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How to Research a Vacation Rental Investment
It is vitally important to the long term performance of an investment property that investors perform significant research prior to that property’s purchase. There are many different philosophies as to how to research a property and how to weigh a property’s attributes as each investor approaches a new purchase with a unique portfolio and investment goals. Nevertheless, here are some basic tips on how to get started researching a vacation rental investment prospect:
Unless you have an extensive background in real estate or carry your own license, it is always recommended that buyers work with a Realtor to assist in property research and negotiations on behalf of the buyer. You will often find that owners of vacation rental management companies are also real estate brokers. No one will know the potential for a property’s investment performance quite like a Realtor who runs a management company. Usually that Realtor will know through experience how much more nightly rent one neighborhood commands over another, or how much an additional bedroom can add to the rental’s bottom line. This type of insight can be invaluable when deciding between different investment possibilities, as the Realtor can assist you with identifying the very best candidates for profit potential.
If a property has been an active vacation rental for some time, one of the easiest ways to grade its performance is to simply request its income, expense and occupancy records from the previous few years. Income and occupancy records should give you great insight into the seasonality of the rental market and give you some degree of predictability of what type of return you might expect month to month. The expense records should provide hard data into the regular carrying costs involved with the property such as monthly utilities, HOA fees, and regular maintenance (lawn care, handyman visits, etc…). If a property has not been operating recently as a vacation rental, the best way to estimate for its income potential - beyond asking your vacation rental specialist Realtor, of course - is to study nearby AirBnB/VRBO listings, surveying their calendars and rate schedules. How crowded is the market? How does this prospective property stack up to its peers?
Every county in the United States maintains a public database of property records that can be easily searched online. These databases provide a wealth of historical information regarding past property owners, historical sales prices, as well as taxes assessed over time. Prospective buyers would be well-advised to study a home’s property record card to understand its trends of price and tax appreciation over time. It is very important to remember that a new buyer will not be paying the same amount of tax as the previous owner. To estimate the new tax, you must take the new property sales price and multiply it by the current millage rate, which will be advertised by the city and/or county in which the property resides.
As recently as five years ago, most municipalities did not have any rigorous legislation on the books with respect to regulating short-term rentals. That all changed with the explosive rise of AirBnB and the consequent ease with which everyday property owners could enter the vacation rental market and begin to monetize their properties. Fast forward to today’s municipalities which are awash in vacation rental ordinances, new zoning restrictions, and tax requirements which are aimed at managing the growth of the vacation rental market. It is now very common for cities to strictly enforce their zoning restrictions and to require owners to jump through hoops to acquire some form of short-term rental license prior to operating as an AirBnB/VRBO. Again, here is where your Realtor with vacation rental market expertise will truly earn their commission. A Realtor’s knowledge of the regulatory structure surrounding vacation rental use can quickly identify the appropriate vacation rental prospects and rule out others based on zoning and local law. Furthermore, a great Realtor will assist you after closing in filling out the required paperwork and follow-up involved in achieving a vacation rental license.
You wouldn’t buy a $50,000 car without test-driving it, would you? If its an option, prospective buyers should definitely consider staying in the vacation rental to “test-drive” the property and guest experience for themselves. Oftentimes this firsthand guest experience can lead to new insights on either red flags that deserve further scrutiny or on areas that a new owner might improve to enhance income potential. If you can’t stay in the property itself, try to at least stay in the neighborhood to see the experience through a guest’s eyes. Spending time in the neighborhood may also lead to insights into the neighborhood’s development trends that may signal opportunities for price appreciation over time.
The above bullet points offer some basic guidance on how to research the income potential of a vacation rental property. As usual, the best strategy is oftentimes the simplest : work with a Realtor who has extensive experience in the vacation rental market. A great Realtor will help all levels of buyers to better understand which properties have the best income potential and can help navigating the sometimes murky regulatory waters of local vacation rental legislation. Combining the expertise of a local agent with one’s own due diligence and research will give any buyer the confidence to move forward in decision making towards their next income property purchase.