Building Passive Income: How to Start Investing in Vacation Rentals

Building Passive Income: How to Start Investing in Vacation Rentals

The vacation rental market predicts a compound annual growth rate of 3.4% every year until 2027. That’s huge! So if you’re looking to invest in the vacation rentals market, now is the time.

Vacation rentals can be a lucrative and passive way of making money. They are far more lucrative than long-term renting. And you can use vacation rentals as your own second home whenever you don’t rent it out.

But there’s a lot of logistical and monetary considerations of investing in holiday homes. One bad decision or calculation could cost you time and money.

This guide covers what you need to know about earning passive income through vacation rental investments. As long as you research and plan, you could enjoy a great investment property!

Step 1: Choose a Location

What’s the first rule of real estate? Location! Rental properties can live or die on their location.

It’s one of the only aspects of vacation home rentals that you cannot change. Here are some things to take into consideration when you choose a vacation rental location:

  • Do you want a vacation rental near your home or somewhere else?
  • What is the weather like?
  • City, country, or suburb?
  • When are the off-seasons, low-seasons, and high seasons?
  • Is zoning an issue?
  • Are vacation rentals legal in the area?
  • Are there supermarkets, parks, and entertainment venues?

Try and narrow down your search to a handful of specific locations. You will probably have a rough idea of your budget already but try and consider location first.

You can always decide on different locations later if there are no suitable properties in your chosen neighborhood.

Step 2: Do Your Research

Once you have selected a few locations that tick all the initial boxes, it’s time to dig deeper. You need to research the vacation rental market in those areas to see if you have a viable investment.

Research the following:

  • Do families, couples, or groups rent in this area?
  • Is there a need for a property not currently available?
  • Is parking important?
  • What are the fluctuations in seasons?
  • What is the vacation rental cost for other properties?

Look on vacation rental websites and check out the other listings thoroughly. It would also be a good idea to book a few vacation rental stays in those locations. You can check out the competition and see what you could do to offer more.

Research the top attractions and events in the area. If you are buying vacation rentals in Orlando then you can assume the majority of tourists are families. But if you are buying downtown in any city, couples might be a safer bet.

Step 3: Quantify the Upfront Costs

There might be a lot of upfront costs when you invest in a vacation rental. It’s important you can handle them and they don’t take you by surprise.

The obvious upfront costs are the deposit and fees involved with buying property. You may need a 25% down payment.

Then, you need to list any maintenance, decorating, or cosmetic improvement costs. If you need to repaint the living room or install a key lock, you should calculate the costs for this.

After that, you need to make a list of all the furniture the property needs. Unless you happen to have a storage unit filled with bed frames and tables, you’ll need to buy all the furnishings upfront!

You will also need to buy kitchen utensils and supplies of consumables e.g. toilet paper. Walk around your own home and make a detailed list of everything you use. Or the next time you stay in a vacation rental, make a list of everything they have.

The more you can quantify, the more costs you can prepare for.

You don’t want to set aside $4,000 for “incidentals” and find out later you should have set aside $8,000. This is why spreadsheets exist!

Step 4: Calculate Monthly Outgoings and Income

So, you have figured out how to find vacation rentals in the right neighborhood with all the amenities you need in the local area. You have done your research and raised the upfront funds.

Now it’s time to calculate how much you can expect to make. You need to ensure that you will receive an acceptable, passive profit monthly and earn back your initial upfront investment.

Calculate Outgoings

First, calculate your monthly outgoings. These could include:

  • Bills such as insurance, electricity, gas, water, cable, etc.
  • Property management fees
  • Cleaning fees
  • Extra money set aside for maintenance and call-outs

Because you want to invest in a vacation rental for passive income, you will want to pay for a property management service. Otherwise, you will be dealing with bookings and customer service queries in your spare time.

Calculate Income

Then, calculate your monthly income. Landlords often charge their renters 10-20% above the mortgage cost. But you will know from your research if you can charge more for a desirable location.

Always remember to factor in around 25% vacancy rate which will allow for low season demand. It is highly unlikely tourists will occupy your vacation rental 100% of the time. But you should have a more accurate idea of the vacancy rate from your research.

Assuming all the figures are great, you should snap up your vacation rental property!

Step 5: Post Your Property Online

Finally, you need to advertise your awesome vacation rental property online so tourists and travelers want to stay.

First, hire a professional interior photographer to take pictures of your rental property. It’s a competitive market and you want to put your best foot forward.

Then, sign up for all the vacation rental sites. Airbnb is the most prolific and well-known. But VRBO, HomeAway, and travel sites like Expedia and TripAdvisor advertise vacation rentals.

Be across them all to increase your bookings.

Also, at this point, you should hire a property management company. And try to make everything as autonomous as possible. Install a key lock so guests can check themselves in and write template answers to common queries.

Start Investing in Vacation Rentals Today

Vacation rentals are a fantastic investment opportunity. All you need to do is research and calculate your potential earnings and costs. If you do, there is no reason why you can’t enjoy a profitable side business.

Check out our other finance and travel articles for more tips and advice!