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Is It Time To Consider Adding A Vacation Rental To Your Portfolio?

Published on Monday - September 21, 2015

If you are a vacation rental property owner, you are either bracing for a lull or getting ready for the busy season. There are many ways to build your real estate portfolio. One of those ways is by acquiring a vacation rental property. By definition, these types of properties are located in a seasonal, “vacation” area. At their peak, they can yield great returns. However, owners need to account for off seasons. While the highs are high, the lows can be difficult to deal with. Not every area or property makes a good vacation rental. If you are thinking about purchasing a vacation rental property, there are a few things you should consider first:

1. Peak scheduling: Vacation properties have a tendency to be fickle. You may have spent a week at a beach house and loved everything about it, but that doesn’t necessarily make it a profitable investment. Regardless if you are talking about a property on the beach or a ski resort, there are only so many peak times available. For three to four months out of the year, you need to generate enough income to cover the remaining nine months. Most vacation properties in prime locations offer weekly rentals to take advantage of said demand. When evaluating a vacation property, however, never judge it at its peak. Find out what the off peak demand is like, and make your decision based on the resulting numbers. Breaking even or even taking a small loss, off peak may be worth it if you are generating more in the peak times. When you evaluate a vacation rental, you need to compare the off season with the high season, and see if the lull warrants the purchase. If you can’t see yourself making it through the off season, it may be time to move on to another property.

2. Demand: With any type of rental property, it is important to eliminate gaps in vacancies. Not only do you need to understand peak supply and demand, but you need to know if the demand is constant. Any type of gap will completely change the outlook of the property. Off-peak renters are not nearly as likely to rent for just a week. If you go a month without collecting any rent, you can put your entire operation at risk. Talk to as many local Realtors in the area as you can, and get an idea of the rental market. Read any local newspapers and see if there are an excessive number of properties for rent. A vacation rental is a year round investment that requires constant demand, even at a reduced price.

3. Expenses: Vacation rentals have different expenses than traditional rentals do. For starters, a vacation rental may be located 100 miles from where you live or work. If you want to check up on something in the house it is not as easy as talking a quick drive to the property. This means that you need to outsource almost everything on the property, which comes at a cost. Enlisting the services of a property manager may solve some of the problems, but they will charge anywhere from 10-12 percent of the rents received. You also need to treat every short-term lease as if it is a long-term: you may have to have the property cleaned and updated on a regular basis. Most seasonal rentals usually come fully furnished, an expense that must be considered. You are also in control of all the utility, water, sewer, cable and heating bills in the property. Homeowners insurance can also be higher. If the property is on the beach, you will have to deal with flood insurance. When all is told, a vacation rental has much higher expenses than a traditional rental. This needs to be taken into account during your evaluation.

4. Down payment: A vacation rental is treated like any other type of investment purchase. Even if you classify the property as a second home, it will still require increased down payment amounts. You can expect to come up with anywhere from 20-30 percent down. Additionally, the loan underwriting guidelines are much stricter on a vacation property. It may also be difficult to get a true estimate of the value based on the lack of comparable sales in the area. This can further complicate the loan process and the appraisal. In one sense, a vacation property is very much like any other investment purchase you would make, but there are subtle nuances that could make it much more difficult. This starts with having the available capital to cover the down payment, closing costs and expenses.

The right vacation property can be a huge boost to your portfolio. It is important not to get swayed by your personal feelings about an area. You can have a great time vacationing somewhere and not see value in the property. When you are on vacation, you are not as committed to breaking down the numbers and expenses as you should be. Look at the big picture and let the data do the talking. Understand that a vacation property requires more time, money and effort, but if you find the right one it will all be worth it.

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