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Apr 9 2020

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How to Buy a Vacation Rental Property in 6 Steps

People typically buy a vacation property to use as a second home and also as an investment property that brings in rental income to offset some of the costs of ownership. When buying a vacation rental property, it’s important to choose an area that is a popular vacation destination so the property will be rented frequently.

Having a reliable lender to finance your purchase is equally as important as an ideal location. Check out Visio Lending, a national lender who focuses on offering rental property loans up to $2MM with either fixed or variable 30 year terms. Fill out an online application and work with the team to get a quote.

Follow these 6 steps to buy the right vacation rental property:

1. Choose a Vacation Rental Property

The best location is one that is often visited by tourists. It usually has main attractions such as beaches, mountains, lakes, casinos or a national park. Location, amenities and attractions are important when considering where to buy a vacation rental property. Choose a vacation rental property in an area you like but also one with plenty of tourist attractions.

How to Find Vacation Rental Properties

In the past few years, vacation rental properties have become a popular alternative to tourists looking for temporary lodging while on vacation. These types of properties can be found online, with a realtor in the area, or from a turnkey real estate company.

Here are common ways to find vacation rental properties:

Search Online Listings

An online search is the best place to start looking for vacation rental properties. Choose a few tourist destinations you like and then get a feel of the area by looking at maps, local attractions, hotels and rental properties. This will help you find out what properties rent for, why tourists go to this area, as well as available vacation rental units to buy.

Check out Zillow, Realtor.com, and ForSaleByOwner. You can filter results based on price ranges and areas you want to purchase in and some listings have vacation property as a keyword you can search for. This will take some research ahead of time since you need to know what attractions are in the area that will encourage tourists to visit and rent from you.

Use a Realtor

After browsing online, you should also work with a local realtor to help you research the area and set up appointments to view potential vacation rental properties. A realtor will be able to give you a local’s perspective of the area, including where specifically vacationers want to stay. For example, they might tell you within 1 block of the ocean is the best place to buy.

A realtor will also show you how much comparable properties are selling and renting for. The best way to start working with a realtor is to ask your network for referrals. You can also use Realtor.com’s Find a Realtor tool.

Best Places to Buy a Vacation Rental Property

The best places to buy a vacation property are based on the desirability of the location, their affordability, your expected ROI, the local occupancy rates and the short-term market rental rates. Choose a place in a tourist area with not only nearby attractions that are easy to get to but also has upside investment potential.

* Data acquired from Rented.com on June 28th, 2018.

Map Definitions:

  • Annual Revenue – The average rental revenue over a 12-month period that the typical rental property in the market could expect to earn. This is exclusive of any additional fees the guests might have to pay such as cleaning fees, damage waivers, etc.
  • Average All in Costs – The average annual expenses for a rental property in the market; including things like the average mortgage payment, property insurance, real estate taxes, utilities, and maintenance.
  • Average Daily Rates – The average rates over the course of the year a rental property in this market could expect to earn. Actual Daily Rates will vary in markets depending on the time of year, day of week, and even length of stay.

Some locations include Las Vegas due to its casinos, Nashville due to its music scene, Orlando due to Disneyworld and Pensacola due to its coastal location. The area’s attractions are important, but some major cities such as New York and San Francisco are ruled out due to being too expensive and not having a high enough ROI.

Local occupancy rates of 70% or higher are a good rule of thumb when deciding where to buy a vacation rental property. However, you do need to consider that many vacation towns are seasonal, so these rates will fluctuate. Short-term market rent rates vary as well. Consider the rents in the area and then figure out if you can afford to pay your bills when the property isn’t rented or if the rents fluctuate based on the seasons.

2. Calculate Income & Cost Potential

You want to purchase a vacation rental property that you will enjoy but also makes sense financially. Once you identify a potential property, you should perform a cost-benefit analysis to make sure you can afford the property, even when it’s vacant. Look at vacancy rates for the area as well as short-term rents and then compare them to your monthly financing and operational costs.

