Find An Agent

Everything You Need to Know About Owning a Vacation Rental

If you’re already investing in real estate, a vacation rental may be the next thing you want to add to your portfolio. Or maybe you’re looking to enjoy a vacation property for yourself but rent it out during a major event. Either way, be sure to read this guide first.
If you’re already investing in real estate, a vacation rental may be the next thing you want to add to your portfolio. Or maybe you’re looking to enjoy a vacation property for yourself but rent it out during a major event. Either way, be sure to read this guide first.

Owning a vacation rental can be a win-win — you can make some extra cash and you may even use it as a vacation home of your own depending on location! It might sound simple, but there is some research you should do before getting started. Here are some key tips for owning a vacation rental.

Decide on Your End Goal — Then Find a Location

If you already own a rental property, the thought of branching out to vacation rentals may seem like a natural next step. Or, maybe your main reason for venturing into vacation rentals is to be able to have a vacation home for yourself. Either way, it’s important to decide on which side of the coin you fall since it will likely affect a lot of the decisions you will need to make.

The first of those decisions is where to purchase the property. This can ultimately be the reason your vacation rental makes a profit or actually costs you money. If your end goal is simply to generate income and you live in a touristy area, you may look for a rental home near where you live.

This will make it easy to find, and especially easy to manage. Or maybe you’re lucky enough to be able to rent a portion of your own residence as a vacation rental — this is frequently done in areas by a beach by renting out a “mother-in-law” or carriage house.

If you don’t live in a particularly desirable area, but your reason for getting into vacation rentals is so you have a place to go on vacation, this will also affect your location choice. You’ll want to first look at places where you want to spend your time and then determine how you can make a profit.

Pros and Cons

You may be wondering what pros and cons there are over owning a vacation rental property as opposed to the more traditional route of renting a property to the same tenant over a long period.

Pros

Let’s start with the pros. If your vacation rental is in a desirable location that has high demand most of the year, you could potentially make more renting it out several days at a time, rather than monthly. This is because people expect to pay a premium when they’re only staying for the weekend. Plus, you’ll enjoy more flexibility and tax benefits than you do with a long term rental and you’re able to use the home as your own vacation rental whenever you’d like. You also may spend less in repairs since short-term renters typically put less wear and tear on a property.

Cons

While there are lots of pros, a vacation rental is not without its down sides. Vacation rentals take a bit more managing than long term rentals since you’re “flipping” them so frequently. While this can be managed quite easily with a reliable cleaning service and potentially a management company, it is something to consider.

Your “rent” is also not guaranteed, so you may need to plan for a higher vacancy rate with a short term vacation rental and invest more in marketing to keep your place competitive. Also, just like a long term rental, you run the risk of destructive or untrustworthy guests.

Calculate Your Income Potential

When you’re looking into vacation rentals, you’ll need to make sure your venture is profitable — or at least break even if your main goal is to have your own vacation spot. An easy way to figure your potential monthly income is to take your expected nightly rental rate (based on research on other similar properties in the area) and multiply by 30 days and your expected occupancy rate (70% is a good rule of thumb). Then, subtract any mortgage monthly payment and your monthly expenses for the property from this total. This gives you a good estimate of how much you can expect to bring in a month.

For example, if your rental rate is $100 per night, your monthly mortgage is $1200 and expenses are $200, you could expect to make $700 a month or $8,400 a year.

Taxes, Laws, and Insurance

You’ll want to make sure you include any occupancy or state lodging taxes as a separate fee in addition to your daily rate, as you must pay these yourself when they come due. Some companies like Airbnb add, collect, and report these for you automatically when a renter pays, depending on the city or state.

Some cities, counties, and states have specific laws related to short term rentals beyond just collecting tax on them — some don’t even allow them at all! Make sure you’ve thoroughly researched these laws in your area and comply with any rules related to reporting, inspections, or fees.

Since your regular homeowners insurance likely won’t apply, you’ll want to look into special insurance that covers short term vacation properties. Even landlord insurance from some companies may exclude short term rentals.

How to Start the Cash Flow

After you’ve purchase a vacation rental, determined your nightly rate, secured insurance, complied with laws, and tied up any other loose ends like repairs, it’s now time to list your property! Consider having professional photos taken and come up with a great marketing description to get potential renters excited about staying at your property.

There are plenty of sites to list your vacation rental, but some of the most common are Airbnb and VRBO. It’s simple to fill out a listing and start accepting guests, just make sure you have an airtight rental agreement with a cancellation policy, damage deposit, check-in/check-out procedures, and house rules (like specifics regarding pets, smoking, parties, etc.).

After a guest has stayed in your vacation rental, ask them to leave a review and attempt to resolve any potential negative experiences. Guest reviews carry a lot of weight in the vacation rental world.

If you are planning to purchase a new vacation rental property, seek assistance and guidance from an experienced real estate agent local to your specific market. They know the area, have a good idea of what renters are looking for in a vacation home, and can help you find a good investment property.

 

SHARE

Luke Babich

Luke Babich is the co-founder and Chief Strategy Officer of Clever Real Estate, the free online service that connects you with top agents to save money on commission. He's an active real estate investor and licensed agent in St. Louis, with 22 units currently. Luke graduated from Stanford University and subsequently ran a historic data-driven campaign for University City City Council. Luke's writing has been featured in Homeland Security Today, Mashvisor, Payments Journal, and Bigger Pockets.

See all Luke's Posts
WHAT'S NEXT

Clever Has Partnered with Top Agents to Find Investment Properties

Learn how you could save thousands when you buy or sell investment properties with Clever!