Are you thinking about expanding your real estate portfolio to include a few vacation rentals? You’re not alone. Airbnb reports that 57.8 million bookings were made in 2020 – and that’s during a pandemic! But can it be as easy as it seems, or is this investment strategy just another money pit? Is a vacation rental property a good investment, or is it something you should steer clear of?
Vacation rental properties can be very lucrative as investment properties, but they’re not to be treated like other real estate investments like fix & flips. With a vacation home, you’re not selling the dwelling as much as you’re selling the experience. That experience can require more upfront investment, but if done correctly, can also yield massive profits.
But before hitting the pavement at that beachfront town, let’s talk about what a vacation rental is and what you’ll need to consider before adding one to your portfolio.
What is a Vacation Rental Property?
Vacation rentals are properties that have short-term rent terms and are usually in a desirable area. You can find vacation rentals anywhere someone wants to live (for a little while). It can be a luxe home in a beach resort, a rustic cabin off the grid, or an efficiency studio in the heart of a major city. If you’ve ever booked a stay at an Airbnb or VRBO property, then you’ve stayed at a vacation rental.
These can sometimes be confused with timeshares, where one person (or family) shares partial ownership rights to a property with others and pays to keep that ownership going. The difference is that a vacation rental is typically owned by a single investor who rents it out for short timespans, like nightly or weekly.
While a vacation rental might seem like an excellent way to diversify your real estate portfolio, there are some stark differences between owning a vacation home and investing in a fix & flip property that you should consider ahead of time.
Things to Consider Before Buying a Vacation Rental
The truth is, vacation rentals can be incredibly lucrative if you get it right. To make this investment model work for you, you’ll need to think of vacation homes differently than you would a regular investment property.
With a vacation home, you’re not selling a place for someone to live, but instead you’re selling an experience. Consequently, this business model means a lot more effort than any other investment property in your portfolio.
However, if you’re willing to put in the work and can be an active participant in the business behind your vacation rental, the profits can be much higher than a one-and-done fix & flip.
Considerations You’ll Need to Tackle
Make sure your property is zoned correctly. This has gotten many investors in hot water as many cities are cracking down on short-term rental models. Before investing in that gorgeous beachfront property, make sure nightly rentals are allowed in that municipality. Take this consideration seriously – there have been cases where unknowing investors have ended up with a felony record due to not understanding (or caring about) how the property is zoned.
Can you handle the additional expenses that come with vacation homes? Unlike standard landlord rental agreements, as the owner of a vacation home, you should accept that you’re on the hook for many more expenses. Things like furniture, linens, appliances (both large and small), condiments, coffee filters are all items that will require some additional budgeting that can reduce your overall profits. Make sure you account for them before pricing your home for rent.
How much will you use the property? This can be both a pro and a con depending on how you look at it. Most vacation rentals will have an off-season where renters are less likely to come. This time needs to be accounted for in your projections and the times you would like to use the property. There’s not much fun in owning a gorgeous resort-style home and never getting to use it! If you’re able to work your schedule so that you can occupy the house during the off-season, then a vacation rental can be a good investment. If, however, you’re not willing to get snowed in during a blizzard in your rustic cabin in the woods, you’ll need to account for the loss of income during the times you stay in the home when it could instead be rented out.
How will you manage upkeep in the off-season? Even though your home won’t be hosting guests, there are still upkeep considerations that you’ll need to tackle to make sure the home remains in good condition. Things like making sure the pipes don’t freeze, or that the hurricane shutters are installed and removed correctly, or that the home doesn’t become a critter paradise. These are all things vacation homeowners need to factor into their business models.
How to Make Your Vacation Rental Popular
If you’re ready to make some big money as a vacation rental investor, let’s talk about how you can ensure your home is always in demand.
Remember that this business model is about providing an experience and not just a shelter. Your business will live and die by the reviews it receives, so you’ll need to think about this property differently than you would a fix & flip.
Consider the accommodations you would expect at a 5-star hotel; how can you create that experience for others in your home?
Tips for Creating a Luxury Experience that Gets 5-Star Reviews
Offer welcome gifts. This doesn’t have to be extravagant but consider little amenities that show your appreciation for them choosing your rental. Things like sparkling cider, premium coffee, or fresh treats from a local bakery can add that little bit extra that boosts your review score.
Create a local info booklet. Make their experience in your town a great one by creating a little guide to the local ins and outs. Add sightseeing attractions, local eateries, and “locals favorites” stops that aren’t on the average tourist’s radar. Also, be sure to include a quick-access directory of local emergency numbers and the contact information for you or the caretaker if something breaks.
Make sure the home is spotless every time. Nothing throws off a great experience like coming to a home with dirty sheets, moldy towels, or bugs. Make sure that your vacation property is ready for show before your guest enters.
Respond quickly to all communications. We live in a fast-paced world, and you being first to respond to an email could be the difference between your home getting booked over a competitor. Have procedures in place for all communications, including customer service, marketing, booking, quality control, and property management.
Are Vacation Rentals Better Investments than Standard Landlord Rentals?
Vacation rentals can be very lucrative but comparing them to standard rentals is complicated as they’re entirely different beasts. With a landlord rental, your renter is responsible for taking care of the property while you’re more hands-off. Vacation rentals are much more hands-on as the property is the vehicle that drives the experience, and the experience is the thing that you’re selling.
Tips for Making it Easier to Own AirBNB or VRBO Properties
Whether you own a single home or multiple properties, here are a few ideas to help lighten the load for a vacation rental business like yours.
Outsource what you can. Some vacation communities have property management companies already established that help owners like you keep their properties up and running. Property management companies can help with things like:
- Check-in/Check out
- Cleaning and Maintenance
- Guest services
The catch is they’ll typically take a 30 – 50% cut of your booking fee. This commission can be well-worth it, though, if you’re not willing or able to be readily available to the property and your guests.
Ask for feedback. You’ll never know what’s missing from your rental home if you don’t ask, so make sure to be in touch with guests immediately after their stay. Doing this will help you understand blind spots in your business strategy and help boost your rating on rental sites.
Use social media. You’d be surprised how a good Instagram account or blog can be for marketing your property to potential renters. Take lots of pictures of your home and the surrounding area and invest in a social media scheduler (they’ll run you around $150 – $200 a year) to help push out content consistently that helps get your home noticed outside of the saturated rental websites.
While vacation rentals involve a much more hands-on strategy than other investment properties, they can be very lucrative when in the right person’s hands. If that person is you, give a few of these tips a try and let us know in the comments what has worked best and what tips you think we’ve missed.