How to Buy a Vacation Rental Property in 5 Steps

Cody Cromwell
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Choose an Appealing Vacation Location

Choosing a vacation rental property is a big investment and it is important that the investment pays off. When you go on vacation, you want something to look forward to.

Choosing an appealing vacation location will help you experience the best vacations possible.

Go to the Internet and search for vacation buzzwords or phrases such as beach, mountains, theme park, golf, boat, surfing, and fly fishing.

Once you have these terms in mind, choose locations that match your favorite vacation locations.

This way it will be easier for you to visualize your vacation so that vacation time will go smoothly.

A great way for you to get an understanding of a certain location is to take a virtual tour.

People can create virtual tours on-line and you will be able to take a tour of your vacation location before even booking your vacation.

This will help you to know what to expect in the area you plan to vacation in.

Compare your vacation area to similar areas that are going to be around your vacation location.

When a lot of people share the same vacation ideas, you can get the best vacation ideas at the least possible price.

Once you decide on a vacation location, make sure to check out hotel reviews and online accommodation information.

These are important because you don’t want to be paying extra for things you don’t need.

Where to Find Vacation Rental Properties

When making your first few purchases, you are going to want to take your time and make sure it is an investment that is worthwhile. One way to do this is to have good idea of the basic steps to buying a vacation rental property.

There are a number of sources for vacation rental properties.

The quickest way to buy a vacation rental is to do a quick search on the internet. If you are looking for properties in vacation spots, search for property sites like Upcoming Property, VRBO.

Another option is to check out local newspapers online – especially ones with classified ads. You should also check out local real estate websites that are intended to cater to vacation home buyers. There are also many small local websites that cater exclusively to real estate related topics, such as vacation home articles.

There is also the option of contacting the owners of a vacation home directly. If there is a waterfront property that you are interested in buying, you should contact the vacation property owners. They will often be more than willing to get together with you at a mutually convenient time to show you the property.

A final option is to hire a vacation property professional. Finding professional realtors that specialize in vacation property will probably work best for you. Most of these professionals also understand the areas to best search for vacation rental properties, and can direct you to the properties that you need.

Calculate Income & Expenses

While the market fluctuates, one of the best ways to determine how much money you can borrow against a rental property is to calculate its projected annual income and expenses.

The income side needs to take into account the amount of rent a property could generate, minus the mortgage or rent expense … of course, including any applicable property taxes.

The expenses can be broken out into harder expenses (like supplies) and soft expenses (like insurance and property management fees), or lumped into one category. It’s important to include both items in order to accurately estimate your expenses.

It’s also a good idea to multiply the expenses by a average number, which will show you how much you spend on each expense during the year. For example, some property managers will apply 10% to the property expenses for their own business. In that case, you would multiply each of your expenses by 10%.

Now that you know how much income a property could generate, and how much you would spend on expenses, you can determine how much you would need in cash for a down payment, to cover the principal and interest on a mortgage.

Vacation Rental Property Expenses

Buying a vacation rental property is not a bad thing at all. When you buy a vacation rental, you become the landlord, which means you get to save on all kinds of expenses.

Vacation rental properties, particularly those that have already been run by another home owner, will have a low utility and maintenance costs. Also, you can make your vacation rental property more profitable by reducing spending on these two areas.

Here are some tips to help you decrease your expenses to a minimum:

Check the HOA Fees

If the vacation rental property has a homeowners’ association that reinvests in the property or property improvements, finding out from them if you need to pay an annual fee, if you’re required to pay a management fee, or if you get to pay a special fee when you manage the property can help you avoid a costly mistake.

Look at the Utility Bill

One of the biggest hidden costs in a vacation rental property are utility bills. If you don’t use a lot of utilities in your home, this might be a pass for you. But if your vacation rental property (especially one without a pool) is in an area with high gas and electric bills, you’ll need to budget for them.

How to Make Money on Vacation Rental Properties

So, you’re thinking about renting out your vacation property to vacationers for additional earnings? Keep reading! Here are the 5 steps we believe you must take to make extra income through vacation rental properties.

Check The Local Market

There are two main reasons to wish to sell your second home: the enjoyment factor and the financial factor. However, if you’re looking for a primary residence, renting out your vacation property could even help an investor to buy a primary residence. And renting your vacation property can also be a first goal for a vacation property investor aspiring to become a real estate investor.

However, if you’re wishing to make extra income from your vacation property, you probably wish to sell as soon as possible. In that case, you need to prepare yourself to sell your vacation property on time with the least effort and unable to allocate too much time for other business issues. Such as financial and family issues.

Check The Market Trends

Finance the Vacation Rental Property

Once you have decided that a vacation rental property is a smart option, your next step is to investigate the mortgage programs and bank requirements of the bank you’re thinking about working with.