Once you find out the operating costs and the rental income, you can figure out if the property is cash flow positive. For example, if a property’s monthly operational expenses are $250, monthly mortgage payments are $1,750, the nightly rental rate is $100, and the occupancy rate is 80%, you can calculate your potential monthly profit in the following way:

  • Potential monthly income: [($100) x (80%) x (30 days) – [($250) + ($1,750)]] = $400

In this example, the property is cash flow positive if it was available for rent a full 30 days. However, remember that you’ll drastically reduce your potential occupancy rates if you live in the unit part-time and that occupancy rates will also decline during off-peak seasons.

A vacation rental property can be a sound investment and an enjoyable place to relax, but keep in mind the costs associated with ownership. Besides the fees that online sites charge for booking your rentals, you will also be responsible for hotel taxes, insurance, HOA fees, utilities, and management fees. These costs can also include property management fees, advertising to renters, property taxes, taxes on rental income, HOA fees, licenses, mortgage payments and insurance.

Typical Vacation Rental Property Costs

Here we will discuss the main costs of owning a vacation rental property:

Vacation Rental Property Taxes

There are 3 types of vacation rental taxes which include property taxes, rental income taxes, and occupancy taxes. They all need to be factored into your ownership expenses. Property taxes depend on the county the property is in and income taxes are based on your short-term rental earnings. Occupancy taxes also vary by city, county, and state.

Property Taxes

Property taxes vary widely across the country. Before you purchase your property, find out the annual taxes from your realtor or from the previous homeowner. Make sure that this is something you can afford to pay even if your property isn’t rented since vacation rentals can often be seasonal.

Property taxes are usually paid monthly from an escrow account that your lender sets up so you won’t get stuck with an expensive annual lump sum. Property taxes are typically tax deductible. This is why it might be good to consult a CPA in your area so you take advantage of the most tax deductions available.

Rental Income Taxes

The second type of taxes are the rental income taxes you pay at the end of the year. If you rent out the property for 14 or fewer days, regardless of the rental income amount, you don’t have to pay taxes on it. Otherwise, you will be taxed on your rental income based on your ordinary tax rate.

Occupancy Taxes

Third, there are occupancy taxes, also known as a hotel tax. These generally range from 5 – 19% per night. You should collect these taxes from your guests and you are responsible for paying them to the municipality or city where they are due. These may be in addition to state lodging taxes. If you rent your property out through Airbnb they will collect the taxes for you if your city has that capability with them.

Operational Expenses

Property insurance, HOA fees, and utilities are other costs associated with owning a vacation rental property. Property insurance covers your property from weather damage and vandalism. HOA fees cover your amenities and common areas and sometimes include certain utilities. Utilities are the essentials needed to run your home like water, electric, gas, and cable.

Property Insurance

You will need either homeowner’s or landlord insurance when you own a vacation rental property. The type of insurance you need depends on how often you will rent out the property and how often you will use it as a vacation property. Remember to inquire about flood insurance if you are in a coastal area.

HOA Fees

If you purchase a condo or a home in a planned community with common areas, you will be responsible for paying HOA fees. These fees vary based on the number of units, size of the unit and what amenities are offered, such as a 24-hour concierge or a spa. HOA fees are usually paid monthly but can also be paid quarterly. If you rent out the property then these fees can be tax deductible.

Utilities

Keep in mind that unlike a traditional rental property where the tenants pay their own utilities, you will be responsible for all utilities associated with the property. It’s a good idea to call the utility company, ask a neighbor with a similar property or ask the previous homeowner for past utility bills. These numbers can then be figured in when deciding what to charge for rent.

Management Fees

Management fees are paid to a property management company when they manage your vacation rental property. Most vacation rental property owners choose to use a property management company since the property is usually far from their primary residence.

These fees vary widely based on the services you need the management company to provide. The more the company has to do, like listing the property, showing it and meeting new guests for each arrival, then the more they charge. Average fees are 28% across vacation rental markets.

This is significantly higher than the average fee of 10% for long-term rentals. The reason for the increased fee is that a vacation rental property takes more time to manage since tenant stays are much shorter.

Financing Costs

You can, of course, pay cash for your vacation rental property, but most people choose to finance it. If you do finance your vacation rental property, you need to factor in your monthly mortgage payments into your costs. Also, take into consideration the upfront costs of financing including an appraisal and loan origination fees. We discuss financing in the section below.

