Wednesday, September 21, 2022

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Economics Of Vacation Rental Property

Small Landlords Still The Backbone Of The Residential Property Industry

AirBnB Rental Cabin – My Top Tips on Economics of Vacation Rentals | Short term rentals

When the rental housing market failed last May, the government leaned heavily on all landlords to pay the bills while tenants and mortgage banks trembled in fear. We all discovered how important local landlords are to communities and local economies.

While big real estate corporations received infusions of stimulus cash, small landlords found rent default was a problem and receiving stimulus funds themselves to be difficult. Many of them reported selling condos, apartments etc., at a discount to to cash rich buyers.

Despite an unfair playing field, it is likely small real estate investors and small business landlords will find a way to buy rental income properties and flourish 2022 and the next 5 years. Weve learned that for some, being rental landlords is a business not a hobby and new solutions will help.

the global market is forecast grow at a CAGR of 8% from 2021 to reach $28.1 billion in 2028

Cons Of Owning Vacation Rental Property

Con #1: Expenses

One of the most difficult tasks as a vacation home owner is accurately projecting expenses. Even if you have accounted for expenses such as utilities, mortgage payments, insurance, taxes, management fees etc., there will inevitably be unplanned costs.

Whether its additional maintenance or repair of damaged goods, you should always expect the unexpected and make sure youre prepared.

Con #2: Higher Renovation and Repair Costs

Short-term rentals innately have more maintenance costs for damages or repairs. This is in large part because its usually harder to keep an eye on short-term rentals. There are more people coming and going and visitors have no attachment to the property, as they would in a long-term rental. Turnover rate of a short-term rental will inevitably require higher renovation and repair costs.

Con #3: More Risks

There are a couple of risks associated with owning a vacation rental property. First, there is always some financial risk when investing in anything. However, vacation homes tend to be more sensitive to economic downturns, which further increases their risk.

Another risk to consider is a natural disaster occurring in the area. The demand for beach or waterfront vacation homes is high. But keep in mind that houses close to water come with a higher risk of flooding, hurricanes, etc. No matter where you decide to buy, make sure your insurance covers everything.

Con #4: Unexpected Costs

Con #5: Lack of Flexibility

Owning A Vacation Property In The Outer Banks

Most people think that you can earn enough money in rental income to cover the cost of the mortgage. While this might be the case in warmer vacation spots where you can rent year round, it is certainly not the norm in a place like the Outer Banks of North Carolina. Owning a rental property in the Outer Banks may be a worthy investment, but keep in mind the rental season is limited by seasonal temperatures.

In North Carolina the typical rental season is between ten and sixteen weeks, depending on how close to the ocean your home is located. The majority of rentals occur in June, July, August and September. Real estate agents may quote you all sorts of year round rental numbers, but most homes rent primarily during that time frame. Due to the short rental season most people cannot make enough money off of their home, , to cover the mortgage.

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Making Sure Your Vacation Rental Is Properly Insured

If you rent your vacation rental out the majority of the year, it is considered a business, and therefore a standard homeowners insurance policy is not adequate coverage. We recommend specifically asking your insurance provider about their vacation rental coverage or shopping around for a vacation rental policy. Here is what you should be looking for:

Property Protection: This includes coverage for the property and all property structures including the garage, fences, swimming pool etc. Property protection could also provide coverage for your personal property, such as the furniture.

Liability coverage: Liability coverage is extremely important for a rental property and provides the coverage for medical bills or legal expenses if a guest is injured at your vacation rental property.

Loss of Rent Coverage: If you are unable to rent out your property due to a fire, flood, or guest damage, Loss of Rent Coverage will help cover your lost rental income.

Supplemental Coverage Based on Location

Earthquake Coverage– If your vacation rental is in California or another area at risk for earthquakes, you should be covered. Flood Coverage– Is your vacation rental property in an area prone to flooding like Florida? Flood insurance is a must.Volcano Coverage– We require all Hawaii vacation rentals we finance to have volcano insurance.

You Need To Market It And Find Guests

Floridas Economy Enjoys $27 Billion Annual Boost From ...

Theres no if-you-build-it-they-will-come strategy here. You need to:

  • list your home on all the top rental platforms,
  • optimize your listings to appeal to the right audience,
  • fill the home with comfortable and on-trend furnishings and decor, and
  • most importantly, price the property just right for the market its in.

You might even need to run occasional discounts and promotions in order to fill the home during seasonal lulls.

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Supply And Development Constraints Continue

We wonder if the market is splitting to serve the haves vs the have nots. The haves do not appear to be stopped by constrained supply. In fact, the luxury market is well served and new construction of luxury units may not be as affected by anti-development regulators.

