Buying a cute little home in a thriving downtown area and renting it out can sound like a great idea at first glance. After all, home-sharing sites like Airbnb, HomeAway and VRBO are rising in popularity. According to Technavio, the global vacation rental market will be worth more than $190 billion by 2021. Why not get a piece of the action?
While it's true that this rental business is a growing sector in today's economy, making a vacation rental investment is a big decision and needs to be thoughtfully considered.
In the best case scenario, you purchase a place that's in good condition at a reasonable price in an appreciating market. You have an asset that is a good investment in and of itself. Then, you are able to successfully rent it out to travelers to your area at a profitable price. Now, you have an incoming-generating asset.
On the other hand, you could end up overpaying for a property that comes with problems and issues like neighborhood noise or a poor location. Perhaps you are not able to rent it out at the price you had hoped to get or for as many days out of the year as you wanted. In this case, you could have an asset that is a stressful drain on tight resources.
How do you ensure that the first scenario plays out instead of the latter? Consider these tips to make sure you make a wise decision before jumping into this growing rental business.
1. Set SMART Goals
SMART goals are those that are Specific, Measurable, Achievable, Results-focused, and Time-specific. Before you embark on making a vacation rental investment, you'll want to work through this exercise.
For instance, setting a goal of making money is not specific or measurable. Instead, write out a goal like, "I want to generate $200 profit on average every month within one year." This goal paints a picture of specifically want you want to achieve within a particular time frame. As you research properties and the work it would take to maintain and rent them, you can go back to your goal to see if it's really feasible to achieve that goal.
Another good goal to set is something like, "I want to find, evaluate and close on a rental property that is undervalued within in six months." Again, this goal can give you benchmarks to check against as you are scanning the local real estate market.
2. Research Your Market, Neighborhood and Home Values
Once you have narrowed down your search to a handful of potential vacation rental properties, you will want to thoroughly research each property's value against other homes in the area.
Check out real estate sites and comparable homes in the area. Compare how much properties have recently sold for against how much the sellers are asking for your potential new property. Consider using the online Home Value Estimator tool, which checks a handful of leading sources to provide property estimates.
Bankrate's web site provides an estimator that looks at home values in particular states. Keep in mind that specific neighborhoods may be appreciating or depreciating within a state, or even within a city, so you'll want to do a more careful check once you've found a specific property.
Besides ensuring that your potential property is undervalued or at least comparable to other properties, you'll want to take a look at things like location and appeal to potential visitors.
Consider whether the design of the home and its neighborhood would be attractive to those on vacation. Think about how easy it is to get to tourist spots in the city. Easy access to highways or main roads as well as to public transportation options can make a rental unit more appealing. Properties that are walking distance from restaurants, shops or attractions may also draw folks looking for vacation lodging.
Finally, consider things like crime rates in the area and noise levels from busy streets or even from attractions like nearby stadiums or nightclubs.
3. Crunch All The Numbers
This can be the tricky part of making a wise decision. Although some costs are predictable like mortgage, interest, insurance and taxes, many others are not. It is wise to make conservative estimates on terms of maintenance and repair costs as well as how much you can charge for your rental and how much occupancy you are expecting. Remember that if you over-estimate these costs and under-estimate your price and occupancy, you'll end up with extra money in your pocket. Do it the other way, and you'll be experiencing a constant drain on your resources.
Access online calculators, which allows you to key in estimated number of customers, their length of stay and your price. Once you have a conservative estimate of your potential earnings, you'll want to subtract out your expected costs and expenses.
Call some local property managers for assistance. They should be able to give you a ballpark figure of common repairs and maintenance issues and associated costs for your area. Some of these costs will be dependent on your particular rental unit, but others may be applicable in your area including things like weather-related damages.
Check with utility companies to get some typical costs for heating and air conditioning per square foot in your area. Again, this can vary depending on how energy efficient your rental unit is, but a ballpark figure can help you come up with an estimate.
4. Play the Devil's Advocate
Before you sign those closing papers, think about all the things that could potentially go wrong. Don't do this exercise to break your spirit about your new venture, but instead do it as a way to double check that you've considered all aspects before making the final investment.
Consider how often your property may be vacant during off-seasons or between paying customers. Hopefully, you made a conservative estimate on what percentage of the time you expect to be fully booked. If your price is high enough during peak season, you may be able to offset some vacancies and price reductions during the off-season.
Although most guests will hopefully treat your home as their own, you may experience a bad guest every once in awhile. Not only can this be an awkward or difficult experience, you may end up paying legal fees if you need to pursue any action to remove the guest from your property or collect for damages.
Be sure to consult with a lawyer and draw up a tight rental agreement regarding security deposits, what happens in case of damages, and who is responsible for what components of the rental agreement. If you have many of the details in writing, it could save you headaches later.