Why (and How) You Should Invest in a Vacation Home

Step 1: Begin your search for vacation home real estate

There are two sides to your home search: the location and the individual property. And thanks to today’s technology (and the network of agents at Vacasa Real Estate), you’re not limited to searching for a vacation property close to home.

Where to buy a vacation home

If you’re not wedded to an exact location, try thinking like an investor. True investors are often concerned most with income potential, so they expand their search to multiple towns or even multiple states. Even if you initially want to buy in a specific ski town two hours from where you live, with a little research you may find a better financial fit near a resort that’s six hours away.

Also make sure to familiarize yourself with cap rate—the rate of return on a real estate investment. This metric can help you compare and evaluate the income potential of rental properties in different locations. (For starters, check out our list of the 25 best places to buy a vacation home, which is already ranked by cap rate.)

What type of vacation home to buy

At the same time, consider different types of properties. Should you buy a cabin or a lakefront home? A beach house or a condo? Maybe you want an A-frame cabin, but will it fit enough guests to earn the rental income you’re hoping for? How does the ROI for a larger mountain home compare to the potential returns on a cluster of ski-in/ski-out condos nearby?

Your search may not end where you first imagined it would—so it can be rewarding to keep an open mind.

5. Advertise Manage the Vacation Property

You or your property manager can list the property’s availability on the websites we mentioned earlier to expose it to vacationers. When you list availability, block off the days you want to use it so no one else can rent it during that time.

If you live a distance from your property and manage it yourself, you’ll need a system to let service staff and guests into the property. Some owners have a keypad that renters use to get into the property and then reset it between each use. Alternatively, you can hire a management company to manage the property for you, saving you time since you don’t have to be involved in the daily operations.

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Step 3: Estimate ROI on a vacation home investment property

When you find an investment property that appeals to you, run some numbers to calculate your potential return on investment (ROI). The experts at Vacasa Real Estate can also share an estimated monthly cash flow analysis for individual properties, plus estimates of their operating expenses and net income.

Once you get familiar with this data, you may be surprised to discover that vacation homes selling for the same price can have very different cash flow potentials as vacation rentals. When you factor in short-term rental data around location, square footage, bedrooms, bathrooms, HOA fees, property taxes, and more, you may find yourself more attracted to a specific type of property or a core location.

Pay Down Personal Debt

Savvy investors might carry debt as part of their portfolio investment strategy, but the average person should avoid it. If you have student loans, unpaid medical bills, or children who will attend college soon, purchasing a rental property may not be the right move for now.

Pereira agrees that being cautious is key, saying, "It's not necessary to pay down debt if your return from your real estate is greater than the cost of debt. That is the calculation you need to make." Pereira suggests having a cash cushion. "Don't put yourself in a position where you lack the cash to make payments on your debt. Always have a margin of safety."

Managing Tenants (onboarding and departing)

Create educational materials to provide to your tenants:  Explain to them where the closest stores and restaurants are, what to do in a case of emergency and how to best enjoy your investment without overstepping their bounds.  Explain the limits clearly and succinctly.  I’ve had clients who bought weekly rental properties and discovered tenants on the roof.  Now, in her onboarding documentation, it clearly states that if tenants are found on the roof that they will be immediately evicted and lose their deposit.

Create a welcome and departure checklist for your guests.  Everything you expect them to do before they leave is best given in this type of format.   If they have a great experience, remind them to leave you a review on the site that they found you.

Legality

Some places do not allow weekly rentals.  Downtown Huntington Beach currently does not allow weekly rentals, although momentum seems to be building for this to change.  Enforcement is particularly difficult as the city must be able to prove that you rented the house out illegally and received compensation.  As you can imagine when these sorts of transactions are done, it is quite difficult to prove the financial transaction since the payment was made well in advance.

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When to Hire a Property Manager

Rental property owners can manage the property themselves or hire a property manager. It can be a hard decision to make because property managers typically charge between 8% and 12% of collected rents, which can really eat into profits.

Still, hiring an experienced property manager can be well worth the cost. After all, it means less work and fewer headaches for you, as you take advantage of their industry expertise. In general, a property manager will:

  • Know how to market the property
  • Understand the local rental market and ensure you price the rental accordingly
  • Show the property to potential tenants (so you don't have to)
  • Screen tenants (for example, conduct credit checks and verify references)
  • Collect rent on your behalf and deposit the money into your bank account
  • Handle late rents and navigate the eviction process
  • Handle tenant complaints
  • Arrange maintenance and repair work
  • Pay property-related bills, such as property taxes, utilities, and insurance

To decide if hiring a property manager makes financial sense for you, ask yourself these questions:

  • Do I have time to manage the property myself? If you have another full-time job, you likely won’t have the time or energy to manage a property on your own. This is especially true if you own multiple properties.
  • How close is the rental property to my home? Being far away from the rental takes more time out of your day and makes it more difficult to manage routine and urgent issues.
  • Am I willing to deal with tenants? Even if you do a good job of screening, it’s likely you’ll have to deal with unreasonable tenants, late rents, and evictions at some point. Is that something you’re willing to do?
  • Is my rental property for short-term or long-term tenants? It might be easier to self-manage if you are looking for long-term renters. But if it’s a short-term rental (for example, an Airbnb), you will be dealing with many different tenants—and potentially a lot of complaints and maintenance issues.
  • Do you need to be in control? If you will have a hard time handing over responsibilities such as choosing tenants and performing maintenance tasks, you may be better off managing the property yourself.

