If you’ve enjoyed some measure of success in vacation rental you might be eyeing another opportunity to add to your portfolio. Here are a few things you should consider in your screening process.
You Don’t Have to Buy
The same due diligence for an STR purchase applies when only doing a lease that allows you to sublease in a vacation rental format. Indeed, with higher interest rates at the moment, a lease/sublease situation might make the most sense.
Pros: no exposure for major repairs or for downswings in the short and medium-term real estate market.
Cons: will need to have significant profit margin to hedge against seasonality and no equity can be built since this is not a purchase.
Research Vacation and Location-Independent Hotspots
Once you’ve decided whether you’re going to pursue a rental or a purchase, you can move on to researching your locations. Depending on your resources and your goals, you might pick a vacation hotspot (that you might also want to use yourself occasionally) or a city that is starting to get attention among remote workers (they may choose to stay at an STR in their early months in their new city before choosing a longer-term option).
Keep in mind that in highly competitive markets, design will matter more: your fixtures and furniture will need to be more than basic as people will want to feel a bit more “at home” for what they’re spending.
Things to keep in mind:
- The types of attractions that are around, whether major league sports or natural wonders
- Seasonality — are there downswings in demand?
- Demand — what kind of demand is there normally?
Use websites like Zillow and software like Airdna to assist you in finding and evaluating your opportunities. Don’t rule out an in-person scouting trip once you’ve narrowed down your search to 1-2 markets.
Calculate Cash Flow
Once you’ve seen what your potential income is you’ll need to start adding up your costs and liabilities. You’ll need to research property management and cleaning service options as well as local tax regulations. Often platforms like Airbnb and VRBO have made deals with local municipalities to collect and pay out occupancy taxes on behalf of hosts, but this isn’t always the case.
Also calculate for taxes on profits, because rental income that doesn’t live in a separate business entity will be taxed at your ordinary tax rate.
Buy/Lease a Property
If you decide you will be leasing and subleasing, make sure that your rights to sublease as a vacation rental are explicitly included and that your rights are protected.
If you are going to buy, this is when you start looking at properties and exploring financing for the purchase.
Once you’ve gotten the property you want, whichever process you go down, you’ll need to clean, furnish, and list it.
Iterate, Evaluate, Exit
If you remember that you always need to begin with the end in mind, you should know at the beginning of the process what your goals are. If you know you want to exit after a certain amount of time or income, you can continue to evaluate that goal as your listing matures with reviews and reputation.
You can continue to tweak your offer as conditions change, which may sometimes necessitate converting the listing to a medium or long-term rental if needed.
There’s never been more acceptance or excitement about vacation rentals not just as places to relax, but as places to live for a period of time. If you approach your next listing methodically, you can set yourself up for great success in this booming industry.
