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3 Gut-check Tips for Buying an Income Property

Date: October 25, 2020 Author: Second Home Market

1. Decide Early Whether to Self-Manage or Not

While vacation rental investments are famous for their "passive" income, many don't realize how much work actually goes into managing a property as a full-time vacation rental.  At times you'll need the combined skills of a customer service rep, the sharp eyes of an accountant, and either a handyman gene - or at least an excellent rolodex of tradesmen.  For many  outsourcing this extra effort and skillset required is worth an - on average - 20% commission to a property manager.  On the flipside, many feel like no one will ever care for a property or your guests as much as you yourself, and so this becomes a labor of love and a worthwhile investment of time to self-manage.  Try to decide early where you fall on the spectrum of available time and effort and proceed accordingly.

2. Determine Your Goals for the Property

What do you value most in a vacation rental... Income? Availability to use the property yourself? Some investors are laser-focused on maximizing every potential rent dollar that can be generated from a vacation rental property, while others are content for a property's income to cover it's carrying costs while allowing ample time for the owners to stay and use the property.  It is important to decide before buying a property what your specific goals for that property truly are, as they will inform all of your choices for the property from there on out.  

3. Be Realistic About Carrying Costs

Vacation rental properties are wonderful assets that can provide substantial income, tax benefits, and price appreciation over time.  Nevertheless, there are real costs involved with maintaining and "carrying" a rental property over time that should not be taken lightly.  Unlike most long-term unfurnished rentals, a vacation rental property requries  a substantial initial investment in furnishings, in addition to regular maintenance costs, utilities and taxes.  Vacation rental cash-flow can often be seasonal and inconsistent as off-peak times earn less nightly rent.  Furthermore vacation rentals are often hit harder in economic downturns as vacationers tighten their belts and cut back on travel to save money.  Will you have enough capital on hand to "ride out" hard times? Can your property transition to long-term tenancy if needed to cover expenses?  Be sure to consider "worst case" scenarios when determining whether an investment property makes sense within your financial plan.


These considerations can be considered the "big three" questions that should be answered prior to purchasing a new vacation rental property:

- To self-manage, yes or no?

- What are my investment goals for the property?

- Do I have a clear grasp of the costs involved, and can my rental income meet and exceed those costs?

With confident answers to these three questions, new investors to the vacation rental market can invest more securely knowing their investment plan is well-considered and on a solid foundation.

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