Buying a vacation rental property is a great way to invest in real estate, offset homeownership expenses, and enjoy your favorite vacation spot as a second home. While these properties can generate high rents, they often come with seasonal fluctuations and extra costs for upkeep. To successfully make this type of investment, you’ll need to be familiar with local markets, run the numbers on potential income and expenses, and understand the buying process. Follow our step-by-step guide to help you learn how to buy a vacation home.
Step 1: Decide if Buying a Vacation Property Is Right for You
One of the most important parts of investing in real estate is knowing how to carefully evaluate each potential property and decide if it’s right for your business. While buying vacation property can be incredibly profitable and enjoyable, there are drawbacks. As you consider the process of how to buy a vacation home, here are the main benefits and disadvantages:
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As you weigh the pros and cons, don’t forget to consider the methods you’ll use to advertise and find tenants. If you’re thinking about listing on Vrbo or Airbnb, make sure you thoroughly research the requirements. There are some strict maintenance policies, so having all the information you need before you make a decision will help in the long run.
Step 2: Research & Choose a Location
To purchase a vacation rental property that consistently generates maximum profit, picking the right location and type of property is key. If you’re teaming up with a real estate agent, they can tap into the multiple listing service (MLS), find off-market deals, and give you the scoop on upcoming listings. Some agents even focus on second homes and vacation spots, increasing your chances of finding the perfect property. These platforms provide valuable information about properties and rental options in various areas, helping you make the right choice. Before making an offer, evaluate the location with criteria such as:
- Rental market conditions
- Employment rate
- Weather and proximity to amenities
- Location demand
Once you’ve narrowed your search to one or two potential locations, it’s time to dig deeper into the market and demand. Examine the vacation trends and property types influencing a specific area. Ask yourself the following questions:
- Would tourists like to take a break in this area?
- What types of attractions are nearby?
- How does the location’s popularity peak and fluctuate throughout the year?
- Is there sufficient and consistent demand for vacation rentals in the area?
Important Note: While you should always consider the financial aspects of a potential vacation rental property, don’t overlook that the property should be in a pleasant, accessible, and desirable location to attract visitors.
Step 3: Understand Your Overall Expenses
When considering a vacation rental property location, it’s crucial to calculate its profitability. First, ensure you can afford the property, and always examine the costs of nearby vacation rentals. Compare these costs with your monthly financing and operational expenses. To estimate your rental income more accurately, try to obtain occupancy rates for similar vacation rentals. Remember, locations with high tourism often have higher property values, but they also offer greater rental income potential.
Here are the essential expenses that you should keep in mind:
| Property Taxes | These expenses are often tax-deductible. Consult your certified public accountant (CPA) to maximize tax benefits for vacation rentals. Property tax information can be found online, typically on the property listing or through the assessor’s online database. |
| Rental Income Taxes | These taxes are due at the end of the year if you rent the property for more than 14 days. Your rental income will be taxed at your regular tax rate if you must pay taxes. |
| Occupancy Taxes | A hotel or lodging tax varies by state and typically ranges from 1% to 15% per night. These taxes are usually applied to vacation rental guests. If landlords rent their properties through Airbnb, the company may collect these taxes from guests if the local city has an agreement to do so. |
| Property Insurance | Vacation rental insurance covers the risks associated with renting your property to others. It covers the structure, contents, and liability while covering income loss. Annual vacation rental insurance costs between $1,500 and $2,500. Property insurance depends on the need and location of your property—it could be against hurricanes, mudslides, or floods. |
| Homeowner Association (HOA) Fees | You are responsible for paying HOA fees if you purchase a condo or a home in a planned community with common areas. These fees are usually paid monthly but can also be paid quarterly. HOA fees cover grounds maintenance, landscaping, pool maintenance, trash removal, gate security guard, electricity, and other utilities for common areas. If you rent the property, the fees can be tax-deductible. |
| Utilities | Utility fees cover heating, cooling, internet, electricity, and gas costs. Before purchasing a vacation property, get an idea of these costs from the seller and local utility companies. The prices will vary according to how you and your guests use the property. |
| Management Fees | You will need a property manager if you don’t live near the property or simply want someone to manage it for you. Fees vary depending on the management company’s services, but the average cost is 12% to 50% or more of the monthly rental income. They are higher than the average long-term rental fee of 4% to 10% because rental income is sporadic or seasonal. The property management company also tends to have more work to do with frequent tenant turnover, resulting in higher expenses. |
| Financing Costs | To finance your vacation rental property, you’ll have to factor in your monthly mortgage principal, interest, and private mortgage insurance (PMI) if you have it. Work with your lender to get accurate numbers for other costs like the appraisal, loan origination fees, and closing costs to get a full picture of what you’ll be paying. |
