Nicole Mazzola

858.775.0328
nicole@aare.org

1020 Prospect Street #350
La Jolla, CA 92037

How to Ensure a Vacation Home Purchase is a Good Investment

April 4, 2019

If you’ve been thinking about investing in real estate and buying a property to rent out over the long haul, you might want to consider a somewhat unique investment opportunity: vacation rentals.

In fact, renting out vacation properties has become all the rage lately thanks to sites like Airbnb, VRBO, and HomeAway. Travelers have become savvy in their choice of accommodations abroad, choosing places that mimic home rather than defaulting to tiny hotel rooms with very few amenities.

If you invest in the right vacation property, you can realize a full calendar of bookings throughout the year. But it’s important that you play your cards right in order to make sure that the property you invest in will make it easy for you to turn a profit.

Here are some things you should consider before investing in a vacation home.

Identify a Market For Vacation Rentals

As with any other type of real estate investment, choosing the right location of your vacation home is crucial. Find out what the market is like in the area you’re looking at to see how in-demand it is for travelers and those looking for accommodations.

Make sure the property is located in a place that vacationers would want to spend their holidays. The right location can make marketing and renting your vacation property so much easier. The more desirable it is, the more frequent bookings you can enjoy.

There are so many potential scenarios you may want to think about when choosing a location. A quiet waterfront cottage, a condo close to entertainment and shopping, a beach property, or a townhouse in a ski resort are all great examples of the types of vacation homes you may want to consider that vacationers would flock to, as long as there’s demand.

Determine How Much You Can Rent For

There are obvious costs associated with buying and operating a piece of property. And when it comes to vacation rentals, you want to make sure that the rent you charge can at least cover all associated expenses. Ideally, you’ll want to turn a profit, which is the whole idea behind buying and renting out a vacation home.

But in order to make sure you’re profitable, you’ll want to know how much you can realistically rent the place out for. You can always scope out vacation rental websites to find out what similar properties in the area are going for.

Or, you might get a more accurate idea by having a real estate agent conduct a thorough analysis of the area and what vacation rentals fetch in short-term rent.

Get Yourself Enough Insurance Coverage

Homeowners insurance is a must for anyone who owns real estate. But with vacation properties that you’ll be renting out to complete strangers on a regular basis, you might want to get yourself more comprehensive coverage that will protect you.

In addition to buying a policy that covers the cost of completely replacing the property should disaster strike, it’s also important to consider taking out a personal liability policy that will deal directly with the ownership and rental of the property, including all assets inside the unit.

Look into policies that will also protect you while your property is vacant between tenants. And if there are any heightened risks in the area that you’re looking at buying into – such as earthquakes, forest fires, or floods – take out a policy that covers that, too.

Factor in All Costs

It goes without saying that you’ll need to assess the prices of the properties you’re looking at and make sure you can afford them. But the mortgage is only one part of the mathematical equation when it comes to vacation rental investments.

After you’ve determined that you can afford the place and are able to secure a mortgage, you’ll need to take a detailed look at all the costs that will be associated with operating the property. This includes, but is not limited to, the following:

  • Property taxes
  • Maintenance
  • Repairs
  • Utility bills
  • Insurance
  • Cleaning fees (if you hire an outside cleaning company)
  • Property management fees (if applicable)
  • Marketing

Don’t make a purchasing decision without first having figured out what it’s going to cost you to keep the property running. And don’t forget to consider times when your unit is vacant, as you won’t have any rental income coming in to cover your carrying costs.

Make Sure You Have Adequate Cash Reserves

The last thing you want is to be strapped for cash one month because you don’t have a financial cushion to carry you through slower times when your property is not rented out.

As such, it’s wise to have adequate cash reserves before you invest in a vacation property. Besides, your lender will likely require you to have a certain amount of money before approving your mortgage.

The Bottom Line

There are plenty of opportunities to make a great income and build wealth in the realm of vacation properties. And with vacation rental sites like Airbnb and VRBO exploding, now might be a great time to take advantage of such a lucrative opportunity. Just make sure you’ve dotted your i’s and crossed your t’s before you dip your toes into this type of investment.