Vacation rentals have been around for a long time but have recently become a very popular alternative to traditional hotels thanks to online travel booking platforms such as AirBnb. These accommodations range from high-end luxury homes to a spare bedroom in an apartment and can include homes, condos, villas, apartments and even tents or boats. Below we explore the basics of vacation rental real estate properties. Below we take a deep dive into everything you need to know about vacation rental properties.
Table of contents
- Vacation Rental Property Definition
- What is a Short-Term Vacation Rental?
- What is a Long-Term Vacation Rental?
- Types of Vacation Rentals
- Pros and Cons of Investing in Vacation Rentals
- Vacation Rental Property News
- Managing Vacation Rentals
- Financing Vacation Rental Properties
- Explore Other Types of Rental Real Estate
Vacation Rental Property Definition
A vacation rental is the renting out of a furnished private dwelling residence such as an apartment, house, or professionally managed resort-condominium complex on a temporary basis to tourists as an alternative to a hotel.
What is a Short-Term Vacation Rental?
A short-term vacation rental is the leasing out of a furnished living space for a short period of time – this can range from a few days to weeks.
What is a Long-Term Vacation Rental?
A long-term vacation rental is the leasing out of a furnished living space for a period of time that is generally one month or longer.
Types of Vacation Rentals
Vacation rental is a broadly used term, but within this asset class are several types of unique sub-classes that each have their own special characteristics. We explore the most common types below:
A property that has housing for both short term guests (i.e. -hotel) and also apartments for longer term guests (i.e. apart-). Aparthotels sometimes have hotel services like housekeeping and on-site dining.
A form of camping that involves accommodations and facilities that are more luxurious than those associated with traditional camping.
A serviced apartment is a long or short term rental that is a fully furnished apartment with all the typical furniture you would find in a regular home. Serviced apartments usually have building amenities such as a pool, fitness center, and attended lobby, but lack suite specific amenities such as room service, mini-bar, and linen service.
Vacation rentals that are usually centrally located in major urban areas (e.g. New York City, London). Urban rentals are often located inside large high-rise residential complexes.
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Pros and Cons of Investing in Vacation Rentals
There are many factors to consider when determining whether or not to invest in rental real estate, specifically vacation rentals. The following is a comprehensive list of the pros and cons you need to know before investing in vacation rental properties.
Pros of Vacation Rental Investing
- Greater Returns – Vacation rentals have been delivering investors some of the greatest returns in the rental real estate industry. This is mostly caused by a combination of strong renter demand and high booking rates in desirable markets. Some investors have even sold or forgone apartment investing, and solely pursued vacation rentals for the strong returns.
- Enjoy A Second Residence – Vacation rentals allow you to not only financially benefit from your investment, but also physically enjoy it for a relaxing vacation. This is especially true if it is a nice single family property. Prior to online vacation rental platforms such as VRBO, vacation properties were reserved only for the wealthy and most would sit vacant year round.
- Less Reliance on Long Term Tenants – Since your tenants are only intended to be there short term, you don’t have to worry about committing to a potential long term problem tenant who cannot pay rent or is destructive. Regular tenant turnover ensures your quality of tenant and cash flow is diversified.
- Easier Access To More Customers – When you put your listing up on Airbnb or any other vacation rental platform, anyone from anywhere in the world can now become your customer. Some take this even further and run their vacation rental property business completely virtual from hundreds or thousands of miles away by using lockboxes, cameras, and other management tools.
- Payments and Screening is Done For You – Most vacation rental companies collect payment and identification documents upfront prior to booking a reservation. This means that your payment is secured and you have greater assurance that your guest is legitimate; among other things too such as profile reviews.
Cons of Vacation Rental Investing
- Depend on Vacation Rental Platform for Customers – While multifamily apartments can always solicit new tenants with an old school “For Rent” sign, most vacation rentals depend on websites such as AirBnB and VRBO. These platforms also charge a fee for every booking, potentially eating into your profit.
- Greater Risk for Damage or Issues – Because of the higher volume of people passing through your property, there is a greater likelihood of things getting worn out, theft/breakage or encountering a problem tenant. Some property associations have went as far as banning vacation rentals at buildings due to short term guests causing property damage and noise complaints.
- More Effort to Manage – Managing a successful vacation rental can be like a second job. Due to more frequent customers (i.e. daily, weekly, etc.), short term rentals require more collecting of payments, more bookings, and more property maintenance to stay on top of. Instead of doing this once every couple of years, it can now become monthly, weekly, or even daily.
- Potentially Higher Operating Costs – Vacation rentals are usually expected to be delivered fully furnished and fully equipped with amenities such as Wifi, TV service, towels and beddings, kitchen appliances like microwaves, and access to a pool, gym, or other applicable property amenities.
- Lack of Income Certainty – This may not be true in some hot vacation rental markets, but short term rentals can be susceptible to seasonal vacancy, last minute cancellations, and market saturation or excess competition.
Vacation Rental Property News
Managing Vacation Rentals
As mentioned above, self-managing an active vacation rental can be like a second job. If you don’t mind taking the late night “Why is the Wifi not working?” phone calls or coordinating cleaning crew schedules, then maybe self managing your vacation rental is a good fit for you. However, for those who might not have the time nor want to take on another responsibility, hiring a vacation rental property management company might be another option.
Financing Vacation Rental Properties
In the eyes of lenders, vacation rentals are considered a relatively new business model. As such, securing a mortgage to purchase one can be more complex than getting a mortgage on an apartment rental property. Lenders tend to underwrite these types of loans with great care and careful analysis. Some requirements that you may be asked to meet include showing proof of a one-year history of per-night rentals, providing a 30% down payment, and showing proof of six months’ equivalent worth of mortgage bills in reserve at a bank. Interest rates are also higher than regular conventional home loans. Average interest rates are usually about two percentage points (2%) above the average rate for a primary residence loan. Location also matters. Properties located in primary real estate markets (e.g. Maui, Hawaii; Venice, Italy, or any major tourist town) with a long term history of tourist stability are more palatable to lenders. The good news is that once you establish some experience, Lenders can start relaxing some of these requirements to those borrowers with proven and documented track-records of running a short-term rental business.