Are you thinking about purchasing a short-term rental in a resort or vacation area? Or otherwise getting involved in the short-term vacation rental business? Understand what you're getting into before you buy. There are a number of specific considerations rental real estate investors should be aware of before purchasing these properties.
For many people, the best way to own a vacation rental property is to enjoy it themselves. That is, purchase your own vacation home because you enjoy using it yourself.
You can rent it out when you're not using it to offset the expenses of ownership, but it's very difficult to make a short-term vacation rental a cash-flow positive property in its own right.
Most landlords understand that a standard homeowners insurance policy isn't sufficient if they plan to treat their property as a residential rental. That's why they get special landlord insurance policies.
But even your standard landlord insurance policy won't provide adequate coverage if you own a short-term vacation rental. In these cases, you'll need something closer to commercial liability insurance. This is because your landlord or homeowners insurance doesn't cover business activities conducted in the dwelling. But in a vacation rental, everything that happens on the property is commercial activity.
Furthermore, in most cases, your personal umbrella insurance coverage won't protect you against claims arising from your business. You'll have to get this protection from a separate policy in addition to your personal liability plan as it isn't designed or priced to provide commercial coverage.
Marketing a vacation rental is a resource-consuming but necessary task. In most cases, vacation rentals have a lot of competition from local hotels, motels, bed and breakfasts, and RV parks. Many of these businesses have professionally designed websites with excellent photography, so it's necessary for vacation rental owners to do some marketing of their own to make their properties stand out.
Well-produced video tours of vacation rentals can help book renters. While these videos aren't free and usually aren't cheap, remember that nothing is more expensive to a vacation rental owner than a poor website that doesn't adequately sell their property.
Vacation listing websites help you book renters but they can take up to 30 percent in commissions. While this may seem high, remember that each booking can involve dozens of inquiries for each renter. If you don't hire someone to field these inquiries, you'll have to do it yourself. You probably don't want to rely on a listing website alone for your marketing. If you do, you may be costing yourself a lot of rented nights each year. Here are some relevant facts from the Vacation Rental Property Marketing Blog about vacation rental owners' marketing expenses:
Meeting the high expectations of vacation renters requires a ton of effort. Today's renters expect pristine furnishings and conditions inside and outside the property. Depending on your niche, market, and how you have marketed your vacation rental, you'll need to have a system in place to ensure it's completely cleaned up and ready to re-rent every few days.
This means clean linens, pristine kitchens and bathrooms, wiped-down furniture, and a dwelling that smells fresh, pleasant, and clean from the second each new group of renters walks in. This takes an intense housekeeping effort and costs a significant amount of money.
There are significant costs associated with failing to keep your renters happy. If a renter shows up at your vacation rental for their dream weekend and the air conditioner isn't blowing cold air or if the water heater is having problems, you don't have a couple of days to fix it as residential landlords usually do. You or your handyman have to make repairs quickly and effectively within an hour or so, max. Otherwise, the renter may file a chargeback with their credit card company or trash your vacation rental's reputation on Yelp, HomeAway.com, and other websites future renters may visit.
Prepare to furnish the entire vacation rental property at once after you purchase it. Most residential landlords don't have to worry about this, of course, so the costs often take new vacation rental landlords by surprise.
Attractive, comfortable and well-made furniture is expensive. You can easily spend $20,000 to $40,000 on furniture and decor for a medium-sized rental house. That's enough to eat up the first year of rental income that in-demand vacation properties can earn.
While the high expenses associated with purchasing, marketing, and furnishing vacations rentals and limited peak tourist seasons found in most resort areas make it difficult to turn vacation properties into profitable rental income generators, you still get the benefit of long-term capital appreciation.
Additionally, if you're able to get a great deal on a future retirement home today and can offset the costs of ownership in the years prior to retirement by renting it out, purchasing a vacation rental could be an excellent way to go.