you have stayed at a vacation rental and have thought, ‘What a great idea, owning a vacation rental investment property”. People are looking for ways to improve their investment portfolios. Including a vacation rental investment property may fit the bill.

Even when your financial advisor will recommend the purchase of a residential rental property, they probably have little or no understanding of how to invest in vacation rentals. This is completely understandable, this is a fairly new concept as it exists today.

I have invested in vacation rentals for about 15 years in Spain. Spain and a few other countries have pioneered the current concept. Today’s vacation rentals have grown from yesterday’s bed and breakfasts.

My favorite property was located on a beach. While it was popular and rented well, the income fell short of paying all of the expenses by about 25%. The winter was a good time to rent but activity slowed down then.

That 25% was actually a good return because it permitted me to stay there periodically during times when it would not have been rented. It was a perfect situation. I never considered that the property would be other than a vacation home for me and that I would earn something when I was not using it.

The basic consideration

There is one basic consideration for investing in a vacation rental property. Can you afford to supplement part of the operating costs if income falls short of operating costs? If the answer to this question is yes, you may be a candidate for owning a vacation rental property.

Most vacation rental properties do not earn enough to pay all of the bills but some can and do. If you want to earn a profit on your vacation rental, it may be possible based on a number of factors including location and marketing.

As an example of vacation rentals making money, let’s discuss an actual situation. An associate of mine owns three townhomes in a four-unit building. He originally built the building in Gulfport, MS one block from the beach to lease on a one-year basis. After the first year, he realized he could earn more as a vacation rental.

He earned $44,000 gross income

This last year, he has earned on average $44,000 per townhome (operating costs were just above 1/2 of income). One of the units came on the market and KEYLADDER.com analyzed the property. The analysis strongly indicated that this property would be profitable as a full-time vacation rental. I recommended this to investors and they purchased the property.

The newly purchased property started producing income almost immediately. The property managers are still doing an excellent job marketing the property. Property managers work with the owner of the other three units by making referrals.

Professional managers can help you make more money

Professional managers know how to attract guests. There is an art to this entire process. Unless you are living close to the properties and want to undertake the management, cleaning, managing the calendar, and marketing, you should hire a professional manager. Professional managers can also bring in guests that were originally intending to rent another property but it was full.

Please understand that most properties are not suitable for vacation or short-term rentals. They are not zoned properly, not located near an attraction, are too small, etc. This is why a buyer needs help.

If you can live by making up the difference between cost and income and using the property as a second home, there are far more opportunities to choose from. A key issue with making a choice is to investigate and ensure that your proposed property is located in a legal zone for this use.

Zoning is important

Many cities and other government agencies are actively cracking down on vacation rentals that have been established in housing areas. The last thing you want is to have the City send a fine and tell you to stop renting it for less than for example 6 months at a time. Biloxi for example can fine a violator $500 per day.

KEYLADDER has looked at many dozens of potential properties with an eye to converting them into a long-term lease as a backup plan. In most cases, leasing the property as a backup plan will come up short of the income required to make the payment on a mortgage.

Second home financing with 10% down

If you want to find a property that can be a full-time vacation investment you will need help to find it. If you are considering buying a property that you can stay at a few times per year and rent to vacationers in the remainder of the year, this may be the best arrangement. You can obtain a lower interest rate loan as a second home with a down payment as low as 10% compared to 20-25% for an investment property.

There are some rules for second home loans, the main one is that you must occupy it some of the time and the second is that it can not be located too close to your existing home and that it should be in an area where people actually take vacations. Your mortgage broker can explain the rules. Putting down 10% increases your return on investment compared to 20%.

Acquiring the property is part of the total effort to make a vacation rental business out of a property purchase. Furnishing and decorating the home and how you market your property will determine the level of potential income you can earn.

Location is critical

I mentioned the location. This is critical. Just because you think that your ideal location would be great for a vacation rental does not mean that it can attract guests. Of course, there are no rules about what it takes to make a successful vacation rental but there are some things that others have learned.

Select a location that is used by lots of people for vacations. The beach areas are good. Do not locate too far from the beach, most people like to walk from the property to the beach. Swimming pools in warm climate areas are winners. Not all areas have long seasons when most of the income is earned. For example, if you have located on a beach in Maine, the season may not be longer than three months for the highest income.

Mississippi Gulf Coast has a long rental season

A property along the Mississippi Gulf Coast will have a much longer season than Maine would have. Areas with lots of events can be beneficial. For example, on the Mississippi Gulf Coast, there is Mardi Gras, Boat Parades, Cultural Events, and conventions during months outside of the key summer income period.

Buying a vacation home for yourself and renting it when you are not there is the best concept for most people. If you are interested in purchasing a property for use as a vacation home and/or vacation rental, please contact us. We also recommend that you consider using the services of KEYLADDER.com, we are a Strategic Partner for KEYLADDER which means if KEYLADDER finds a property for you, Logan-Anderson would make the offer and manage the purchase process.

Visit Christies Gulf Beach Rentals and see what a great vacation rental property should look like. Christies is a Strategic Partner, KEYLADDER helped the owners who trust Christies with their properties to acquire them and have Christies manage them.

Logan-Anderson has worked with KEYLADDER to close deals for clients that are profitable. The properties on the Christies website are a good example of excellent properties acquired at great prices and with excellent prospects when marketed properly by experts.