High end renter households. Screenshot courtesy of the Joint Center for Housing Studies at Harvard University.

Although stimulus money may be flowing to state and city governments, regulations may prevent them building multifamily residences. The costs and logistics of such building projects are a big issue.

The key issue with the housing and rental markets is the inability of different levels of government to agree to permit building. High construction costs, rising demand, regulations, and few investors willing to risk their money for huge, speculative projects in the rent control era, means its more likely rents will rise.

Some question whether increased supply and high density will solve anything. Theres a point to be made that even if you build more affordable units in California, New York, or Miami, more people will move there and fill them up. Prices therefore may not fall given there is continuous demand.

Where To Find Vacation Rental Properties

An online search is the most convenient way to find vacation rental properties. You may already have an idea of where you want to own a vacation property. Sometimes, you can find great properties right in your neighborhood or state. Having proximity makes self-managing a vacation rental easier than if you live far away.

Consider your budget. Areas with high tourism tend to come with high property values, but they also generate higher rental income. It doesnt mean you have to give up that location. Maybe you can find something in a surrounding town or on the outskirts if you cant afford property in the higher-priced area.

You also can call a local real estate agent to work with you in finding a vacation rental.

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The Nuances Of Financing Vacation Rentals

Investors typically turn to alternative lenders like Visio Lending for a few reasons. The first situation is if they are self-employed, including owning their own business. Another reason would be that they already own too many properties to qualify for another conventional mortgage. Finally, and importantly, they may turn to an alternative lender because they want to own their investment properties in a legal entity to protect their other assets. That is not allowed with conventional mortgages. Here are some of the key nuances of financing an STR or vacation rental:

More Home Buyers Under The Age Of 30 Are Getting Into The Short

South Lake Tahoe to vote on future of vacation rental homes

Every summer when Trevor Plencner, 24, was growing up, his family would take a trip to New Buffalo, Mich., where theyd rent a house on Lake Michigan. Year after year, Mr. Plencner became increasingly intrigued by the notion of owning a vacation rental property himselfso much so that he decided to give it a whirl.

In February 2018, when he was 20, Mr. Plencner purchased a vacation rental in Lake Geneva, Wis., about an hour northwest from where he lives in Hoffman Estates, Ill. While there are multimillion-dollar houses on Geneva Lake, through persistence and good timing, Mr. Plencner bought a 1,200-square-foot cottage a few blocks off the water for $111,000. He put 3.5% down using a Federal Housing Administration loan. Six months later, after painting and furnishing the interior and renovating the basement, Mr. Plencner put the cottage on booking websites. In the summer, his nightly rate is around $400 in the winter, it is closer to $175. To his delight, the three-bedroom homes rental income started covering the mortgage, and then some. In June 2019, he bought a second Lake Geneva property with a friend for $85,000.

The exterior of the 1,200-square-foot, three-bedroom vacation rental that Trevor Plencner owns in Lake Geneva, Wis.

Trevor Plencner and his girlfriend, Nichole Dittmer, on the outdoor patio at Mr. Plencners vacation rental. He bought the property for $111,000 in February 2018.

In addition to a hot tub, the backyard of the home has a fire pit.

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What Kind Of Data Can You Expect From The Vacation Rental Income Calculator

Now that you have an idea of what the vacation rental income calculator does for a real estate investor, let√Ęs take a further look at the important numbers which it will generate:

  • Rental Income

As you might have guessed, the vacation rental income calculator will show you projections of the rental income which you will potentially make from renting out your vacation rental property. The calculator looks at the predominant nightly rate of vacation home rentals in the area where your investment property is situated in order to give you the most accurate estimate of the rental income that you will be able to make each month.

  • Cash Flow

The cash flow is the amount of money that your vacation rental will be making per month. The calculator takes into account all the expenses that are associated with buying, financing, and operating your vacation rental, and subtracts them from the rental income to estimate the amount of profit that the property will be producing. The resulting cash flow can either be positive or negative, indicating whether you will be making or losing money.

  • Occupancy Rate

The occupancy rate indicates the number of days that your rental property is expected to be occupied by tenants in a year. The vacation rental income calculator estimates the vacation rental occupancy rate based on actual Airbnb analytics and data gathered from the neighborhood where your rental property is located.

  • Cash on Cash Return

  • Cap Rate

I Want To Buy A Vacation Rental Property

Now you just need to figure out whether or not you can afford it. How much money does it take to own a second home and how much money will you earn from it? Ill walk you through the details of our second property to uncover the real cost of home ownership. Then you can decide if vacation rental ownership is right for you.

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Consider Your Stage Of Life

Are you raising a young family? How often do you travel? How much money, on average, do you spend on a family vacation? Are your kids grown and you want to provide a gathering place for everyone?

