7 Reasons to Invest in Vacation Rental Properties
I’ve been a passive income investor since my early 20’s, and real estate has always been my side hustle. A few years ago, I ventured into the Vacation Rental market and learned a lot about that investment class. If you have ever been interested in owning Vacation Rental properties, here are a few thoughts that might be of some help;
- Diversification. Vacation Rentals (commonly known as Short Term Rentals, or STR’s) are a great way to diversify an investment portfolio. When I acquired my first STR property, I also owned several Single-Family Homes (SFH) and some small commercial warehouses. I’ve always been an advocate for diversification, so I felt that I was building a solid Real Estate portfolio by adding STR’s into the mix. Diversification just makes business sense to me.
- Cash Flow. Vacation Rentals can usually generate higher cash flows than a long-term rental SFH. Obviously, this is dependent upon demand (location, location, location) but it’s pretty easy math. Suppose your $500,000 SFH rents long-term for $2,800 per month. The same $500,000 home in a vacation destination could easily rent for $300 per night. At 20 nights per month, that is $6,000 gross rental income for the same property. Of course, there are fees such as cleaning for STR’s, but the math works. My advice is to build a spreadsheet model, use conservative assumptions and see how the numbers work for the specific property you are interested in acquiring.
- Customer Acquisition. With aggregators such as HomeAway, VRBO and AirBnb, finding tenants for your vacation rental is rarely the issue. In a matter of minutes, you can have your property listed and viewed by literally millions of people around the world. Compare that to your traditional SFH long-term rental property, where you are limited to primarily a small group of local people who normally used a property management company to find their next home to rent. The markets are not even comparable.
- Landlord Laws. If you’ve ever owned long-term rental properties, you’ll know that the laws dictating rent collection, eviction, deposits etc, are extremely skewed to the renter. With STR’s, that is reversed. When you rent your Vacation property to someone for less than 30 days, there are much different rules in place. You collect 100% of the rent and deposit before they step through the door. If they don’t want to leave when their time is up, it’s not a 3-month eviction process. Honestly, I’ve never had that situation with a Vacation property renter, but I’ve certainly had to suffer through the eviction process with long-term renters, and it’s not a pleasant (or cheap) experience. In terms of damage to your Vacation rental property, there are multiple ways to deal with it. First, collect enough of a deposit upfront that discourages the renter from damaging the property. Secondly, most of the aggregators have property insurance that you can force the renter to purchase. What’s better than having insurance for your property that someone else pays for? Having said that, I’ve never had to withhold a penny of deposit from a renter or collect on an insurance policy for damage. I chalk that up to hiring great property managers who do a great job of screening renters.
- Passive Income. Ok, I use this term a little loosely. I don’t actually believe in passive income. If you are going to own real estate, you are going to have to be involved. However, if you choose the right property management company, a Vacation Rental property can be as close to passive income as any real estate investment there is. You’ll have to approve rental policies, rental rates, services provided etc., but if you choose to be a passive investor, it’s possible. If your property is close to where you live, you might choose to be more active and do the check-ins/outs, cleanings, hospitality yourself. It’s really up to you.
- Property Appreciation. Most of my SFH’s have provided incremental appreciation over time, which is one of the reasons I really like real estate as an investment. However, when you buy a property in a vacation destination, the appreciation can be significant. As an example, I purchased a vacation rental property in a popular ski resort for $420k. For 3 years, I enjoyed about $55-60k gross annual income from that property. I sold the property after 3 years for $760k. I didn’t do any significant capital improvements during this time, just normal wear and tear stuff. It was simply market appreciation. Lucky? Maybe…but it certainly helps to know the market and understand the location before making the purchase. The point is when you buy at the right price in a vacation destination that is in high demand, there is a pretty good chance of experiencing higher rates of appreciation than with a SFH in a generic neighborhood, in some random town.
- It’s YOUR home. Here’s my favorite reason for owning a Vacation rental property. It’s yours! You can use it anytime you want. You can also let your family and friends use it (at a discounted rental rate, of course, haha). When you start looking for a property to acquire for STR, look in places where you love to visit! Where do you vacation? Chances are, there are hundreds of thousands who love to vacation there as well….and they are all potential customers!
If you’ve decided to purchase a Vacation rental home and have questions? Give me a call. I’ll be happy to share any knowledge I’ve got regarding these types of properties. I can also help you get the property financed if needed. The good thing about Vacation Rental properties is that boutique lenders in this particular investment class focus on the cash flow of the property, not the individual purchasing the property. If the property will cash flow enough to cover the debt plus a small cushion, then the credit worthiness of the borrower is much less of an issue. If you aren’t sure about how to come up with a down payment, there are options for that as well. For example, if you’ve got an eligible IRA/401k from a previous employer, then we’ve got a great program designed to help you diversify those funds.
I sincerely hope this helps someone. Give me a call or email me if you’ve got additional questions. I’ll be happy to help.