1. Location: Determine which potential locations will have the demand to meet your short term rental goals
2. Property Size: Understand what type of travelers come to the area, and what size property best fits their needs
3. Numbers: Run conservative numbers before purchasing to make sure you will actually make money
4. Renovations: Determine what renovations are needed, who will be doing them and how long they “should” take
5. Buy Right: Leave the emotions at home, and buy based on the numbers
Purchasing a vacation rental really entails a logical and analytical approach to deciding which property to buy. Instead of your primary residence where the deciding factor might be the large entertaining space in the living room, the main considerations for a vacation rental should be based on what renters want. Are you in a location where people vacation, or travel frequently and need a place to stay? How does your property compare to others available for rent nearby in terms of size, design and furnishings? Do you offer easy access to local attractions and amenities? These are all important factors to consider, so please try not to get emotionally invested in a specific property that may hurt your wallet down the road.
Location is possibly the biggest factor in determining whether your property will succeed as a vacation rental. If you are in a resort destination, is the property you are looking to purchase near the main amenities (beach, ski area, theme parks) or is it 30 minutes from anywhere interesting? If you have a secluded cabin in the woods that could be appealing, but you need to understand if that is in demand from travelers before committing. A lot of vacation rentals are coming up in urban areas which can draw business travelers, visiting relatives and tourists alike. These areas tend to have more restrictions on what types of properties can be rented for less than 30 days (definition of a vacation rental or short term rental).
Property size has a major effect on how often your property gets rented. A 5 bedroom home will have a much higher nightly rate than a 1 bedroom condo, but at a lower occupancy rate. It’s important to understand your local market because if it’s mostly people driving two hours for a quick weekend getaway, smaller is probably better. However if you are a major destination such as the Outer Banks in North Carolina, there are 15 bedroom homes that rent by the week and are full most of the summer. You can use Airbnb’s income estimator to better understand demand in your area.
Running conservative numbers is key to not getting stuck with a few slow months and going belly up. Assume your construction costs will be more than your contractor says and will take longer too. Research similar properties nearby to understand what nightly pricing is reasonable and what seasonality looks like. For example, mountain towns have strong winter and summer demand, but lower occupancy at lower prices during the spring and fall (mud season).
To help figure out potential returns, check out our short term rental calculator: Calculator Link
Buying a rental ready property will cost you a premium on the purchase price, but enables you to get up and renting much sooner than undertaking a major renovation. Depending on your investment strategy, renovations can be a major value add and increase equity if you do them efficiently.
Contractor or DIY? You can read about our approach to renovations in our Apres Ski Renovations and Alpenglow Renovations articles, but it really comes down to your personal skill set, scope of work and whether time or dollars are more important to you. The “easiest” approach is to hire a contractor and let them handle everything regarding your property overhaul, however this will generally be the most expensive route. Handling everything yourself is potentially the least costly route dollar wise, but it comes down to your personal situation – if you earn $250k/year at your job it’s probably not worth the time to handle your own renovations, but maybe this is a passion project for you. Decide what works best for your personal situation and go from there.
Guests have certain expectations of quality above what a traditional long term renter will accept. If your property isn’t up to snuff, you can expect your reviews to suffer and bookings to taper off.
Understanding your market is the most important thing, along with picking a location that will be in demand with travelers. Buy a property size that will help you meet your earning requirements and make sure to run conservative numbers in terms of earning and costs. This leaves room for improvements and ensures a successful investment even your conservative estimates end up being accurate.