In general, finding financing for your vacation rental property is a much more common requirement than finding financing for your primary residence. This is because vacation rental properties (like second homes) aren’t viewed by most lenders as primary residences with mortgages.

If you can’t find financing from a bank you already belong to, consider looking into real estate investment companies that specialize in vacation rental properties.

These investors often gain access to mortgage programs that would be otherwise unavailable to investors. Some examples of real estate investment companies that specialize in vacation rentals are Andelus Capital or NewHomeGem.

Conforming Loan

When you purchase a vacation rental property, you’ll need to start from the ground up. You’ll need to secure a loan to purchase the vacation rental property. The most common financing method is known as a conforming loan, which allows you to purchase a vacation rental property up to a certain size depending on the property type (apartment, condo, etc.).

When you’re ready to purchase your vacation rental property, find a Title or Mortgage lender. Most lenders will have a registered agent that will work with you to secure the loan and find the right vacation rental property for you (trusted lenders rarely charge origination fees).

When you get approved for financing, ask the Title/Mortgage lender to explain the loan process, from reviewing your loan application to closing the loan. You’ll also want to understand the end result of the loan process – your monthly payment schedule and how much down payment you’ll need to put down, among other things.

Portfolio Loan

Vs. Investment in Property (Security) Company Loan

One of the biggest questions I get regarding purchasing vacation rental property is how to make it a good investment. I often start with the information that I put out in the How to Buy a Vacation Rental Property in 5 Steps on how to evaluate the vacation rental. I then explain how to get seasoned advice and what to ask once the purchase is about to close. Which leads me to the next question I get.

What about the vacation rental purchase? How can you make this a good investment?

There are two options and it can be confusing to know which one might be better for you.

Note: Your lender may have a preference for which would be better for you, but the choice is up to you. They can only be right or wrong if you ask the right questions and use the information you get from them.

The portfolio loan, or investment in property loan is usually for the purchase of a vacation rental property, if the property has more than one unit, a timeshare unit, or a lot with a manufactured home on it.

The loan is usually an interest free loan, but there are sometimes credit requirements. But note that the interest is usually small.

It is attached to the property and serviced by the property management company. If you don’t manage the property, the property management company does.

Multifamily Loan

Buying a home and achieving a 30-year mortgage is a big responsibility and many families are shutting down on this dream. The few who are doing buy homes will end up paying much more than these properties are worth.

This is the right time for you to invest in rental properties. If you are planning to buy a property that is not for your own use, it is important that you should seek help and assistance of professionals, such as a real estate agent.

> So, what is property investment?

Property investment is the investment of money on a piece of land and it can be residential, commercial or industrial. In this process, a person buys a piece of land, builds a house, and rents it to anyone throughout the year.

> What are the advantages of property investment?

You get to benefit two times:

  • You get the satisfaction of building something that will eventually be your own home
  • You get to build a stream of income

> What is the process of property investment?

The process is quite simple. You need to start with the following steps:

The initial step includes preparing your own budget for the home you wish to buy or rent. You will need to obtain the loan amount or the amount of cash you have to invest before moving forward with the investment.

Short-term Loan

When you’re ready to buy a vacation rental property, the first thing you should do is figure out how much you can afford. Performing a home study will help you familiarize yourself with the costs associated with buying a rental property.

Download the free vacation rental real estate investor kit to learn how to get started.

Renting is a great way to make money with your vacation rental property, and the vast majority of owners make more money than they do renting. The key is to find a property that brings in good income.

Some tips to consider:

1… … Choose vacation rental properties that bring in the highest returns.

2… … Take your time when buying the property.

3… … Get a tenant to pay the mortgage payments for you.

You can buy a vacation rental property in as little as five to six weeks, but many experts suggest waiting at least a year.

Buy a Vacation Rental Property in 5 Steps

As a real estate investor, I’ve taken the process of buying a vacation rental property in just five simple steps:

You should first look at property listings from the IRS and the real estate industry for vacation rental properties that are sale-leaseback opportunities.

Hire Operational Services

When you conduct your due diligence on a property for rental, there’s good operational services to ensure that the property is available for your guests. Some commonly purchased operational services on vacation rentals include:

  • On-demand laundry
  • Apartment cleaning
  • Exceptional guest customer service

When you rent a vacation rental property that has these quality services, you can rest assured your guests will be taken care of. Even if you don’t have a property management company, you can still provide these quality of services. But if you don’t have the time, don’t want to take on the responsibilities, or do not want to mess and inspect the property, then hire a local vacation rental management company to take care of these services.

This is one of the most crucial steps, as it is difficult to screen a potential guests via email or phone.

In addition, these properties come with the services that will be provided by the management company once you rent it out. The management company will be responsible for keeping everything in order, as well as for providing the outstanding guest services. Most of these properties will have a high level of cleanliness, neatly designed and furnished along with an exceptional level of comfort. Then you wouldn’t have to worry about a thing, save for the time you are away on your next adventure.

