6 Steps to Starting a Vacation Rental Business
What is a vacation rental?
A short-term vacation rental is a property that you own or control and then rent out for short periods of time. They are a cost-effective alternative to hotel rooms where people can stay when they’re traveling. Hosts can rent out their furnished house, room, apartment, or condominium for a temporary amount of time as an alternative to traditional lease-based long-term rentals. In essence, they provide safe, affordable short-term housing for those who need it.
Airbnb is an example of a popular platform that vacation rental hosts can use to list their space and makes investing in vacation rentals easy. Hosts share their passions and interests with travelers and locals through their unique accommodations. Usually, these kind of rentals offer more space at a lower price than a hotel and allow travelers to experience what it’s really like to live in a particular location.
Are vacation rentals a good investment?
Short answer? Yes.
Long answer? Keep reading.
When you invest in a vacation rental property, you can build a financial safety net, take more risks, develop advanced business skills, and have more time to do what you’re passionate about.
Here are some reasons why investing in vacation rental real estate is a smart move:
Vacation rentals are always in demand
The value of vacation rentals is increasing every day because they are always in demand. Additionally, if you take great care of your property and decide to sell it in the future, you could use those profits to invest in other properties.
It’s easy to find (and communicate with) guests
Websites like Airbnb and HomeAway have made it much easier for guests to find and book your vacation rental property. These sites also help protect renters and guests with their background check process, so both parties feel safe and secure.
You can enjoy it, too
You can use your own vacation rental whenever you want. You set your own calendar, so you can block out the times you wish to use your property. And when you’re not using it, you can rent it out to guests. It’s a win-win.
You can charge higher rates for higher demand
Business is all about supply and demand. When your rental is in high demand — you get to charge more money to rent it. Different locations have different busy seasons, so do your research to figure out what times of year are hot.
You gain experience to grow your business
Owning and operating a vacation rental business lets you to learn as you go — while you make money. You’ll learn how to improve your guests’ experiences, gain more business skills, and get paid while you’re doing it.
1. Pick your property
When making a rental property investment, you should first select your location. Make sure that it appeals to guests but is also safe and secure. Here are some questions to consider:
- Do you want a beach condo, lake house, mountain home, or city apartment?
- Do college students visit your area during spring break? (and if yes, are students on spring break the kind of customer you want to rent to?)
- Does your area have convenient commuting options for business travelers?
- Are there local attractions that your guests can enjoy, such as concerts, sporting events, national parks, casinos, and more?
Once you’ve picked your location and know what kind of property you want, it’s time to start looking. Here are a few common ways to narrow down your search:
- Research online. You’ll see what is available for purchase as well as what the rental rates are for your chosen area. Some helpful websites include:
- Realtor.com
- ForSaleByOwner
- Zillow
- Find a real estate agent. A local real estate agent will research places that meet your criteria, and they can set up appointments for you to visit potential vacation rental properties. The agent will also be able to give you the inside scoop on what it’s like to be a local and the best recommendations on areas where visitors would prefer to stay.
- Contact a real estate company. Roofstock is an online marketplace that provides research, analytics, and insights to help buyers evaluate and purchase independently certified properties. Buyers can access vetted homes with attractive investment profiles and cash flow opportunities.
Once you’ve narrowed down your options, you’re ready to move onto the next step.
2. Buy the property
Investing in a vacation rental property is not a decision that should be made lightly. Before making an offer, find out both the possible operating costs and the rental income, so that you can ensure the property is cash flow positive. Here are the steps we recommend taking:
- Conduct a cost-benefit analysis to make sure the property will still be affordable, even in the off-season when business is slow.
- Find out the vacancy and short-term rental rates
- Establish your monthly financing and operational costs
Once the above is figured out, calculate your monthly profit using this equation:
[(Rental rate) X (occupancy rate) X (30 days) − [(the property’s monthly operational expenses) + (monthly mortgage payments)]] = property cash flow
For example, if the rental rate is $105, the occupancy rate is 75%, the property’s monthly operational expenses are $275, and the monthly mortgage payments are $1,800, the equation will appear as follows:
[($105) X (75%) X (30 days) − [($275) + ($1,800)]] = $602.5
- Keep in mind that occupancy rates will decrease throughout off-peak seasons, so be sure to account for those when making your decisions.
