How about a home in the mountains or by the lakefront? You are sure to have many such dreams of owning homes and spending your vacations there. It is time to make your dreams into reality. You can also earn additional income by renting your vacation home or rental property.
Here Three Super Easy Steps to Buy a Vacation Rental Property
Accessible Location
Intention to buy the vacation rental property-
First, decide if you will be using the vacation property as your second home and renting it out for only a few days. If you will be using it more as your second home, buy it in a location of your liking. If you are buying it as a rental property, opt where renters have easy accessibility.
The popular places to buy a vacation rental property are lakefronts, mountain slopes near valleys, entrances to beaches, and national parks. Amenities and local attractions are also crucial when selecting the location of the property.
Priority of the renter-
The intention of the renter is a significant factor when considering buying the property. Do they rent it because it is closer to a local attraction, or do they rent it because they want to stay in a secluded place? Consider how renters will access and enjoy their stay at your property. Hire real estate consulting services if you are staying away from the property, or you do not have any idea of its worth. It is always better to have a sound knowledge of the location before you set your eye on any vacation rental property.
Income Vs Expenses
You purchase a vacation rental property for some extra income. But buying a property comes with additional expenses. You have to constantly upgrade the home as per the latest holiday stay trends. You have to clean the home each time a renter vacates it and manage its swimming pool and garden. Also, do not expect rentals throughout the year. There will be high occupancy during the vacation season and a lull during the off-peak season. Hence, the income of the vacation rental property is calculated after deducting the possible operational costs and comparing them with the monthly financials.
Here is the list of taxes on vacation rentals-
Property tax- Get property tax information online on the property’s listing. Tax deductions are available, and a certified public accountant will help you to sort them out.
Rental income tax- You will be charged based on the ordinary tax rate at the end of the financial year. You pay this tax if you have rented your vacation home for more than 14 days.
Occupancy tax- It is the hotel or lodging tax and ranges from 5% to 19%. Usually, this is collected from the renter itself.
State lodging tax- The state lodging tax is not uniform and varies as per the states. It changes from as low as 1% to a high of 14%.
Here is the list of other expenses on vacation rentals-
Property Insurance- It is a homeowner’s or landlord insurance policy based on occupancy. A second home policy will do no good since they do not cover you if a renter damages or gets hurt from your property.
HOA fee- The Home Owners Association fee is a common feature in planned communities. It depends on the property type, amenities, and location. It is paid monthly or quarterly and is tax-deductible.
Utilities- These are the electricity and gas bills you pay for your vacation rental property. It depends on how much you and the renters use the utilities.
Management fees- If you are staying far away from the property, you usually hire property management services. The fee for such a service varies from 15% to 30%. It is high for short-term rentals since they have to manage it each time a renter vacates the property.
Financing cost- If you have taken a mortgage for your vacation rental home, you have to calculate the interest, monthly mortgage principal, and private mortgage insurance payments.
Miscellaneous expense- The other expenses include repairs costs, upgrading costs, and the commission you pay when you advertise it on vacation rental platforms like Airbnb or Vrbo.
Related: Commercial Real Estate Services
Here is the list of income generation techniques for your rental home-
Airbnb– It is a vacation rental listing platform that charges a service fee for each booking. List your property with a good description and images on its site.
Vrbo- It is an online classified ad website with an annual subscription for listing your vacation rental property. You can either self-manage your listing or take their help for an additional fee.
Advertising on travel magazines, newspapers- Advertise your vacation rental property on local travel magazines and newspapers. Try distributing flyers at the entrances and vehicle parking section of the local tourist attractions.
Build a website– Instead of listing your property on Airbnb or Vrbo, build a dedicated website for your property. Run ads on Google and social media platforms like Instagram and Facebook. Include customer testimonials. You can save on service charges and build a database of customers through online booking.
Hiring real estate consulting services- Hire real estate consulting firm if you find it challenging to get renters for your property. They manage to get renters for you by advertising your property in places where there is visibility and traction.
Financing the vacation rental property
Once you calculate the earnings and expenses and decide on buying the property, the next step is finance. Most investors seek loans as a source of finance for their vacation rental property. Here are the types of loans available for the property-
Conventional or fixed-rate loan- The conventional loan is immune to mortgage rate changes. It is usually paid over a fixed term of 10, 20, or 30 years with a 20% down payment.
Adjustable-rate loan– Here, the initial interest rate is fixed for a certain amount of time like three, five, or seven years. When it ends, the mortgage rate adjusts itself to the current rate.
Jumbo loan (non-conforming loan)- If your vacation rental property rate exceeds the conforming loan limit, you opt for a jumbo loan. For this, you should have a higher income and credit score. Also, you should have at least 6-12 months of cash reserves.
Short-term loan- Also known as a bridge loan or gap loan, it is perfect if you are trying to sell one home and finance it to buy the other vacation rental property. The two mortgages are combined into one loan. The lending institutes refinance the vacation property once you sell your home.
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Hire real estate consulting services
We suggest that you go with the services of a real estate consulting firm during the process of buying your vacation rental property. Selecting a property is not easy, especially when you are buying it to generate rental income. A real estate consulting firm will help you choose the perfect vacation rental property. They also manage it so that you keep getting a good income.
Bottom line
Buying a vacation rental property is a good way of diversifying your investment portfolio. It gives you good returns in the form of rent. Moreover, you can enjoy your vacations by making them your second home. If you are planning to buy one, do not forget to hire real estate consulting services. They will make things easy for you.