Related Resources

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The Pros And Cons Of Buying A Lake House Home Buying – 8-minute read Victoria Araj – June 03, 2022 Owning a lake house may fulfill your wildest homeowner dreams, but it can come with risks. Learn whether or not you should buy a lake house with our help. Read More

How To Buy A Cottage Or Cabin In 2022: A Step-By-Step Guide Home Buying – 10-minute read Andrew Dehan – June 03, 2022 Ready to get cozy in a little house all your own? Buying a cottage is a unique experience. Here’s what you need to know if you want to purchase a cabin in 2022. Read More

How To Buy A Second Home With No Or Low Down Payment Home Buying – 6-minute read Melissa Brock – May 23, 2022 Do you need a getaway place of your own but don’t know how you can afford it? Here are some strategies on how to buy a second home with no or low down payment. Read More

5. Surfside Beach, Texas

 Not only is Surfside Beach high on our overall li

Not only is Surfside Beach high on our overall list of best places to buy a vacation rental in 2022, but this small town between the Gulf of Mexico and the Intracoastal Waterway also holds the top spot for best places to buy a beach house

It’s easy to see why so many love to slip away to this seaside village: surfing (or boogie boarding), fishing, birdwatching, and enjoying fresh seafood are among the many ways to spend vacation days in this affordable destination.

As you’re scouting homes in Surfside Beach, our RES team says to keep in mind that travelers coming to this area look for convenient beach access and nearby restaurants. Family-friendly stays are also popular here, so buyers should look for ways to maximize the number of people their rentals can accommodate.

2. Calculate Income Expenses

Once you identify a potential property, you need to make sure you can afford it, even when it’s vacant. Look at what vacation rentals in the area go for and compare this to your monthly financing and operational costs. If you can get an idea of occupancy rates for a vacation rental in that location, it will help you calculate income. Local property managers and real estate agents can help you find this information.

Example: If a property’s monthly operational expenses are $250, mortgage, taxes, and insurance are $1,750, and the nightly rental rate is $100, with an occupancy rate of 80%, you can calculate your potential monthly profit in the following way:

Potential monthly income: [($100) x (80%) x (30 days) – [($250) + ($1,750)]] = $400

In this example, the property is cash positive if it was rented a full 30 days in most months.

However, you reduce your occupancy rates and income if you live in the rental part-time. The occupancy rates and amount of collected rent also decline during off-peak seasons, so you’ll need to test several scenarios to make sure the property is bringing in the income you desire.

Let’s cover some of the expenses you may encounter so you can calculate the cost.

Vacation Rental Property Expenses

Besides mortgage and insurance payments, you’ll also have to pay for online booking fees for your rentals, taxes, insurance, homeowner association (HOA) fees, utilities, repairs, and maintenance. You may also have to pay extra to advertise for renters. If you outsource to a property manager, you’ll need to include those fees, but they generally absorb your advertising costs as part of your management contract and fees.

Taxes on Vacation Rentals

  • Property taxes: These are typically tax-deductible. Consult your certified public accountant (CPA) to take advantage of the most tax deductions available for a vacation rental. You can find property tax information online, usually on the property’s listing, or through the assessor’s online database.
  • Rental income taxes: You’ll pay these at the end of the year, but only if you rent the property for more than 14 days. Anything less, and you won’t have to pay taxes. If you do have to pay taxes, you will be taxed on your rental income based on your ordinary tax rate.
  • Occupancy taxes: Also known as a hotel or lodging tax, these generally range from 5% to 19% per night, depending on your state. Vacation rental landlords typically charge these taxes to their guests. These may be in addition to state lodging taxes. If you rent your property through Airbnb, it may collect the taxes for you if your city has signed up with them to do that.

Property Insurance

Make sure you have the right homeowners policy for your type of property and how you plan to use it. A regular second home policy may not cover you if a renter gets hurt or damages the property. You will need either a homeowner’s or landlord insurance policy based on use and occupancy. The type of insurance you need depends on how often you will rent the property and how often you will use it yourself. Inquire about flood insurance if you are in a flood zone.

HOA Fees

If you purchase a condo or a home in a planned community with common areas, you will be responsible for paying HOA fees. These fees vary based on property type, size, location, and amenities. HOA fees are usually paid monthly but can also be paid quarterly. If you rent the property the fees can be tax-deductible.

