Investing in vacation rental properties
July 3, 2017
The decision to purchase a vacation rental can prove exciting and financially rewarding. Having an opportunity to own the right investment affords homebuyers the benefits of owning a second home, while allowing for financial gains. Yet, there are considerations that must be taken into account when purchasing investment property. Inadequate preparations can prove problematic for under-prepared homebuyers. Through proper planning and realistic expectations, homeowners are often afforded an opportunity to own a successful investment, which generates income and builds equity.
A prospective homebuyer's search for the right vacation property should align with their intended use of the home and investment strategy. When contemplating the purchase of a vacation rental, homebuyers should fully understand why the destination is of interest to vacationers. Although purchasing a home in a remote setting may be less expensive than comparable properties found in well-known tourist destinations, an isolated home's potential as a vacation rental is often limited.
As to be expected, vacationers will desire access to local amenities without having to travel great distances. When purchasing, home buyers must consider the home's proximity to attractions like the beach, trail heads, resorts, gaming, fishing, and golf. But, home buyers should also give thought to a subject property's physical offerings, such as bedrooms, bathrooms, kitchens and other living spaces which are of importance.
Prospective vacation homeowners also benefit from purchasing homes that are a commutable distance away from their principal residences. A vacation home that requires substantial travel, may seldom be used by the homeowner and eventually become burdensome.
When not in use, homeowners will want to ensure the property isn’t vacant for extended periods, as unattended homes present opportunities for problems. When not being rented, investors should take precautionary measures, equipping their homes with timed lighting, security systems and asking trusted neighbors to keep a watchful eye.
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When not in use, homeowners will want to ensure the property isn't vacant for extended periods, as unattended homes present opportunities for problems. When not being rented, investors should take precautionary measures, equipping their homes with timed lighting, security systems and asking trusted neighbors to keep a watchful eye.
Vacation home buyers are typically afforded options ranging from condominiums to single-family homes; there are advantages and disadvantages to both. Condos often provide property maintenance, and have other amenities not typically afforded by single-family homes such as pools, tennis courts and game rooms. But such offerings also come at a cost. Single-family homes are usually more private, but homeowners have responsibilities for maintenance. In many cases, neither is necessarily free from the influence of homeowner's associations.
A home's ability to be purposed as a vacation rental may be restricted, pursuant to association regulations and local zoning ordinances. To that end, understanding limitations placed upon vacation rental ownership is of profound importance when committing to buy.
Beyond the initial purchase and resultant mortgage obligations that follow, the ownership of a vacation rental entails other financial considerations, including tax implications, property maintenance, utilities, association dues, and other operational costs. Each of these responsibilities play consequential roles and prospective home buyers are encouraged to discuss the purchase and intended use of the investment property with a mortgage lender and a tax professional prior to purchasing.
Budgetary constraints encumbered in the ownership of investment properties are an ever-present reality. And while rental revenues may sufficiently offset ownership costs, other expenses borne may require supplemental appropriations from the homeowner. But investing in the purchase of a vacation home, especially in tourist destinations, rarely underperforms long term. Still, owning and operating a vacation rental must be thought of as a business, and in effort to maximize profitability, homeowners should capitalize on demand, while accounting for rates and occupancy factors.
To better understand vacation rental investments, home buyers are encouraged to rent themselves. As a customer, home buyers are given an opportunity to experience the process, research options and prepare suitable business plans supporting their objectives. When home buyers find a home they're interested in, they should examine the rental histories of comparable properties found within the area.
Attending to the needs of guests, answering calls, contracting rental agreements, arranging deposits, accepting payments, performing maintenance and cleaning between guests can be an overwhelming proposition. For these reasons, prior arrangements are recommended, especially if the homeowner doesn't reside nearby. Absentee homeowners are often best served in hiring a professional management company. But, acquiring the services of a third party can be expensive; home buyers are encouraged to interview several property management professionals to discuss services and fees.
When transforming a home into a vacation rental, homeowners must focus on the aesthetics and purposefulness of each living space. The home should be clean and well-appointed. Functional furnishings, sleeping accommodations, and defined entertainment space are critical in remaining competitive with other vacation homes. Linens, draperies, artwork, houseware and appliances, are also important. The services of an interior designer, familiar with vacation rentals, can prove beneficial in making the home marketable to vacationers.
For some, purchasing a vacation rental in partnership with others proves advantageous, allowing prospective home buyers to lower their initial investment, while sharing in the opportunity to enjoy the property. All parties have the potential to benefit financially while sharing in obligations. But, the percentage of ownership interest and cancellation strategies must be determined before purchasing a vacation home. It may prove advisable to partner under the provisions of a limited liability company and work with a legal professional.
Vacation home buyers often benefit from the knowledge and experience of real estate professional well-versed in rental properties. Their expertise can help prospective home buyers make informed decisions, supporting their investment strategies.
Sean and Aimee McDonald, Realtors with RE/MAX North Lake Tahoe, can be reached at 775-250-8335 or firstname.lastname@example.org.
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