Growing Wealth in the Vacation Rental Market: Advice for First-Time Investors

Written by Katie Conroy Posted On Thursday, 20 February 2020 05:00

If you’re a first-time real estate investor, now’s the time to grow your wealth through the booming vacation rental market. According to Technavio, a global market research company, growth in the vacation rental market is expected to hit $194 billion in total value by 2021. Short-term vacation rentals are frequently more affordable than hotels and often more comfortable. Vacation rentals can be profitable for someone looking to grow wealth through real estate. Here are a few tips if you’re considering a move into the vacation rental market.

The Right Spot

First, think like a vacationer. You want a place in a beautiful and easily accessible natural setting, with lots to do and see. For many people, that means the beach. For others, it could be a mountainside cabin. Remember, people are looking for an unforgettable experience, a vacation they’ll reminisce about for years. That makes the location an important factor. 

Do your research, as buying in an area where demand is low could leave you with high vacancy rates, which will certainly cut into your profits. When you find a place you like, consider spending a few days there to assess what the place has to offer. You’ll want to be able to tell potential guests that there’s lots to do and plenty of good places to eat.   

If you’re located far away from your vacation home, you may not be able to handle routine maintenance and guest support. In this case, you’ll likely need to hire a property manager. Many property management companies offer online booking, hire maid services to clean your home in between guests, and provide 24/7 support. 

Assess Your Financial Situation  

Review your financial picture, paying special attention to your income, debt-to-income (DTI) ratio, and credit score. You’re basically taking on a second mortgage, and that can be an overwhelming prospect for someone who’s not well-positioned financially. Your credit and debt picture will have a lot to do with the kind of loan you’re able to secure. A disadvantageous loan will ultimately work against your profit potential. And you’ll need an adequate cash reserve on hand in case you lose income due to job loss, illness or injury.

Best Loan Options

Conventional loans are often the best option for an investment property because they’re relatively cheap. A buyer with a credit score of 720 may qualify for a very manageable APR. FHA loans are often a good option for first-time homebuyers, but they can’t be used to buy a rental property. Also, be aware that if you apply for an investment property loan, your lending institution will request a rent schedule so they can factor expected rental revenue and expenses into your DTI. Keep in mind that if the previous owners used the property for vacation rentals, they might be able to provide a rental revenue history. 

Show Lenders an Appealing Financial Picture

Having a plentiful supply of cash is one of the best ways to show lenders you’re a good candidate for a loan. As with any real estate purchase, the more you can put down up front, the better the terms you can expect on your loan. An investment property mortgage will require at least a 20 percent down payment (approximately half of all vacation property buyers made a down payment of at least 30 percent in 2017). It’s an option well worth considering because paying at least 20 percent up front means you’ll avoid paying private mortgage insurance.  

The Tax Factor

Even an inexperienced investor understands about property taxes and knows to factor it into expenses. However, if you’re a first-timer, you may not be familiar with lodging taxes, which are required in many places. In such locations, it’s the landlord’s responsibility to collect lodging taxes on the rents they charge. As a landlord, you don’t pay lodging tax yourself, but you do have to account for taxes from your guests, so be sure you’re charging enough to account for it. A busy landlord may find it difficult to monitor and account for lodging taxes from each guest. Fortunately, there are tax management services that can help. 

A vacation rental property can be an excellent investment for a novice looking for ways to generate wealth. Growth in the short-term rental market and the desirability of a temporary vacation home rather than a hotel room make it a profitable investment.

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