- Also, remember to factor in an extra fee for pets if you wish to allow them.
Now, if you’ve done your homework and have got all the numbers in place, it’s time to make the big purchase and invest in vacation rental property!
3. Make a business plan
Now that you officially own a vacation rental investment property, it’s time to start treating yourself like the business owner you are.
First step? Making a business plan! Here’s a few things you’ll definitely want to include in your business plan:
- Your goals: What do you hope to accomplish with this business venture? Where do you want to be in the future as a real estate investor? Be sure to keep your goals specific!
- A strategy: This is the exact business plan you will follow to reach those goals — how will you turn this property into a profit?
- A financial plan: This plan should include how much you currently have, regular expenses the business will incur, and your rates. If you’ve taken out a loan, this is where you should outline an actionable plan to pay it back.
- A marketing plan: this step is incredibly important — after all, none of your brilliant plans will work out if no one can find your vacation rental property in the first place. So how are you going to get your property listing out there? Who are the people you’re hoping to market to? Why should they pick your property over all of the competition?
Additionally, be sure to contact a tax professional in the area of your property rental to ensure you have all of the proper information required for tax season and business deductions. Some things to keep in mind include:
- Hosting fees: If you have your vacation rental on listing sites like Airbnb, be sure to keep a record of the fees you’ve paid for the hosting service.
- Business expenses: Keep receipts of anything you buy for your property (everything from items for your guests to cleaning supplies, repairs, and furniture).
- Property depreciation: You can account for home improvements and the depreciation of your property.
- Travel expenses: Don’t forget that you may be able to deduct the mileage from time spent traveling in your vehicle to meet with guests, help with check-ins, or clean the rental property.
4. Get the property ready for guests
You’ve finally reached the fun step: it’s time to get the property ready for your guests!
After doing all of the obvious tasks — setting up the property with furniture and other necessities, stocking up on basic toiletries and assorted towels, filling the kitchen, etc. — be sure to add special touches for your guests. A fully furnished home makes it convenient for visitors because they will have everything they need, and they’ll be more likely to offer a glowing review.
Another great idea is to include a handwritten thank you note along with contact information, special instructions regarding your rental home, and local guides (maps, restaurants, tourist attractions, and more).
5. Start advertising
Now that you’ve made your business plan, and your rental property is ready to go, it’s time to advertise and start drumming up some business.
- Take noteworthy photos and write a captivating property description (or if your photography skills are not up to snuff, bring in a pro!): You want to have at least 10 well-lit and eye-catching photos to truly convey to potential guests what they could experience during their stay at your property. When you include an interesting description describing all of the amenities and local experiences, it encourages guests to choose you over others.
- List your property on multiple sites: The more sites you book your property on, the better chance you’ll have of building your business. Some options you could use include:
- HomeAway
- VRBO
- Booking.com
- Airbnb
- Create social media business accounts: Establish your presence on Facebook and Instagram to promote your vacation rental investment. Make sure to include flattering pictures of your property, along with posts that describe the features, what guests can expect during their stay, and information about the local area. Research proper hashtags for Instagram that will help potential guests find pictures of your property.
6. Manage your rental property
All that’s left now is to decide how you’re going to manage your rental property. Will you do it yourself, or hire a company to do it for you? Hiring a manager would certainly save you a lot of time, but make sure you can afford the fee. Either way, here are a few things you’ll need to consider before your first guest arrives.
- You’ll need a system for welcoming guests. It’s unlikely that you will always be able to be there to meet your guests in person when they arrive, so decide how they will get the keys to your property. Consider setting up a keypad so that renters and staff can easily get inside, and you are able to change the passcode as often as necessary.
- Establish the cleaning schedule and routine for before and after each guest. Who will be doing the cleaning and laundry? Don’t forget the little details like who is in charge of stocking up on cleaning supplies and toilet paper.
- Consider who will take care of any necessary repairs on the property.
- Hire a bookkeeper or be sure to gather professional advice in order to keep your rental finances organized.
Ready to get started?
Starting your own vacation rental investment can allow you to enjoy a lucrative income with a flexible schedule, so you can live life on your own terms. When you put these steps in place and refine your systems based on feedback, you’ll increase renter satisfaction while gaining new guests and increasing your number of returning guests ultimately leading to success thanks to your savvy vacation rental investment.