The vacation rental is a business in its own right. This is one of the most important factors to consider when you are looking for a vacation rental. To draw in frequent guests and continually enjoy a prosperous vacation rental business, you need to advertise all year round and manage the property properly.

As the owner of a vacation rental property, I somehow assume that most of you’ve learned how to advertise the place through the internet… But did you know that it’s not just a matter of using an online vacation rental website to post your properties?

Vacation Rental Properties Are Not Listed on Commercial Web Directories…

The Holiday Inn hotel website and Travelodge website do not list many vacation rentals, in the standard categories or under unusual categories like Senior Homes, Dentists and Doctors….

In my opinion, this is a big mistake for vacation rental marketers. The internet is a great place where vacation rental properties can be marketed and recommended. Moreover, it is a massive source of potential customers.

There Are Many Ways You Can Advertise Your Vacation Rental Property…

But before you begin, you need to know that the vacation rental market seems to be –broken” and you will find that your potential customers will not, or cannot, find your property online.

Vacation Rental Property Tax Benefits

Real Estate Taxes

Real estate taxes, often abbreviated as real estate taxes, are the fees paid for the right to use and own land or buildings and are usually determined by municipal governments. These taxes are regularly paid in cash or in credits on your utility bills. Though real estate taxes are usually local, state, and many municipalities have a real estate tax commission that is similar to a state agency, and much like state agencies, they have interstate jurisdictions. Real estate taxes are not federal taxes, but are required to be collected by each and every county, city, and state.

Real estate taxes in the United States are collected on a tax-assessed value (TAV) basis. This value is the assessed value of the property on January 1st of the tax year (the assessment date). The tax assessor then assesses the actual market value of the property. In some states, this assessment must be used as is as a basis for collecting real estate taxes. In other states, the assessor can adjust the tax to reflect the difference between the two numbers. States that use the market value as tax base may raise taxes as follows:

IF the market value on January 1st is less than the assessed value:

HOA Fees

One way that some homeans have managed to keep their HOA fees down is to delay paying their monthly charges and put them all on the same bill. This means that you will have to pay the same amount every month, though you may be adding on a lot of months’ worth of charges at once.

Make sure you’re reading your HOA’s rules carefully. Some charge a “late fee” if you don’t pay the bill by the due date, while others charge you a “late fee” even if you paid it up front on or before the due date. So if you’re late paying the bills, make sure you’re aware of what’s going to happen.

Depending on the HOA, most fees are paid yearly. For a monthly fee, this means you’re going to be paying a lot more the longer you neglect your bills. Therefore, you’re going to want to pay your fees as soon as you get the bill in your mailbox.

Mortgage Interest Expenses

Mortgage interest expenses are the most commonly forgotten expense in planning your vacation rental business. They are also one of the largest expenses.

The expenses are typically paid upfront when purchasing your initial vacation rental property or when you refinance the property. However, if you purchase the property through a syndication or through a real estate investment trust (REIT) the expenses will be spread over many years. The investor’s fees are reduced in this case and you’ll pay them quarterly, which is beneficial in the short term. However, if those fees go up 10%, you might find your expenses go up 10%, as well.

Until you have written off these expenses, they’ll still be part of your taxable income. Your tax filing won’t show you as having written them off.

Pros and Cons of Buying a Vacation Rental Property

This is the first question that comes up when people consider buying a vacation rental property.

The biggest benefit of buying a vacation rental is that you are able to receive rental income when you aren’t home. There is also very little maintenance involved when managing your own property, and you aren’t obligated to answer to a co-op board, which is a huge benefit if you are a solo investor.

However, obtaining financing for a vacation rental property can be challenging. If it’s your first time buying, your choices may be limited. In addition, the potential liability of the real estate can be a substantial concern, so if you are purchasing as a sole investor or have a tight budget, a vacation rental property may not be for you. It is also important to note that vacation rental properties typically have a higher upkeep as they are also responsible for making repairs and landscaping.

Bottom Line

When it comes to buying a vacation rental property, you can either buy your own place or buy a place for someone else. The following are general guidelines that are meant to help you understand the ins and outs of this process.

Know your budget: Decide as to how much you’re willing to spend on a vacation rental property. If you’re buying a place for those difficult to find rentals that offer huge deposits, budget accordingly. Determine how much you can put into the property without putting yourself in a significant financial hole. Otherwise, it’s better to pick a property that’s in the middle range. …

Decide on your target: Next, decide on the age group of tenants you wish to attract. You’ll want a property that is attractive to the type of holidaymaker you’re looking to find. Do you want families staying? Or couples? Looking for a corporate lodger? List your target market and determine your property’s look and feel. …