Is a Vacation Rental a Good Investment?

Is a Vacation Rental a Good Investment?

It may be a seller’s market for real estate right now, but it’s not just another holiday when it comes to investing in a vacation property.

The prospects for short term rentals these days can certainly be just as favorable as buying a residential home. In fact, brands like AirBnB and VRBO continue to gain traction as more people make travel a priority again.

However, there are several factors an investor must first consider.

Local to here, St. Augustine, FL is the No. 2 vacation rental location in the country. There are many reasons why: The city’s rich history, the weather, the proximity to the beach, not to mention its affordable property values and massive redevelopment efforts.

Even considering those benefits, buying a vacation home won’t directly turn into instant profit. You still need to do your homework before making the decision.

The first fundamental question to be asked is, how do you plan to use the vacation property? For yourself? Purely for revenue? Or some sort of combination?

If it’s exclusively for profit, it then becomes a numbers game.

As opposed to long-term rentals, where there is a higher occupancy rate, vacation rentals pose challenges similar to running a hotel business because of the high turnover involved. This typically results in elevated maintenance costs, be it appliance repairs/replacements and other updates. Because of this, on average, you should factor in 25 percent of the margins for upkeep.

If you purchase a property not local to you, or if you’re in the area but don’t want to be bothered with day-to-day issues, you will also need to hire a property manager. Set aside another 25 percent for that.

Some of the expenses can be offset by increasing the occupancy and/or the daily rate if you buy a home with very desirable features, such as a nice backyard, on the water, or in a commutable location.

Another thing to take into consideration is how many days you expect the unit to be occupied. Sites like AirDNA can assist by providing data on comparable properties. You can plug the data into your own ROI worksheet. (example at the end of the article)

After that, add in mortgage, insurance and taxes, then see what’s left over and determine if it’s worth it. From there, figure out the per-day cost and decide on your ROI objective. For example, if you put $100,000 down on the property and you’re left with $5,000 after a year, you have a 5 percent annual return. It’s up to you if that works, but I typically don’t invest in deals for less than 12-13 percent.

One thing not to worry about? Market trends. Forget about the macro conditions, since they are unpredictable. Instead, look at the present local conditions, rely on the numbers to see if a deal makes sense and then take the plunge.