An In-depth Analysis of Vacation Rentals for Real Estate Investors

Investing in a vacation home can be a rewarding venture, both personally and financially. A robust portfolio of vacation rental investment properties can provide real estate investors an opportunity to earn significant cash flow.

However, as with any investment, investing in vacation rentals requires careful planning and financial consideration. It’s essential for investors to assess their budget, financing options, long-term financial implications, and more. Each financing option has its pros and cons, so investors must choose the one that best aligns with their goals.

The ABCs of Financing a Vacation Home Rental

Investors should take these basic steps before buying a vacation rental home.

  • Assess Budget and Financing Options

    • By assessing their budget and financing options, investors can determine how much they can comfortably afford without straining their finances.

  • Budget for Ongoing Expenses

    • When considering the purchase price, investors should also account for additional costs including property taxes, insurance, maintenance, regular travel expenses to visit the vacation home, and potential homeowners’ association fees.

  • Consider Rental Income

    • Keep in mind that rental income can help cover expenses, but it may also have tax implications. It’s essential to understand taxation rules as well as local regulations for short-term rentals in your chosen area.

Are Vacation Rentals a Good Investment?

Short term rental vacation properties are a great way for real estate investors to earn passive rental income. Investors can earn more with vacation rentals than traditional rentals because landlords can charge more for stays in vacation rentals on a per-night basis, creating more cash flow than a traditional 12-month lease would.

Investing in Vacation Rentals: Advantages and Disadvantages

Investment properties can require investors to be able to pour a steady stream of capital into them for capital expenditures or maintenance emergencies. A vacation investment property is no different.

Upgrades, repairs, and renovations are just a few things investors must consider when it comes to purchasing short term rental vacation properties. Budgets should include CapEx and maintenance holdbacks to ensure cash flow in the end.

This exciting venture has gained immense popularity in recent years, thanks to platforms like Airbnb and Vrbo. However, like any investment, it’s essential to be well-informed about the advantages and disadvantages before diving in.

Advantages of Investing in Short-Term Vacation Rentals: High rental income, flexibility, asset appreciation, diversification
Disadvantages of investing in Short-Term Vacation Rentals: High initial costs, seasonal income, ongoing expenses, more tenant turnover

Diving into the Ever-changing Short-Term Rental Marketplace

The short term rental marketplace has exploded over the last couple of years, thanks to spiking rental demand and added inventory. As the industry continues to grow, investors, travelers, and the industry itself are anticipating certain trends to impact the trajectory of the industry.

  • Increased regulation
  • Growth of alternative accommodations
  • Increased use of technology
  • Increased focus on sustainability
  • Greater competition
  • Continued growth

Prime Locations for High Return on Vacation Rental Investments

Ask any real estate investor, and they’ll tell you that location is one of the most important things to consider when it comes to the best vacation rental investments. If the city isn’t well-trafficked or the vacation rental is in a bad area, people won’t want to stay there, and the investor won’t profit.

When it comes to finding the best locations for vacation rental properties, investors should consider the following technical matters related to the property’s ROI:

  • Occupancy rate
  • Average Daily Rate
  • Local rules and regulations
  • Property taxes
AIRBNB locations for real estate investors: Charleston, South Carolina, The Poconos, Pennsylvania, Chattanooga, Tennessee, Savannah, Georgia, Joshua Tree, California

Investors should also consider other factors like amenities and city attractions, the neighborhood’s crime rate, number of other vacation rentals in the area, and the proximity to the city center or downtown area.

Financing a Vacation Home with Lima One

Lima One finances short-term rentals through our rental loan programs with guidelines that include lower in-place DSCR requirements and underwriting based on irregular income. This makes it easier for STRs to qualify for loans for rental properties.

Financing is one of many considerations real estate investors should have in mind when considering investing in vacation rental investments.

If you’re looking for vacation home financing and you’re ready to purchase a short-term rental property, Lima One can help. We provide extensive industry knowledge and private lending expertise to those investing in rental properties.

Contact us to get started with your next short-term rental investment.