| Licensing Fees | Depending on the size of the property and the number of bedrooms, some municipalities require short-term rentals to have a vacation rental license, which typically costs $1,200 the first year and $600 each subsequent year. |
Step 4: Estimate Your Monthly Income
By estimating your monthly expenses, you’re now ready to calculate your potential monthly income accurately. This evaluation will often make it clear whether or not learning how to buy a vacation home is a wise business decision for you. To calculate your potential monthly income, put the following items into the equation:
- Nightly rental rate
- Occupancy rate
- Number of days
- Monthly operating expenses
- Mortgage, taxes, and insurance fees
Here is the equation and an example to illustrate:
[(Nightly Rental Rate) × (Occupancy Rate) × (# of days)] – [(Monthly Operating Expenses) + (Mortgage, Taxes & Insurance)] = Potential Monthly Income
Example: If your vacation rental has a nightly rental rate of $340, an occupancy rate of 60%, monthly operating expenses of $1,000, and mortgage, taxes, and insurance are $2,500, here’s how to calculate your potential monthly profit:
Potential Monthly Income = [($340) × (60%) × (30 days)] – [($1,000) + ($2,500)] = $2,620
Important Note: Vacation rental property revenue is frequently influenced by season. In the summer, a house near the water will be more appealing, while during the winter, a home near a ski resort will thrive. You need to know what to anticipate during the busiest times of the year and during the off-season to ensure the property will bring in the desired income. Speak with a mortgage lender or financial advisor to understand your investment calculations fully.
Step 5: Evaluate Long-term Potential
A property is a solid asset with the potential to increase your wealth over time. In addition to calculating the potential monthly income of your property, consider the long-term benefits of buying vacation rental property when looking for investment properties for sale. Keep these factors in mind to ensure your vacation rental investments pay off in the long run:
- Capital growth: Always be on the lookout for expanding areas in terms of population, the economy, and local infrastructure.
- Invest in locations you know: Familiarize yourself with potential vacation rental property investment locations. Learn everything about the area, from demographics to businesses to attractions.
- Return on investment (ROI): It’s important to buy where you won’t go into debt or get a negative cash flow. Keep tabs on rental yield trends when deciding on an investment rental property.
- Vacancy rates: Focus on a tight rental market for vacancy rates. Examine the most recent vacancy rate data for your preferred neighborhood; investing in areas with low vacancy rates reduces your chances of having an empty property between renters.
- Future developments: Learn about future developments and plans in your preferred location. Look for information on infrastructure project proposals on government and council websites. It’s also good to look for residential developments near amenities like schools, hospitals, and malls.
- Renters’ needs and wants: Choose a type of property that appeals to the people currently renting in your preferred area. It will also benefit you if a property has desirable features for the target market, such as proximity to public transportation, shopping hubs, and hot spots.
Step 6: Get Financing & Close on the Property
Once you’ve done your homework and feel confident that your investment will pay off, you’re ready to finance your purchase. Reach out to a lender for more detailed information about different loan options to determine which fits your needs best. Don’t forget to ask if they have experience with second homes and vacation rentals, so choose someone who knows the ropes of this type of purchase. Let’s take a look at some of your financing options for buying a vacation rental property:
- Conventional loan
- Bank loans
- Real estate investment trust (REIT)
- Home equity line of credit (HELOCs)
- Cash-out refinance
- Hard money loans
- Cash
Once financing is secured, the rest of the property purchase will be similar to a single-family or multifamily investment property. The seller and buyer will negotiate the price, the bank will clear the loan, and both parties will sign documentation to transfer ownership to the new homeowner and close the transaction.
No matter which financing option works best for your purchase, consider using Baselane to manage your income and expenses and even automate rent collection. Baselane is a bank solution made specifically for rental property owners, and creating an account is completely free.
Step 7: Set Up Management Operations
After finalizing the purchase of your vacation rental home, you’ll need to decide how to manage the property. You have two options: hire a property manager or manage the property using property management software. Your choice ultimately depends on your available time, experience level, and the distance from the property. Here are the main differences between the two:
- Property manager: Hiring a property manager relieves you from the daily responsibility and oversight of the property. They will ensure the property is in good shape with routine, seasonal, and preventative maintenance. They also advertise vacant units, negotiate and enforce lease agreements, and ensure premises security. While it’s always good to grasp the financial aspects of your investments, they will help you stay on top of market activity to set rental rates and calculate overhead costs, depreciation, taxes, and profit targets.
- Personal management: If you decide on self-management, you will handle all aspects listed above. Purchasing property management software is a great option to help you stay on top of your tasks and keep everything organized. It simplifies online rent payments and provides robust features like online marketing, digital lease signing, tenant screening, and maintenance tracking.