How to Make Money on Vacation Rental Properties

Popular ways to make money on vacation rental properties include Airbnb, VRBO and hotel programs. If you hire a property management company they list the property for you and take care of all services, but you need to add their fee to your costs. Alternatively, you can manage the property yourself and create/manage the listings.

The following are ways to make money using your vacation rental property:

1. Airbnb

Airbnb is an online platform that lets you rent out your vacation property to tourists looking for hotel alternatives. You can create a property listing with a description of the property’s amenities, number of bedrooms, bathrooms and any other highlights. Include photos with your listing that are taken during the day for the best lighting.

You will be charged a service fee from Airbnb every time a booking is completed on the site. The service fee ranges from 3 – 5% depending on the host’s cancellation policy. Taxes are included if the region requires it, but the service fee is calculated from the booking subtotal before fees and taxes are added. Fees are automatically deducted from the host’s payout.

2. VRBO

VRBO, or Vacation Rental by Owner, is an online classified site where vacation owners advertise their property so tourists looking in that area can see it. You can manage the property yourself or hire a property manager to list on VRBO and to take care of all the day to day operations.

It differs from Airbnb in that it offers several different fee structures. There’s a $399 annual subscription for long-term rentals, an 8% booking fee or a 13% booking fee if you want the listing managed for you. The fees are automatically deducted from the homeowner’s payout.

3. Hotel Program

A hotel program is another option for making money with your vacation rental property. Hotel programs offer “condotel” properties you can purchase that are already enrolled in a hotel program. These hotel management companies require you to use their management services so you can’t manage the property yourself and is geared towards people who want to rent their property and then use it around a strict rental schedule.

These hotel programs vary widely based on the type of unit, location and the services you pay for. However, they all typically require that you own a property in a designated building and then sign up for their rental program. The unit will be fully furnished and the hotel will rent it for you, clean it, and give the guests access to all hotel amenities included in the night’s rate.

Rates on condotels are usually higher than other condos due to the hotel amenities, but hotel program fees are also higher. Expect to pay a franchise fee, often around 10%, and other fees that may be up to 50% of the rental income. The hotel program usually pays owners quarterly and automatically deducts all of their expenses first.

3. Get Financing & Buy the Vacation Rental Property

After you choose the location of the property and calculate its income and costs, you’ll have to pay for the property. You can buy it with all cash or finance the property. Vacation rental properties are usually financed with a conforming loan, a portfolio loan, a multifamily loan or in some cases a short-term loan such as a hard money loan or a bridge loan.

Visio Lending is a national lender that offers loans to purchase vacation rentals up to 80% LTV. There are no seasoning or debt to income requirements and strong borrowers can get prequalified online in minutes.

The 4 common types of financing for vacation rental properties are:

Conforming Loan

Lending qualifications for a conforming loan on a vacation rental property are more lenient than for a rental property but stricter than for a primary residence. Lenders know that borrowers will be living there part of the year and not entirely dependent on rental income to pay the mortgage. With that said, a downpayment of 20% is generally needed and a credit score over 680 (check your score free here).

Balance Sheet Loan

A balance sheet loan is a mortgage that either doesn’t conform to Fannie Mae/Freddie Mac standards or is kept on a lender’s balance sheet as an investment. Balance sheet loans are a broad term but typically include rental property loans, jumbo loans, cash out refinances, and more.

Portfolio Loan

A portfolio loan can be used by an investor who wants to finance multiple properties at once. It can also be used to finance a multi-family property. Portfolio loans usually offer lower personal qualifications and fewer property requirements. For more information on portfolio loans, check out our in depth guide to portfolio loans.

Multifamily Loan

A multifamily loan is used to finance a multifamily vacation property with 2 – 4 units or an apartment building with more than 4 units. There are 4 types of multifamily loans: conventional mortgages, government backed loans, portfolio loans, and short-term multifamily financing. Each type of loan has their own lending criteria. For more information, you can check out our ultimate guide on multifamily loans.