Considering your stage of life will help determine exactly why you want to buy a vacation home and if the timing is right.

Should You Invest In Long

Vacation Rental Economics
Colorados real estate market has been hot, inspiring many investors to grab a piece of the pie

Colorados real estate market has been hot, inspiring many investors to grab a piece of the pie.

Although most counties are still recovering from the 2020 price dips spurred by the pandemic, rental costs are quickly climbing up as businesses reopen and more people move to Colorful Colorado.

According to data from STR, short-term rental prices across the state have increased by 25% since March 2020 higher than Florida, Arizona and California. As for median monthly long-term rent, a one-bedroom goes for around $1,100 per month in Denver, and a 3-bedroom single-family home can go for well over $2,000 per month.

Housing prices have also significantly increased, making the barrier to entry for first-time investors more difficult than previous years. By working with a discount real estate broker and taking advantage of the current ultra-low interest rates, however, there are still ways to make high ROI, even with high housing prices.

For those trying to decide whether to invest in a long-term or short-term rental, this article will list the pros and cons of both.

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You Go With Emotions And Forget About Numbers

Many homeowners fall in love with a property or a specific area and forget about what its going to take. Whats the point in buying the biggest house on the street if in a few years youll close the business? You have to make sure that its the right decision for the future.

But this is not only the case with this type of investment dont make the mistake of investing irrationally. Be brave and recognize your possibilities and limitations, and make the most of what you can afford. Dont take risks that can end up costing you a lot of money.

Short Term Renters Will Likely Become Long Term Tenants

In our last report last summer, rent prices had reached a 5% to 6% growth rate is pushing toward 15% now. Given the economy is expected to keep improving, and sustained likely by infrastructure spending, we should see greater demand for rental property. The embattled California rental market should recover in 2022. See the best California cities for rental landlords.

The US rental market is undersupplied, and since housing prices are reaching ever higher, more Americans will be forced to turn to renting. Most will believe their rental will be a short term transition but without new construction seriously increasing pace, their tenancy might be much longer.

What is the one decision that will change results for US property managers? Its the first word youll see on This Page.

Landlords will want to learn better management strategies and build their business on a modern property management system that will allow the to grow services and increase efficiency.

Even middle class buyers will need to rent as prices soar. The issue of housing prices, rising interest rates, and labor shortage will create headwinds for landlords and multifamily investors, but the market does look solid for some time yet.

Wages are rising well in 2021, but wont keep up with rising rent price increases. Landlords will need to screen more strongly to ensure their tenants can pay the rent continuously.

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Is Property In The Outer Banks A Good Investment

Lastly, if the money you get from renting your home does not cover the cost of renting it, you may be able to post a taxable loss on Schedule E. The tax laws for rental properties are extremely complex and since Im not an accountant Id highly suggest you speak with a CPA. There are also lots of good articles on the Internet that can explain the differences between passive and active income and between rental properties and personal residences. In each of these situations different tax laws will apply.

Is Owning A Vacation Rental A Good Investment

Vacation rental home vandalized, neighbors fed up

When investors follow the appropriate steps to buying a vacation rental property, they are more than likely to reap the many benefits this investment offers. The biggest payoff vacation rentals have is increased cash flow. Vacation rental platforms are a great way to generate income from a short-term lease, and if your property is in high demand, you will see even greater profits.

The tax benefits associated with vacation rentals are also available to take advantage of. Your vacation home is considered a business if it is rented out for at least 2 weeks per year or more for tax purposes. This means that the rentals income will be taxed, but you can also write off many of your rental propertys expenses. You can deduct many items from your taxes, including utility costs, property management fees, occupancy taxes, mortgage interest, and more.

Not only can you generate income by leasing out your rental property, but also you have the benefit of vacationing there yourself. If you ever decide to take a getaway, your vacation rental can be made available for your own personal use. You can even hold on to your vacation home to use as a future retirement home.

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Residential Properties Need Residential Appraisals

Traditionally, for rental properties, appraisers fill out a 1007 report on comparable rents for long-term leases think a year or more. Appraisers primarily appraise homes for owner-occupiers. Every once in a while they are asked to appraise a home as a long-term rental. In most markets, they rarely are hired to appraise an STR or vacation rental. Getting an accurate appraisal of an STR or vacation rentals potential gross rents, therefore, can be difficult because most appraisers are unsure how to determine short-term rents.

As an alternative lender, Visio is able to use a common sense approach to determining STR rents. Visio considers any actual rent performance available on the property and then augments that information with comparable data from a variety of data sources. Unlike a licensed appraiser, Visio is not limited in the information it can use to establish an appropriate rent estimate.

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