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July 7, 2023

Vacation rental investments: Understanding what to look for in the current environment 

Reasons to consider taking a loan to pay for a vacation

Investing in vacation rentals has gained momentum in recent years. Even in this time of economic uncertainty, domestic leisure travel is expected to remain strong, with a normalized growth rate of 2% projected for 2023 and 2024 (according to the U.S. Travel Association®). That means the market is ripe for your vacation rental investment—a potentially lucrative passive income stream.

But, like any strategic financial decision, you’ll need to do your homework first. This article will help prepare you for your vacation rental investment.

Questions to ask before investing in vacation rentals  

1. How do I find the right property? Should I hire a real estate agent?

Gone are the days of having to search for “For Sale” signs in your local neighborhood. Today, real estate investors have fast access to information via online listings.

Furthermore, the purchasing process has been streamlined with modern conveniences, which can include everything from online prequalification for financing to digital closing procedures.

In any case, you may feel more comfortable partnering with a real estate agent to make sure you secure a property in line with your goals. Just keep in mind—if you do hire a real estate agent, they should specialize in vacation rental investment properties and be able to help guide your search.

2. Is there construction nearby?  

In the short term, construction may mean increased noise levels and unsightly equipment. In the long term, it could mean more amenities and other structures that boost the value of your investment.

Generally, the more construction you see, the more reliable the indication of growth.

At the same time, it’s important to look out for developments that will likely compete with your vacation rental, as well as those that could impact its price.

3. How much should I set aside to cover maintenance expenses?  

Maintenance costs add up fast. As a general rule, it’s recommended to allocate 1% of the total value of the property per year for maintenance.

For example, if your vacation rental property is valued at $400K, you would need to budget $4K each year to cover maintenance expenses.

4. Should I hire a licensed property management company?  

Before deciding, it’s important to understand the role of a property manager and what they should be expected to bring to your relationship. Typically, a property manager’s responsibilities include the following.

  • Leveraging their unique insights of the target market to advertise your vacation rental
  • Communicating with guests to provide an optimal client experience
  • Addressing maintenance problems to keep the property running smoothly
  • Managing the cleaning and turnover of the rental to ensure it is prepared for the next stay

A reliable property manager is an important asset to any real estate investor. However, this support comes at a cost, as property managers generally charge between 8% and 12% of the monthly rent—substantially impacting your cash flow.

One consideration to keep in mind is whether it would be more expensive to maintain the property yourself or to have a property manager do it. Remember that cost can also be measured by your time, not just the dollars you spend.

Quick tip: If you enjoy getting very involved in your projects and consider yourself “hands-on,” a property manager may not be a good solution, as you’ll have to split decision-making power with another individual.

5. Is the investment property in a good location?

Location is critical for all real estate purchases, but especially vacation rentals.

As vacationers are looking to experience the best of the best in the area, you’ll want to make sure your property is right in the middle of the action. It should be close to popular attractions, restaurants, shops, and public transportation.

However, these are not the only factors to consider. If you plan to use the rental yourself, ease of access will likely become an important factor, requiring you to narrow down your list to properties that are within driving distance.

Be sure to consider all these factors as you’re searching for and evaluating your options.

6. Will the cash flow from this property meet my needs?  

You’ll want to narrow down your list to properties that offer the opportunity for capital appreciation and are simple to manage. But for most investors, profitability takes priority—a projection of positive cash flow on an annual basis is key.

Perform your due diligence and ask yourself these additional questions to determine whether the potential investment will meet your financial requirements:

  • Will there be periods of vacancy?
    • You’ll want to evaluate typical occupancy rates to see if a given property has peaks in the summer and valleys in the winter (or vice-versa).
  • If so, is that something you can sustain?

You may consider a minimum return on investment (ROI) when making a purchase. This can be determined by dividing expected net cash flow by the cost of the property. The typical target for investors is between 6% and 12%.

Debt consolidation vs Balance Transfer chart

For example, if the price of your property is $400K, you would need an annual net cash flow of $32K to meet a target ROI of 8%.

Quick tip: Hedge your investment portfolio against inflation with vacation rental income. Real estate is typically a solid investment during times of increased inflation, as higher inflation results in boosted property values—thus increasing the amount landlords can charge for vacation rentals.

7. Am I making this purchase with an investment mindset or am I emotionally involved?  

Searching for an investment property is different than searching for a home you plan to build a life in. Your decision-making around a property should be based primarily on your investment strategy.

 

Understanding local regulations

It’s vital to understand the local regulations on vacation rentals before investing. These can vary significantly from state to state—even city to city. Here are some examples and links you may find helpful.  

New York City has some of the most restrictive rules. As of this writing, NYC.gov states: “Short-term rentals are only permitted if you are staying in the same unit or apartment as your guests, and you have no more than two paying guests at a time.”   

Florida is a state where vacation rentals are thoroughly regulated. For example, you’ll need to obtain a license with the state and follow the local laws that are in place. You can learn more about Florida’s licensing requirements through the state's Department of Business & Professional Regulation.  

Arizona does not impose vacation rental laws at the state level—instead, the laws are dictated by cities and towns (for example, Phoenix requires that vacation rentals never be used for nonresidential purposes). Property owners statewide are expected to pay transient privilege tax (TPT), which requires the obtainment and annual renewal of a TPT license. This can be procured through Arizona’s online portal, Business One Stop.  

No matter the city/state you’re considering for your vacation rental property, you’ll need to do thorough research to ensure you can abide by all applicable regulations.

We recommend you consult with legal or tax advisors before making any investment decisions.   

BHG Money: Your key to a vacation rental investment 

Similar to how you’ll need to carefully evaluate potential investment properties before choosing one that suits your needs, it’s important to complete the same process when searching for a lender. You’ll want to choose one who supports your goal of developing passive income—and will give you maximum flexibility as you get your property up and running.   

Equally important is a lender who moves efficiently to get you funded. You never know when you’ll come across an excellent opportunity that you need to capitalize on quickly—so it’s important to have a lender who’s aligned with your timeline.   

To meet these objectives, look no further than BHG Money. Since 2001, we've helped elite professionals realize their goals, including securing passive income opportunities.  

Because your time is limited, we offer a streamlined process and faster funding than traditional lenders. Compared to other lenders that offer low amounts and short repayment periods, we provide commercial loan financing up to $500,0001,2 and extended repayment terms of up to 12 years.1 This makes your vacation rental investment more accessible than ever.  

Start by using our online payment estimator to view your personalized loan estimate in just 30 seconds, without affecting your credit score.  

 

¹ Terms subject to credit approval upon completion of an application. Loan sizes, interest rates, and loan terms vary based on the applicant's credit profile. Finance amount may vary depending on the applicant's state of residence. Call 866-297-4311 for complete program details.

² BHG Money business loans typically range from $20,000 to $250,000; however, well-qualified borrowers may be eligible for business loans up to $500,000.

For California Residents: BHG Money loans made or arranged pursuant to a California Financing Law license - Number 603G493.

No application fees, commitment, or impact on personal credit to estimate your payment.