8 Common Mistakes When Investing in a Vacation Rental

8 Common Mistakes When Investing in a Vacation Rental

If you’re thinking about entering the vacation rental industry with a property you already own, the initial costs could add up – as you may need to remodel, refurbish, and redecorate your home. You’ll also need to include community expenditures, licenses you need to start in this business, paid marketing campaigns you wish to carry out and more. However, buying a property and converting it into a vacation rental is a completely different ball game. In addition to the above costs, you’ll need to make a return on your investment, and also, make the right decisions for your business’ future.

Of course, there are risks involved when investing in something as expensive as a second property, and laws have yet to fully adapt to the needs of this new type of business. Nevertheless, buying a property to convert it into a vacation rental is something Americans are doing more and more. It is predicted that vacation rentals will topple the hotel industry by 2020. Furthermore, revenue in vacation rentals has already amounted to $14,540 million in 2019. 

To help you get started, we’ve put together these eight errors vacation rental homeowners have previously made. Make sure you avoid them!

1. You’re not sure if it’s worth investing

In order to know whether it’s a good idea to invest in a vacation rental for tourists, you’ll need to have a financial plan first, and then calculate an actual budget after. Can you afford all the expenses? Experts recommend not taking out a loan higher than 30% of your income, and to expect the unexpected. That means, leave room (financially) for any problems that could occur or things that you didn’t calculate before.

It’s also better not to expect reservations immediately and to put aside a sum of your budget in case the business takes a few months to take off.

2. You’re unaware of the additional costs

Investing in a second home for a short-term rental does not only entail paying the price of the property. There are also additional costs which mount up. These consist of insurance, accounting expenses, devaluation, supplies, furniture, taxes, repairs and maintenance etc. As well as this, you need to take into account any licenses, taxes and other community expenses.

The region in which you’re investing in can also affect these purchase-related expenses, so make sure to do some research before making a decision. 

3. You don’t know the area

Having a good understanding of where your property is situated in terms of price and value for money will allow you to make the best decision. Ask yourself some questions, such as, why is your potential property three times cheaper than the neighbors’ houses?

If you have an idea of the demand in your area and are aware of the competition, you can make an informed and correct decision. Perhaps you’ll be interested in buying in a different district, or in building a swimming pool at the property in order to stand out from your future competitors. Additionally, you’ll need to be aware of the trends in the vacation rental industry and what guests want, so you’ll know exactly what to offer them. 

4. You don’t know how to calculate the value of the property

There are many factors that determine the value of your property. Give yourself time and figure out by analyzing all the different factors. With regards to the value, this does not only refer to the price, but also other factors that make the property more valuable. For example, the location, how close it is to public transport or point of interests, how old or the new facilities are, the potential it may have and the possibilities to improve it, the crime rate (which is also something you’ll need to look at) and so on.

After comparing the different buying options and analyzing them all, you could lose sense of what is expensive or cheap. Always compare the asking price to similar homes in the area.

5. You don’t consult an expert or a notary beforehand

If you aren’t an expert in the tourism and real estate industry or are unsure what the prices and mortgages in the area are, or what kind of price you should offer, seek someone’s opinion who can help you during the whole process. Having an understanding of the subject will ensure that no aspect – no matter how small – is overlooked, and will advise you on the decisions you make. It will also help you negotiate, tell you what you can ask for and how far you can counteroffer.

On the other hand, a notary is another expert opinion you’ll want to count on to avoid unpleasant legal surprises later on. You should bear in mind that investing in a second home for touristic purposes isn’t the same as buying a first home. 

6. You go with emotions and forget about numbers

Many homeowners fall in love with a property or a specific area and forget about what it’s going to take. What’s the point in buying the biggest house on the street if in a few years you’ll close the business? You have to make sure that it’s the right decision for the future.

But this is not only the case with this type of investment; don’t make the mistake of investing irrationally. Be brave and recognize your possibilities and limitations, and make the most of what you can afford. Don’t take risks that can end up costing you a lot of money.

7. You think you won’t be able to manage a property long distance

Many property owners decide to invest in an area close to their home, even though it may mean less demand and fewer visitors in the area. This can be a huge error!

Nowadays, it is perfectly fine to run a property long distance and to succeed – a lot of property managers already do it! With automated check-ins, such as WIFI door locks and other solutions and tools on the market, you don’t need to be present to get into this business. This way, you can invest in a property in an area with more interest and more potential profits. Not just in the next state – it could even be abroad!

8. You think you have to buy during the low-season

When you are considering buying a home and converting it into a vacation rental, you might think it’s a good idea to purchase during the low-season to have it ready for the high season. Although it makes sense, it’s also important to have an idea of what the high season entails in the area you’d like to invest in. 

If you research and buy during the high season, you’ll have a better understanding of what your vacation rental can bring, and you’ll have a clearer calculation of the return on investment. Also, you can observe competition in the area and see how much demand there actually is.

Once you have invested in a property, you should avoid other common errors, such as not taking out a specific insurance policy or not marketing it to the right type of guests.

Make sure you take these into consideration when investing in a vacation rental in order to make the most well-informed decisions for your business!

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