Short Term Loan

A bridge loan is a short-term loan that can be used as interim financing. For example, if you find a great deal on a property and want to buy it before you have long-term financing in place, a bridge loan could work. These loans generally have more lenient qualifications than conforming loans.

Another alternative is a hard money loan. This is ideal for a property that needs to be rehabbed or seasoned before you refinance it with a permanent loan. Hard money loans are based more on the after repair value (ARV) of the property rather than just the borrower’s financial standing. For more information on hard money loans, check out our guide on the best hard money lenders.

How to Buy a Vacation Rental Property with No Money Down

Buying a rental property with no money down is possible but it requires some legwork and isn’t commonly done with vacation rental properties. You need to find the property, convince another investor to put the money down or find a lender to finance it with no money down. If you want more information, you can read our ultimate guide on flipping houses with no money.

Remember that you can get a vacation rental loan up to 80% LTV with Visio Lending. Unlike more traditional lenders, there are no seasoning or debt to income requirements. You can get prequalified online in just a matter of minutes.

4. Hire Operational Services

Once you buy your vacation rental property you can either manage it yourself or get someone else to do it for you, which will affect the services you need as well as your overall costs. For example, if you’re going to manage the property yourself then you need to hire operational services such as lawn care and cleaners. If you have a pool, you will need a separate company to clean and take care of the pool.

Typical operational services include things like the following:

  • Cleaning services
  • Repairs and maintenance
  • Exterior landscaping care

However, if you buy a vacation rental property with a homeowners association (HOA), they’ll take care of much of the external care for you. Further, if you hire a property management company they will typically take care of all operational services for you. Of course, they charge a fee which needs to be factored to your costs. Vacation rental property management fees vary but average 28% of the rental income.

“If the property is well maintained, updated and kept clean it can lead to repeat vacationers who come back during the same time year after year. Having these repeat tenants will provide more consistent income and will reduce commissions paid to management companies for finding new tenants.” – Chris Dowler, Founder & Landlord, Dowler Construction Services

5. List the Unit on Vacation Rental Websites

You want to rent the property as soon as possible to start making rental income and offset your ownership costs. You or your property management company will list the unit on websites to expose it to vacationers. These sites include Airbnb and VRBO, among others, and you can list it on more than one site to increase your renter pool.

When you list your unit for rent, block off the days you want to use it so no one else can rent it during that time. If the unit is part of a hotel management program, they will list the unit for you.

6. Manage the Property

The two ways to manage a vacation rental property are to either do it yourself or hire a company to do it for you. If you manage it yourself, you need to either live nearby or hire service staff like cleaners because you can’t turn over the unit yourself. You’ll also need a system to let service staff and guests into the property. Some owners have a keypad that renters use to get into the property and then reset it between each use.

Alternatively, you can hire a management company to manage the property for you. This is the less time consuming way since you don’t have to be involved in the day to day operations. However, it can be costly and you need to be able to afford the management fee. Typically management fees for vacation properties range from 25 – 50%, with 28% being the average.

“Returns tend to be heavily dependent on how a property is managed. It’s far more complex than most people realize. Listing on Airbnb or VRBO is just the first step. Getting the right photos, descriptions, dynamic pricing, guest communications, and onsite management all make this a full time job if you want to truly maximize returns. This is why we at Rented.com find most owners are better served by working with a professional manager.”

– Andrew McConnell, CEO of Rented.com

Investors with vacation property may also benefit from taking some of the uncertainty out of rental income and vacancy rates by using a service that offers fixed rent. Rented.com offers this through their Rented-Backed program. With programs like this, owners of vacation properties can off load the management responsibilities and get fixed rental income every month regardless of occupancy, seasonality, or guest demand.

If you want to hire a property management service, some of the most popular national options include the following:

Types of Vacation Rental Properties

Common types of vacation rental properties include condos, single-family homes, and multifamily properties. Each type of vacation rental property has different features that are attractive to short-term renters. For instance, a condo may have great amenities while a single-family home offers privacy and a multifamily property can house your extended family.