Remember that property management software is still an option even if you hire a property manager. You would just give them access to the platform of your choosing. Here are some examples of the different property management software options available:
| Guesty: Best for integrating rental property information and guests from multiple platforms |
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| Lodgify: Best for website builder with direct booking and integrations with third-party sites |
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| OwnerRez: Best for connecting directly to QuickBooks for property and financial management |
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| Escapia: Best for detailed analytics and accounting tools |
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Pro Tip: No matter which type of property management you choose, streamline the process with your own tools. Use our rental property maintenance checklist to ensure owners take care of their regular preventative maintenance tasks before they become emergencies or require expensive repairs.
Step 8: Advertise Your Property
An important step in learning how to buy a vacation home is promoting your rental. List your place on popular sites like Vrbo, Airbnb, and Booking.com. Since these are the top vacation rental listing sites, advertising your property on these platforms will help you generate the maximum exposure, improving your occupancy rate and potential income. Consider the differences between each listing site for vacation rentals:
Vrbo
Vacation Rental by Owner (Vrbo) is a website designed for vacation property owners and travelers. Either manage your property yourself or hire a property manager to list on Vrbo. With a subscription, you get access to Vrbo’s reservation manager and calendar, which helps you keep track of the guests and their stay duration. As a Vrbo host, you’ll have the option to choose between two fee structures:
- Pay-per-booking: Hosts pay a 5% commission on the booking total and a 3% payment processing fee.
- Annual subscription: Hosts pay $699 annually for unlimited bookings and avoid the per-booking commission but still pay the 3% processing fee.
Airbnb
Airbnb is a well-known vacation rental listing site that lets you list and rent your vacation property to tourists looking for accommodation. Create a property listing with a description of the property’s amenities, the number of bedrooms and bathrooms, and photos of the property to help get the most exposure on your property listing. Every time a booking is completed on the site, there is a service fee. Look at the two fee structures for stays:
- Split-fee: The split-fee structure requires the hosts to pay a 3% fee, and guest service fees are under 14.2% of the booking subtotal.
- Host-only fee: With a host-only fee structure, the entire fee is deducted from the host payout, typically 14% to 16%.
Booking.com
One of the most widely used websites for travelers is Booking.com. A feature that hosts can enjoy is setting house rules that guests have to agree to before staying. Aside from this, it enables you to request damage deposits for extra security and report guest misconduct if something goes wrong. It protects against liability claims from guests and neighbors for up to $1,000,000 for every reservation. Listing on Booking.com is free, but there is a commission fee structure.
- Commission fee: A set percentage of each reservation you receive through the platform. The fee varies by country and property type.
Step 9: Rent to Qualified Vacationers
Tenant screening is essential in finding and choosing suitable renters for your property. Screening will help avoid renters who will damage your property or scammers who are unwilling to pay for their stay. Follow these tips to make the best choice:
- Follow the Federal Fair Housing Act and each state’s Fair Housing laws.
- Check and review the vacationer’s basic profile information, such as phone number, email address, “about me” section, age, vocation, and maturity.
- Check for the social media account of the renter to confirm that they have a real identity.
- Choose a renter with an “ID-verified” badge.
- Read the vacationer’s reviews.
Frequently Asked Questions (FAQs)
Is purchasing a vacation home to rent a good investment?
Buying a vacation rental property can be an incredibly profitable investment, but do your due diligence before diving in. Don’t forget to consider the pros and cons of vacation rentals, calculate your expenses and income, choose the right financing, and advertise your property online. If you don’t do plenty of research, you may end up with a vacation or beach rental property that costs you more money than it generates.
How much can you expect to make on a vacation rental?
According to the National Association of Realtors (NAR), an estimate of the average annual revenue for short-term rentals is $39,200. The profit you can generate from purchasing a vacation home depends on many factors, like location, property size, amenities, and rental demand. Plus, vacation rentals are prone to seasonal fluctuations, so make sure you also consider the appeal of properties in different areas throughout the year.
Are Vrbo and Airbnb a good investment?
Yes, Vrbo and Airbnb can be valid investments if approached strategically. Make sure to thoroughly understand each platform’s rules and fees and research the associated costs and potential income of any rental property you purchase. However, both platforms have a large user base, which can help extend your marketing reach.
Bottom Line
When considering how to buy a vacation home, carefully evaluate individual properties, their potential income, and your expenses. When you invest in this type of property, of course, it can be both risky and rewarding. Use these steps to help you make the right choices and generate profits on your investments. We’d love to hear about any vacation investments you’ve made!
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