Utilities

Include expenses for heating, cooling, electricity, and gas for cooking. Before buying property, you can get a general idea of these costs from the seller and local utility companies. The costs will vary depending on how you and your guests use the property.

Management Fees

Some vacation rental property owners hire a property manager if the property is far from their primary residence. These fees vary based on the services provided by the management company. Average fees are 28% of the vacation rental income. They’re higher than the average fees of 4% to 10% for long-term rentals because the rental income is sporadic or seasonal, and the property management company has more work to do with more frequent tenant turnover, so expenses are higher.

Financing Costs

If you finance your vacation investment property, you need to include your monthly mortgage principal, interest, and private mortgage insurance (PMI) payments into your costs. If the property has 20% equity, you aren’t required to pay PMI. Also, calculate the financing costs including the appraisal, loan origination fees, and closing costs.

How to Make Money on Vacation Rental Properties

Popular ways to make money on vacation rental properties include advertising on Airbnb, Vrbo, and other online vacation rental platforms. Some high tourist areas have local magazines for advertising vacation properties. If you hire a property management company, they advertise the property for you.

Airbnb

Airbnb

Airbnb is an online platform that lets you rent out your vacation property to tourists looking for hotel alternatives. You can create a property listing with a description of the property’s amenities, number of bedrooms and bathrooms, and any other highlights. Include photos with your listing that are taken during the day for the best lighting.

Airbnb charges a service fee every time a booking is completed on the site. The service fee ranges from 3% to 5%. Taxes are included if the region requires it, but the service fee is calculated from the booking subtotal before fees and taxes are added. Fees are deducted automatically from your payout.

Vrbo

Vacation Rental by Owner (Vrbo), is an online classified ad site. You can manage the property yourself or hire a property manager to list on Vrbo. Vrbo offers several fee structures, including a $399 annual subscription for long-term rentals and an 8% booking fee if you self-manage your listing or 13% booking fee if you want the listing managed for you by Vrbo. The fees are deducted automatically from the rental income.

Finance the Vacation Rental Property

There are a few different ways of financing a vacation property. 

A conforming loan requires a downpayment of around 20% and a credit score of 680 or higher. Qualifications for conforming loans for vacation rentals are more lenient than for a standard rental property. 

A portfolio loan can be used to finance multiple rental properties. 

A multifamily loan is used for properties with 2 or more rental units. 

A short-term loan is a bridge loan used as interim financing until long-term financing can be secured. This includes hard money loans – loans secured by a property. 

How To Successfully Maintain A Vacation Rental

Owning a vacation rental property is a smart financial move to grow your wealth and build assets. However, there are lots of moving parts to consider. Here are some things you need to accomplish that will help you successfully run a vacation rental.

Maintaining Financial Expenses

Financial expenses for a vacation rental don’t just stop at your monthly mortgage payments. There are several different expenses you need to cover, whether they’re one-time purchases or monthly bills.

Here are some potential expenses for buying a vacation rental property:

  • Homeowners insurance: Just like your primary residence, you’ll need homeowners insurance for a vacation property. The standard homeowner’s insurance policy provides coverage in the event of damage. The average insurance cost is $1,272 per year.1
  • Property management: This will include house repairs and outdoor landscaping. You’ll want to set aside an annual fund amount that’ll go towards maintenance. You can hire a professional property management company to handle tasks like house cleaning, landscaping and repairs to make the rental process easier.
  • Home furnishings: A rental property won’t be very appealing to potential renters without proper furnishings. Set your home up with bedding, living room furniture and kitchen appliances to start. The more usable your home is, the more appealing it will be when it’s listed online.
  • Security system: Even if your rental property is in a gated community, it’s better to have a security system locked in to protect yourself and your renters. You can install smart security cameras on the house exterior or a smart doorbell that records video footage of people who attempt to access the home through the front door.
  • House cleaning: You’ll either need to clean the home yourself or hire a third-party housekeeper to clean the property after a renter finishes their stay.

Establish A Digital Presence

Promote your vacation property on popular rental sites such as Airbnb and VRBO. On those sites, you’re able to decide how long rental stays can be and the total fees and costs for potential renters.

After approving a renter’s stay, connect with them via an email or online messaging system to keep them informed about the vacation property. Try an email template that will include important things to know before coming to use the home, as well as local go-tos and activities for the renters to try out during their stay.

The Bottom Line

If you decide you want to buy a vacation home, make sure you’re ready for the responsibility that comes with it. If you enter your search for a second property fully prepared for each step of the process and equipped with sufficient knowledge about what’s financially expected of you, your oasis awaits!

Ready to make the leap and buy a home in your favorite vacation spot? Let us help! Start your application online with Rocket Mortgage to begin the process.

If you’re looking for inspiration as far as where to buy a vacation home, explore the best places to buy a vacation home in 2021.

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