Common types of vacation rental properties include:

1. Condo

A condo is a piece of real estate divided into more than 1 unit with each unit separately owned. The surrounding common areas are jointly owned by the condo owners. A condo building often has shared amenities such as parking, a gym, and a pool, and shared common areas. Since you pay an HOA fee, the common areas are maintained for you.

These onsite amenities make condos popular options for vacation rental properties. However, HOA guidelines may have rental restrictions. For example, you may be allowed to rent your property 12 times a year but the minimum term is 2 weeks per tenant. Another thing to consider when purchasing a condo is that the HOA fees are an added cost.

2. Single Family Detached Home

A single family detached home is a stand-alone building that doesn’t share walls with any neighbors. It is designed to house 1 family as opposed to a multi-family dwelling. This single family detached home can make a popular vacation rental property for those who want privacy and those with a family.

A property with a yard, separate parking, a pool, a basketball court or other onsite recreational activities is considered more desirable to many vacationers who want to stay with their family or group of friends. The property is also more desirable if it’s located near shopping, transportation, and attractions.

3. Multifamily Property

A multifamily property contains multiple residential housing units with separate entrances in 1 building or in 1 complex. They are intended to house multiple families as the name suggests. Most new vacation rental owners don’t start off with multifamily properties since they’re more expensive, there’s often less inventory, and they require more property management.

However, if you’re an experienced investor, a multifamily property is a great choice to rent to multiple families at once or to keep a unit open for your own family while renting the others.

A multifamily property can also bring you additional income in the form of coin-operated laundry machines, billboards, and paid parking.

Vacation Rental Property Tax Benefits

One of the benefits of purchasing a vacation rental property is that it offers certain tax deductions. These benefits include being able to write off a portion of your real estate taxes, HOA fees, and your mortgage interest expenses.

Vacation rental property tax benefits include:

Real Estate Taxes

If you rent out your vacation property for more than 14 days per year, then the property is treated like a rental property by the IRS. However, if you use the property for more than 10% of the days it’s rented, then it’s considered a personal residence. That being said, real estate property taxes can be deducted on your income taxes, but you should hire a CPA who is familiar with the differences between rental property and a personal residence.

HOA Fees

HOA fees are not deductible if the vacation rental property is rented less than 14 days per year since it’s considered a second home and these fees are an assessment by a private entity. However, if the property is considered a rental property then your HOA fees can be written off as a tax deduction.

Mortgage Interest Expenses

Mortgage interest expenses have similar guidelines to real estate taxes when it comes to tax benefits and deductions. You can deduct 100% of mortgage interest under the second home rule if you rent the property for 14 days or less per year. This applies to properties up to $1.1 million. If you rent the property for more than 14 days then you can deduct mortgage interest from your rental income.

Pros and Cons of Buying a Vacation Rental Property

Buying a vacation rental property can provide a place to vacation while offsetting some of the expenses with rental income when you’re not using it. Short term rents are usually higher than long rental terms, but maintenance expenses, utilities, and management fees can quickly add up.

Pros of buying vacation rental property include:

Cons of buying vacation rental property include:

  • You will have to cover property taxes, maintenance and utility bills, regardless of whether the property is rented or not
  • You may have to pay a property manager to take care of operations
  • Vacation rental properties are usually hit harder during economic downturns since people often eliminate or cut back on vacations to save money.
  • Cash flow can be inconsistent since renters are usually seasonal

“Cash flow in this case is not consistent, whereas if you invest in residential or commercial rental property, every month you expect to receive a set amount of cash flow. Your cash flow can dramatically change from season to season with a vacation rental property, so you will need to budget for slow seasons.” – Shane Lee, Data Analyst, RentHop

Bottom Line

Buying a vacation rental property can be a great way to invest in real estate, offset some home ownership expenses and still enjoy your favorite vacation spot from your own second home. These properties can yield high rents but can be seasonal and they also have costly expenses associated with them.

Visio Lending offers rental purchase loans up to 80% LTV on vacation rental properties with no seasoning or debt to income requirements. They also offer potential vacation rental property owners refinance loans and portfolio loans. Get prequalified for your next purchase online.


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SOURCE: http://fitsmallbusiness.com/how-to-buy-vacation-rental-property/

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