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Investing in Vacation Rental Properties

Updated on October 1, 2016

Investing in Vacation Rental Real Estate

Investing in real estate can be one of the prime ways to build wealth and is often the key building block of most people's over-all investment portfolios. Vacation rental properties are a special subset of real estate investment, which have grown in popularity over recent years with the emergence of self-management sites, such as vrbo and airbnb. Vacation rental properties often serve the dual use of personal use in a location that the owner desires (beach, mountains, etc.) as well as rental to third-party tenants. Unlike full-time rentals, which provide no real use to the owner, other than a stream of income and tax deductions, when managed properly, vacation (short-term) rentals can provide use and enjoyment for the family, as well as income and equity growth.

Vacation rental properties can either be managed by the owner or by a rental management company, but these companies normally charge 30-40%, which can be the "profit margin" in many cases. Therefore, if you have the time, it's much more profitable to mange the property on your own, rather than paying someone else to do so.

Choosing the Location

The first step in purchasing a vacation rental investment property is to determine the area in which you wish to invest. this should obviously be an area that is popular among many visitors (preferably year-round, but there are some beach areas, such as Galveston, TX, that can be an exception), It is often a good idea to choose an area that is within a few hours drive of a large city or multiple large population centers so that you have a large "pool" of renters.

This area may be a mountain resort, a beach town, or other area where people like spending their down time. Hopefully there is an area close enough to your primary home where you and your family would also enjoy spending time (and close enough to drive to on occasion to check on the property).

Finding the Right Property

Once you have identified an area, you need a find a real estate agent in that area who is familiar with short-term (vacation) rental properties. This agent can give you advice on which sub-areas, property types (condo vs. single family home), and sizes rent best. If there are established rental management companies in your area of choice, your agent should also be able to get rental histories for different properties/sub-areas that you are interested in so that you can have an idea of expected income. Keep in mind that these income histories will vary depending on how much the owners made it available to rent (vs. how much they used it themselves), so it can sometimes be challenging to compare "apples to apples".

Make sure you figure into your income expectation just how much you are planning on using it yourself and if you are going to be using the property during "prime times" (e.g. Christmas, New Year's, 4th of July, etc.). Finally, figure in expenses, such as utilities and deduct tax benefits, if you are going to be writing it off as a rental property (consult with your tax professional for best practices). Remember that incomes will vary from month to month (unlike a full-time rental), so it's best to look at an annual basis and compare that to what your expenses will be (mortgage, property taxes, utilities, etc). to determine how much of an investment you can afford.

Have you ever rented a private rental home while on vacation?

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