If you’re looking for higher returns on your real estate investments, vacation rentals could be the answer. Compared to long-term rentals, they generally offer higher cash flow, especially if located in popular tourist destinations.
But securing financing for short-term rentals (STRs) from traditional banks can be tricky, if not impossible. ABL offers an alternative. We take the seasonality of STR income into account to extend fast, flexible DSCR financing based on the property’s average annual income.
What Is a Vacation Rental?
A vacation rental is a short-term rental (STR) property rented to travelers for days or weeks at a time. Think of it as an alternative to staying at a hotel. The property could be a single-family home, condo, or even a tiny home or cabin.
Unlike long-term rentals, most vacation rentals don’t require you to market them to tenants directly. Instead, you can list them on popular STR marketplaces like Airbnb or VRBO, where guests can book a stay at your property online.
Benefits of Investing in Vacation Rentals
Investing in vacation rentals has many advantages:
- Higher income potential. A vacation rental that stays booked can earn a lot more than a comparable long-term rental.
- Property appreciation. Like most real estate, vacation rentals appreciate in value over time, increasing your profits when you raise rent or go to sell.
- Tax deductions. As a property owner, you can deduct property expenses, mortgage interest, and depreciation from your taxable income.
- Diversification. Owning vacation rentals can diversify your portfolio against market downturns in other assets and types of real estate.
How to Invest in Vacation Rentals
Now that you know the benefits of owning a vacation rental, here’s how to invest in one:
1. Choose the Right Location
As with any type of real estate, location is everything. Focus on tourist destinations or areas close to airports, beaches, and other attractions. This usually indicates high demand from travelers. However, you should also research local regulations on short-term rentals since some jurisdictions restrict or even prohibit them.
2. Evaluate a Property’s Return Potential
Next, shop for properties for sale and evaluate their return potential.
This involves analyzing comparable STRs nearby (aka comps), calculating the property’s potential revenue by multiplying its projected nightly rate and occupancy rate, and estimating expenses—including cleaning, maintenance, property taxes, home insurance, utilities, and mortgage payments. ABL offers competitive interest rates of 6.99-9% on its DSCR loans.
3. Finance Your Vacation Rental
Once you’ve settled on property to buy, it’s time to secure financing. Carefully evaluate your funding options by comparing local lenders and their loan requirements and terms.
At ABL, we offer flexible 30-year rental loans with an average DSCR requirement of 1.2 and LTV ratios of up to 80%. That means you could borrow up to 80% of the purchase price, so long as the expected net operating income (NOI) is at least 1.2 times the debt payments.
4. Make Renovations and Upgrades to Boost ROI
After closing on the property, make any necessary renovations to turn it into a suitable STR. Also, consider making upgrades to boost its appeal. For example, some high-ROI upgrades might include remodeling the kitchen, adding an outdoor kitchen, and installing a hot tub.
5. List on STR Marketplaces
To attract STR tenants, list your rental on an STR platform like Airbnb or VRBO. Start by taking high-quality photos of the space and writing a compelling listing description. Then upload this information to your chosen STR platform and mark when your property is available for bookings.
6. Manage Your Vacation Rental
As your property starts attracting guests, you can either manage the rental yourself or hire a property manager. Either way, you’ll want to stay on top of communicating with guests, cleaning between stays, and encouraging positive reviews to help your STR listing stand out online.
7. Monitor Performance and Adapt
Keep track of standard STR metrics like occupancy rate, average daily rate, and net operating income (NOI). You can then use this data to spot trends and areas for improvement. You can also solicit feedback from guests to improve your service.
6 Vacation Rental Best Practices to Follow
To boost your vacation rental performance, follow these best practices:
Always Check STR Regulations
The last thing you want is to buy a property you intend to turn into a vacation rental, only to learn that STRs are severely restricted or banned in your market. Do your due diligence by studying local STR regulations upfront. This will save you a lot of headaches later.
Leverage Financing to Boost your ROI
Even if you can pay for your next vacation rental with cash, check if financing could boost your returns. Generally, if the interest rate on the mortgage is lower than your expected return rate, then you stand to gain by financing your purchase. Contact one of ABL’s DSCR loan experts to learn how a rental loan would affect your final ROI.
Create a Memorable Guest Experience
Vacation rentals aren’t just about providing shelter. They’re about creating a memorable experience that guests will remember. This is what will motivate them to leave you a positive review, return in the future, and refer your vacation rental to others.
Keep Emergency Reserves
Vacation rentals can be unpredictable. From extended vacancies to high-cost repairs, you never know when you’ll need cash to cover a drop in net operating income (NOI). That’s why it’s important to maintain an emergency reserve.
Set Clear House Rules
Because vacation rental guests only stay for short periods, many may not respect your property as they would their home. To protect your investment, set clear house rules about what is and isn’t allowed regarding pets, parties, trash disposal, etc. Then communicate these to guests.
Build a Strong Team
Your vacation rental’s performance will depend on your team. Surround yourself with reliable real estate agents, contractors, lawyers, and lenders to ensure a profitable investment.
At ABL, we’re more than just a lender. We’re a strategic partner that wants you to succeed. That’s why we have local teams ready to assist you at a moment’s notice. See if you pre-qualify for a DSCR loan today!