Last week I talked about approaching real estate investing from a long term buy and hold strategy. If the long term strategy is the most common then this week’s strategy is certainly the up and comer. Let’s go over some advantages and disadvantages to short term buy and hold real estate investing. Often referred to as short term or vacation rentals.
The National Association of Realtors has only collected data on vacation rentals since 2003 and in 2014 a record number of sales were made. The vacation rental industry has given birth to companies such as VRBO (Homeaway) and AirBNB just to name a couple. Furthermore the feedback we’ve received from our users, has caused us to adapt and develop new tools which will be coming to Revestor this Fall.
With all of the users, investors and agents I polled for this week’s post there was one piece of advice that each gave. And that was to know your numbers. With all of the variable and unexpected costs that come along with buying a vacation rental it’s important to due your homework.
#1. Know the area
You need to be familiar with the area that you’re looking to buy in. I’m talking year round. Let me give you an example. I can rent out a 3 bedroom / 2 bath townhouse in Palm Springs from January 1st to April 30th for $5,000 / month and have people lining up to occupy the unit. From June 1st to September 30th it isn’t uncommon to have a 90% vacancy rate. Vacation destinations have seasonality and rents that coincide with those seasons. There are other cities such as New York, San Francisco and Chicago that may not be exposed to such a change in demand but the bottom line is that you must know your market. All 365 days of it. (Well New York can get really hot and really cold regardless there is demand but not so much so in Chicago)
#2. Know the rules
If you know the area then you must know the rules. Your neighbors may not be thrilled with the idea of living next door to a new tenant every few days, few weeks or few months. Perhaps there is something stated in the HOA, CC&R’s or local laws. The explosion of owner occupied vacation rentals is still a relatively new market and laws will be changing as a result.
#3. Know the numbers
Revestor can help you locate properties and run the numbers as a valuable due diligence tool. It’s up to you to understand those numbers. Here are just a few items you need to consider when understanding the numbers for a potential vacation rental.
Furnishings – You need to develop a budget for furnishings. Know ahead of time that your future tenants likely won’t care about the beer they spill on the couch.
Cleaning – Depending on your length of stays, vacancy rate, your proximity to the property, your willingness to clean etc. You’ll need a best case / worst case scenario in place.
Utilities – Running the A/C 24 hours a day may not be what you had in mind but it may be what your tenant has in mind. Or perhaps they prefer your pool be heated to 85 degrees. Those unexpected utility bills can wreak havoc on your bottom line.
*You can manage utilities from afar on your smartphone nowadays.
Effects on neighbors – Your tenant is on vacation so they are likely going to do what others do on vacation. Stay up late, make noise, drink etc. This can have a negative impact on your neighbors and can make management difficult for you.
#4. Decide who will manage the property
Sites like VRBO & AirBNB are great resources to help monetize your vacation rental but what is the best solution for you? If you’re considering one of these methods I would highly recommend looking for a MeetUp or local event hosted by AirBNB where they will walk you through their platform. I would also recommend (just in the beginning) renting your place below the market price. The reason for this is two fold.
You’ll get it occupied quicker saving you the expense of vacancy
You can get more people through and get better reviews faster
If you decide to go with a property management company understand that they will likely take a higher percentage. Cuts as high as 20% are commonplace in the vacation rental market. There are advantages however to working with management companies that focus solely on the vacation rental market. Companies such as Pillow Homes and Mission Sands are good examples.
Vacation rentals can be a very lucrative strategy when it comes to real estate investing. IF, you know your market. If you’re searching for that starting point for getting started then Revestor is the place for you. Being able to run investment calculations over live listings will help familiarize you with the market and help you to make better decisions. When you’re ready, we also have a network of professionals to help you complete the purchase process.